Tips for Success in Trading the Markets

If trading is supposedly easy, why do most futures traders lose money in the long run?  If you are one who makes money trading: congratulations.  Permit me to help turn those profits into bigger profits, and to try to help others be a successful trader like you.

You can earn a substantial income trading the markets from your home or office computer if you know exactly what to do.  Let me help.  You will discover advanced tools, clever tricks and tips, and key techniques for successful trading used by top people in the field.  Find out what you can do to be a successful trader in today's dynamic markets.

I have been in this business for 25 years, and have seen numerous fads flourish and fade.  Often the fad is based on a $3,000 seminar, or the marketing hype that Gann's ultimate secret has finally been discovered or rediscovered.  The bottom line when it comes to trading is:  it takes hard work, quality data, and a computer with state-of-the-art investment software.

As a successful entrepreneur, I know that most of the promises the fast buck artists are making are completely worthless. What upsets me even more is how they substantiate the success of their claim to riches with hypothetical results or back testing of a mathematical model.  With tricky wording they make it sound like you will make that kind of money by trading their system.  They even offer a money back guarantee that IF you make every recommended trade for a year, and are not profitable, they will refund the cost of the course or system.  It's all marketing hype.  I get solicitations for these products on a weekly basis, and they all get filed in the trash basket by my desk.

Now, don't get me wrong.  There are bona fide techniques for spotting good trades and making good money trading the markets.  But the get-rich-quick artists are hyping their theoretical approach.  Twenty years ago, I too, sought for the holy-grail of trading and have researched numerous ideas.  Through optimization, graphs of my theoretical results were as impressive as those being hyped today.  But sadly, real-world trading results were markedly different than the theoretical results of the optimized system.  With the hindsight of 22 years experience, I don't believe the holy-grail of trading exists, and I no longer waste my time or money looking for it.  In my opinion, those who market get-rich-quick systems, courses, and books make all their money by selling useless advice to unsuspecting people who want to take advantage of an exciting yet confusing market.

You must have timely information

I realize that not everyone takes trading as seriously as I do.  For example, my sister-in-law is a homemaker who successfully dabbles in the stock market.  For her level of trading activity, the information she obtains for free from the Internet satisfies her needs.  However, active traders will have a real-time data source that delivers live market quotes to their personal computer using the latest satellite, cable, or Internet technology.

I get real-time data from two vendors:  eSignal (IDCO) and Data Transmission Network (DTN). While there are minor differences in pricing, content, and optional services, both vendors are well established leaders in the industry.  They have well funded engineering departments and deliver a quality data feed using state-of-the-art technology.

Data vendors package the data streams that originate from all the exchanges into a single data feed.  The data feed is compressed so more can be fit into a given broadcast bandwidth, and then is distributed by satellite, cable TV, or over the Internet.  I have satellite equipment which consists of a 30 inch dish and a satellite receiver supplied by the data vendor.  The receiver box has a serial port that passes the data feed to my personal computer.  My computer runs state-of-the-art software to capture news stories, assemble the market quotes into quote pages and display charts that update in real-time tick-by-tick as the markets change.

The satellite feed sends all ticks for all symbols from all exchanges.  The software I use stores all this information so I can view a chart for any symbol at any time.  The chart can be in any time-frame such as those that show every tick or those that show trading for a time period such as a daily chart or a 5-minute bar chart.

I also receive a streaming Internet data feed from Interactive Data Corporation called eSignal.  Because communication across the Internet is bi-directional, my computer can communicate with data servers at eSignal to download historical tick, intra-day and daily chart data that I may not have collected.

I recommend either vendor, eSignal (IDCO) or Data Transmission Network (DTN), to serve as your source for market data.  If your level of trading activity does not justify the expense of a real-time data feed, both vendors offer delayed data feeds that save you the fees charged by the exchanges for real-time data.  Please contact either vendor for more information about their services and equipment.  Some end-of-day traders are satisfied with  free daily and intra-day data that can be downloaded from the Internet using Ensign Windows.

You must have an account to trade

I almost feel foolish stating something so obvious.  But the differences in the services and commission structure are not so obvious.  Traditional introducing brokers place orders at your request, and can be a source of counsel and advice.  Some traders feel the need to communicate with a person on the other end of the phone when placing an order, rather than with a computer.  Because you deal with a broker, and receive the services of the brokerage firm, you can expect to pay a higher commission for your trades.

The Internet has fueled a trend of the last few years for traders to use discount brokerages whose rates are discounted because of the large volume of trades they handle.  Service is non-personal.  Most trades are submitted using an order entry form and transmitted across the Internet.  Fills are reported back to your computer across the Internet.

I see two advantages in using an Internet order entry system:  cost and speed.  I am no longer willing to pay a 3% commission to a full-service broker to buy or sell a stock for me.  Commissions of $250 on each side of a transaction really took a bite out of the profit, and often influenced me to not make a trade or exit a position.  I admit I have often held on to a bad stock position because I did not want to pay the high commissions.  Those days are gone because I now trade electronically over the Internet.

