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Welcome to our Knowledge is Power Resource Guide, providing free futures trading information to get you on the road to trading success today trading the FX Forex Futures markets with information offered by University for Forex trading education into fx futures trading methods, trading systems and trader methodologies which lead to successful trading! Financial Trading Articles & Tidbits - written by market expert Joe Ross. Part 2
6. Hey Joe! I want to learn how to trade, but I’m having a conflict. Is trading futures gambling?
Trading futures is gambling only when you trade them without full knowledge of what you are doing. There is a good measure of self-knowledge required to choose the proper course to follow if you want to become a trader. It has even been postulated that many small traders in the forex and futures markets, without knowing it, secretly want to lose. They jump in with high hopes—but feeling vaguely guilty. Guilty over 'gambling' with the family's money, guilty over trying to get 'something for nothing,' or guilty over plunging in without really having done much research or analysis. Then they punish themselves, for these or other sins, by selling out, demoralized, at a loss.
A trader is gambling when he/she trades from ignorance. The gambler makes his trading decisions on gut feelings, hopes, dreams of getting rich quick, tips from the broker, “inside information” from friends, and from the improper understanding and use of indicators, oscillators, moving averages, and mechanical trading systems. In general, he is looking for a way to shortcut having to truly learn what is going on. Unfortunately, most new traders who attempt to trade futures fall into this category.
However, true trading is actually speculation (managed risk). The speculator is willing to accept the risk of price fluctuation in return for the greater leverage that comes with that risk in the hopes of earning a greater profit. The true speculator makes his trading decisions based on knowledge gathered from information about the behavior of the underlying, seasonality, historical and current market trends, technical chart analysis, commodity fundamentals, investment market dynamics, and knowledge of those who trade it.
7. Hey Joe! What about adding new positions when day trading?
A day trader should learn to press the market and add contracts at crucial trend confirmation intra day prices, moving all protective stops to break even with additional contracts. When a bull market makes new half day highs, instead of trading a one price unit size, trade two or more price units with a tighter stop. Either the market profitably explodes, or the trade is exited immediately.
When building bull-market trade positions, move protective stop-loss orders to break-even as new trade positions are added.
The best location for your protective stop-loss order is below a previous reaction low, swing-low, trend-line, or psychological price resistance area. And keep in mind you are not adding to an existing position. You have it correct when you say adding “new” trade positions. They are new trading positions and must be managed as such, all the while remembering that each “new” position is put on that much closer to the end of the move and therefore carries increased trading risk of loss.
8. Hey Joe! Do you think there is any truth in that individual traders are affected by the overall mood of the financial and forex market?
I believe there is a lot of truth in that statement. I also believe you must learn to detach yourself from the financial market moves. I read something a long time ago and saved it. I don’t remember who wrote it, but here it is:
“Short-term trading must rank near the top of the list of the most unpredictable and exciting occupations on our planet. As the aggregate of market players ride the market to soaring heights and terrifying lows, the collective consciousness of the crowd soars to euphoria and falls in despair in concert with the price movement.
“If the crowd experiences a cumulative emotion—ranging from mild optimism, greed and euphoria, to minor anxiety, then fear and outright panic—it stands to reason that all but the most robotic of traders go through personal feelings that mirror the experience of the crowd.
“It's common to find traders who stay in high spirits when the market trends up, and feel dejected and depressed when the market declines. In past years, this may have had more significance because many traders refused to sell short; they missed out on market action when it tumbled. Another reason for the ‘up is good, down is bad’ emotion seesaw lies in the unfortunate fact that when markets fall, many novice traders ignore their stop-loss points. A falling market = falling account value.
The downside to this syndrome, however, is more than detrimental to your wealth. Attaching your emotions to market gyrations can adversely influence your relationship with your loved ones and friends.
“How do you stay disconnected and detached from market moods? First, we state the obvious: acquire the knowledge and discipline needed to make wise trading choices. Second, refine money management skills; it is an absolute ‘must.’ Establish an overall, big-picture plan for your trading business, so daily market gyrations don't look so daunting. ALWAYS plan your trade and trade your plan. When in doubt, get out. If you don't enjoy selling short, when the market ‘rolls over,’ take profits and stay on the sidelines until conditions improve. After all, when you are in cash, you will have no emotional connection tied to market activity.
