Routine & Habits VII: The Routines and Habits

Well folks this is the biggie. All I have written before in this series comes down to this post.

It’s my belief that participants attending seminars would obtain greater benefit from a seminar if they adopted, for 30 days after the seminar, a set routine to internalize the seminar concepts. At the end of the 30 days, the routine would become a habit and the seminar participant is then free to choose whether to adopt all, some or none of the content. The key point is that until he has internalized the seminar content, he is not in a position to choose.

I remember my first Market Profile seminar. I flew from Sydney with two mates: one was a technical trader working as a technical analyst for a broking firm (let’s call him John); the other was a day-trader (let’s call him Paul).  Paul and I ‘lost’ John pretty early in the piece. By the middle of the first day, John was doodling and post session discussions revealed that he had taken the view that the Profile was not for him – it was too far removed from what he knew.

Paul and I liked the idea of the Profile but we struggled with the application. It took me 9 months before I got comfortable trading the Profile way – what enabled me to persevere was the fact that I set a daily routine to follow. Each day I set the goal for that day and followed the set routine.  Part of the routine involved reviewing whether I achieved the day’s goal and if not what I had to do the next day to complete it. I would not move to the next topic until I was satisfied I had mastered each day’s goal.

Trading routines have a similar objective. Their outcome is to produce habits of success. The routine you set is one that is personal to you. Below is the one I follow – it suits my personality; treat it simply as an example.  Experiment with a routine, content, time of day, order of activities until you find one that sits comfortably.

Monthly Routines: 

  • Review summary of the psychology and equity journals. Are there any empowering patterns? Are there any disempowering ones? I look for the patterns under the headings: setups, instruments, and personal behavioural patterns. For example: is there an instrument that bore the preponderance of losses for the month? If so, did the losses occur for a particular setup? What was the difference between the current environment and the most recent environment that I made money in this instrument? In this setup?
  • Review equity journals to determine if I am on track. I look to make about 22% per year so I am looking to make about 2% per month. If I am not on track, where can I make improvements? What has to happen for me to return to budget? Etc……

It’s important to understand that I make these enquiries from a stance of curiosity – there is no question of blaming myself for errors or feeling anxiety because I am behind the eight-ball. True if I have had 4 consecutive losing months or more than 12% loss in any rolling period, I take an enforced holiday of at least a week. But this is in the form of a breather to put a space between the losses and me and not as a form of self-punishment.


  • Analysis of markets with a view to preparing a short list of possible trades in the coming weeks and a watch list where trades are unlikely but possible if certain events occur.
  • Analysis of psychology journal – summary of daily entries for possible patterns (see above entry in Monthly Routines).
  • Analysis of equity journal – to ensure that there are no out of boundary losses.


  • Download and update data
  • Update psychological journal
  • Update equity journal
  • Prepare for trades – plan, and visualize
  • Ensure day’s activities are planned around trading activities.
  • During the trading day, a series of routines to ensure my ‘rat brain’ is not running my trading.

That’s it. I hope you have enjoyed the series.

Routine and Habits VI: The Pyschological Plan

What is Winning Psychology? For me it’s a combination of traits and tools that provide the environment whereby a trader consistently executes his trading plan. In this blog, I’ll look at some of the tools at the trader’s disposal.

The first is preparation: whether you are a day trader, or longer time-frame trader, preparation is essential. The preparation takes place firstly at the conscious level and then at the subconscious. I set out some of steps of the preparation in my previous blogs in this series. Once we have completed the preparation consciously, I recommend we visualize in the alpha state the various step of the preparation. It’s beyond the scope of this blog to describe the visualization process but there are any number of good books on the subject. By visualizing our planned response to the various scenarios, we reduce the probability that we’ll breach our plan.

The second tool I like is a bio-feed device. The one I use is the 3100 WristOx from but there are less expensive devices that do as good a job. The bio-feed back device warns me when my ‘rat-brain’ is starting to take control and before it totally takes over.

