Day Trading: Knowing When to Exit a Losing Trade

I am guilty of it; you are guilty of it; the very best traders are guilty of it-sometimes it is very difficult to know when to fold.  There are a plethora of explanations to the irrational desire to hang on to a losing position in the misguided hope that your trade is going to make a dramatic turnaround.  It rarely happens, and most traders end up riding the trade too long and smashing into their stop loss.  The loss is always painful, and most of us (if we can be honest with ourselves) can usually identify a point in the trade where we should have exited with a minor loss.  Yet, we often fail to take advantage of this early exit and incur a substantial loss.

Why?

A great deal time and research have been spent on trading, especially the emotional and psychological aspects in trading decisions.  As a group, people have a strong need, and desire, to be right; and in the opposite sense, people have a strong aversion to being wrong.  Bailing out of a potentially disastrous trade is an admission that you, as a trader, have made a bad trading decision.  In short, you were wrong.  No one wants to be wrong. To be sure, I don’t want to be wrong.  Yet, as day traders there is usually a point in a trade were we would be well advised to admit we are wrong and save a bundle of money.  Most day traders seldom avail themselves of the early exit option.

When a trade is obviously going the wrong way it would seem obvious that a wise trader would be anxious to minimize his or her loses.  I have looked at some of my worst trades and been able to accurately pinpoint several exit points that were obvious.  Unfortunately, hindsight is 20/20.  Our emotions control much of our thinking in relation to trading, and once I (or any other trader) is convinced the trade is a good one it is no small task to change your mind quickly and accept that the trade is a terrible one.  As I said earlier, we like to be right; we dislike being wrong, and admitting we are wrong on the selection of a trade often leads to disastrous results.

Many texts and noted authors claim that leaving your emotions on the sideline is absolutely essential for successful trading. I don’t know about you, but my emotions are an integral part of my personality and the notion that I can carte blanch abandon them is wishful thinking, at best.  On the other hand, I do think we, as traders, can learn to minimize our emotions in the trade selection and trade management process.

What is the secret?  There is no secret; but developing the ability to see things as they are rather than as we hope is a skill to be developed.  The market is an emotionless, mechanical device and does not take your emotions into consideration in its day to day operations.  What we, as traders, think is completely irrelevant.  The skill that I work on constantly is seeing the market from a realistic point of view; not my point of view, but what is really going on in the market price action.  Reality can be a very painful teacher, especially when you are on the wrong side of a trade.  But it is reality that we have to work with, and traders must learn to trade from the perspective of what is really occurring in the market, not what we wish the market to do, or how we think the market should move.

In summary, I have noted that removing your emotions from trading is basically wishful thinking.  On the other hand, we can learn to develop a realistic view of how the market is moving and trade accordingly.  It’s no easy task, but with practice reality can become your primary viewpoint, not your wishes.


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More Notes on FibGrid from a Technical Analysis Skepticyes,

Years of trading experience has reinforced a single, indisputable fact; prices tend to stop and start along common lines.  The reason for these phenomena is poorly understood, as is the position of the exact point these lines utilize for their stopping and starting points.  This observation is not an extraordinary revelation for anyone who has spent any length of time in front of a trading chart.   Often called support and resistance lines, these stopping and starting points are evident when observing the price action on any futures or stock chart.


The world of Efficient Market Theory would have us believe that these areas of support and resistance are the result of random market movement where supply and demand are in equilibrium.  In an academic sense, this explanation makes good sense, as there does not seem to be a discernible pattern in either the lines of support or lines of resistance.  It might also be useful to note that once a line of resistance is passed through by the price action, it often becomes a line of support, and vice versa when considering support lines.  In short, it is common for most lines to be, at one point or another, both support and resistance; it all depends upon the time period under analysis and the movement of the underlying assets price action.


