Preparation and Prevention

BarroMetrics Views: Preparation and Prevention

preparation

Yesterday again proved the value of in-depth preparation for a trade.

I had been stalking the AUDUSD for around 10-days. Finally, the AUDUSD moved into my sell zone with momentum divergence on a 60-minute chart.  I also had determined the lowest price I was prepared to initiate the trade, where my stop and first exit target was going to be.

I turned to the 5-minute for my setup and entry. And just as my entry bar appeared to be forming, my home PC dies!

I had to:

  • Boot up my IPad Pro
  • Connect to the office PC via GoToMyPC (needed the AccuStrength service)
  • Logged in to my entry platforms (first time on Ipad Pro).

Luckily, the pair had not moved too far from my theoretical entry. So, I executed. Only problem?

I had set up the Dec AUDUSD CFD and not the FX pair!

Now Dec is an illiquid month. So, I immediately exited Dec (loss $250.00) and re-entered an FX position at .7674 (optimal entry .7684). The whole exercise cost me about 11 pips.

The point is that but for knowing my levels, especially the minimum price I was prepared to accept, the boo-boo with Dec may have cost me so much more.

The moral of the story: I ask the attendees to my courses to spend some time visualizing their trades:

  • Where they will be entering.
  • Stop placement
  • Target exit, if any.
  • What can go wrong? Plan and see their response.
  • What can go right? Plan and see their response.

Most times, the visualization does not come into play. But sometimes, like yesterday, it proves its worth. How about you? How do you prepare for your trades?

 

You, the Market and the Times

 

markets-and-you

BarroMetrics Views: You, the Market and the Times

If ever there was a time when trading skills were required, it’s NOW!

For some time I have been of the view that a Black Swan event will shake the stock markets’ belief in Central Banks.

All over the world – from the US to China, from Europe to Japan – stock prices have divorced from the economy, and aligned with ‘easy money’.

Once this belief – that central banks can defy economic laws – is shaken, the central banks will be unable to prevent a correction that has been ten years in the making – ever since QE began in 2007. 

The question is how many retail traders are ready to meet the challenge.

In one sense, trading is relatively simple: buy lower than you sell. But, as my mentor, said: “The devil is in the details”.

Pete Steidlmayer’s equation for success was: You x Market Understanding led to success. The problem is both are difficult to come by.

Self-awareness, given human nature, is difficult because there is pain involved. Pain is seeing ourselves with all our flaws; and pain, if we elect to change.

Market Understanding is at least as difficult. There are so many conflicting ideas on how to interpret and respond to market information: from mechanical approaches to the esoteric ideas of Gann and Elliott.

What’s a trader to do?

Firstly recognise that our end of month statement, over time, will reflect the state of our knowledge and execution. If we execute consistently and fail to produce a positive return, our market understanding is at fault. That we can change.

But, if we fail to execute consistently, then we don’t know if it is the lack of consistency or our plan that is the reason for the losses.

So, the first steps are:

  1.  Formulate trading rules,
  2. Execute consistently, and
  3. See if, over a large sample size (30 trades), we generate a profit.

In this trial period, trade small. I recommend trading micro CFDs and FX where 100 pips will be only $10.00.  Once you have proven to yourself you can make money, you invest more capital.

So, where are you on the road of success – still flaying about seeking for that easy (doomed to failure) road to riches? Or are you ready to work for your success? Only you have the answer.

An Educator Gets Taught

education

BarroMetrics Views: An Educator Gets Taught

No sooner did I arrive in Singapore that I came down with a heavy cold. Not enough to send me to bed, but enough to affect my voice and energy levels. Still, I found the trip worthwhile given I learned something new.

We are now approaching Stage 2, Practical, Ultimate III. I have learned much – specifically, what I say and what is heard can be worlds apart. For example, I use a chart pattern learned from Bob Volman that I call an FTP.