The final tool is the trading psychological journal. The purpose of my journal is to identify empowering as well as disempowering patterns. For example: a pattern that identifies when we are likely to over-trade. Once I find the pattern, I like to visualize:

  1. The events that created the environment
  2. Visualize an alternative response for a number of days
  3. Check to see if the next real-time event results in new behaviour. If it does, no further action is necessary. If it doesn’t, re-do steps (1) and (2).

For empowering patterns, I seek to create the pattern each time I trade.

I like to create weekly, monthly and 3-monthly summaries of the various patterns. In this way. I find it is easier to spot recurring patterns.

Routine and Habits V: The Money Management Plan

The money management plan balances the risk of ruin with maximization of profitability. In other words, it seeks to give us the biggest bang for our investment dollar with the greatest measure of safety: the name of the game is to survive a series of consecutive losses.

The Money Management plan seeks to answer:

  • What risk shall I take on this trade?
  • Given my stop loss, and my risk assessment of the trade, what is the maximum size I can place? If you have different levels of size, then the questions are: What is the maximum normal size and what size shall I have for this trade?
  • If you trade more than one instrument,  what is the maximum portfolio risk?
  • What maximum loss will I incur before I take a rest from trading?
  • At what point do I make my profits available to my position sizing?

To answer the questions, you have two components to consider:

  1. A psychological component: the dollar amount we risk needs to be within our risk profile’s comfort level; otherwise the probability is we’ll not follow our trading plan. If your current level of risk is above your comfort zone, increase your size incrementally – slowly boil the frog technique. Raise the size so slowly that your increased size doesn’t cause your subconscious to send out distress signals.
  2. A technical component: the inputs to your money management algorithm. There is your trade results: your win/loss rate, your Avg$win/Avg$loss, your avg$win for longs, your avg$win for shorts, the mean and standard deviation of possible consecutive losses, your maximum drawdown, the means and standard deviation of possible consecutive wins, your high water mark, your maximum adverse excursion, your maximum favourable excursion. There is also the market volatility: I use ATR to measure volatility.

All these factors impact the amount of risk you take. If you want a ‘quick and dirty algorithm’, there is the Turtle formulation that considers only the volatility of the market and the amount you want to risk – however you decide that:

(% Capital to risk x Capital)/(S value of ATR) = # of contracts. For example, let’s say you have US$20k and you want to risk 2% and trade the ES. Let’s take a 45 day – the ES has an ATR of about 25. The $ value is 25 x 50 = $1250. So the number of contracts you can trade is:

(2% x 20,000) = 400/1250 = 0

That’s right, a US$20k is not enough to trade 1 contract in the ES. The formula can be applied to any timeframe.

Money Management is one of those subjects that can be as simple or as complicated as you want to make it. I recommend you start with the Turtle formulation and move on from there.

Routine and Habits IV (B): The Trading Plan

Today I am going to write about aspects of a discretionary plan. Discretionary plan are first and foremost a reflection of our beliefs about the nature and structure of markets. Someone who believes in the market efficiency theory will use a different plan to someone who believes they are chaotic.

I believe that markets are chaotic. Consequently, I believe:

  • Markets have a discernable structure
  • They rhyme rather than repeat i.e. there are patterns we can exploit but these patterns are repeated’ similarly rather than exactly’.
  • The market rhymes because the patterns are a reflection of the emotional tug-of-war between the buyer and the seller.
  • The context in which the patterns occur are critical to the plan.

A discretionary plan is also a reflection of our psychology including our appetite for risk; this refection is articulated in our trading philosophy. In Trader Vic–Methods of a Wall Street Master by Victor Sperandeo, I found a statement that mirrored my values:

  1. Preservation of Capital – this is the overriding principle
  2. Consistency of Returns – this goes hand-in-hand with (1)
  3. Superior Returns – only when (1) and (2) have been secured

My plan and results reflect the three characteristics; for example I use the Rule of 3 not because it increases my bottom line. Indeed, in a strongly trending market, the rule reduces my profits. I use the rule because it smooths my equity curve.

