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VOLATILITY STOP

Joe Ross (Newsletter No. 556)

 

I've previously used the chart below in various publications, from webinars to seminars, and in my E-Book "Stopped Out." The lesson is worth repeating.

 

We are going to look at a 1-2-3 formation in combination with the Volatility Stop. Volatility Stop can be used to track or contain a trend or a swing better than can a moving average.

 

Since Genesis Trade Navigator has this study already programmed into it, I will use it to demonstrate to you how to go about setting it up.

 

When you see a trading range formation followed by a breakout from the consolidation area, and then a Ross Hook, you should immediately think "defined trend," and begin to also think "Volatility Stop."

 

What you want to do is to attempt to curve fit the Volatility Stop line around the formation including the breakout bar, so that you see containment of the formation. Stay with the trade until prices move below the VS, or exit on a Stop Close Only basis with a close below the VS - your choice.

 

The VS has 3 parameters: a moving average, a multiplier, and an offset value. You can manipulate these three until you get containment. Containment in this case is fully evident by the time you see the Ross Hook. At that point the VS line is well-established below all of the price action.


Yours,
Joe Ross

RISK TOLERANCE: KNOWING YOUR LIMITATIONS AND WORKING
AROUND THEM

Joe Ross (Newsletter No. 552)

 

Winning traders know how to tolerate risk. Trading outcomes are far from definite, but they don't mind. They have no problem putting on trade after trade and doing so with grace and nonchalance. However, not everyone can live up to this standard. Many novice traders have trouble taking a risk, even a small one. They either avoid executing a trade, or when they do, they find it excruciating to monitor the trade as they wait to see if their profit objective will be reached. Depending on your background and personality, you may have trouble tolerating risk. But don't let it dash your hopes of making profits. You can develop a way to work around a low tolerance for risk.

 

When you find risk taking particularly fearful, it's hard to concentrate. You are continually on edge and tempted to close out a trade just to end the uneasiness. Part of risk tolerance is biological and part of it is socially learned.

 

Some people are easily agitated and once they become anxious, they find it difficult to calm down. They continue to remain anxious and on edge, even when a threatening event has passed. If you are easily agitated, it's useful to take precautions to reduce your propensity for over-stimulation. The mind and body go together and there are many ways to reduce your overall level of agitation. For example, if you exercise, avoid caffeine, meditate, eat nutritiously and get plenty of rest, you will stay more relaxed. That said, it's hard to fight biology. If you've always been the kind of person who gets anxious easily, you'll have to find a way to work around this aspect of your personality.

 

If you find taking risks especially difficult and extremely anxiety provoking, you may need to adapt your trading style to fit your physiology. There's no one right way to do this. It depends on your preferences. But one issue to consider is the length of time you stay exposed to risk. The longer a trade, the more risk involved. Scalpers, for example, take minimum risk. They get in and get out of the market as fast as possible. Some anxiety-prone people may find this kind of fast-paced trading especially stressful, but others may find it appealing. You don't have to wait very long to see how a trade turns out.

 

At the other extreme, long term trading or investing can be another option. Some markets have relatively consistent long-term trends. By doing some simple homework, you can identify a few solid companies or markets, and use a strategy that enables you to hold on for the long term.

 

After you enter the trade, make a conscious decision to restrict the number of times you look at the price. You might decide to look only a few times a year, for example. Looking at how prices are doing can be a lot like looking at a slot machine or roulette wheel. When you look at it, you'll feel anxious as you anticipate what might happen. But if you avoid looking, you'll see the grain of truth in the saying, "out of sight, out of mind."

However, that's not all you need to do. You will also find it useful to put a stop loss in place to limit your risk. Defining the amount of risk you are taking up front will help you tolerate risk. (Remember, though, that you must account for volatility over the course of the trade. It's impossible to completely eliminate all risk. You must find a happy medium between getting stopped out too early or allowing your investment to fall in value to an uncomfortable level.)

 

There's one last thing you can do: Accept the fact that should the market go against you, you will definitely lose the portion of capital that isn't protected by your stop-loss. In the end, you must accept that you may lose.

One of the main reasons people have difficulty taking risk is that they are afraid of the consequences of a potential loss. They wonder what they would tell their spouse or their parents should they lose. They wonder what they would need to do to make back the lost money.

 

It is vital that you trade with money you don't mind losing. If you can truly believe that losing the money is no big deal, you'll be able to tolerate the risk, even if you have extremely low risk tolerance. But if you can't afford to lose the portion of your capital you are risking on the trade, don't risk it. You will never be able to convince yourself that it is a good idea, and if you have low risk tolerance, you will just be putting yourself in agonizing pain.

Extremely low risk tolerance can severely hamper trading, but if you take the proper precautions, you can still trade profitably. By finding a trading style that suits your personality and only risking money you can afford to lose, you'll feel calm enough to trade freely and profitably.

 

Yours,
Joe Ross

A GOOD MOOD IS MORE IMPORTANT THAN YOU THINK

Joe Ross (Newsletter No. 553)

 

Have you felt under extreme pressure while putting on a trade, and found that you just couldn't think straight? You questioned your trading plan, and suddenly you hesitated at a critical moment during the trade, a time when decisive action was needed. When you get like this, it may be hard to snap out of it. A bad mood has a lot to do with it. When you're in a bad mood, you'll be stuck and paralyzed. Your mood impacts your decisiveness. The better your mood, the more earnestly you'll trade.

 

Experiments have shown that seeking extreme perfection is a function of two factors: a bad mood and a belief that mistakes have dire consequences. College students were asked to complete a task that consisted of identifying 100 spelling and punctuation errors. Participants were randomly assigned to one of four experimental groups. Some participants were told that if they made a mistake on the task, they would receive a slight form of punishment, while for others, making a mistake had no consequences. Some people did the task while in a good mood, while others did the task in a bad mood, which was induced experimentally by the researchers.

 

The participants who were in a bad mood, and thought that they would be punished for making a mistake, tended to unnecessarily check and recheck their work. In other words, they tried to achieve an unrealistic level of perfectionism. Why did this group of participants obsessively strive for extreme perfection?

These participants allowed their mood to dictate their behavior. They thought, "I'm going to look for mistakes until I feel satisfied." When you're in a bad mood, however, this isn't a very useful strategy. A bad mood doesn't dissipate very quickly, and so if you check and recheck your work until you are satisfied, you'll check and recheck longer than necessary. Since you're in a bad mood, you'll never feel satisfied, no matter how much checking and rechecking you do.

 

This experiment explains why people seek out extreme perfectionism while in a bad mood. If you are prone to experience self-doubt, your confidence will be especially shaken when you are in a bad mood.

 

As you try to execute your trading plan, you'll question whether it is viable or whether current market conditions are optimal. You'll never be satisfied, and think "Something doesn't feel quite right." At these times, it is vital to do one of two things. Either avoid trading while in a bad mood, or don't let your mood guide your actions. Remind yourself that when you are in a bad mood, you will be especially prone to question your actions, and may act irrationally or impulsively. If you are aware of the psychological mechanisms that influence your decision-making, it's possible to work around them. If you think, "I'm in a bad mood, and thus I'm irrationally questioning my trading plan or my abilities," you can try to ignore your mood, and persistently and logically try to follow your trading plan with discipline. But whatever strategy you take, don't underestimate the mood you are in.

 

Yours,
Joe Ross

LEDGES

Joe Ross (Newsletter No. 553)

 

This week we are going to look at a ledge. First Majestic (AG) prices have trended down, and after a series of Ross Hooks, prices moved into a ledge formation. 

 

A breakout of the #2 point of a 1-2-3 formation defines a trend. A breakout of a Ross Hook establishes a trend. Ledges, by definition, always occur in a trending market. So if a breakout comes at the bottom of the AG ledge, we can assume the trend will continue. We trade the ledge breakout only in the direction of the former trend.

Ledges always begin with a Ross Hook, but due to indecision, prices begin to move sideways. Ledges have matching or almost matching lows and highs. The matches must be separated by at least one bar. 

 

Yours,
Joe Ross

AN UNUSUAL CHART

Joe Ross (Newsletter No. 554)

 

This week we are going to look at an unusual chart sent in to us by one of our subscribers. It is a chart of the euro fx. I know you cannot see much detail, but because of Internet constraints we are forced to make these charts small in size.

 

The main point is that you see the very long bar that contains 2 Ross hooks on it.

 

You would think this pattern would show up more often, but it is kind of rare. After a trading range is established, there is a bar that breaks out of both sides of the trading range.