The conditions for an FTP are:

  1. A sideways pattern in a timeframe e.g. a 5-period swing on a 290-minute chart.
  2. The FTP pattern appearing at the Boundaries of Congestion – either around the high or low of congestion.
  3. A breakout of congestion on the side the FTP occurs.

In this case, the FTP signals a valid breakout.

I thought the pattern was relatively straight forward and simple. That’s not the feedback I received via the practical exercises:

  • Some just got the pattern wrong.
  • Some had the right pattern but ignored the location of the pattern.
  • A few got it right.

The great thing was the exercises allowed the attendees to adjust their mistakes.

It got me to thinking. How effective are two and three-day seminars as teaching tools when unaccompanied by practical classes?

So what’s your experience with two and three-day seminar?

Do You Have What It Takes? 2

BarroMetrics Views: Do You Have What It Takes? 2

Motivation Dream Deadline

Yesterday I left you with a question: how do ensure that we operate from a foundation based on greater pleasure? I asked that because doing so ensures we maintain our motivation.

To answer that question, we need to delve once more into our human wiring.

  1. What drives our actions? The imbalance of pleasure and pain.
  2. What creates pleasure and pain? A thought gives rise to a feeling which gives rise to an action. That action produces results that lead to a thought etc.

The result of our actions tends to be determined by how closely aligned our perceptions are aligned with reality. The closer aligned they are, the more likely our results will bring us what we want (and that means pleasure).

It’s important to note that ‘our reality’ is the ‘out there as seen by the in here’.  Our perceptions determine what is real for us. If our reality is out of alignment with the way things are, then we are unlikely to get the results we want.

For example, if we believe that trading success is guaranteed by doubling down, then we are likely to go broke before we get rich.

The other mistake is to confuse reality with our thoughts. For example, we are long the S&P and the market suddenly dives. The reality is the market is moving against us, and we are losing $x.00. That’s it. If we catastrophize or indulge in wishful thinking, we are making our thoughts a reality – a reality that exists only in our mind.

What is the reality? It is that the market is moving against us, and we are losing $xx.00. That’s it. If we catastrophize or indulge in wishful thinking, we are making our thoughts a reality – a reality that exists only in our mind.

Our confusion of ‘thoughts for reality’ tends to surface when our fight, flight or freeze instincts are triggered. So, the best ways to deal with this primal fear:

  • Learn to accept uncomfortable thoughts and feelings for what they are – automatic responses to external events. Be comfortable with discomfort.
  • Prepare as best (and as extensively) as we can for ‘surprise’ and ‘unexpected events’ – by pre-planning our responses.

For example, Let’s say I envisage that I short the GBPUSD at 1.3307. And, no sooner do I get my fill, that the pair rallies to 1.3397.  How would I react?

I picture firstly how I would feel, then secondly, how I would react. I tell my students to ask, after entry, ‘what does the market have to do to prove me wrong?’ And to answer that question by ‘seeing’ their response is as

I tell my students to ask, after entry, ‘what does the market have to do to prove me wrong?’ And to answer that question by ‘seeing’ their response is as much detail a possible.

Through preparation and anticipation, we overcome the effects of ‘fight, flight and freeze’. Using the same process, we can ensure that the ‘pleasure’ side of the equation outweighs the ‘pain’ side. And in this way develop our grit to attain our goals no matter the barriers.

Pleasure and Pain

BarroMetrics Views: Pleasure and Pain

The results are in: Traders 3, Students 1.

What???

The score represents the ratio of Traders over Students who have registered for Live the Life of Your Dreams, my ebook in organisation and goal achievement.

The ebook will be out September 30.

This week, I was asked what was the best book I have read on motivation. I must admit to having a love of reading, and, as a result, I do cover a lot of ground. You’d think I have difficulty nominating just one.

Nope, the best one is Jason Gracia’s The Motivated Mind. He provides a structured approach to getting things done. And, he has insights not available anywhere else.

For example: what are the elements of overcoming procrastination? Most authors say: The pleasure of success needs to outweigh the pain of action. 

