Lessons from the Pros


(Trading Education + Written Plan) – Emotions = Trading Futures Like a Professional

As we come into the New Year I thought it would be a good time to write about how profitable professional traders become this way.  Go back and read the title of this article.  Did it appear to be like a formula from one of your math classes in school?  Do you remember your math teacher telling you that rules for calculating these formulas had to be written in a certain way and if you ever deviated from the rules you were given a bad grade on your test?

Welcome to trading futures like a professional!

Over the past several years many Institutions and Hedge Funds have changed their trading styles to trend following and scalping using something called an algorithm.

Algorithm – (pronounced AL-go-rith-um) is a procedure or formula for solving a problem.

Frequently called algo in the trading/investing community. The word derives from the name of the mathematician, Mohammed ibn-Musa al-Khwarizmi, who was part of the royal court in Baghdad and who lived from about 780 to 850.

As you can see from the date when algorithms were first discovered, they are not new to the world but they are just becoming more prevalent in the trading/investing community.

Why do you think the majority of Institutions and Hedge Funds today use algos?  For one reason and one reason only – to be more profitable!!

When Institutions and Hedge Funds use the algos for scalping they are sending orders to the markets at speeds that would be virtually impossible for the human mind to execute.  When they are using algos for their longer term strategies they need something that keeps them with the current price trend.  Not allowing any human emotion to sway them from their decision to be long or short.

In both of these two styles of professional trading one common denominator is missing – human emotion.  Once the computer says buy or sell, the order is automatically sent to the Exchange to be executed. Professional traders realize that trading is a probability business. When a trader uses a style with no human input they are called non-discretionary traders.

To get to this point in their success they needed a few things.  Obviously, a trading education so they know what they are trading.  Next, a strategy to trade the markets and a written plan. After that was in place their strategy was back tested to assure there is a high probability of success and relatively low drawdown (series of losses) periods.

After this the most important part of their success was to program their strategy so the computer would use their rules as an algo.  Once programmed, the effects of human emotion are completely removed.

Result – profitable professional Futures traders.

So, we know how the majority of the Institutions and Hedge Funds trade, but how would this help you as a trader?

Create your trading plan, just like they do, and trade like an algo! – Emotion Free!

In order to do this you need to make some changes to your trading plan, if you are not already profitable.  Make the changes that will cause your trading plan to trade like an algo.

Free Trading WorkshopLet’s look at a few things that might help you do that:

  • Trigger Points for Action
  • Journal Your Trades
  • Novice Instincts Could be Just Emotional Decisions

Trigger Points for Action

For an algo to work at all the code (trade plan) put into the computer must be written as either on or off, black or white.  Too many unsuccessful traders have plans with very gray areas of when to take action or when to terminate a trade once in it.  Professional algo traders have very clear conditions that must be met before the computer is allowed to send instructions to buy or sell.

Review your trading plan and see if your entry and exit signals are capable of being read by an algo. If there are any undefined variables or gray areas that the computer would not be able to execute, then you need to change it to rules that are black and white or on and off.  As a trader with unclear rules you will be consistently late entering your trades because you have to think each time it is time to take action.

Once you have created a trading plan, I would recommend that you read it over until you know everything there is to know about your plan.  Then create a flow chart to summarize your trading plan and keep this on the front page of your trading plan.  The flow chart allows you to quickly see a course of action you need to take with each trade, like an algo reacts and executes a trade.

A trader who uses emotion to trade or has a plan that is not black would have to read each page of their trading plan before every trade.  Meanwhile, an algo would operate with a flow chart and very quickly know what each step of every trade must be.  Who do you think will make money on this trade?

Journal Your Trades

This is how you will track the results of your trading strategy and monitor your discipline.  While we all know if we made money or lost money by looking at our profit/loss statements from our brokers, we don’t know if we followed our rules or not because the profit/loss statement does not document that information.

Record your results and any reasons why you took the trade.  Did you stay in the trade until your target?  Did you follow your risk management rules?  Were you trading on days you were not feeling well or distracted? Knowing this information allows you to know if your strategy failed or if it was you not being disciplined enough to follow your rules.

Novice Instincts Could be Just Emotional Decisions

Don’t follow your instincts as a novice trader.  These are usually going to be emotionally driven decisions based on fear and/or greed and not the price action you actually see on the chart.  Create one trading strategy and define the rules so a computer can read them and then execute each setup as they occur.

Once in a trade, there should be no questions in your head of what is your next step to do.  If there is ever a question about how to manage the trade after you are in it, you should just exit at the market because it has now become an emotional trade.  All questions should be written when you write your trading plan and then you simply follow it.  No questions asked!

You don’t need to program your trading style into a computer, but you do need to think and be prepared to react like an algo if you expect to trade like a professional trader.

“Happiness is when what you think, what you say and what you do are in harmony.  Mahatma Gandhi

Don Dawson

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.

Join over 170,000 Lessons from the Pros readers. Get new articles delivered to your inbox weekly.