 

The next bar is an inside bar, the first failure to go higher and lower after the breakout. So the breakout bar has 2 Ross Hooks.

 

Yours,
Joe Ross

INFORMATION OVERLOAD

Joe Ross (Newsletter No. 552)

 

A mistake we see a lot of traders making is that of wanting and seeking too much information. Whereas you cannot have too much information when you are trading as a fundamentals analyst, you must avoid having too much information if you are going to trade as a technical or chart analyst. 

 

The reason for this is that too much information leads to conflict and conflicting information leads to confusion. Confusion in turn leads to your inability to pull the trigger on a trade.

 

At trading Educators we teach that in most instances you should take your entry signal from a larger time frame and then if you wish, you can manage the trade on a lesser time frame. Other than with special methods for day trading, taking signals from the daily chart has never changed for me in all the decades I've been trading. But read carefully what I said above--"take your entry signal from a larger time frame."

 

If you try to take your entry signal by comparing the larger time frame where you will take your entry signal with the time frame on which you will manage the trade, you will far too often end up doing nothing and missing the trade.

 

The first chart below shows the daily euro-British Pound pair as it stood on a Friday before the Open. In my opinion this chart clearly signals taking a short position. We are seeing an inside bar reversal following a failure to meet the March high. In fact it might be said that prices have moved up too fast and are due for a correction.

However the second chart, which shows the same currency pair on a 60-minute chart with the 7am - 8am price bar just completed offers a picture of confusion. It conflicts with what you see on the daily chart. Comparing the two will almost surely end up in hesitation and a missed trade. 

 

Yours,
Joe Ross

FIGHTING MURPHY'S LAW

Joe Ross (Newsletter No. 554)

 

While trading the markets, there are times when Murphy's Law says it all: "Whatever can go wrong, will go wrong." Does this sound a little too cynical? Perhaps it does, but only if you submit to pessimism. If you have a winning attitude, however, you're ready to tackle anything. You'll think, "Things go wrong all the time. So what, I'll take it in stride and move on." If you cultivate a winning attitude, you can fight Murphy's Law with ease.

 

It has been said that trading knowledge is not sufficient to trade successfully. Sure, it's essential to have extensive knowledge and a wealth of experience with the markets, but trading with a winning state of mind is also necessary. Traders with a winning state of mind are anxiety-free. They are confident, organized, and have high self-esteem. Many traders, though, unnecessarily limit themselves. They aren't confident, but uncertain and easily shaken. They are vengeful, rather than enthusiastic about vast market opportunities. They are easily disappointed, and find it hard to get energized. And they face an adverse market event with frustration, instead of persistence and discipline.

 

Consider the difference between the limited trader with a pessimistic attitude and the resourceful trader with a winning attitude. The limited trader may think, "The markets are rigged, too risky, and don't let you win." The resourceful trader, in contrast, thinks, "The markets provide opportunity, and can be mastered." The resourceful trader realizes that he or she may not be perfectly skilled. Mistakes are bound to happen. The limited trader thinks, "If I get stopped out, it illustrates that I'm a loser," but the resourceful trader thinks, "If I get stopped out, then I have to reevaluate the trade." While the limited trader thinks, "If the market doesn't do what I expect it to, then I don't know anything," the resourceful trader thinks, "If the market doesn't do what I expect, then my analysis or timing has to be reconsidered." While the limited trader allows his or her emotions and feeling of low self-esteem to take over, the resourceful trader takes an active, problem solving approach and gets things done.

 

A winning attitude can do wonders. Rather than feel like a victim who has no control over the markets, a winning attitude allows you to gain realistic control of your thoughts and emotions. Rather than react emotionally to a setback, a winning state of mind allows you to cope with an adverse event effortlessly, and manage risk in order to protect your capital.

 

When you have a winning attitude, setbacks aren't a threat. You don't pessimistically blame the markets or market participants for a setback. Instead, you take responsibility for your actions. You think, "What can I do to make a winning trade? Maybe I can change my method. Perhaps I need to stand aside and study the current market action more closely. I'll learn from my mistakes and eventually master the markets."
 

By not putting pressure on yourself to trade with perfection, you feel more relaxed, creative, and ready for action. So when setback after setback starts making you feel like Murphy's Law is true, question its validity, cultivate a winning attitude, take control, and master the markets.

 

Yours,
Joe Ross

 

REINVENTING YOURSELF

Joe Ross (Newsletter No. 555)

 

I have never actually counted how many times I have had to reinvent myself and, along with it, my trading. As the markets have changed, I have had to change.

 

While the markets have not changed from going up, down, and sideways, they have changed in the frequency in which they change direction; the degree of volatility in the market; the duration of trends; mostly the change from trending markets to swinging markets, and, in some cases, back again.

 

Other notable changes that have caused me to have to reinvent myself were: the advent of the personal computer, along with the introduction of day trading to the masses. Another change was the introduction of options for futures. Yet another was the opening of markets never before traded, such as the DJ mini, the Russell 2000, the Nasdaq mini, natural gas futures, ETFs -- these and more came into existence during my trading career. Another major change came with the introduction of new traders from all over the world, along with new exchanges in various countries.

 

In 1988, when I first began to teach trading, 99% of my students lived in the U.S. Today, at least 50% live in other nations.

 

I have been a long-term trader, a day trader, a swing trader, a spread trader, a trader of options on futures, an ETF trader, a stock trader, and most recently my concentration has been on options on equities.

 

I have been able to make these transitions due to one, and only one, reason: my understanding of how markets work. Understanding the how and why of market dynamics, and understanding the Law of Charts, has enabled me to move from one market to another, to change my trading style in order to adapt, and to trade profitably under every market condition I have ever encountered. It is the understanding of how markets work that I have tried to show to others. At Trading Educators we are dedicated to revealing the basic truths of trading in the markets to anyone who wants to learn. You can try to figure it all out for yourself, or you can allow us to give you a helping hand. The decision is yours to make.

 

Yours,
Joe Ross

RETURNING TO YOUR VOMIT

Joe Ross (Newsletter No. 556)

 

Dogs do some pretty disgusting things, especially in what some of them choose to eat. Dogs also vomit, and they do so a lot more frequently than do humans.

 

There is an interesting scripture in the Bible book of Proverbs: "As a dog returns to his vomit, so a fool returns to his folly."

 

It has always puzzled me as to why traders, including myself, are willing to return to our folly. We take a hit or a series of hits in a market, and then try to win in that same market, when obviously there are better trades to be had in other markets. We are like moths throwing ourselves into the flame.

 

If you open a store, you had better make sure it's in a good location, one where there's good foot-traffic and a chance that someone will buy what you are selling. If you own a store, you have to wait for the customer to come to you.

 

However, when you are a trader, you don't have to wait for anyone to come to you - you can go to where the money is being made. Surely, when you consider all the charts for all the markets that are available to a trader, you can find at least one market that is perfectly set up for the way you want to trade.

 

If you want to stop "returning to your vomit", you need to change the way you think. It takes a bit of effort to do that, but when you can't see what to do in a trade, or any one of a number of things are currently wrong in your chosen market, stop trading there. Look around for a better market in which to trade.

 

Yours,
Joe Ross

TRADE WHAT YOU SEE II

Joe Ross (Newsletter No. 555)

 

For years I have taught the concept of trading what you see, not what you think. Our opinions are worthless when it comes to trading.

 

However, there are times when it's extremely difficult to see which way to go with a trade. For example, look at this chart of Watts Water Technologies.

 

I'm not sure I even labeled it correctly.

 

By definition, we have a 1-2-3 high. But what else do we have? What else can you see?

 

I see that within the 2-3 portion of the formation there are two matching highs and two matching lows. Does that mean we have a ledge? The answer is "no". Why? Because a ledge occurs only in a trend. This is not a downtrend we are looking at, it is a collapse - a stop-running meltdown. This is a company that deals in water development and supply. Water is in short supply in much of the world. Is there suddenly more water around the globe?

 

What else can we see on this chart? It looks to me as though we are also looking at the downside breakout of a trading range that began in early May. If that is true, then the point I've marked #2 is really a Ross Hook. A Ross Hook is defined as the first failure for prices to move lower following the breakout of any type of consolidation area. And if this is a Ross Hook, we have a Traders Trick Entry to go short on a breakout of 1 tick below the last bar on the chart.

 

What should you do in this case? For me, the answer is simple: find something else to trade. Deciding to not take a trade is as much a part of trading as is any other aspect of trading. 