Gracia takes the view that what is needed is this: (The Pleasure of Success and the Pain of Inaction must outweigh the Pleasure of Inaction and the Pain of Action).

The book is littered with gems and insights. Well worth a read. Best of all you can grab a second-hand copy for $0.58 from Amazon. New costs more, prices range from USD 28.15 to USD 32.71 (The Motivated Mind)

For the Amazon review lovers, attached are some comments from Amazon readers.

Customer Reviews

Solution to Impulsive Trades? II

BarroMetrics Views: Solution to Impulsive Trades? II

I’m still battling jet lag and now have a touch of the flu. So, today I’ll be brief.

When preparing for your trading, you reduce the chances of impulsive trades by being as specific as possible. For example in the AUDUSD Currency Strength Meter chart in Solution to Impulsive Trades?, the AUD could:

  • Form a bearish conviction bar down – suggesting downside continuation.
  • Form a bullish conviction up – suggesting upside continuation.

The two possibilities form the boundaries of the price action. That’s not to say either will occur; but by setting the boundaries we have anchor points by which to judge the subsequent price action.

For example, Figure 1 shows yesterday’s price action in the AUDUSD. The bar is bullish, but the range us below normal. So, I’d see that as suggesting more upside today that needs to attract buying as evidenced by at least a 75-point range with bullish form.

I’d be wrong if we saw a bearish bar today.  Anything in-between we’d have to assess at the end of the day.

So, how do we use the info? Use is limited only by our imagination. For example, if we went short on Friday, assessing the price action as bullish will allow us to exit before the stop is hit. If we went long on Friday, we could look to tighten out trailing stop and so on.

The point is creating detail specific scenarios inhibits impulsive trading; and the more you do it, the more accurate you become in assessing the day’s bar.

2016-08-23_19-20-09 AUDUSD 01

FIGURE 1 AUDUSD Daily

 

 

 

Solution to Impulsive Trades?

BarroMetrics Views: Solution to Impulsive Trades?

One of the most common refrains from traders is: “I lose money because I take impulsive trades. If only I kept to my plan, I’d make money!”

The implication is ‘I have to fix my psychology’. 

Sometimes this is true – there is a limiting belief that needs to reframing. I have found that most times, however, the solution is far simpler. By that I mean the trader fails to describe precisely:

  • The conditions that will trigger the trade.  And,
  • The conditions that will keep the trader in the trade.

Last week, I set Figure 1 as part of UIII’s preparation for the week.

Here’s the context to the assignment. UIII FX traders are asked to sell the weak currencies and buy the strong ones. Why? Because such pairs produce the biggest bang for the investment dollar. I have found two configurations produce the best results:

  1. At the start of a trending move – the corollary: when congestion has likely ended; and
  2. At the start of a parabolic move.

UIII’s who replied to the assignment took the for either:

  • The attached reply or
  • The AUDUSD is in congestion and accordingly, will look elsewhere for a strong or weak pair.

What do you think? I’ll post my assessment tomorrow.

2016-08-22 CSM AUDUSD

FIGURE 1 AUD CSM

2016-08-22_09-50-22 GB HW

FIGURE 2 Sample Work

Choice Commitment & Consistency

BarroMetrics Views: Choice Commitment & Consistency

We all want to move from non-profitable to profitable, from profitable to even more profitable. To do that we need to acquire the necessary knowledge and then transform that knowledge into a skill.

The problem with trading is that on a trade-by-trade basis, we produce random results. For this reason, newbies often confuse being lucky with being competent. “Hey, if just turned $10k into $100k, how can you tell me that I have just been lucky“?

As a result, most of the 90% who fail at trading don’t even try to acquire the necessary knowledge.

Those that do seek it are met with the challenge that many of the ‘educators’ promise ‘get rich schemes’ that have no chance of long-term success. The courses pander to our human insecurities promising ‘no loss’ trading, ‘instant success’ and so on.

As a result, many an aspiring new trader loses heart or his capital. He’s tried so many courses with little success! 