I believe a discretionary plan has certain critical elements:

  • A way of identifying the trend of a timeframe and when the trend changes or is likely to change. Once we identify that a trend is likely to continue, or that it is likely to change, we have our strategy. That strategy is rooted in the timeframe we are trading and includes the effects on our the trend by higher time frames.
  • Tools to identify price levels where a trade may take place (zones) . As my nature favours a responsive trade, I look to buy support in an uptrend and sell resistance in a downtrend. I very seldom buy/sell breakouts of my timeframe.
  • Chart patterns that indicate a zone has held (setups) and entry patterns that tell me ‘now is the time to take a trade’ (triggers). The setup and trigger define the price stop placement. In addition to the price stop, I look to define the qualitative conditions that will cause me to exit a trade.
  • Chart patterns that define the core profit target in the Rule of 3. This core profit target versus the stop defines the Risk:Reward expectancy: I need to see around 2:1 or better to take a trade.
  • The relationship between the price stop, my risk assessment of the trade, and money management plan govern my position size. I have three sizes: normal, 1/2 above normal and above normal (usually 1.5 or 2.0 times normal).
  • A set of rules (Rule of 3) that govern my subsequent trade management i.e. the management of the trade once it starts to move in my favour.

What tools do I use?

  • TREND: Barros Swings and the Ray Wave
  • ZONES: Statistics of waves, MIDAS (see free section’ for Paul Levine’s lectures on this tool), and various ratios.
  • SETUPS: Negative Development and Contraction
  • TRIGGERS: Intra-day volume on Market Delta software
  • INITIAL QUALITATIVE EXIT STRATEGIES: Based on Market Profile and Wyckoff
  • INITIAL PRICE STOPS: Barros Swings and The Ray Wave

Once you have your tools, you need to create a plan. I have found that classifying the rules under ‘Buy & Sell’ and giving a setup and trigger a separate rule number, is the best way of creating a data base to assess the efficacy of the rule. I’ll discuss this farther in the blog on ‘Stats to Keep’.

A couple of final comments. I believe all traders should have a passing acquaintance with statistical and probability theory. This comes from someone who was mathematically a complete dunce until well into his mid-30s. “Salvation” was found in two books by Derek Rowntree:

  1. Statistics Without Tears
  2. Probability Without Tears

Finally if you see yourself as a serious trader (as against someone having a ‘flutter’ i.e. a gamble for pleasure), you owe to yourself to back test your setups and triggers. Generally because a discretionary trader relies so much on context, it is difficult for most back testing programs to test the trading rules. However, you can certainly test the setups and triggers. In back testing, you are looking for evidence of robustness and if you lack the skills to do it yourself (like me), then find someone who’ll do it for you.

Routines & Habits IV: The Trading Plan

Plans can be fundamentally and/or technically based and if the latter, mechanical and/or discretionary. The fundamental based plans that I know of are all discretionary approaches; I have never seen a mechanical, fundamental plan but that doesn’t mean they don’t exist.

The best place to start is to define my terms:

  • Fundamental plans are based on inputs such as supply and demand, value etc
  • Technical plans are based on technical analysis
  • Mechanical plans: rule based plans, no trades are taken outside the rules
  • Discretionary plans: rule based plans with a rule that says ‘entries and exits need not follow the rules’. In essence, this allows intuition to play a role.
  • Subjective plans: a trading style that is totally based on intuition. Most of the pit traders I have met and some of their replacements, the ‘on screen scalper’.

I am a monthly trend discretionary trader – that’s my niche. But in today’s post, I’ll be writing about mechanical plans. I stress that in this area, my knowledge is vicariously derived – from books, my students and my peers who have been kind enough to share.

Before I get into the discussion, there are two points I want to make.

  1. I subscribe to a view put forward by Mark Douglas: that whatever style best suits an individual, the optimum path is first start as a mechanical trader. The mechanical approach teaches us to trade what we see, not what we’d like to see.
  2. The style we ultimately adopt is the one that suits our personality. In his latest video, Stephen Pierce makes the point that to succeed in business we first must choose the environment that provides the greatest opportunity for success ( Part of the trader’s environment is his personality. As we’ll see later, it’s not only in the realm of trading plans that a trader needs to take his personality into account.