Yours,
Joe Ross

DON'T BE AFRAID TO BE YOURSELF

Joe Ross (Newsletter No. 560)

 

There isn't one “right way” to trade the markets. It's tempting to emulate your favorite "Super Trader," but in the end, it's essential to match your trading style to your personality. Some traders, for example, carefully back-test a strategy before using it. They scrupulously estimate the probability of success for a trading strategy in an attempt to forecast how it will do under current market conditions. They are methodical and somewhat compulsive in their approach. But based on their personal psychology, they know that they are most comfortable when they have considered all possibilities, and taken reasonable precautions to ensure success.

Other traders are more easygoing. They take risk and uncertainty in stride, and aren't afraid to formulate their trading plans as they go along: "Back testing is of little value. History repeats itself only occasionally. You've got to go out to find opportunities as they happen." Which approach is best? Again, the approach you use to trade the markets depends on your unique personality.

That said, the single most important factor for trading successfully is self-confidence. You can have a foolproof method, but if you don't have confidence, you can't use the method effectively. Developing a sense of confidence takes hard work. You must accumulate real life experience. You must live through various market conditions, and see how you react. Once you have rock solid confidence based on a wealth of experience, though, the way you approach trading is a matter of preference.

Some people are naturally optimistic. They tend to look at the world through rose-colored glasses, believing that all turns out well in the end. If you have proven skills as a trader, an optimistic attitude can keep you at the top of your game. By pushing yourself to the limits, you will consistently perform at your best.

However, keep in mind that optimism can hurt you if you don't have excellent trading skills. Many novice traders over-trade, abandon risk limits, and lose big when they are overly confident.

But not all successful traders are extremely optimistic. Indeed, many successful traders are skeptical, cynical, and think, "If I'm not careful, I could lose capital." They are confident in their ability to trade profitably, but they know themselves. They believe in preparing carefully for a trade, and prefer to over-prepare. Before they execute a trade, they must be fully satisfied that they've covered all their bases. They think and re-think their strategy. They even worry a little about whether it will work. But in the end, they trust their approach, and they are confident that all their preparation and worry will pay off.

Research studies have shown that you must be yourself in order to achieve a high level of performance. Trying to be someone you aren't just because you think it's the "right" way to trade often does more harm than good. For example, if you take optimistic people and make them question their skills unnecessarily, their performance suffers. Similarly, if methodical, pessimistic people try to avoid going through the motions of checking and re-checking for possible flaws, their performance suffers. It is vital to remember that there is no one right way to trade. In the end, you must find what works best for you. Through trial and error, you must discover what you need to do to make profits in the markets. The only standards that matter are your own. In the final analysis, it's just you, the markets, and no one else!

 

Yours,
Joe Ross

 

SPREADS II

Joe Ross (Newsletter No. 557)

 

Whenever I sit down to write a bunch of issues of Chart Scan, I never fail to include at least one example of spread trading. I cut my teeth on spread trading in the early years of my career.

 

Spread trading is one of the best-kept secrets in trading. Those engaging in spreads tend to be institutional traders, hedge funds, and trading pools. I could spend many hours telling you about spreads, but you will have to take my online spread-trading seminar if you want the full treatment. All I can do here is to show you a picture, and ask "Why are you not picking up the easy money available through trading spreads?"

 

As I sit at my keyboard writing this article, I can see a spread: long February 2015 live cattle -- short February 2015 lean hogs. Both markets had been going down since November of 2014. Both bottomed out within 1 day of each other in Mid-December. However, that is when the spread became truly viable. Within 5 days, it was obvious that after bottoming, hog futures were flat, and moving sideways. However, after bottoming, cattle futures were trending upward. As I write this on December 29, the spread has completed a 1-2-3 low, and is climbing. From the level of the #2 point to the last close, the spread has moved $7,450 per spread contract. The market was open only ½ day on December 24, 1 day on December 26, and 1 day on December 29. That's quite a nice move for only 2 ½ days of trading!


Yours,
Joe Ross

STAYING CALM THROUGH MARKET GYRATIONS

Joe Ross (Newsletter No. 557)

 

Many traders ride an emotional roller coaster, feeling euphoric bliss after a win, but overwhelming disappointment after a loss. Experienced professional traders, however, stay calm and relaxed even after a series of losses. They don't let the natural ups and downs of trading impact their emotions.

 

Ideally, the winning trader stays rational and unemotional, but even a seasoned trader can fall prey to emotional ups and downs occasionally. It's natural to question your method at times. It is easy to start doubting your approach, and wonder about the validity of what you're doing. At the other extreme, it's also natural to become euphoric and feel omnipotent. During winning periods, it is easy to become overconfident, and that can lead to trouble. While overconfident, you feel a false sense of security. You're tempted to take unnecessary risks, and you start to think that you don't have to do any more studying to find and figure out new ways to extract money from markets. It is easy to fall into a sense of complacency.

 

"Wannabe traders" are especially prone to experiencing an emotional rollercoaster. They may not use proper risk management. They are prone to risking too much capital on a single trade. And when they take big risks, they are likely to feel overly ecstatic when they win big, but especially beaten when large amounts of trading capital are wiped out after a big loss. Through proper risk management, however, relatively little is lost on a losing trade, and that helps minimize the sense of disappointment after a loss. It's easier to stay evenhanded in terms of your emotions when your equity curve is smooth, rather than jagged due to extreme losses. Trading is a business. It isn't recreational gambling. As a business professional, it's essential to maintain objectivity. The more objective you are, the easier it will be to creatively analyze market action and trade opportunities as they present themselves.

 

How does a seasoned trader control his/her emotions? He/she realizes that one's trading performance moves in cycles. Sometimes one is profitable, and sometimes not. Gaining awareness of this fact helps one control his/her emotions. Realize that if you have a big winning period, you shouldn't get overly excited because, most likely, you'll have a flat or losing period just around the corner. That's the way the market works. No style of trading makes money all the time. The odds are that after you have a big winning period, you'll go through a period of break-even or losing money shortly thereafter. Try to make enough money to give yourself a cushion to handle the losses when they come.

 

Trading can wreak havoc on your emotions unless you take precautions. Through proper risk management, though, you can control the extreme ups and downs that are inherent when you have your hard-earned capital on the line. Winning traders, however, stay calm, objective, and rational. If you can trade in this optimal state of mind, you'll increase your chances of achieving enduring financial success.

 

Yours,
Joe Ross

TRADING WITH DISCIPLINE

Joe Ross (Newsletter No. 558)

 

Top-notch traders have unwavering discipline. Without discipline, you will be unable to master your ego, create empowering beliefs, have faith, and develop confidence in your abilities. The lack of discipline will prevent your skill as a trader from progressing.

 

It may be tempting to trade "by the seat of your pants," but if you don't develop clearly defined trading plans to follow, and follow them consistently, you'll have difficulty achieving enduring financial success.

 

What's the harm in abandoning a trading plan if you make a profit anyway?

 

Making an occasional winning trade even when you throw your trading plan out the window may provide short-term pleasure, but entering trades haphazardly can adversely influence your long-term ability to maintain discipline. When you stop following your trading plans, you become rewarded for a lack of discipline, and you may start believing that abandoning a trading plan is no big deal. An unjustified reward may increase your tendency to abandon trading plans in the future. You may be prone to think, consciously or unconsciously, "I was rewarded once; maybe I will be rewarded again. I'll take a chance." But the positive outcomes of undisciplined trading are usually short-lived, and a lack of self-discipline ultimately produces trading losses.

 

It's useful to distinguish justified wins from unjustified wins. A justified win is when a trader makes a detailed trading plan and follows the plan. A justified win that results from following a trading plan reinforces discipline. An unjustified win occurs when a trader doesn't make a plan, or drifts from the plan. He or she may be rewarded, but the outcome occurred by chance. The win is unjustified, and can reinforce undisciplined trading.

 

Cultivating discipline is vital for consistent and profitable trading. Trading is a matter of getting the law of averages to work in your favor. One repeatedly implements proven trading strategies so that, across a series of trades, the strategies work enough to produce an overall profit. It's like making shot after shot on the basketball court so as to accumulate a winning number of points. The more shots you take, the more likely you will amass points. But the winning player is the person who first develops the skill to make the shot consistently, so that at every possible opportunity the ball is likely to go through the basket. To a great extent, consistency is key. If the player uses one approach one time, and a different approach at another time, performance is haphazard. It's the same for trading. One must trade consistently, following a specific trading plan on each and every single trade. This allows the law of averages to work in your favor, so that across the series of trades you will make an overall profit. If you sometimes follow the plan, but abandon it at other times, you throw off the probabilities, and you are likely to end up losing overall.