If you are looking for low-cost, electronic execution for stocks and stock options, then I recommend the PreferredTrade system offered by PreferredTrade, Inc.   It is an order entry system for self-directed investors and active traders.

The software I use to chart the markets integrates with PreferredTrade so I can simply double click on a Bid or an Ask quote, and the order entry form in PreferredTrade is populated with the symbol, price, and buy/sell instruction.  I then adjust the quantity if different than my default.  After I check the order to verify everything is correct, I click the Send button and a trade is transmitted across the Internet to PreferredTrade, Inc.  Within seconds I get a confirmation back that the order is pending.  If the trade was a market order, a fill is reported back in seconds, usually less than 5 seconds. The whole process is faster than I could have picked up the phone and gotten a hold of a broker.

There is less chance of making a mistake when I fill out my own order entry form than when talking on the phone with a broker.  When talking on the phone I have to say it right, and the broker has to write it down right.  You are reading this because you want to know about the best and how to save money.

If you want to trade the e-mini futures using an electronic order entry system over the Internet, then I recommend you deal with Interactive Brokers.

I have shared this information about electronic order entry systems so you save money in commission costs, have the ultimate in execution speed, and deal with reputable brokers.

You must recognize when Opportunity Knocks

When I was learning the ropes 20 years ago, I often kicked myself when I missed a good trade.  I eventually realized that opportunities are like trains at the station.  Though one just left the station, don't fret over it.  Another train will arrive soon.  Opportunities in the markets are like that.  You need to develop the skill to recognize an opportunity when it presents itself, and the wisdom to be patient during the waiting period.

I will give you tools and techniques to spot an opportunity.  Developing confidence in your ability also develops patience since you will not be grasping at everything out of fear that you will miss the next big winner.  You should not be bothered that you missed the last winner, because another winner is coming your way.  Use the tools and techniques to be onboard the next one.

You must use technical analysis

I have often said, 'A chart is a chart.'  This means that the things I look for in a chart (opportunity) occur without regard to the security, whether the chart is for a stock or for a future, or what time frame is used for making the bars on the chart.  In particular, I am looking for chart patterns and formations.  These patterns are found on 1-minute bar charts, hourly bar charts, daily, weekly, and monthly charts.  These patterns appear on stock charts and on futures charts.  So, the information I give you is generic in that you can use it regardless of whether you trade just stocks or just futures, or whether you are a day trader, a short or long term position trader, or hedge the crops in your fields.

I am a technical analyst.  I scan lots of charts looking for the next 'train about to depart the station'.  I do not need to know the fundamentals such as supply and demand, P/E ratios, corporation management, competition, weather patterns, government policies and interest rates.  Supposedly all that information is already factored into the present price of a security.  I use the chart as a road map of the trend and behavior of a security because embedded in the chart are characteristics that help identify a trade opportunity.

My expertise from the past 22 years has been in the development of analytical software.  Yet, having been there and done that, having dug through the mathematics of dozens of popular studies, having back tested various ideas in search of the holy grail, what I am about to say may surprise most of my clients.  Though the software I use (Ensign Windows) has a broad arsenal of fantastic technical analysis studies and tools, I personally concentrate on analyzing chart patterns.

Well, I said you must use technical analysis, so just what is it that I use when I analyze a chart?  I use:

• trend lines
• parallel lines
• Fibonacci bar counts
• Fibonacci price levels
• basic Elliott wave counts
• pennants, gaps, and break-out formations

There are literally hundreds of ways to analyze the markets, and dozens of software programs available to assist in the process.  You will want to acquire and use analysis software that fits the following criteria:

• fast and efficient
• easy to learn and use
• inexpensive
• rock solid reliable
• excellent support
• flexible
• powerful
• works with a real-time data feed
• works with the Internet
• has a programming language for developing new trading ideas

Technical Analysis Tips

The six tips illustrated in this section are effective techniques for finding winning trades and maximizing profits.  I cut through the fog and show you how to spot winning trades without needing to be a technical whiz.  Even though my illustrations make it look easy, the process of analyzing charts and trading is still hard work.  Also, I have the benefit of hindsight in selecting a good example to use to illustrate a principle.

The Power of Trend Lines

I am frequently asked which is the best study or tool to use to trade the markets.  I think the best analytical tool is drawing a straight line on a chart beneath the lows of bars to show a rising trend, and above the highs of bars to show a falling trend.  A tool this simple does not require a computer.  Yet, because traders have computers, they overlook the power of a trend line, and number crunch massive quantities of data through complex formulas searching for a secret methodology no one has discovered.  Forget it.  I have been there and done that.  I keep coming back to the simplicity of manually drawing trend lines on a chart.  Ensign Windows even has a tool to draw the trend lines automatically.  When the chart trend reverses and breaks through the trend line, a new position is taken.  This is the primary tool I use, and everything else you learn is just an enhancement to the power of the trend line.