There have been a wide variety of attempts to quantify the location, or predicted location, of these support/resistance lines.  Floor traders pivot points have been a popular support/resistance predictive device for quite some time, and can be very useful.  On the other hand, pivots points can often be far off the mark and, on some days, completely irrelevant. There is no reliable way to determine on which days the market will honor floor traders pivots and which day they ignore them.  That, of course, creates a problem for traders and pivot points…it is difficult to discern which day to use pivot points and which day to ignore them.


FibGrid on the other hand, has added much needed clarification to the support/resistance equation. As anyone who has consistently read this blog can attest, I have been a long time critic of the vast array of technical trading tools that have come to market.  Everything from goofy robots, to elaborate charting programs have all been tested and found wanting.  But this darn FibGrid actually works, and I have been forced to retract my iron clad condemnation of technical trading programs.  It is most embarrassing.


David Starr describes the program most eloquently:


“The tendency of financial market movements to be proportional to other movements in ratios that have Fibonacci proportions is well documented. For example, many know that prices often retrace 38. %, 50%, or 61.8% of a move. Others know of some of the common projection ratios and we use many of these in our analysis. Less known is the FibGrid technique that projects a series of possible support and resistance levels based on projections from the beginning stages of the last bull market of significant degree.

The amazing thing is how prices tend to find these support and resistance levels that were projected from prices years earlier (sometimes even decades earlier) and those projections provide levels that are meaningful in almost all timeframes, including short day-trading timeframes. This 2584 share chart of the emini Dow futures shows how price obeys FibGrid levels on intraday movements. The key values for the projection of these levels were set back in 2002 and the support/resistance levels shown today have not moved since then. Prices still find them.”

I use FibGrid in my trading room and wouldn’t consider trading without the program running.  There are many lines that appear in the FibGrid program that might normally be ignored by the average trader, yet time after time I notice price action stopping on these less than obvious lines, sometimes right to the exact tick.

It would be difficult to calculate how many point I have made or been prevented from losing using the FibGrid program, so my endorsement is primarily anecdotal; but I am often astonished at the accuracy of this program in identifying support and resistance.

I would like to point out that FibGrid, in and of itself, is not a complete trading system.  This program will only make you existing trading system far more effective and profitable.





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FibGrid: It Even Converted this Hardened Skeptic

If you have read even a smattering of my articles about technical trading you will know that I am skeptical of just about every technical trading technique. I have been vocal in my criticism, often to the point of sarcasm. I have labeled chart formations pure bunk, poked fun at the Elliot Waves theorists, and howled at anything resembling Gann lines, Andrew’s Pitchfork and a host of other exotic sounding technical tools. In short, I have little use for most aspects of technical analysis. Then I became acquainted with FibGrid.

I have a friend with whom I often spend time trading, David Palmer, and he uses a wide range of technical analysis tools. Needless to say, I have a field day poking fun at the endless array of odd looking lines and random chicken scratching that adorn his chart. I am sure he must tire of my endless criticism, as my needling can sometimes border on being cruel. Just the same, we continue to trade together as I have a tremendous amount of respect for his integrity and work ethic. To make matters worse, he is always trying to cajole me into giving his technical tools a try, which I generally dismiss as something akin to practicing witchcraft. Now that I think about it, I have no idea why he puts up with me; but we continue to actively trade together and I genuinely enjoy his company.

One of his favorite topics is the use of a program called FibGrid. For months I dismissed this arcane sounding program as another over-hyped tool of dubious distinction. I refused to use the program on both ethical and philosophical grounds. As a testament to David’s tenaciousness, he finally got me to install the program on one of my minor charts “just to prove him wrong, once and for all.”

Note to readers: I hate it when I am wrong about any aspect of my trading style, which is constantly evolving, and the remaining portion of this article is a frank admission that FibGrid has made my view of technical trading a bit cloudy.