The remaining hardy bunch continue to pursue their dream They finally find a program (or coach), that their research shows, is genuine. The knowledge is there – all they have to do, to succeed, is learn it, apply it and internalise it.

But, learn, apply and internalise,  is difficult. And here they face the most difficult challenge.

Usually,  for the hardy bunch, learning is not a problem – they do this quite readily. No, learning is not the challenge – making the commitment and choices to act consistently in a way that turns the knowledge into a skill is the challenge.

Let me give you an example of what I mean.

Research shows deliberative practice is the most effective and efficient way to master a skill. For Ultimate III students, a request was made in early August for at least one hour per week of practice. We are meeting in the last week of August – I wonder how many will have put in at least four hours. I suspect not too many (if any at all). I am curious to hear the excuses.

Going into the benefits of deliberative practice is beyond the scope of this blog. But, it’s not hard to figure out. I’ll leave it with you to work it our for yourselves.

Les Meehan

BarroMetrics Views: Les Meehan

I am still struggling with jet lag. I guess it’s a function of age – takes longer to get back to normal.

I’ll be setting up a more structured program for the blog:

  • Monday and Tuesday, I’ll focus on material aimed at assisting traders.
  • Wednesday and Thursday, I’ll focus on market commentary.
  • Friday will be a ‘free-for-all’.

In the spirit of the new format, here is the rego page to the podcast I promised last week (Execute Plan)

We had a few technical difficulties, so there is no video, only sound. Still, there is worthwhile information in the 20-minute interview.

Here is the link:

http://www.barrometrics.com/webinar-keep-me-informed/

You will need to register – we’d like to know who are accessing the podcasts.

Execute Plan

BarroMetrics Views: Execute Plan

John dropped me a line asking: “I have problems entering according to my plan. I pull the trigger either too late or too early!”.

Interestingly, the problem is not an uncommon one. I am seeing it repeated in the current crop of Ultimate students.

My advice:

Firstly, make sure you do have a problem and are not merely falling prey to hindsight bias i.e. ‘too late or too early’ is defined by what the market did after you entered.

Secondly, if you are not executing as planned, take steps to define clearly what has to happen to enter a trade. For example, the statement below would be inadequate. :

I’ll enter at my buy zone when I see a bullish conviction bar

Better would be:

I’ll enter after the market hits my buy zone, 1.3500 to 1.3510 at the close of a     30-minute bullish conviction bar. The maximum price I’ll pay is 1.3520. If the bullish bar closes above 1.3520, I’ll place a limit order at 1.3520.

If the market fails to hold 1.3500, I’ll stand aside for today and review my options for tomorrow. 

Let’s see why the latter statement is better:

  1. It defines the buy zone. So, no action is taken until the zone is hit. It also means you may miss a trade if the market gets to 1.3511 and bounces. Accept that you will miss trades because a market fails to get to your zone.
  2. It defines the entry timeframe.
  3. It provides a plan in the event the market bounces strongly off the buy zone.

The key is we define our entry conditions as clearly as possible. Once that is done, I recommend you spend a few minutes, visualising entering the market – include scenarios, where the market throws you a curve, e.g., hits the zone, closes above 1.3520 and never retraces. It’s important to accept the scenario ahead of time.

The reason we circumvent our plan is usually due to the fear of missing out – the 3Fs (flight, fight or freeze) raise their heads. Speaking of which, on Monday, August 11, we’ll be providing a link to a podcast with Les Meehan, trading psychology coach. Don’t miss listening to the interview (it’s only 15-mins long). Les is providing a special free offer – details Monday.

Also, he is conducting a webinar on Thursday, Aug 11 at 13:30 EST (that’s 1:30 Singapore time, Friday, August 12): Engineering Your Trading Mindset for Success.

Now 1:30 is a wee too early for me (at least normally) living in Hong Kong. But, if you register, you’ll be given access to a recording. Based on past webinars, it would be a worthwhile event.

Here’s the link to register: rightmindtrader.com webinar