The Power of Parallel Lines

The first analysis principle is that prices move in trends, but the trends do not last forever.  Eventually price movement changes direction and breaks through the trend line.  The second principle I use is observing that up trend lines are frequently parallel to each other.  This means there is a repeatable chart characteristic in the rate at which price movement advances.  Likewise, down trend lines are frequently parallel to each other.  I use this principle of parallel lines to give me an idea of what would be a typical up trend or typical down trend when price movement changes direction, and a new trend starts.

The Power of Counting Bars

Over and over again, I am amazed at the repetition when I count the number of bars in a trend.  The count frequently is one of the following numbers: 3, 5, 8, 13, 21, 34, or 55.  These numbers are members of a set of numbers called the Fibonacci number sequence.  Take any chart, such as the one in this example, and use a straight edge to mark the trends.  Count the number of bars in each trend and label the trend line with the bar count.  Each chart will have a characteristic that starts to appear.  I have seen charts that with regularity move up and down for either 5 or 8 trading days, and then reverse direction.  This tip can be used to develop patience, and know with greater accuracy on which day the trend top or bottom will be put in place.  For example, there are 8 bars in the trend from the point labeled diamond 4 to point diamond 5.

The Power of Fibonacci Price Levels

Fibonacci price levels are constructed by drawing horizontal lines at the top and bottom of a recent trend.  The band is then sub-divided with additional horizontal lines at significant percentages.  The three retracement sub-division percentages I use the most are 38.2 percent, 50 percent, and 61.8 percent.  These percentages are members of a set of Fibonacci Price levels.  When a trend is being used to forecast the size of a subsequent larger trend, the significant percentage I use is 161.8 percent.

Prices often extend or retrace to these Fibonacci price levels, and then reverse direction.  Confidence is increased that a trend has fulfilled itself when its slope is parallel to other trends, the number of bars in the trend is a Fibonacci count, and the price is near a Fibonacci price level.  Fibonacci Price Levels are easily constructed on an Ensign Windows' chart using the trend top and bottom I select.

Another principle of horizontal lines is that previous resistance becomes future support, and past support becomes future resistance.  Always consider significant support and resistance levels from the past and extend horizontal lines at these levels into the future.  Note in the example that the pennant point consolidated on the horizontal line I labeled as Fibonacci Bottom for the first 5 wave down trend.  Also, this horizontal line was resistance to a couple of the wave tops I labeled with 4 and diamond 4.

The Power of Counting Waves

Underlying forces cause markets to move work in ways that create identifiable patterns, or a series of waves.  Big trends are called impulse waves, and each impulse is followed by a correction wave.  The theory named after Ralph Nelson Elliott, is basically expressed that there will be 5 waves in the main trend, followed by 3 waves in the corrective reaction.

I keep it simple. I look for trends with 5 waves, and corrections with 3 waves.  If I see the pattern, my confidence is increased that the current price movement is due for a reversal.  I also look at longer term daily, weekly and monthly charts to consider the direction of the security in its bigger picture.  Trade with the trend and use corrections as opportunities to join the direction of the main trend.

The Power of Pennants

Pennant formations indicate the balancing of opposing market forces.  The pennant is a narrowing triangle where prices are making subsequent lower-highs and higher-lows.  Prices usually break out of a pennant pattern rapidly with the frequent presence of a gap, increased bar range and increased volume.  Join the move in the direction of the break-out. Odds favor a breakout to the upside from an ascending pennant, and to the downside from a descending pennant.  A smaller variation to a pennant is a flag where price movement pauses and moves sideways after a steep move.  Odds favor a break away from the flag to resume in the same direction.

Summary

The various tips I have mentioned are used in the complete analysis, and when there is good correlation or fulfillment, I make the trade.  If the chart pattern is confusing, I leave it alone and look for another symbol that shows an opportunity. My ego is not such that I have to have all the answers to all the complexities than might exist.  I only have to satisfy my own comfort level.  I don't need to be a guru to the world.

Use these tools to spot opportunities.  The best use of your time will be to print a set of quality charts using Ensign Windows or similar software, sit down with a straight edge and colored pencil, and draw trend lines, parallel lines, count bars in waves, and count wave patterns.  Draw horizontal lines from all previous key trend tops and bottoms. Use Fibonacci Price Levels as price objectives.  You will find Fibonacci price and time relationships present on every chart.  Using this information, I can frequently predict with good accuracy a pattern, time and price objective.  At the forecast time and price, I draw a circle on the chart using a dime for the circle template.  A chart studied and marked in this manner serves as a road map, and confidence develops as price movement unfolds, confirming your analysis.

I publish a free monthly Trading Tips newsletter filled with more information like this.  Please register for the newsletter so I can develop these and other trading tips in greater detail for you.  The newsletter teaches principles of technical chart analysis and gives insights into analysis tools and studies.  You are invited to read past issues on the Newsletter page of this web site.  You are also invited to talk with me weekdays in the chat room built into Ensign Windows or accessed with the free eChat program.  Click this link to learn more about the chat room.