 

With discipline comes profitability. Don't let unjustified wins interfere with your ability to maintain discipline. Follow your trading plan, and reinforce the idea that if you follow your plan, you will end up more profitable in the long run. 

 

Yours,
Joe Ross

SPIKE REVERSALS

Joe Ross (Newsletter No. 558)

 

In this issue of Chart Scan, we are going to look at a 1-2-3 formation in combination with the Spike Reversal. The Spike Reversal is often a price bar that becomes the #1 point of a 1-2-3 formation. It looks as follows:

 

A Spike high has:

  • a high sharply above the days on either side,

  • a close at or near the day's low,

  • and must be preceded by a strong rise. 

A Spike Low has:

  • a Low sharply below the days on either side,

  • a close at or near the day's high,

  • and must be preceded by a strong decline

Keeping in mind that every #1 point develops from a Ross Hook for the continuation of a trend, nevertheless, probabilities dictate that the Spike Reversal is more often than not the beginning of a move in the opposite direction to the previous trend or swing. It may turn out to be nothing more than a retracement correction of a few bars, but there are two things I prefer to do when I see one:

  • Bring my trailing stop within 1 tick of the extreme of the reversal bar.

  • Take my money and run - standing aside until either the trend continues or the Spike Reversal does indeed result in the formation of a 1-2-3 high or low.

 

Yours,
Joe Ross

 

CRUDE OIL

Joe Ross (Newsletter No. 560)

 

Crude oil is the coldest item around these days. Prices have severely dropped, and may drop even further. Prices could stay low for quite some time in the future.

 

However, it wasn’t so long ago (2005) that prices for crude were coming off of new highs.

Regardless of what you trade, or where you live, the price of crude oil is going to affect your life. We are receiving many emails asking us about crude oil prices. Will they go higher? Will they go lower? Will the continuing discoveries of wells via fracking bring down the price of crude oil and thus the price of gasoline?

My friends, I do not have the answers. When they passed out crystal balls, they somehow overlooked me. However, we can learn something about price action as it appears on the chart of crude oil below. I think this might be a good opportunity to see what the daily chart was telling us at a time that crude oil prices had made a high. While we discuss the daily chart, please realize that the weekly and monthly charts showed crude still in an uptrend, with the monthly chart indicating that the rise may have been a bit too steep. On my charts it had become increasingly parabolic.

Now to the daily 2005 crude oil futures chart which I will show from June to October in order to conserve space and see a clearer image.

Clearly, the dotted uptrend line had been broken. I drew solid horizontal line at the base of what was officially a trading range in accordance with The Law of Charts. The arrow points to a price bar that typifies the vertical midpoint of the trading range. Inclusive of that bar, prices have been consolidating for 21 days. The Law of Charts states a probability of a breakout of the trading range is/was most likely to occur on days 21-29.

We could also see the left shoulder and head of what might well become a classical "Head and Shoulders" formation.

What does all this mean? I can tell you only what it meant to me in 2005, and what it means to me now, in 2015 - you are, of course, entitled to your own opinion. Keeping in mind that I have trained myself to trade only what I see and not what I think, I extracted myself from anything to do with short-term crude oil futures, and stood aside in 2005, and am again standing aside for the time-being. Short-term conclusion: get out of any short-term long or short crude oil positions.

What do I think in 2015? I think crude oil has a very good chance of going lower - perhaps even hitting the $40/bbl. mark.

 

Yours,
Joe Ross

 

LONG-TERM CHARTS

Joe Ross (Newsletter No. 561)

 

It seems that these days few traders are interested in trading long-term. The monthly and weekly charts remain relatively unnoticed.

 

Traders are so busy looking at anything and everything from 60-minutes down to 1-minute, that they let beautiful trades slip right by them in the very markets where they are trying so desperately to make a buck. Since weekly charts of the E-mini S&P show only a few bars, I am going to have to use a continuous chart to show you what I mean. The prices may not be correct historically, but the relationship between bars will be exactly as they happened, so don't despair about the fact of continuity.

 

Please keep in mind that the moves you will be seeing are huge on the weekly charts, and even greater on monthly charts; and if they last for only a few bars, that is many times better than the moves you are getting on intraday charts. On the above chart, there were only two times when prices moved lower than and preceding dip.

 

Yours,
Joe Ross

 

REMEMBERING WINNERS TO WIN MORE

Joe Ross (Newsletter No. 559)

 

Making profits is often a matter of thinking and feeling like a winner. It can be argued that tapping into your history of success can put you in a winning mindset.

 

When trying to maximize your performance, it can be useful to set your sights high. The idea is that the more you expect from yourself, the more you will achieve. Modest expectations might produce modest results. The images that come into your mind dictate your expectations. If you don't expect to see a profitable opportunity during the trading day, perhaps you won't. On the other hand, if you think optimistically, you have a good chance of reaching your potential. You might think: "If I study the markets carefully enough, I'll find at least one way to make a profit today." However, this kind of thinking can be pushed too far. Positive thinking is generally good, but if too much emphasis is placed on it, it can lead to trouble. Sometimes the trades are simply not there, and if you try to create a trade where there isn't one, you will defeat what you are trying to accomplish.

 

As a trader, your goal should be to reach your potential, but this has to be balanced with discretion and common sense. Using discretion isn't the same thing as unrealistically thinking you'll make a 500% return on your money on any given day. You may find that there are days when you simply cannot achieve your peak performance.

 

Not everyone has the same abilities. It isn't realistic to think that an average trader can approach the success of a "Super Trader." But whatever your skill level is, you try to maximize it. For some, that may just mean putting on a few small trades a day to develop an intuitive feel for the markets. For others, it may mean making $100,000 a day. The main point is to maximize your performance. Try to achieve a level of performance that exemplifies the best that you can be.

 

When you strive to be your best, your confidence increases. Suddenly, you're enthusiastic and ready to achieve success. Try the following exercise: Close your eyes. Let yourself relax. Now think of a recent time when you've accomplished something important, a task you're proud of. It could be a recent winning trade. Or it could be an athletic event you won recently. Perhaps it's a big business deal you closed, or even a high mark you received for a performance. It could have happened yesterday or 10 years ago. The main issue, however, is that the event you remember should provide a clear image that inspires you, an event that makes you feel good about yourself, and makes you feel that you can do anything. Focus on the image. Try to remember the positive, optimistic thoughts that were running through your mind. Allow yourself to feel good about the experience. Remember how it felt to win. Soon, you'll find that you become optimistic, focused, and ready for action.

 

Use this technique before you start the trading day, or when you are about to execute a trade. If you find that replaying just one winning accomplishment isn't enough, replay two or three, until you cultivate a winning attitude.

 

Images are powerful. By remembering vivid images of past successes, you'll feel more optimistic and ready to master the markets! 

 

Yours,
Joe Ross

 

THRUST REVERSAL

Joe Ross (Newsletter No. 559)

 

Last week we looked at a "Spike Reversal." This week we are going to look at a different kind of reversal - I call it a "Thrust Reversal."

 

Quite often "Thrust" is the first step in what turns out to be, at the very least, a short-term move. By that I mean you can usually count on some sort of follow-through in the short-term.

 

On the chart I'm going to show you, you can see something that occurs in all markets and in all time frames.

 

The explosive move you see on the chart of WTS was preceded by a sudden and rapid meltdown of prices. The meltdown was nothing more than stop- running. You see such stop-running quite often in the stock market. My point is that what we were seeing was not a downtrend. It was simply a collapse brought about by one or more market movers powerful enough to put the squeeze on investors who were long the shares of the company. Such moves often accompany disappointing financial reports by a company, but not always. Sometimes a meltdown is initiated by news affecting an entire industry, or even by news affecting the whole economy.

 

In the case of the up-thrust bar in the share price of WWT, I feel certain that what we were seeing was directly related to weather-related news. The question is, was this the beginning of an uptrend? That was possible, yes. But more likely it was the beginning of a short-term move that could quite possibly last only a day or two. When I see a thrust reversal, I get ready for some quick short-term profits. In essence, this is a scalping situation. Take some money and run. Possibly move any remaining portion of your position to breakeven, and count your blessings if the thrust bar results in a real move!

