Hello traders! This week I’d like to update you on my friend Paul and his journey of becoming a successful trader. If you haven’t read them, my previous two articles on Paul’s progress can be read here and here.
As a brief recap, Paul (a friend of mine for many years) lost his job last July and decided to trade for a living. He has a supportive spouse and has a couple of years worth of living expenses in the bank. Since our last update, Paul has continued to trade on the demo account and is now ready to start his live trading account. What we needed to see was consistency trading on the demo before we switch to live trading. By consistency, what do we mean? Several things, actually! First of all, no chasing trades! Paul seemed to try trading breakouts a bit too often, especially when adding to a winning trade! While I do recommend adding to winners as they have moved far enough in your direction, I recommend only doing this when price has moved back up to supply (for a short trade) or back down to demand (for a long trade), essentially treating each new add to a position as a brand new trade. The main problem when adding on the actual breakout is what happens to your average price, it ends up not being very good. When adding in the right way your average price should still be good enough to manage your stop properly. In my experience many new traders trade breakouts improperly, often having their stops placed incorrectly and end up with many unnecessary losses. So that is one thing we have fixed in the past few weeks!
The second thing to help with his consistency was his time frames on charts. While many of you know by now that we recommend at least 2 time frames, the how and why of them is sometimes confusing. Generally speaking, if one time frame has your supply and demand zones marked on it the next time frame down is when you will be timing your entry. Very often Paul would flip between a four hour chart for zones, then down to a five minute for zones, then end up entering on a fifteen minute chart! This certainly messed up his reward to risk ratio a few times – having a 20 tick stop on a four hour chart then a 15 tick profit target from a fifteen minute chart is doing it wrong! To fix this we placed a couple more charts on his trading computer to help better visualize what he is trying to do.
The third thing that hurt his consistency was all of the choices of technical indicators! When I was out of town teaching a class he decided to explore the dozens of indicators that exist and try to figure them out. While these extra tools can be helpful they must be used in the right way. After much back testing we have placed one oscillator and a couple of moving averages on his charts, and we are comfortable with the results.
So what is next for Paul? By the next update, Paul should have some type of business entity set up. Your tax professional at OTA Tax Pros and an attorney can help you with the proper entity for your financial situation. I can’t tell you how important it is to have yourself set up properly; it can save you thousands of dollars every year when done right. This process would have been done already if everyone in Paul’s household hadn’t come down with the seasonal flu!
Because Paul has kept an accurate trading journal for the past few months he knows what to look for on the charts and will trade accordingly. It has been six months since Paul got laid off. With the proper education and the discipline to take his time, I truly believe he is on the path to becoming a successful trader. Within the next week or two he will be trading live which as you might know is a LOT different than trading on the demo! We shall see how his emotions come into play with real money on the line. Will he stick with his plan or will he do what many new traders do and take his profits too quickly? Stay tuned, the next update should be interesting!
Until next time,