Points (1) and (2) may seem contradictory, but my experience as a mentor suggests otherwise. Traders that move straight into discretionary trading more will confuse ‘intuition’ with ‘into wishing’. It’s worthwhile remembering that intuition is borne from experience of lessons learnt from our successes and failures. So unless you have built up the experience base, your ‘intuition’ is likely to be flawed.

The best mechanical plans I have seen have the following characteristics:

  • They contain around three buy and three sell rules: entry, stop and profit taking.
  • They are based on some observation about the nature of the market rather than  being based on just ‘data-mining’ i.e. some computer generated relationship.
  • Sound testing of the system for robustness is a must.
  • If the system trades more than one instrument, the testing needs to incorporate testing on portfolio basis. The testing program recommended was ‘Trading Recipes’; this has been replaced by Mechanica Software (

The best books I have read on the subject are the two by Thomas Stridsman: “Trading Systems and Money Management” and Trading Systems that Work”. Thomas makes a point that I have incorporated into the testing of systems. The testing for robustness is found in the normalization of results and not just by the dollars made or lost. He argues that $100.00 made on the S&P is very different from $100.00 made in oats because of the different volatility between the two instruments. We can take this a step farther and argue that the same can be said about the same instrument in different times. For example in 1987 a drop of 100 points in the Dow was a cause for concern; today, it happens almost routinely.

To normalize results, Thomas suggests we use on a one-contract basis, the result divided by the price initiating the trade: we have a result in percentages rather than dollars. In this way, we compare apples with apples between different instruments and different times.

By their very nature, the best mechanical plans ignore the context in which a trade takes place. Consequently, as long as the environment remains stable i.e. the system is operating within the conditions that suit it, it will make money. Indeed, given human nature, and taken as a whole, I believe mechanical traders will make more money than discretionary traders in this environment.

But in an unstable environment or one in a transitional phase, the mechanical trader will fare worse than the discretionary trader.

In the next blog, I’ll commence the series on discretionary trading plans.

Routines and Habits: A Detour

I was going to write on trading plans, a subject that will probably take a couple of posts. But Ms A. Wang sent me a blog by Dr. Brett Steenbarger, Virtual Trading Groups: Getting to the Next Level, which contained a topic I thought more appropriate to end 2007.

In that blog, Brett writes that traders would benefit by interacting with their peers provided the group consisted of members “sufficiently experienced to offer value to others, ones sufficiently committed to putting time and effort into learning, and–perhaps most of all–ones sufficiently secure to maintain an open kimono and share all the successes, failures, lessons, and letdowns”

The question I’d ask is: who would join and are they the ones that would most benefit from such interaction?

My experience with groups is: those most willing to join the groups are the ones that need it least. Who would join? Usually the classes NLP practitioners call ‘unconsciously competent (the experts) and the consciously, unconsciously competent (the master teachers)’.

What class of traders would benefit most? Two classes:

  1. Those NLP practitioner’s call ‘consciously incompetent’ (those that know they don’t know and want to do something about it) and
  2. The ‘consciously competent’ (those that have yet to internalize the habits of success).

But yet it is precisely groups (1) and (2) that either fail to join or fail to persevere with the group.

At least that has been my experience.

There are major benefits from joining such a group – not the tips, you learn little from tips; it’s in the exponential growth of the learning curve that we most benefit. For the novice the benefits lie in:

  • The exposure to a probability mindset and the different ways that mindset finds its voice.
  • In the fact that there are many ways to make money;
  • In the fact that the successful traders will lose money in many trades; but
  • Most of all, the novice learns that success lies in keeping a gulf between the Avg$win and Avg$loss.

For the successful trader, the group forces him to challenge his assumptions and heuristics – a challenge that may go unheeded when trading alone. In a sense, the successful trader will benefit less than the novice but he will be the one more likely to join and stay.

In 2008, I’d like to see the idea of virtual trading groups take hold and proliferate. I’d like to see consigned to the rubbish bin (where it belongs), the idea that trading/investing is a profession that has a license to print money. In this part of the world, we have ad after ad telling us how to ‘turn $10k into $1M in 12 months for just 15 minutes a day!’ This unrealistic expectation is probably the most important reason for the dismal rate of success among newbies. Finally, I’d like to see the percentage of successful newbies rise from the current 10% to 20% to 40% and more.