I had a chance to discuss the rationale behind the functioning of FibGrid with its designer David Starr. I have to admit I was impressed with the range of knowledge Mr. Starr possessed about trading, practical application for using the Fibonacci sequence, and his grasp of the history of trading. I have to admit that the guy actually made sense, which I consider unusual for traders purveying anything having to do with technical trading or technical trading indicators.

To make a long story short, I started using FibGrid and the darn thing opened my eyes wide. In the case of e-mini trading, the Fibonacci lines generated by the program date back nearly a decade and are color coded in a hierarchy of importance.

Still, I had not traded with the program and even though the theory sound plausible, I remained unconvinced that it would work in practice.

I decided to put the program to the test, and started using FibGrid in my well attended trading room…in front of some seasoned and knowledgeable e-mini traders. I expected the program to flop miserably and I could relegate the software to a pile of other worthless software have accumulated over the years.

Then something went horribly wrong, tragically amiss, shockingly awry.

The darn program worked. Not only did the program work, it worked with amazing accuracy; and the more I used and understood the program, the more accurate it became. In short, FibGrid started to consistently add cash to my bottom line. A technical program had proven itself worthy to grace my chart and my world had been turned upside down.

Gradually, I began to integrate the FibGrid lines into my well established methodology and have significantly increased my bottom line profit. To be sure, the program has made a significant dent in my profit margin and it only gets better as I learn the nuances of the program.

Who would have thought that this curmudgeon price action trader could learn something from technical analysis? From the onset, let me say that it wasn’t me…I started using the program only to prove it was a sham, like all of the other technical analysis programs I have sampled.

Want proof?

Sign up for a free week in my trading room and watch me integrate FibGrid into my existing methodology. I will begrudgingly admit….it works like a charm and you are leaving good trades and a significant amount of money on the table if you aren’t using FibGrid.


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What is the Market Going to do Today?

I am invariably asked this question as I begin each day in the trading room.  Will the market go up?  Will the market go down?  There is a gap up…does that mean the market is going to fill the gap immediately or maybe wait until later in the day?  I almost always disappoint the individual asking the question by answering, “I really don’t know.”

Even worse, I really do not know.

Predicting which direction the market will move can be one of the most embarrassing propositions for any trader to undertake.  Of course, you have at least a 50% chance of being right, which is some consolation. Generally speaking, though, I don’t have the slightest idea which way the market will move, and many find this disturbing.  As a trader, many think you ought to have some general idea as to which direction will move.  But I am a scalper, and I don’t concern myself with predicting which way the market will move.

I am looking to catch areas of momentum and ride that momentum until it subsides.  Instead of knowing which way the market is going to move, I am simply hitchhiking a ride as the market moves in one direction or the other. I am quite comfortable reacting to the market as oppose to predicting what the market might do.

Scalpers use a number of techniques to identify areas of potential momentum.  First and foremost, most useful information is contained in the actual price action in the market.  Oddly enough, price movement is often ignored in favor of a variety of oscillators, rate of change indicators and a number of exotic charting systems.  I am not interested in many of the popular predictive systems like Elliot Wave analysis, Gann Lines, or systems of a similar ilk, but I want to make sure I point out that my opinion does not imply these systems do not work.  My point is a simple one, these systems do not work for me and I do not use them.

No, I am far more interesting in support and resistance, trend lines and momentum.  I have an important maxim: Trade primarily with the trend. I allow myself one countertrend trade per day, and that is usually one too many; but there are many very enticing set ups that occur countertrend and learning to lay off these trades is a challenging job.  Most traders find that countertrend trading is an unprofitable method in which to trade.  Further, the empirical scientific evidence bears out one indisputable fact; trading against the trend is far less profitable than trading with the trend.  For a scalper, trading with the trend the majority of the time is imperative.

I also employ, in varying degrees, forms of Fibonacci analysis.  I have never been convinced that the underlying principle of Fibonacci is valid; that is, the market moves in natural cycles that can be predicted using the Fibonacci sequence.  One thing I know for sure is that enough people trade using Fibonacci analysis that the system works.  Whether Fibonacci works because so many people use it or it is intrinsically valid is of little consequence to me; I don’t care why it works, I only care that it does work and therefore employ some tenets of the system in my trading.

