In my efforts to become a better and more consistent trader, I read a lot of books on trading, psychology, and how to build trading systems.
For the last 6 months or so, I have been reading books on market profile and the auction process. I started with the recommended reads:
Steidlmayer on Markets by J. Peter Steidlmayer
Markets in Profile by James F. Dalton
Mind Over Markets by James F. Dalton
If you strip away the technical aspect of the above materials on the subject, they all focus on the trader really knowing his market. How the players in the market influence trading, how the auction process specifically relates to the psychology of buyers and sellers, and what you can do as trader to prepare yourself to take advantage of opportunities in the market are all important factors in success.
I recommend EVERY trader read them even if you have no interest in trading market profile.
What follows are some excerpts from Mind Over Markets first few chapters:
Market Understanding + (Self Understanding x Strategy) = Results
I can’t stress this enough. Too many people think that trading success comes from a system, when in reality it is but one part of having success. Think about this carefully. Do you understand what you are trading? Do you have control of yourself (emotions,bias, ect) when you are trading? Are you even confident in your strategy or are you following someone else’s strategy because it works for them?
Many perceive futures trading to be a glamorous, high-profit venture for those with the nerve to trade and that, through the purchase of mechanical systems and computer software, you can bypass the time and dedication it takes to succeed in other professions.
Futures trading is not a glamorous or profitable experience for most of the people who attempt to trade. Futures trading is a profession, and it takes as much time and dedication to succeed as any other profession. You will start as a beginner, learning the objective basks about the profile, then proceed through the stages towards the ultimate goal of any professional in any trade—becoming an expert.
Can you confidently say you have put in the time diligently and honestly required to be considered more than a beginner? Would you let someone who bought a $99 e-book on heart surgery operate on you? Seems like that would be suicide. So I guess that means blindly following some system about trading is suicide for your money.
Most people do not want to know the purpose of the market. They do not want to have to think rationally and objectively about the bigger picture. Most market participants, in fact most people in general, would rather be given a set of rules to blindly follow than to have to use personal insight and innovative thought. Again, the majority of the people who trade futures do not make money.
The above goes back to having all the parts that will make you successful. In the chat/teamspeak this week I had a discussion with alexpmorris (http://yourika.com) about my colored bars indicator. It simply colors the candles on my chart with regard to the momentum of the trend. He asked me about taking entries and how I manage targets and stops. We went back and forth about targets and went over a few charts of the /YM.
He was using a 5 range bar on the /YM. While it worked, it appeared that the 5R was not optimal as there were a lot of fake outs. This lead to a discussion about what I consider ‘tuning’ that charts and setting to adjust for the market vibration. So I ask you, do you think he understands the system?
We also talked about what to do if you have a 30 tick target with a 30 tick stop and it only goes 29 ticks in your favor. This became a heated debate because I try my best to never let a trade run back against me. While my stop is not a trailing stop in the mechanical sense and is more discretionary, I asked why he would ever sit and watch a trade come all the way back. You may be reading this and thinking its common sense, but I will tell you now there are people that will let a trade walk all the way back to hit their stop.
Is it because their system doesn’t have a trailing stop? Maybe. Is it because they don’t fully understand their system and the market they are trading? Maybe. More likely it is because they are following rules that they don’t own, meaning they are following something without thinking or understanding even some of the basics of the trading style they are using.
Just because you have a race car doesn’t mean you will win ‘The Cup’. If I gave you the same tools as Michelangelo could you paint the Sistine Chapel ceiling with the same skill? Doubtful, if not impossible.
Failure to recognize and accept that one is in a Trend day is one of the most costly mistakes a trader can make. Several days of trading profits can be lost in one trading session if you are positioned against the trend.
Nothing really needs to be said here other than ‘don’t fight the trend’. Recognizing trend days as they develop is a skill that I have yet to master. Every good system should have a way to recognize a trend day. I use the GMMA ribbon to look at trend strength and the pattern of swing highs and swing lows. Most of the time the trend is apparent, but my short time frame for trading influences my bias.
Trading logic is largely a product of experience, but it is more than just careful observation and practice; it is an understanding of why the market behaves the way it does. This understanding is best gained over time and through a conscious effort to understand the forces behind market movement.
Why does something trade like it does? It is because of the high frequency traders? Is it because of news? Is it because its the hot thing for the day? Do the traders in the pits influence it? Does it even have a pit? Is it a derivative of something else (ie IWM to the RUT, SPY to the ES to the SPU)?
If you would like to discuss things further after you have read the books I mentioned, please join us in the VTF chat and teamspeak.
If you haven’t read the above, or even taken the time to read the first few chapters, don’t waste your time or mine. I have very limited tolerance for those who don’t make the effort to help themselves, mainly because I want to take your money in the market.
EDIT: From my friend http://twitter.com/tbg4321
Your post for new traders was very well written & so true. I would add tho that to follow a strategy of a successful trader in paper could help the trader find out if that strategy is a basis for their own.