 

Yours,
Joe Ross

 

SCALPING

Joe Ross (Newsletter No. 565)

 

When scalping, it is vital to understand the mindset needed for this kind of activity. You must not allow yourself to look for the big trade. You must not allow yourself to look for how much you can make by riding a winner.

The discipline calls for seeking a set number of ticks, pips, or points, and then taking your money. You must have absolutely no regrets about missing out on what happens after you have taken your money - you must exit at your money objective. This is not to say that you cannot come up with a management scheme that allows for only part of your money to be taken at an objective, and then developing a scheme for trailing a stop in case the move continues. You might even have two objectives for a trade, maybe more.

The idea behind a scalp is to find a very high percentage trade, and then use a lot of shares or contracts, so that you make a pile of money on only a very small move. You have to be fast, so I suggest you do this kind of scalping only in fully electronic markets like the E-mini S&P. Also, be sure there is sufficient volume to enable your scalp. You will be badly hammered by the market if you go long with a lot of size in a market that is not trading sufficient volume to handle that size in the time interval you are trading.

Example: A market is trading a volume of only 70 contracts in a 15-minute period, and you enter with a 50 lot. You will definitely move the market, and there will be only 35 potential fills to take the other side of your trade. You would be overtrading.

Example: A stock is trading a volume of 9,000 shares in a 15-minute period, and you decide to enter a trade for 5,000 shares. Do you see what will happen to you? There are only 4,500 potential fills for your position. You would be overtrading.

With those things in mind, and probably a few I've forgotten, let's look at how I traded the E-mini S&P.

I have placed arrows pointing to the available trades. My objective was to get .75 per trade on a lot of contracts. There were 6 trades in all, and 100% winners. One of the trades made only .50 and one made only .25. The remaining 4 trades made .75. Total made was 3.75 points. On the surface, that is not a lot for a day's work. But I did a lot of contracts. I'm not telling how many, but you can figure out for yourself how many you need to do. If you wanted to make $1,875 you would have had to trade a 10 lot. Of course, that would have been the gross amount. Commissions and fees would have reduced your take-home pay.

What was the magic method? Here it comes, but it is not the Holy Grail of trading. The five trades were all breakouts of inside bars, bought or sold at the high or low of the inside bar. Take a look:

 

Yours,
Joe Ross

 

AFFIRM TO WIN AND TO DEVELOP FAITH

Joe Ross (Newsletter No. 562)

 

Trading can be exhilarating. When you see a trading plan come to fruition, you cannot help but feel a little special. There are other times, however, when you feel frustrated and disappointed. You regret making a few bad decisions, and may question your ability to return to profitability or achieve lasting financial success. Your confidence can become shaken, and you can lose yourself in feelings of doubt and despair. At times of uncertainty, making affirmations can help you recapture a winning state of mind.

 

Affirmations are positive statements that motivate you. They remind you of your goals, of what's important to you. For example, suppose you have just made a series of losing trades and are feeling disappointed, and stuck in a psychological rut. You can recover quickly by repeating a series of positive affirmations: "I'm human. I can make mistakes. Losing trades are just part of the business of trading. My goal is to achieve consistent profitability. The big picture is all that matters. A few losses here and there are of little consequence for the big picture. Through hard work and experience, I'll achieve my financial goals."

 

Affirmations remind you of who you are and where you're going. If you repeat the affirmations over and over again, you'll start to feel empowered. Even major setbacks suddenly seem unimportant.

 

You can make up a set of affirmations for any trading issue. For example, suppose you have trouble patiently waiting for a trading plan to pan out. Under these circumstances you might say, "I have willpower. I am in control. Winning traders are disciplined. I've made my trading plan, and I can follow it and wait to see what happens. I can learn to trade with discipline. The more I practice discipline, the more disciplined I will become. With each trading plan I successfully follow, I'll gain more self-control. Over time, I will become stronger, decisive, and able to control my emotions."

 

Affirmations can also address a more general issue, such as low self-esteem. Some traders manifest low self-esteem by defining their self-worth by their net worth. They may feel on top the world when they make a winning trade, but worthless and inadequate when they lose. Affirmations can help matters. A trader with low self-esteem may affirm, "I am human, and as a human, I have self-worth no matter how much money I have or how many losing trades I make. My worth is not defined by whether I win or lose. Trading is not my entire life. Winning or losing doesn't define who I am."

 

Affirmations are personal. What you write down and recite is up to you. Affirmations should inspire you, guide you, and motivate you. But whatever you write down and repeat to yourself, it should address your desires, goals, and reasons for trading. At first glance, repeating an affirmation over and over seems like an inconsequential solution, but try it. You'll find it does wonders for your motivation and your mindset. Soon, you'll find that you don't have to consciously repeat the affirmations; you'll think of the positive statements automatically. Over time, you'll train your mind to think positively. You'll approach trading with a winning mindset that will help you achieve enduring financial success.

 

One final hint: Vocalize your affirmations. Be sure you say them out loud. Affirmations are there to help you build faith; faith in what you are doing and faith in yourself to get the job done. The Bible says, “Faith comes by hearing.” You can read affirmations until you turn blue, but unless you verbalize them out loud, they will never achieve a high level of faith.

 

Yours,
Joe Ross

LONG-TERM TRADING

Joe Ross (Newsletter No. 562)

 

One of the concepts we teach at Trading Educators is that of taking entry signals from the larger time frame chart and then, once in the trade, managing from a lesser time frame.

 

For example: taking an entry signal from a 60-minute chart and then managing on a 30-minute chart once you get a fill, or taking entry from a weekly chart and managing on the daily chart. The reason for doing this is to enable you to micro-manage the trade. But, be careful. This is not a good way to trade in all situations. Much of the time it’s better to stay with the chart from which you took the entry signal. It’s too easy to over-manage the trade.

However, in the case of the greatest trade I have personally seen, the management was done in just the opposite manner. The trade was done by a long-term trader, and the trade lasted from 1991 to 2000.

The trader entered the S&P 500 in early December 1991, and exited in 2000, by first entering from a daily chart, using a trailing stop for protection. When he felt he had accumulated sufficient profits, he began trailing his stop on the weekly chart, and then finally to the monthly chart, where he kept his stop 2 natural supports (below two retracements) back. The trade ended up making $16 million.

 

Yours,
Joe Ross

CLEAR AND SPECIFIC GOALS

Joe Ross (Newsletter No. 561)

 

Trading can be tedious at times. Day in and day out you have to look for market opportunities, and once you find them, you have to put your money and a little bit of ego on the line, and suffer the consequences, good or bad. If your heart isn't in it, you'll eventually join the disillusioned minions who have left the trading profession. To “make it” as a trader in the long run, you must love the process of trading.

 

Who would not want to be a winning trader? With complete financial freedom, you could do anything you wanted. It's necessary, however, to turn the abstract goal of becoming a winning trader into a specific, concrete plan. Your trading goals should be clear, precise, and well defined. You must also try to complete your goals within a reasonable time. You should state your goals in an empowering way, and your goals should be realistic. It's also helpful to set a goal that is easy to quantify.

There are a variety of ways to define trading goals.

• You can set performance goals in which you focus on how well you are doing in terms of your own personal standards. When trying to achieve a performance goal, try to increase your physical and psychological skills related to trading.

• You can set outcome goals. Outcome goals help determine what's important to you. They allow you to develop trading techniques and strategies that match your personality.
• A motivation goal helps increase your effort, and allows you to focus your attention on honing your trading skills. Motivation goals allow you to maintain a high level of enthusiasm and confidence.

 

My own favorite goal is “Don’t lose money.” In addition, it's important, for example, to learn to control your emotions. Many traders act emotionally rather than rationally. They also have difficulty taking losses. It's necessary to take losses quickly and easily, rather than dwell on them. It's also important to develop a trading system that is consistent with your personality.

 

All traders should also limit their risk. These are just some examples, but with each of them, it's essential to strive to achieve specific goals every day. On some days, you might just try to set a performance goal. You might practice a trading skill you're trying to hone based on a standard you personally define as adequate. On other days, you might try to achieve a specific outcome, and see how well you do. It's vital, however, to set clearly defined goals, and enthusiastically pursue them. Log your advancement, and reward yourself when you make significant progress.

 

Many traders make the mistake of trading aimlessly every day without trying to achieve specific goals. It's as if

they are trying to saw down a tree without making sure that their saw blade is sharp enough to cut wood. Goals direct and motivate. Without clear and specific goals, you're making a journey without a map. 