In summary, I am a scalper and I am interested in momentum in the direction of the trend.  I don’t use predictive trading systems; I rely upon price action, support and resistance, trend lines, and some limited use of Fibonacci analysis.  I keep it simple and try not to overload my methodology with extraneous charts and unnecessary information.  Scalping is not for everyone, but it is a very effective method in which to trade.






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Robots, Automated Trading Systems and other Nonsense

I try to keep up with the latest, greatest new innovations in the investing industry and lately I have been seeing a plethora of systems that absolve the trader of trading responsibility and promise that a robot or trading system will heap untold profits on the purchaser of the system.  Even better, you can be the proud owner of one of these robotic systems for a mere $239.

My initial thought was, “why have I spent a lifetime learning about trading when all I had to do was plunk down $239 and sit back and count my fortunes?”  More to the point, why hasn’t Wall Street dumped the army of traders and strategist and simply installed a robot and reap trillions from an unsuspecting market?

A quick Google search on one of the brand name robots yields pages of favorable reviews on the merits of the products, though I didn’t recognize any of the individuals reviewing the robotic software.

I did, however, find some reputable reviews from respectable and well known sources and their conclusions were much what I expected.  In short, keep your $239.  The performance of these trading robots was dismal, at best.  And this makes sense, when you think about it.  Who in their right mind would be selling a product that can make hundreds of thousands of dollars and then turn around and sell it for $239? In short, if I had a goose that laid golden eggs I sure wouldn’t be hawking it on the internet for a couple of hundred bucks.  To be sure, if I had a goose that laid golden eggs the only individual that would know about it is ME.

But automated systems and trading robots are indicative of a trend that I have noticed developing in recent years.  Let’s face it; trading is difficult and risky, plus the learning curve is very steep and expensive.  Many would be traders would like to skip the treacherous indoctrination phase of trading and jump straight to the phase where you consistently make money.  And who can blame them?  It is only human nature to take the path of least resistance.

There is a problem in this thinking, though.  You have to pay your dues. In order to trade effectively you have to learn to trade.  Learning to trade is a frustrating, knuckle-biting, anger-inducing process and not for the faint of heart.  Further, there are no real shortcuts to learning to trade…short of learning to trade.

Of course, the good news is that once you have developed the ability to consistently trade profitably it is a skill that you have learned for life.  There are no shortcuts, so save your $239 you would have spent on a trading robot and buckle down to the business of learning to trade.


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Do You Know the Commodity Channel Index?

The Commodity Channel Index has become, in recent years, a very popular index and used for a variety of trading purposes.  In my trading, I use the Commodity Channel Index (CCI) to indicate potential buy/sell decisions and, more importantly, to identify areas of market noise.  It is especially important to avoid trading in periods of market noise because the market is generally without a trend and engaged in normal backing and filling operations.  I like to trade with the trend, and that should come as no particular revelation to most traders.  Quite simply, your chances of succeeding when trading with the trend are significantly higher than trying to pick out retracements and market swings.

The Commodity Channel Index is not a particularly new indicator; it been around for quite some time.  Donald Lambert initially introduced the Commodity Channel Indicator in 1980, and variations and trading methodologies using the indicator have increased exponentially since it’s original inception.

From a semantic standpoint, the Commodity Channel Index is misnamed; it is actually a momentum oscillator and should be used as such.  It is a great primary indicator, but should always be used in conjunction with another technical analysis method.  That specific method could be a corroborating oscillator, or a rate of change indicator, or even volume analysis.  The point is a simple one; don’t go it alone with the Commodity Channel Indicator as it doesn’t give you a complete analysis of what is actually occurring in the market.