“Once you learn to disconnect from market mood, you will shake off emotional limitations that may have hampered your trading decisions. And that should have a positive impact on your trading success.”
9. Hey Joe! I know I am an over-trader. I guess I just don’t understand why? In your overall management, where does over trading fit in?
Over-trading fits in under the topic of risk management. We are talking “risk control.”
First, I would say that risk management is one of the most important things that you really need to understand.
Second, you must begin to under-trade, under-trade, under-trade.
Whatever you think your trade position ought to be, cut it at least in half. My experience with novice traders is they trade 3 to 5 times too much. Other than on spreads, they are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks.
The principle of preservation of capital implies that before you consider any potential market involvement, risk should be the prime concern. You should consider the potential reward, only in the context of the potential risk. Risk must become the determining factor in taking a position. This is the true meaning of risk/reward analysis. Properly applied, it sets the standard for evaluating not only whether to take a trade at all, but also to what degree. Preservation of capital—'refuse to lose'—becomes the basis for smart money management.
10. Is there order in the markets? Are there definable chart formations that form the basic building blocks of price action?
Yes, I believe there are, and I am happy to share them with you. I discovered them many years ago, over time and through the use of statistics. Three basic patterns have emerged that can be seen in any time frame on any chart that is capable of showing you the high and low values of prices. I am interested in the interpretation of these patterns as they apply to price movement. I call this discovery “The Law of Charts,” and it is available to readers of this publication at no charge simply by visiting our website. You can discover the Law of Charts on any kind of chart commonly used in market analysis today: the law can be seen on bar charts, candlestick charts, and point and figure charts.
The Law of Charts
The three basic patterns making up The Law of Charts are as follows:
- Ross hooks
Some of these may be further subdivided as follows:
- 1-2-3 highs
- 1-2-3 lows
- Trading ranges
For years traders have looked at price charts and wondered what they meant. Sometimes viewing a price chart is similar to looking at the stars and trying to figure out which ones to connect to show you the formation known as “Taurus, the bull.” All too often chart formations exist only in the eye of the beholder. At what point does a “pennant” formation become a pennant? What exactly constitutes a “coil,” and when is it a coil? Exactly how would you define a “head and shoulders” formation? When can you call a “megaphone” a megaphone? MORE IMPORTANTLY, what do any of these formations tell you?
The discovery of The Law of Charts was quite accidental—something on the order of Newton discovering the Law of Gravity when an apple fell on his head. As with most discoveries, The Law of Charts was discovered through simple observation—studying charts for many years until the formations just popped out and revealed themselves.
The details of the Law of Charts are seen in our e-book entitled, of all things, “The Law of Charts.” To see how this trader law is applied in regular trading, we are happy to share with you our weekly journal in which we show actual application of the law. The weekly journal, which we call “Chart Scan™,” is also available at no charge.
The Meaning of the Formations
1-2-3s occur only at the end of trends and swings. They are an indication of a change in trend. They take place when the directional momentum of a trend is diminishing. Exactly the way to identify 1-2-3 formations is detailed in our e-book. You will also find in the e-book how to register to receive our Chart scan journal.
Consolidations and the ability to identify them are of utmost importance because prices tend to move sideways far more than they tend to trend.
Ledges occur only when values are trending. They constitute a pause in the trend. The pause may be due to profit taking or, more usually, are reflective of uncertainty in the market. The traders e-book explains more fully how to deal with so called Ledges. Ledges are consolidation areas consisting of no less than four occurrences of price value and no more than ten occurrences of price value, having two matching highs and two matching lows.
Congestion areas are sideways consolidations of price value and reflect periods of accumulation and distribution. You might say that they indicate a market that is essentially at fair value with no significant changes in supply or demand. Congestion consists of from 11 to 20 occurrences of price value prior to a breakout.