 

Yours,
Joe Ross

 

LEDGES II

Joe Ross (Newsletter No. 563)

 

Ledges are a formation described in the Law of Charts. A Ledge must occur in a trend. It must consist of not more than 10 bars from beginning to end. 

 

A ledge must have two matching, or very close to matching, highs, and two matching, or very close to matching, lows.

 

You trade a breakout of the ledge only in the direction of the major trend or swing. The Soybean chart below had two close to matching highs at 1050 and 1049 ½, and two close to matching lows at 1035 and 1035 ½. In this case a sell stop was placed 1 tick below 1035. The question was: "Is it okay to have taken the gap opening?"

Although I don't myself like to take gap openings, they are really a matter of choice. About 1/2 the time you will be glad you took the gap opening. About 1/2 the time you will be sorry you took the gap opening. In a 50% situation like that, I prefer to not take them for one simple reason: if I am going to be correct only 1/2 of the time, then it seems to me I am better off not having to pay the commission. As we say around here, "The broker always wins." I save the commission and am half right. If you take the gap you pay the commission and you are half right. We are both half wrong!

 

Yours,
Joe Ross

APPRECIATING THE MOMENT

Joe Ross (Newsletter No. 563)

 

Have you ever lost yourself in a trade? You focus intensely on your screen and wait for the ideal time to enter. You're fully attentive as you continue to watch your screen as the price creeps up to your profit objective. All your attention is channeled on your ongoing experience. Without even thinking, you exit according to your trading plan. It's as if you are in a meditative trance. There are times when everything just seems to click. Many trading experts call it "trading in the zone."

Trading in the zone is a peak performance mental state. It happens when you engage in a task that requires your full attention and skill. The task isn't so hard that you feel anxious about it, but it also isn't so easy that you're bored. There are times when every trader enters this peak performance mindset. How do you get there? For one thing, you need to feel calm and relaxed.

People experience fear and anxiety when they think about, and regret, past mistakes, or when they worry about an uncertain future.

How do you stay in the moment? It's important to focus your attention on your current experience, rather than self-consciously mulling over the past or worrying about the future. Focus on the process of living in the here-and-now. By taking each trade one trade at a time, you'll feel more relaxed, and are more likely to enter the zone. In other words, don't worry about past losing trades or future profits.

All your attention and energy should be focused on the current trade. When you're in this optimal state, you will trust your instincts. You will see the markets more clearly and objectively. You will be intensely aware of your feelings, sensibilities, and judgments. You'll be in tune with the market action. You'll be able to effortlessly review a multitude of details. Key factors that are driving the market action at the moment will come to mind with ease. When you enter the zone, you'll significantly increase your chances of success.

It isn't possible to always trade in the zone, but when you do, it is a peak experience. At that point, you'll reach a state of bliss. So increase your odds of trading in the zone. Appreciate the process of trading. Don't focus on the prize. Don't worry about past mistakes, and avoid worrying about the future until it happens. By appreciating an ongoing trade moment by moment, you'll not only have more fun, you'll end up more profitable in the long run.  

 

Yours,
Joe Ross

STOP BINDING LOSSES TO YOUR EGO

Joe Ross (Newsletter No. 565)

 

If you're like most traders, you've worked long and hard to build up trading capital. Putting it on the line, even small amounts at a time, can be difficult. But losses are commonplace in trading, and to maintain your sanity, it's necessary to take losses in stride.

Many traders blow losses out of proportion. "The very common phenomenon of personalizing profits and losses often proves disastrous. The linking of ego or self-worth with profitable and unprofitable decisions transforms what should be a dispassionate financial decision into an emotional decision."

It may be difficult, but the professional trader learns how to take losses nonchalantly. A trader I know described how he reacted to a big loss professionally and objectively: "One time I lost virtually everything in one or two days, and a good friend of mine came over. I think I lost four or five hundred thousand dollars or something like that. I told him, 'It's only cash. It's not my life that I lost. I can get it back. It's not the end of the world.' When I lose, I'm not losing my house, my car, my credit cards, or my friends. I made a mistake. I'm angry that I made a mistake, but the cash has nothing to do with it." It's important for traders to put losses in perspective.

Seasoned traders at the CME have observed that when a trader buys a flashy new sports car, he or she usually ends up cracking under the strain of having to maintain a lifestyle of luxury.

It’s a good idea to take a frugal approach to financial possessions. A trader friend of mine said: "I divorced myself from material items a good 20 years ago. By the time I was 25, I had no desires for material items. I've learned over the years that money is only a substitute for love. Material things, like cars and homes, are just substitutes as well. It just became clearer with self-exploration. In getting clearer, I divorced myself from the emotions of the stocks, the emotions associated with money and greed. Money just doesn't buy you happiness."

When you make a trade, put your money on the line, not your ego. It's hard to fight against the natural human reaction to feel personally hurt when you lose money, but professional traders do it, and so can you. One way to take losses in stride is to trade only with money you can afford to lose, not money you need for basic living expenses. If the loss truly means little to you, you will know you can survive the loss, and this knowledge will allow you to stay calm. But if you just can't afford to lose, you'll have trouble convincing yourself that it doesn't matter. It does, and you know it. Losses shouldn't hurt. If you control your risk, you can handle losses more easily. If you minimize the amount you risk on any single trade, it won't hurt your account balance very much. Finally, don't take losses personally. View a trade as a business transaction. It's not about you or your self-worth. You have self-worth no matter how much you win or lose in the markets. If you remember this fact, you'll be able to take losses in stride.   

 

Yours,
Joe Ross

TRADERS TRICK BAR COUNT

Joe Ross (Newsletter No. 564)

 

The chart below displays something we teach at the Traders Trick advanced concepts seminar. We need to learn something here about the Traders Trick Entry (TTE). Prices reached a high point, and then retraced for two days. Those two days made identical highs. Prices then dropped again, and again we had two identical highs.

 

The TTE rules say that after 4 bars of correction you are no longer to enter a trade based on the TTE. However, the rules also state that when expecting a continuation towards the upside, equal highs count as only one bar of correction (retracement). So, although we have 4 bars in the correction, because of the equal highs we count this as only two bars of correction. Now you can see why we made an entry 1 tick above the high of the 4th bar (arrow).

 

What happened afterwards is of no consequence to the rule I am showing you here. In accordance with your money and trade management, you made a little, took a loss, or made a lot on this trade. I will tell you only that we made a little.

 

Yours,
Joe Ross

 

SCHEDULING YOUR WORRY TIME

Joe Ross (Newsletter No. 564)

 

Winning traders execute and monitor their trades in a peak performance state. They aren't worried about past mistakes or future profits. All their attention is focused resolutely on the ongoing trade. But it's hard to focus on your ongoing experience when you're worrying about losses, or some other trading problem. It may sound easy to take losses in stride, and avoid letting them interfere with your ongoing experience, but when you are in a severe drawdown, and worried about how you'll get out of it, it's hard to avoid letting it get to you. You may become consumed with guilt and anxiety.

It's natural. Your future may actually be at stake. But you can't trade at your best when you are worried. Somehow you must train your mind to put the losses out of your awareness. One way to train your mind to temporarily forget about losses is to schedule worry time.

The natural human tendency to worry about problems protects us. If we didn't worry, we might take dangerous risks, and pay a steep price. But worrying can be a problem for successful trading. If you are the kind of person who worries uncontrollably, it may interfere with your ability to pay attention to executing your trading plan. Not only can it distract you when you try to execute a trade, excessive worrying can prevent you from getting a restful sleep at night, or keep you so uptight that you can't relax. Without proper rest and relaxation, you'll find it difficult to mobilize your psychological resources for optimal trading performance.

Worrying becomes a problem when you do it too often and for no good reason. For example, if you've mounted losses and worry about them, you tend to think the same thoughts over and over again. It doesn't help much. You are likely to let it interfere with your ability to make back the money you've lost. You need to put such thoughts out of your mind while you trade. When you worry too much, you feel out of control. One way to regain control is to schedule worry time. The basic idea is to set aside a certain part of the day, seven o'clock, for example, and worry for only 30 minutes during that time. The goal is to worry only at a specific time, for a fixed length of time. When you catch yourself worrying during the day, you can tell yourself to stop with the knowledge that you can worry about whatever is bothering you later. Knowing that you can worry during the "worry session" will help you control your worrying.

It may sound a little simplified, but it works for many people who have trouble controlling their worrying. Try it. See if it works. If you're like most people, you'll find that you worry less, and can control it. So don't let worrying interfere with your ability to trade successfully. Worrying seems like a natural response to a setback, but it usually gets you nowhere. Rather than hopelessly worry, it's vital that you take an active problem-solving approach. If you can control your worrying by scheduling regular “worry sessions,” you will be able to recover from a setback faster and return to profitability.