There are three lines that are of importance on a typical CCI chart.  The zero line indicates a general area of market equilibrium, and the +100 and -100 line indicate potential overbought and oversold conditions.  As I mentioned earlier, there are a variety of methods developed by trading innovators to utilize the CCI, and many are dissimilar in their market indications and methodology.  To be sure, it is essential to be familiar with a specific method of analysis before jumping into live trading using the Commodity Channel Indicator.

One of the potential problems many traders experience is the tendency of the CCI to whipshaw traders in and out of trades.  It is not uncommon, especially in low volume trending markets for the CCI to oscillate along the overbought or oversold lines.  In these situations, the CCI line hovers around the +100 and -100 lines for extended periods of time.  It is important for traders to identify this phenomena early on because the indications from the CCI will have you bouncing in and out of the market and depleting your trading account.

On the other hand, there are times when the CCI gives some of the clearest entry and exit signals you will experience.  It takes time and experience to learn the nuances of this indicator and I don’t recommend jumping headlong into CCI use without proper preparation. There are a number of excellent books written about the use of the CCI and the internet is loaded with all sorts of potential CCI trading systems.  Of course, I would recommend carefully evaluating each system before implementation, as some systems are much better than others.

That being said, I feel the E-mini Trading Professor utilizes the CCI in a superior methodology and provides excellent buy/sell signals.

Summary of Trading for Week of October 4

It was another week of unusual market moves and prolonged periods of price stagnation. As I have been saying for quite some time, the recovery from our current recession will be typified by a “mixed bag” of economic reports. Of course, this week was no exception, though the market chose to react to various reports in unusual fashion.

Friday was probably the most baffling day this week. Most economists expected the economy to add 8000 new jobs, but ADP reported that the economy actually shed 95,000 jobs. As you can see, the experts missed this particular prediction by nearly 100,000 jobs. You would expect the market to react negatively to this sort of news because employment has become a very hot topic of late, but the market chose to march merrily along its way and posted a healthy gain for the day. There are several technical factors that contributed to this gain, but it was by and large a confusing reaction to very bad news.

This sort of market action was the norm for the week, though we did experience some prolonged periods of market stagnation. Of course, this doesn’t surprise me. Since the futures market is based upon broad stock market indices, the market needs smaller investors to reenter the market and purchase stocks. I would be hard-pressed to come up with a rationale for anyone to initiate a long position in the current economic climate. To say the least, the potential for sizable gains in the market are less than compelling; on the other hand, it would not be difficult to envision a sharp correction from current index prices.

It is my opinion that the majority of market participants are traders, not investors. While traders provide an essential function in the market, the market requires smaller investors investing on a fundamental basis. Yet, the fundamentals for our current market condition are shaky and there are many pressing questions about our economy. The dollar has been weak; volume on the ES e-mini contract has been, at times, light and erratic.

To compound the current economic woes, a cottage industry in disseminating bad economic news has kicked into high gear. This is not an unusual phenomenon during recessionary periods. Quite simply, bad news sells. Of special note are the gold bugs, who come out of the woodwork during every recession and tout the benefits of owning hard assets like gold. I feel that some exposure to gold is essential for most individual investor’s portfolios; but dumping your life savings into gold is not a wise idea. There can be no disputing, though, that gold has enjoyed a very profitable run in recent years, and has outperformed the stock market of late by a considerable margin. But my point is a simple one: buying massive amounts of gold is simply not the answer to our current economic recession.

We were able to trade very effectively this week though, as numerous opportunities for high probability setups were the norm. Generally speaking, we earned between $200 and $400 most days this week. Friday was the exception, though; as the market was particularly flat and we managed only a small gain of $100. Fortunately, we had no losing days this particular week.

The E-Mini Trading Professor System trading room enjoyed a wide variety of visitors and the conversation was brisk and interesting. Lots of new faces, and more new long-term customers joined than usual. As a trader, I feel like traditional investors are currently looking for alternatives for making money in ways that are untraditional, especially participants who have typically invested solely in the stock market.