When I started trading over 30 years ago, we did not have the assistance newbies have today -unless you were a local in the pits, you learned by trial and error. Now, it’s very different – today, we traders live in a privileged world where success is there for the taking – we only have to do whatever it takes to succeed. Our success lies entirely in our hands; let’s make 2008 the best year ever!

Happy New Year!

Routines and Habits III: The Disaster Plan

In these plans, I look to prepare for Murphy’s Law: “if there’s anything that can go wrong it will’ (BTW did you know there is a whole web site dedicated to Murphy’s Law?

The important point here is to prepare for these contingencies before they happen.

Let’s take the most difficult problem first.

  • What happens if your internet connection goes down? Now that may be from a baby inconvenience from ‘my modem’ has stopped working to a granddaddy of a disaster where ‘your whole country’s ISP service goes down’. Don’t say that can’t happen – it happened to me when an undersea earthquake brought down all of Hong Kong’s connections. In my case, my contingency plans swung into action. I told a colleague of the problem and he placed interim stops and profit targets and the next day I was in Singapore where there was no problem.
  • In the same vein, let me ask you if your broker takes phone orders? If he does, what types of orders will he accept? IB, for example, will take only market orders.
  • This brings me to the next major problem: what happens if your broker’s platform goes down? Or worse still if his access to the exchange goes down. Allied to this is the problem of what will you do, if the exchange on which you are trading goes down (e.g. as a result of a terrorist attack)?

Think about this. It may be your account size does not warrant precautions, but then again it might.

The three ‘disasters’ above head my list because to a large extent, the ability to protect yourself depends on others: a friend, having other accounts, hedging on a different exchange etc. The next two on my list are more within our control to remedy but are no less stressful:

  1. Having the market gap against you, big-time! I am not talking about say a 2% gap on the ES but something extraordinary like Oct 1987. If you have a 10% gap against you, what will you do?
  2. The last one: you find you have an open position, an open position you were unaware of and it’s against you by 5%, 10% or more, what do you do in the circumstance?

My solution to both problems is to cut the position. This leaves me free to decide on my next course of action.

By the way, problem (2) did happen to me. I forgot to cancel a GTC stop order when I went on a holiday. Though I have someone who checks my positions daily, he, unfortunately, was having marital problems and failed to check the open positions during the break. I came home and found I was short the Hang Seng in raging bull market and down 10%. I cut the position and I was thankful I did: it finished lower the day I cut it and again the next day. But three days later, I’d have been down close to 13% and the loss would have increased the longer I held it.

The solution to major and minor disasters is preparation. Think them through and then rehearse them in your mind so that your responses are automatic. In the long run the preparation you put in may save your life.

Tomorrow I’ll start the posts on trading plans.

Routine and Habits II: The Business Plan

My starting point each September 1 (my year runs Sept 1 to Aug 31) is my business plan.  Since I treat trading as a business and we all know most, if not all successful businesses, have a business plan, I thought this the appropriate place to begin Success Routines and Habits.

I prepare my Business Plan in the first two weeks of September and I give priority to the task.  Below are my headings; they are far from being cast in stone and the same can be said for the plan. It’s reviewed and revised quarterly. The plan serves as a guide only. In the recent past, I can’t remember when I did not make some mid-stream correction.


  • Vision & Mission Statement. To me this is the crux of the document. What we want to become and why must align with our values otherwise all the plan will be is wallpaper and will be as much use.
  • Goals
  • Expenses
  • Projected Income
  • Trading Plan
  •    Rules
  •    Trading Timeframe
  •    Markets
  •    How do I know when plan is not working?
  •   When will I take an enforced break?
  • Risk Management Plan
  •    Position Sizing per trade
  •   Position Sizing Portfolio
  •   Initial Risk Exposure per trade
  •   Initial Risk Exposure Portfolio
  •   When and how to Pyramid.
  •   When and How to make Profits available to trading capital.
  •    Maximum Loss per trade
  • Ongoing education in Plan, Risk Management and Psychology
  •    Time Allocation
  •    Dollar Budget
  •    Areas to Focus on within each area (Plan, RM and Psy)
  • Focus and Review Plans
  •    Especially if there are important life-style changes e.g. changing jobs, having a child etc
  • Disaster and Contingency Plans

A few years ago I attended a seminar by Van Tharp (; also his blog at: on Business Plans. At the end of the seminar, we all had to do a business plan. I have attached this as one of the better ones submitted to give you an idea of the form the plan can take.