The next time you find yourself worrying during a trade, say to yourself: “Look, Mr. Worry, I already did my worrying this morning. I’m not going to worry again until my worry time tomorrow morning!” 

 

Yours,
Joe Ross

REVERSAL BARS II

Joe Ross (Newsletter No. 566)

 

I've been looking into gold last week and this week (I’m writing this on March 6, 2015) because many people are saying it’s time to buy gold. I've been trading gold ever since gold futures became available for trading.

 

Although the trading has been profitable, truly gold has been a market that has its "ups and downs." When gold did go up, it went up like a rocket. When it fell to its lows, it fizzled downward for 20 years. In all, gold has given traders one truly wild ride.

For the most part, gold trends and has a direction, but whether moving up overall or down overall, it does it in much the same way your leg moves when the doctor taps the front of your knee with his hammer. Gold, overall, has been a knee-jerk market.

There was a time during the 1980’s when I day traded gold from the five-minute chart. These days I prefer to trade it from the daily, weekly, and even the monthly chart. I really do make the effort to avoid as much of the short-term noise in gold as I can. Let's look at the weekly and daily charts of gold, and ask the following question:

 

In what way are reversal bars involved with The Law of Charts?

If you will take notice, reversal bars are potential #1 points or Ross hooks at the end of a swing. The least of these moves lasted one week, some lasted several weeks. A one-week move in gold can involve some serious money.

Let's look at the daily chart. I know most of you just don't have the patience for the weekly chart.

 

When I copied this daily gold chart, it was making a classic matching congestion pattern. A breakout from that congestion could take gold higher or lower. If gold moves higher, it could be the beginning of an uptrend in gold that will take gold to at least $2,500/oz. But if the breakout is lower, gold projects a move to below $1,000/oz.

Meanwhile, the chart shows that using reversal bars can be profitable in trading this market. That doesn't mean reversal bars are good in all markets--it doesn't even mean reversal bars are good in all time frames of the gold market. It's the job of the trader to discover what works and what doesn't work. After all, you really need to be paid for doing something other than staring at a screen all day!

 

Yours,
Joe Ross

 

DECISIVE TRADING

Joe Ross (Newsletter No. 566)

 

For those who want to take home big profits, trading isn't a hobby. It's serious business. If you want to make profits consistently, you must have respect for your trades. You must treat each trade like a business transaction. It should be well-planned and deliberate. You should follow a business plan, which outlines a strong rationale for making the trade. You should have a realistic profit objective, and execute the trade with strong resolution to make a profit.

Many novice traders don't approach trading seriously enough. They don't carefully delineate a trading plan, and when they do, they don't follow it. In the "The Disciplined Trader," Mark Douglas observes, "The typical trader will do most anything to avoid creating definition and rules because he does not want to take responsibility for the results of his trading." According to Mark Douglas, traders have a strong motive to avoid responsibility. And one of the most effective ways to avoid responsibility is to pretend that trading is nothing more than a leisure activity.

When taking trading lightly, you can always say, "It wasn't important anyway; there's no reason to worry about it," whenever things don't go your way. On the one hand, approaching trading as if it were just a hobby will allow you to minimize the psychological importance of a setback or a loss, but on the other hand, unless you take trading seriously, you'll never give trading your best shot, and you'll never make the huge profits you've been dreaming of. You'll always have a way out, and it will be too easy to make excuses for things going wrong. Making excuses may make you feel good in the short term, but eventually you'll start to realize that you are taking the easy way out. And the more excuses you make, the less decisive you will feel.

If you want to earn profits, you must feel you are in control of your actions. Taking a decisive approach to trading requires that you take responsibility for all your actions. That doesn't mean beating yourself up for making a mistake, but it does mean trying to gain as much control of your trading as possible. You can't control the markets, and you can't control what other market participants will do, but there's a great deal that you can control. You can manage your risk. You can carefully measure your trading performance, and discover what works and what does not. You can decide which setups to take and which setups to avoid, and you can decide to trade only under market conditions that are conducive to your methods and style. The astute trader distinguishes what he or she can control and what he or she cannot control.

Winning traders take responsibility for their actions. When you identify what you can control, and take responsibility for it, you feel empowered. You feel in control, and you are ready to act decisively. And when you feel in control, you are in a winning state of mind. You'll feel relaxed and alert, and ready to see opportunities and profit from them.

 

Yours,
Joe Ross

TRADE WHAT YOU SEE III

Joe Ross (Newsletter No. 567)

 

At Trading Educators we teach traders to “trade what you see, not what you think”. But as a trader, you will never see anything if you fail to first look!

 

Fairly often a trade comes along that is extremely obvious. I'm wondering right now how many traders have missed the absolutely easy-money Intermarket spread you see below. The spread calls for going long Corn and short Wheat.

Simple observation was all that was needed to make the trading decision. The CBOT gives margin credit if you will trade the spread at the required ratio.

 

As you can see, The Law of Charts is at work in spreads as well as in outright futures or stocks. In fact, The Law of Charts works with any kind of chart you want to use. It works with bar charts, line charts, point and figure charts, and candlestick charts. As long as a chart has a horizontal axis and a variable vertical axis, you can see The Law of Charts in action. The Law of Charts states that a 1-2-3 low occurs only at the end of a trend or swing.

 

Since the low of the swing on the price chart moved lower than the low of the previous retracement, the arrow I have drawn indicates a downswing to the #1 point. If you will take a look at your own charting software, you will see that overall, Corn futures were moving sideways, while at the same time the Wheat futures were moving down. This gives the reason for the spread to work.

 

Yours,
Joe Ross

VISUALIZING THE WORST CASE SCENARIO

Joe Ross (Newsletter No. 567)

 

Visualization is a powerful tool used by professional athletes and traders alike. A runner, for example, will not only run around the track for hours at a time, but also visualize an upcoming race over and over, anticipating what might go wrong and how to quickly recover from an unanticipated setback. Visualization can prepare you mentally to handle the stresses and strains of the trading day.

Trading is physical as well as mental. When you're in the midst of a trade, for example, your adrenaline is pumping as you wait for prices to reach your exit point. It's useful to prepare mentally and physically for the trade.

Trading can be stressful, because while you are in the trade you don’t know the final outcome. You can anticipate what might go wrong and how you will deal with it. Avoiding the possibility by not having a plan for dealing with the setback will put you on edge. On the other hand, if you have a plan for dealing with the setback graciously, you'll feel better, and when you do face the setback, you'll handle it with ease.

That said, some people like the excitement of not being fully prepared. They wouldn't think of anticipating what to say, but if you are prudent, you would agree that it is better to plan ahead instead of being caught off guard without a plan.

Trading plans are essential for disciplined trading, but many novice traders have trouble following their trading plan. The pressure can get to them, and they abandon their plan prematurely. Visualization can help. By running through various scenarios over and over in your head, you can anticipate what may go wrong and pretend that you will handle the setback with grace and decisiveness, instead of panic and indecision.

How might you use visualization? Close your eyes and imagine executing your trade. Observe the thoughts that go through your mind. Imagine trying to stay objective and unemotional. (This is the ideal thinking strategy. You might also imagine thinking optimistically, but this can produce feelings of disappointment should the markets move against you.) Next, imagine the worst-case scenario: the price goes down and reaches the point where you planned to exit and take a loss. Imagine how it feels to lose. What thoughts are going through your mind?

Depending on your experience, you may tend to feel anxious and afraid, but ideally, you should remain calm, and be ready to exit the trade effortlessly. The key to using visualization is to mentally experience a variety of scenarios. Run through the ideal scenario and the dreaded scenario.

For example, you might want to mentally practice the worst-case scenario where you go through the entire situation calmly and according to plan, but also mentally practice variations, such as feeling a sense of panic when the price moves against you. After the initial feeling of anxiety, you can imagine telling yourself to calm down, feeling soothed, and exiting the trade decisively.

You don't know what's going to happen with a trade until it happens, but by using visualization exercises, you can anticipate various scenarios and be prepared. Visualization can help you handle any trading situation like a seasoned professional.  

 

Yours,
Joe Ross

WHEN LOGIC OVERRIDES TECHNICALS

Joe Ross (Newsletter No. 568)

 

At Trading Educators, we define a swing as containing at least 5 bars. However, on the chart below we have some confusing things happening.