Looking ahead, next week would appear to be a reasonably volatile week as there are a plethora of importance and pertinent fed and fed agency announcements that the market will have to digest. All in all, it should make for an interesting and profitable week of trading.


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Day Trading: We Are up, We Are down, Isn’t All Bad?

For swing investors and longer-term investors the markets haven’t had much to offer in recent months. We seem to be stuck in a narrow range, without any end in sight. So if you’re looking for long-term gains in the market, you’ve had a pretty rough go. And frankly, it is hard for me to see any compelling reasons to invest the long side of most stocks. There are, of course, exceptions to this statement; but the vast majority the market is mired in a lethargic semi-coma.

Of course, for us day traders it has been a wonderful ride. The market may start upward, the market may rocket downwards, then bob and weave throughout the course of the day and finally end up very near where we started. This roller coaster is a day traders dream, and we have certainly taken advantage of the sometimes unpredictable movement in the market. In fact, there are days when I have absolutely no idea why the market is moving up, or moving down. Not that it matters, I trade with the market offers and don’t you have any serious consideration to why the market is behaving in a certain manner; and considering the lunatics who are currently at the helm on Wall Street, is probably best to not give any serious consideration to what harebrained strategy the investment bankers are currently scheming. One thing is for sure, it will not be in the best interest of Wall Street, Main Street, or any street except for the likes of Goldman Sachs, Citicorp, and the rest of the companies of that ilk.

Which is not to say these fine American investment bankers are breaking the law. They are, in fact, under intense scrutiny by the ever diligent federal government. Okay, now that I think about it, it wouldn’t take a lot to pull the wool over the eyes of the average federal auditor. After all, Bernie bamboozled the same federal auditors into thinking he was in possession of $100 billion and they took his word for it. Call me crazy, but I would like to think I would ask for some audited statement by a reputable accounting firm to back up Old Bernie’s claims. I don’t think there are many federal auditors that would take my word for it that I claimed I had a  hundred billion I had invested and it was in good hands… and you can trust me on that.

But I digress… the point I am trying to make is a simple one, not extraordinary complicated, and that many of us day traders are having a heyday. Yes, you heard it right, day traders are making money. With all the negative publicity day traders receive it would be shocking to learn that a large number of day traders do quite well. We even do well in stagnant markets.

Why?

We don’t try to predict the market. We actually take what the market offers and bank it. There is a wealth of information and scientific studies that claim that market prediction is an impossibility; and judging from the prediction record of the Federal Reserve and many of our prominent economist as I don’t have too much trouble buying into the theory that market prediction is impossibility. The proof is in the pudding. Yet economists continue to prognosticate, and the Fed continues to print money; and both are quite sure that they are on firm ground when it comes to predicting the future economic events in our country. Such is the life of a carnival worker. To be sure, several of our recent administration economists might well seek employment as pastry chefs in lower class dining establishments. Larry Summers comes to mind. But that’s another story. I suppose a bit of a controversial tonight. Generally speaking, I write articles about the ins and outs of trading theory and chaos theory, but I was feeling a little spunky so I thought I’d have a rip at some of the geniuses behind our current economic dilemma.

Plus, I bought a nice new leather chair today. It’s throne-like with black leather upholstery and I have the illusion of landed gentry. And with that attitude, I will soon be joining a traveling carnival, too.


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Day trading for the week of September 25-29

Day trading for the week of September 25-29

I wouldn’t characterize this week as the most exciting week of trading in stock market, or futures market, history. As a day trader, I am not terribly concerned about the underlying fundamentals in the market. Here at the E-Mini Trading Professor we seek to scalp small portions in market directional movement. But this week was unique in that there were several protracted periods of little or no market directional movement.

It is no simple task to determine the underlying cause of the lack of movement in the market, as there are a wide variety of variables which determine the direction and velocity of the market. But several basic themes can be gleaned from this particular week. Quite simply, it took a reasonably nimble hand at trading to choose trades that were profitable and sound.

