Lessons from the Pros


Do You Believe?

The theme of the last article I wrote was patience. In it I mentioned that waiting for an opportunity and then having the patience to let it play out to its conclusion was one of the biggest challenges for new traders. I also briefly mentioned that trusting or believing in a methodology can also pose some difficulties for the novice trader.

In today’s piece I’ll expose the false beliefs that many traders have about risk, and how few truly understand how the markets really work. Also, we’ll explore the reason why most traders don’t give any strategy a fair chance of proving its viability.

Free WorkshopFirst, let’s address a couple of deep-seated beliefs that most traders and investors have about risk. The first one of these is that in order to extract large profits from the market you must be exposed to a commensurate large risk. The fact is, that if you learn how to identify where banks and institutions are buying and selling you will acquire the skill to take small risk on most of the trades that you place and have the potential for large profits.

The second, and this one is so instilled in investor psychology that when addressing this issue people are sternly admonished to never attempt this as if it is an impossible feat, is timing the markets turning points. In other words, what they’re saying is that you can NEVER pick tops and bottoms in the market. We can disprove this false belief by identifying where supply and demand is most out of balance.

In a recent XLT I moderated, I posted several levels on various futures markets that fit our core strategy (seen in the images below). These are low risk, high probability entry points where we expect the markets to turn. The images below show the four markets that we looked at in this session. Typically what happens on these picks is that two will meet entry, one will stop out for a small loss and one will not meet entry. I’ve highlighted two, although the British Pound demand zone did meet entry and hit the profit target. So, in this instance three met entry and one did not.

XLT 1-20-2015 Prep

XLT 1-20 -2015 YM  Setup

XLT 1-20-2015 YM Result

XLT 1-20 2015 TY setup P. 2

XLT 1-20-2015   TY Profit

The first setup is in the Dow $5 E-mini; we anticipated that this market would stop moving higher at the level delineated in the prep screen, which we can see on the chart above . The implication was that the Dow E-mini would top at the supply zone we spotted and turn down. In other words, we were indeed trying to pick the exact top in the E-mini Dow. As we can see, this is exactly what happened. Now, this doesn’t happen this way all the time but it is a highly probable event if all the odds enhancers are applied.

The second recommendation is a short in the Ten year Treasury note (TY). Similar to the E-mini Dow, we were anticipating a reversal. In the trade the risk was very low and the profit potential was very high shattering the belief that big profits require big risk.

As we can see from the two examples mentioned above, most of what you’ve been told that’s not possible can indeed happen. The message here is that one must change his/her belief system in order to achieve success in trading.

Lastly, a trader must realize that three trades alone using a particular methodology is not a large enough sample size to account for a viable system. A good system will only realize its full potential when the sample size is large. For trading it should be at least 30 trades. A good exercise for most traders is to make a least 30 trades using a very specific set of rules, focusing solely on execution and, only after all the trades are taken, doing a comprehensive assessment of the results.

If the results are good at the end of this exercise then, and only then, can a trader believe that the system he is trading can produce consistent results. Without a belief nothing is possible. Alternately, when we strongly believe that something is possible it’s almost a given that it will become reality. So, do you believe?

Until next time, I hope everyone has a great week.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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