When a chart is in confusion giving us mixed signals, we have learned to step aside. We are interested only in clear-cut trades.

The chart shows only a 4-bar swing to the downside. I've numbered those bars in black. The formation itself from #1 to where we see the last bar is a 1-2-3 high, as defined by The Law of Charts. By virtue of the 1-2-3 high, the last bar on the chart was a Traders Trick Entry to go short, and as shown is so far a losing trade.

If we were able to consider bar #4 as the low of a swing, then the formation from the low of #4 would be, so far, a 1-2 low formation, waiting for #3 to happen. Since bar #4 both opened and closed in the upper 25% of its daily range, it is by our definition a reversal bar. Does that mean we should now go long if we are not already long? It is situations like these that can be confusing. Is this a time to throw out the rules? Is this a time to stretch the imagination and trade what you think, rather than what you see? Can we rationalize that bar #3 was so long that we can count it as two bars?

These are the kinds of thoughts that run through a trader’s mind when looking at a chart. Was bar #4 a reversal bar? Yes, it was by our definition. Was it at the end of a swing? No, not by our definition! Did we have a Traders Trick Entry to go short? Yes, we did. Are we now losing if we took that trade? Yes, we are. Could we have gone long at the #4 reversal bar? Not if we are following our definition that a reversal bar must both open and close within 25% of its extreme point at the end of a swing.

Could fundamentals have helped us here? Not likely! Why? It was because fundamentals at that time were confusing.

The best thing you can do is to avoid trading situations that are not clear. Take only the most understandable trades, ones in which you do not have conflicting signals.

 

Yours,
Joe Ross

TREND CONTINUATION

Joe Ross (Newsletter No. 569)

 

Q: Based on the chart below, would it be correct to say that soy beans remain in an uptrend?

 

A: With regard to the chart above you have a 1-2-3 low, which, when the #2 point was violated, defined a trend. The defined trend was followed by a Ross Hook (RH), and then another RH.

The violation of the first RH established an uptrend.

The second RH turned into the #1 point of a 1-2-3 high, the #2 point was created by the bar that followed it which made both a higher high and a higher low.

The last bar on the chart, by making both a lower high and a lower low, created a #3 point.

If the #2 point of the 1-2-3 high is violated, you will have defined a downtrend. Until then either the uptrend is intact, or you are in congestion.

The last 4 bars on the chart fit one of the definitions of congestion. A down bar, a doji (wild card), an up bar, and another down bar. So you could say down, up, up, down. However, since trend always takes precedence over congestion you are still in the uptrend until, and unless, the last #2 point is violated, in which case you will have defined a downtrend. 

 

Yours,
Joe Ross

ADDICTED TO TRADING

Joe Ross (Newsletter No. 568)

 

Winning traders have a passion for trading. They love what they do. They may even get a little thrill when they put on a trade. But there's a huge difference between loving what you do and trading in order to get a big thrill. Some traders are addicted to trading. They take unnecessary risks, risks that are more about feeling high or getting an adrenalin rush than about making profits. Ari Kiev (2002) describes the addictive trader as, "constantly seeking a sense of power and control; competitive, restless, and easily bored." These traits make addiction-prone traders seek out greater and greater risks until they blow out their accounts.

Trading is fun, and there is nothing wrong with having a little fun. But addiction-prone traders have a gambler's mentality. They put on trades to get high. For example, some addictive traders actually enjoy severe drawdowns. Whereas most traders would do anything to avoid being down $100,000, trading addicts prefer to be down. Even though they pretty much need to make $200,000 to get out of the hole, they prefer this set of circumstances. They prefer to have their back against the wall. It's thrilling, exciting, and makes them feel they are living dangerously.

Another form of trading addiction is using trading to feel superior to others. Addiction-prone traders secretly feel inferior. To cope with this sense of inferiority, they want to believe that they are smarter than any other trader around. Rather than accept what the markets have to offer, they try to outsmart the market. They think they can dominate the markets. For example, they may think of contrarian ways to trade the market even during a strong bullish trend, just because they like to feel different and special. Following the crowd doesn't give them a sense of superiority, so they would rather not do it, even when the crowd is right (which they sometimes are).

Addiction-prone traders allow their emotional needs to guide them, rather than their logic. However, winning traders don't allow their emotional needs to overpower them. They look at the markets carefully to map out reasonable and detailed trading plans. Sometimes they go with the crowd; sometimes they go against the crowd. Whatever they do, though, they allow a rational state of mind to guide them. They suppress emotional needs in order to compete or seek out excitement.

If you have a problem with putting on overly risky trades in an effort to get a quick thrill, it's vital that you learn to trade more prudently. Avoid going against the crowd just to be different. Avoid impulsive trades. Make a detailed trading plan, and follow it. Decide whether you are making a trade on a whim, or are trading based on a sound analysis of the market. If you are trading by the seat of your pants, stand aside until you calm down and can think carefully and deliberately.

Addictive traders end up failing in the long run. If you have this problem, it's essential that you overcome this ailment before you completely wipe out your account.

 

Yours,
Joe Ross

MINIMIZING THE IMPACT

Joe Ross (Newsletter No. 569)

 

Are you tired of facing setback after setback? Traders must be thick-skinned to keep trading over the long haul. It's common to get knocked down hard and have to quickly pick yourself up and tackle the next challenge. So how can you continue to persist after getting knocked down again and again? One of the best ways to persist in the face of defeat is to mentally minimize the impact of a setback.

Setbacks can take a psychological and emotional toll. With each setback, you lose a little energy. It can all add up until you get to the point where you feel you can't take even another minor setback. At some point, past setbacks can produce future setbacks. Trading requires skill. When you've been worn out by experiencing repeated setbacks, it's hard to trade skillfully. By minimizing the impact of a setback, however, you can cope with repeated setbacks and recover quickly.

A setback can be damaging if you elevate its importance. If you work under the assumption that "a winning trader is thoroughly competent," you'll be disappointed when you make even the slightest trading mistake. Actually, even a seasoned trader makes trading errors, so the idea that you must be thoroughly competent is unrealistic. It's often hard to avoid feeling beaten when you've taken a few big hits to your account balance. There's a lot you can do both physically and psychologically to minimize the impact of repeated setbacks.

From a purely physical standpoint, it is essential to minimize the potential impact that a losing trade may have on your account balance. If you lose a lot on a single trade, it will sting. But if you limit the amount of capital you risk on a single trade, it won't hurt at all. You can pick yourself up easily and put on the next trade. It's much easier to take a loss in stride when the real impact on your account balance is minimal.

From a psychological standpoint, there are thinking strategies you can use to minimize the impact of a setback. First, minimize its symbolic importance. Many people over-interpret setbacks by infusing them with more emotions than are warranted. They view setbacks as a form of punishment, as if a teacher or parent were punishing them for doing something wrong. But making trading mistakes is typically less important than is, for example, breaking the law, or not following through on your word.

It may feel natural to react as if you have been punished for a trading error, but it is important to understand that you are actually punishing yourself unnecessarily. Why beat yourself up when you can take the setback in stride and move on to the next winning trade?

Second, don't confuse trading outcomes with personal significance. If you lose a lot, for example, the loss may have great financial significance, but it does not need to cause you to not trust yourself.

You don't need to let a loss or setback make you feel less worthy as a person. Professional investors might say, "If the loss is too big, I'll get fired." All right, you'll get fired. That's a heavy consequence for your mistake, but don't let the mistake affect your feelings of self-esteem and worth.

The impact you accept from a setback is arbitrary. It matters only because you make it matter. If you decide that it really doesn't matter, then it will not.

If you decide that you don't care about losing your job, then a job loss wouldn't matter to you. If you decide that a trading loss is just part of business as usual, then you won’t let the loss have a great impact on your emotions.

It's all in how you look at it. And if it is all in how you look at it, then why not always look at a loss or a setback in a positive light? Why not think, "I'm making too big of a deal over nothing." Ironically, when you psychologically minimize the impact of a setback, and treat it as if it isn't important, you'll become a better trader. You will feel relief. And when the pressure is off, you can more easily think of productive ways of trading the markets with assurance.

Profitable trading requires you to trade with a peak performance mindset, but this mindset is difficult to cultivate when riddled with doubt and frustration. It's essential that you calm down and think rationally. Minimizing the psychological significance of a setback can help you stay calm, free, and objective. And when you feel this way, you'll trade at your best.

 

Yours,
Joe Ross

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Joe Ross







 

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Yours,

Joe Ross

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