Routines and Habits for Success I

I trust you all had a great Xmas!

Over the next few blogs, I’ll be considering the routines and habits we need for trading/investing success. In this post, I’ll be examining the pre-conditions that are necessary.

Routines and habits are actions. There are 5 pre-conditions to effective action:

  1. The quality of our preparation and planning
  2. The will to execute our plan
  3. Our willingness to act beyond our comfort zone
  4. The effectiveness of the review of our results: we seek to improve the results that lead to our goals; and we seek to change or replace the actions whose consequences lead away from our goals.

But effective action is only one half of the power equation. Actions are the direct result of the decisions we make. Our decisions are dependent on:

  • Our internal landscape: our experience, intelligence, attitudes, beliefs, and values.
  • Possessing certain values that are critical: honesty, integrity and accountability.
  • Our willingness to look behind our closed doors. We all have areas of our past that we’d rather not examine. But here’s the conundrum, to the extent that they remain hidden from our conscious minds will be the extent to which they control actions, usually with adverse consequences. So by having the courage and fortitude to endure the emotional pain that comes from such an exploration, we’ll achieve a self-awareness that leads to more effective action.

Armed with the pre-conditions, we’ll examine routines and habits from the 3 perspectives: Intellectual, Emotional/Psychological and Physical.

First in this series begins tomorrow when I look at one aspect in the Intellectual camp: the Business Plan

Richard Wyckoff III

I don’t usually post on weekends. But it’s Xmas so think of this as my Christmas present to you for your support. Merry Christmas and Thanks!

In this post I’ll conclude the Wyckoff series and suggest source materials in case you’d like to take your studies to another level.

Like Steidlmayer, Wyckoff’s work evolved over time – from his early days as a tape reader to the technical trader by the time of his death. Throughout his career there was one constant: principles mattered over patterns. Understand the principle, and you can adjust the pattern. As they say, history repeats itself but…never repeats in exactly the same way.

By the end of his career, Wyckoff had three main principles:

  • The Law of Supply & Demand
  • The Law of Cause & Effect
  • The Law of Effort and Result

Rather than have my take on what Wyckoff meant, read the information straight from the horse’s mouth. You can download the first 5 pages of the “Introduction to the Wyckoff Method of Stock Market Analysis” (published by the Stock Market Institute and including the charts) at ((For this, you need to thank my techie, O K Lee (real name) who was kind enough to work on a Sunday).

Principles are crucial to success. But to learn to apply the principles, we need a model of application.  So, by the time of his death, Wyckoff had also developed a model for trading changes in trend and trading continuation trades.

The best source of this model is the Stock Market Insitute in Arizona. The good news is they finally have a web site: The bad news is they no longer seem to carry the ‘Introduction to the Wyckoff Method of Stock Market Analysis’. Futures and FX traders needed only the Introduction; stock traders/investors would find the full course useful. It would certainly pay futures and FX traders to ask SMI if they still have the “Introduction….” for sale. If you do learn the model, always keep in mind Wyckoff’s comments about the importance of principles. Without understanding them, the model cannot be adapted when the trading environment changes.

Other sources:

  1. There is an excellent but incomplete summary in: The Three Skills of Top Trading: Behavioral Systems Building, Pattern Recognition, and Mental State Management (Wiley Trading) by Hank Pruden
  2. This book contains no theoretical explanations but contains some great practical applications: Timing the Trade: How Price and Volume Move Markets! by Tom O’Brien
  3. Stocks and Commodities has a series of articles by different authors. Go to the bookstore and search for Wyckoff:

Tomorrow I’ll review the S&P recommendation I made on Friday.