Of course, the futures market and the S&P 500 are directly related to the movement and the actual S&P 500, and it is my opinion that the vast majority of investors in the cash market were primarily speculators and not investors. This is not surprising because it is hard to make a case for investors to invest on the long side and any market index. There is a great deal of uncertainty as to the direction of the current market, and we are currently bouncing off several important resistance levels in the cash S&P market. It is my opinion that the general investor has been hesitant for quite some time to commit any substantial sums to longer-term investment in the stock market. Further, we are stuck at intermediate highs, and the continued upward movement of the market is certainly in question.

Of course, October has never been a particularly kind month for stock investors. Whether this phenomenon is self-perpetuating or a natural rhythm of the market is certainly subject to debate, but the fact remains that past Octobers have been unkind to the stock market investors. And investors know this, so it seems they have chosen to stay on the sidelines for a period of time.

From a technical standpoint, the market needs to decide whether to run up to the 1200 mark or retreat back to more manageable levels. As a scalper, I do not have any particular preference as to which direction the market finally decides to move, but it would be profitable if market moves away from the relative holding pattern that we are now experiencing. It is, to say the least, a difficult time to trade as it is typified by unpredictable movement, both to the upside or downside, which are difficult to discern.

In my trading in the trading room, I have chosen to shorten not my stops and profit targets to help ameliorate some of the inexplicable movement the market is now displaying. With speculators dominating the market, the movement is not particularly drastic but it is not unusual to see price movement that is opposite normal expectations.

While I trade primarily on price action, I generally use oscillators and indicators to filter trades for accuracy. On most occasions, my oscillators and indicators have been unreliable and difficult to interpret. On the other hand, using support and resistance has proven to be a reliable technique to chart potential move to the upside or downside. So, as might be expected, I have added importance to support and resistance in my trading.

In summary, the current market is not positioned for taking aggressive trades and most traders would be well served to trade with a conservative mindset and limit the number of trades they initiate to those trades they are very confident with. This takes more self-discipline than most traders are accustomed to exercising, but nonetheless it is essential to stay on the conservative side of his market.


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Ten Rules for E-mini Day Trader Longevity


This list is for traders but also applies to investors.

1. Recognize mental blocks. If you believe that the financial markets are rigged, stay away. Bias is blinding. If your ego requires constant feeding and vindication, do not trade. If being right is more important than making money, steer clear of the stock market. If you must be dogmatic, direct your energy into following these rules.

2. There is no needle in the haystack. There’s no reliable way of picking a single winner from the thousands of stocks listed on the exchanges.

3. Resist betting it all on the longshot because the outcome is based purely on luck. Dr. Ziemba explains the mathematics of horse racing. The point is that the bettor is better off with horses that finish the race “in the money”. They don’t have to come in first.

4. Diversify. Spread your bets around. It’s the only way to be on board the winner.

5. Trade small. Bet only a small fraction of your equity on each position. You must take risk to get reward, but ruin is certain if you take insane risk. It’s defined in Fortune’s Formula. Think Adventures in Conditional Probability.

6. Press the winners. You must compound a winning streak.

7. Never throw in good money after bad. Never double down. Ever.

8. Do not rationalize. Down is NOT up. Red is NOT the new black. If the account equity is shrinking, your bets are in the wrong direction.

9. Establish a stop loss. Place it in the appropriate location (except just above the swing high or under the swing low where everyone else put theirs), a place where you can be statistically confident that the move in the present direction is over. Don’t use a tight stop for lack of equity. The market doesn’t care about how much is in your account, so trade a smaller position size and put the stop in the proper place.

10. Use the stop loss. Just do it. Immediately. No excuses. Having a “mental” stop loss is the same as lying. There’s no point, because the longer you let it slide, the deeper the doo-doo.

*Observe Rule Nine. Always. Don’t go to the bathroom without it.


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