Trading ranges are extended consolidations of price value. They consist of sideways movement lasting twenty-one bars or more. Interestingly, statistics show that breakouts from trading ranges occur most often on price value occurrences from twenty-one to twenty-nine. Furthermore, the narrower the trading range becomes, the more explosive tends to be the breakout, and the wider the trading range becomes, the less explosive will be any breakout from the sideways action. Trading ranges also reflect markets that are at fair value with little change in supply or demand.
Ross hooks always occur as the result of profit taking. A ross-hook is defined as the first failure of prices to continue in the direction they were previously moving following the breakout of a 1-2-3 formation, the breakout of any of the consolidation patterns mentioned above, or the breakout of a previous Ross hook.
Each one of the basic trade formations is able to be defined. The specific definitions are available in the previously mentioned e-book, “The Law of Charts.”
Since the basic formations occur in a variety of ways when seen on a chart depicting actual price action, we want to help you fully understand how to apply the law. There is considerably more to the Law of Charts than can possibly be described in this overview article. You can obtain a clear, thorough understanding of how we trade using The Law of Charts through the Chart Scan, which is sent out by E-mail each week.
We invite you to join us in a better understanding of what you see on a price chart.
Joe Ross’ Trading Educators is dedicated to helping serious traders to become better traders. Our staff and branch offices consist of real traders trading real markets. Trading Educators is involved in daytrading and position trading in various markets like futures, stocks and forex. We also trade futures spreads and options on futures.
11. Hey Joe! If I get my forex buy and sell signals working properly, I should be a winner, right?
Wrong! The perennial questions are, “Should I buy? Should I sell?” All too many traders focus their efforts on identifying buy and sell signals. In fact, that’s what most trading books consist of—some way to find buy and sell signals. Trading systems are usually all about “where to get in.”
The research and analysis traders do is geared towards reaching the goal of getting that magic “base line” directive to guide their actions. How ignorant can you be?
Any successful, experienced trader will tell you that although properly identifying buy/sell signals is important, it’s not the key to being successful. Instead, the way you manage each trade is what will determine your success.
Traders who take the baseline approach tend to believe that the success of their trading activity is dependent on following the right buy/sell signals at the right time. Clearly, it’s important that a trader be able to understand the process of generating signals and to use the methods involved. Realistically though, almost any financial trader can find a way to generate signals (whether using technical methods already out there, coming up with their own system, or using their platform’s automated signal generation tools).
Any successful, experienced commodity futures and forex trader will tell you your trade doesn’t begin and end with a buy or sell. There’s a trade management process involved. For each commodity futures trade you make, you’re making a group of decisions. The way you manage and time those decisions is what will determine the success of your trade.
Let’ say 2 traders get the same trade signal at the same time and act on it. One’s trade may result in profits while the other’s results in losses. How is this possible? It can occur because each trader made a different combination of decisions throughout the course of the trade. The decisions may include scaling in and/or out of the trade, using or not using trailing stop-loss orders, setting or not setting profit price target objectives prior to entry, patience or lack thereof, etc.
The forex and commodities futures traders who made the most effective overall combination of trading decisions will have the better trade results in the end. Of course, there are time when pure chance, gives the better result to the worst trader.
It’s very important to regard trading as a process, and to understand that as a trader your efforts need to be focused on the activity of trading itself, as opposed to getting a quick base line answer. Because there are many things to take into consideration in making your trades successful, it’s essential that you educate and train yourself in all the different areas.
Learn how to develop better trading plans and to trade a sound and proven important trading technique and technical indicator, and learn how to apply what you have developed to the overall process of executing a trade vs the original impulse to enter or stay-out of a trade to the control of your thought processes and emotions in making and managing that trade.
12. Hey Joe! I’m a long-term trader. Any trading advice for me?
Note the yearly ranges for the commodities you trade. What is this yearly high and low, are they higher highs, lows and closes compared to last year? Does the close confirm price action? What is the long term trend? How does this years compare to last three years' average range? Should next year have greater volatility than this year?
How much based in dollars was the commodities price move from the annual lowest low to highest high price? How much did you take out of that range? What should next years high and low be for the commodities you trade based on the yearly trend analysis? These questions define the yearly long term vertical bars, use the monthly priced bars to answer them. Use weekly price bars to answer major trend questions for monthly highs and lows.