Peak Performance Trading Tips

Last week I discussed Chapter 12 of the second edition of Trade Your Way to Financial Freedom, talking about how five investors with totally different ideas, including opposite views on what might happen, could all profit from various scenarios. The five such investors included:

1. Mary; a long-term trend follower.
2. Dick; a swing trader.
3. Victor; a value investor
4. Ellen; trading on the idea that there is some order to the universe and the markets
5. Ken; a spreader-Arbitrager

These five people were contrasted with Eric who buys and sells when he gets an urge to do so and Nancy who follows the advice of several newsletters. The reason they can all profit is due to the shared ten common characteristics most good traders have. Last week I gave you five of the ten characteristics, including

• A tested, positive expectancy system that's proven itself
• A system that fit them and their beliefs
• Totally understanding the concepts they are trading
• Knowing how to determine 1R and
• Being able to evaluate the risk-reward of each trade

Hopefully, you can see how those five qualities would start to generate success. However, I also said there were five equally important (if not more so) qualities and asked you to guess what they are. Let's see how you did.

The sixth key quality is that they all have a business plan to guide their trading. I've been talking about the importance of this plan for years. Most companies have a plan to raise money, but you need such a plan to help you treat your trading like a business. I've done a complete teleseminar on this topic and also a prior workshop. You can learn more about these on my website, plus future tips will also be about this topic.

The seventh key quality is that they all use position sizing. They have clear objectives written out, something that most traders/investors do not have. They also understand that position sizing is the key to meeting those objectives, and have worked out a position sizing algorithm to meet those objectives. We'll be discussing this is subsequent tips.

The eighth key quality is very critical. They all understand that their performances are totally a function of their own personal psychology and they spend a lot of time working on them selves. This area has been my key focus for many years - teaching traders to become efficient, rather than inefficient, decision makers.

The ninth key quality is that they take total responsibility for the results they get. They don't blame someone else or something else. They don't justify their results. They don't feel guilty or shameful about their results. They simply assume that they created them and that they can create better results by eliminating mistakes.

This leads to the tenth key quality, understanding that not following their system and business plan rules are a mistake. We've discovered that the average mistake can cost people as much as 4R. Furthermore, if you make even one mistake per month, you can turn a profitable system into a disaster. Thus, the key to becoming efficient is to eliminate such mistakes.

If you want more information on any qualities, we can help you. In addition, I'd suggest that you look at Chapter 12 to see how these seven traders approached the sample situations that were given and how they made/lost money.

Abell, Koppel Discuss Their Profitable Short-term Trading Methods

No short-term trading system is perfect. However, having and using a system is critical for short-term trading success, say Howard Abell and Bob Koppel.

"A successful short-term trading system must be profitable, consistent, and personal--conforming to the unique psychological and methodological needs of the individual," they said.

Abell is chief operating officer for Innergame Division and author of "The Day Trader's Advantage" and "The Insider's Edge." Koppel has authored "The Intuitive Trader" and is president of Innergame Division, which is a professional and institutional brokerage and trader execution services division of Rand Financial--a Chicago-based futures commission merchant with clearing representation worldwide.

Innergame Division is also associated with the Moore Research Center, based in Eugene, Ore. Steve Moore is the proprietor. Together, they have created the Innergame Partners/Moore Research, Inc. (IPMR) Trading Approach.

The trading method has the following tenets:

Patience Is Your Edge

The edge of the floor trader is buying the bid and selling the offer. This is an unreasonable expectation for off-the-floor day- and swing-traders. However, there are other ways to maintain an edge. Patience and preparation serve to create an edge that helps build and conserve equity. Knowing what you expect the market to do and waiting patiently for the market to come to you-­in other words, to meet your expectations--gives you that edge.

Good Daytraders and Swing Trades Result from High Percentage of "Set-ups"

Each day must be viewed in a larger context, which might be one day to two weeks of market action. Understanding how markets "set up" to make predictable moves and anticipating these moves through the set-up is a valuable key to success.

Anticipating Market Opportunities

In most instances, waiting for the market to demonstrate what appears to be a trading opportunity will result in entering too late for maximum profits.

Predetermined Buy and Sell Areas Must Be Executed

For those traders who have difficulty "pulling the trigger," putting resting orders in the market will get you into or out of the trade.

Trade One Set-Up Per Market Day

Overtrading comes from indecision and anxiety. By setting your sights on one good set-up in a market, you avoid trading your emotions.

Ignore the Noise, Follow the Signal

Much of what a market does during the day can be considered noise--that is, market action without meaning. Hanging on every tick can be a wearisome and misleading chore. You must eliminate your reactions to the noise and follow the essential signals.

Take "Fast-Market" or Climax Condition Profits

In day- or swing-trading it is a good idea to exit a profitable trade if the market climaxes on heavy tick volume or "fast-market" conditions. It is a high probability that the high or low of the day is being made at this time. If the market hits your resting entry orders under these conditions, expect immediate profits or be alert for another wave in the same direction.

Abandon Dull or Non-Performing Markets

If you find yourself in a market that is very dull--look elsewhere. Time is scarce and watching a dull market drains energy.

Koppel and Abell made their presentation to traders attending the Technical Analysis Group (TAG XVIII) meeting in New Orleans late last week. The meeting was sponsored by Dow Jones Telerate.

Everyone Can Profit

What most people don't realize is that at any given time 4-5 people might go long a position and another 4-5 might go short or unload a position. Each of them can have different systems and different ideas, and all of them can make money. They might have different ideas about the market, but they trade it because they've figured out that it is a low risk idea. And a low risk idea is one that I define to be an idea with a positive expectancy, that's traded at a position-size level so as to survive the worst case contingency in the short run so as to realize the long-term expectancy. In addition, they all have common characteristics, some of which I'll discuss later in this week's tip.

In Chapter 12 of the second edition of Trade Your Way to Financial Freedom, I discuss the strategies and thinking of five such investors.

• Mary, a long-term trend follower.
• Dick, a swing trader.
• Victor, a value investor
• Ellen, trading on the idea that there is some order to the universe and the markets and
• Ken, a spreader-Arbitrager

These five people are contrasted with Eric who just buys and sells when he gets an urge to do so and Nancy who follows the advice of several newsletters. I then show how these people would evaluate five different market scenarios and how those scenarios turned out six weeks later. The interesting thing is how the five major characters can generally make money despite totally different market views.

The reason they can do that is because they all share ten common characteristics which most good traders have. In this tip, I'll share five of those with you.

• First, they all have a tested, positive expectancy system that's proven itself to make money. We've been discussing how that's done in this series of tips.
• Second, they all have systems that fit them and their beliefs. They understand that they make money with their systems because it does fit them.
• Third, they totally understand the concepts they are trading and how those concepts generate low risk ideas.
• Fourth, they all understand that when they get into a trade, they must have some idea of when they are wrong and will bail out of the trade. This is what determines 1R for them as we've discussed previously.
• Fifth, they all evaluate the risk-reward ratio of each trade that they take. For the mechanical traders this is part of their system. For the discretionary traders, this is part of their evaluation before they take the trade. And the chapter goes into how they specifically do that for each of the five trading scenarios.

Can you begin to see how those five qualities would start to generate success? However, there are five more qualities that are just as important and, in some cases, even more important than the ones just listed. Why don't you read through prior tips and see if you can determine what they might be.

Have a good weekend. Next week I'll talk about what those remaining five traits are, but hopefully you'll be able to figure out at least 3-4 of them on your own by reading through some of my prior tips. Until then, this is Van Tharp.