This is a rough transcript of a radio show I did… probably about a year ago now… with Craig Weil, the Director of Trading with the Online Trading Academy in Chicago.  The radio program was Traders Talk Live and aired at 9 AM on Saturdays on AM560 WIND.  I did have a recording but can’t seem to find it, but the transcript is probably just as good.

It was an interview based on the article I had published in Stock & Commodities magazine several weeks prior entitled “The Trading Plan.” [Just as a side note, you can check out my article in the April issue of that magazine where I discuss a rather obscure way to use the RSI indicator to verify trends.]

Enjoy, I think you will there is a lot of information packed into this, and regardless of whether you are an experienced trader or a new comer the following is a good reminder or a great introduction to trading.

Interview on Traders Talk Live with Cory Mitchell

When people ask me what the number one thing that all successful traders and investors have in common…it doesn’t take me long to come up with an answer.  Now… you have heard me say hundreds of times that there are many ways to skin this cat… as there are literally thousands of methodologies and strategies are employed every day by successful traders. There are strategies for all asset classes… for all time frames and for all kinds of markets….up…down or sideways.  Now some of you may say…its technical analysis…but of course…the fundamentalists would scoff at that notion. Some of you might say…patience or discipline…and that would be true to a degree.  No one is going to succeed without it…that’s true…But…but you can display great patience and discipline…and still not make money.

You may have even discovered…the greatest investing strategy since Warren Buffett was in diapers…… and back tested it thousands of times to eye popping results…but unless you can implement that strategy properly…and have a plan for it…you will fail.

And just as No business will get funding or succeed without a business plan… no trader or investor will consistently make money in the markets…without a trading plan.

Joining us now for a discussion on trading plans is someone who knows a lot about the topic…Cory Mitchell is an independent Trader and founder of Vantagepointtrading.com…a free educational website devoted to helping traders learn about …and succeed in the markets.

Cory has written numerous articles for several publications including Investopedia and Technical Analysis for Stocks and Commodities Magazine… and it was his featured article in their March issue that compelled me to invite him to the show today.  The title of Cory’s article is simply “The Trading Plan” and in it…Cory has artfully articulated why I think this is an extremely important topic…so I am thrilled he could join us today…Cory…welcome to Traders Talk Live!

How are you…..blah blah blah

Cory…  before we get into our topic today…let’s get a little background on you and your trading experience…

1.  Where did it all start for you? How did you get hooked on Trading?

Well, I have been trading for about 6 years full time…and what probably hooked me was when a professor I had in university introduced me to technical analysis.  The idea of looking at charts and visually trading based on actual price levels appealed to me much more than dealing with a lot of numbers.  I went on to work for 2 proprietary trading firms in Canada… trading stocks… and then a year ago switched to the Forex Market as it is open 24 hours and allowed me more freedom to trade at night which is when I prefer to trade [UPDATED: I still trade forex independently, but also own a small proprietary trading firm specializing in short-term equity strategies].  I am also a member of the Canadian Society of Technical Analysts and an affiliate of the Market Technicians association and definitely love the technical side of trading.

OK Cory…there are many components to a successful trading plan and we don’t have much time… so we had better get going.

Now…as I alluded to in your introduction…I feel  having a plan may be the single most  important ingredient  for success…so much so…that at online Trading academy….we actually have a one day class…dedicated to it.

Now…a trading plan is not just reading some books and opening an account…and sometimes…the new trader succeeds at first without a plan… and thus don’t think they need one…

Ex floor traders are especially guilty of this…when learning to trade electronically…

2.  But we shouldn’t fool ourselves right?   You call it random reinforcement… What is that?

Random reinforcement it prevalent in many things…including life in general…it means that we can do something wrong, and be randomly rewarded for it simply because the market is so dynamic.  This misleads people into believing they can beat the market without a plan simply because they win on a trade every so often – -but it is a short term phenomenon.  This random element reinforces bad habits because it gives an occasion profit while emptying out the trading account over the longer term.  It baits a lot of people into losing a lot of money who don’t take the time to really think through their plan.

3.  So where should someone start?  Do we need a methodology first…or does the plan come first? The chicken or the egg?  We really have to have some idea of what kind of trader we want to be…right?

Yeah.  We do not need some idea of what kind of trader we want to be.  It is likely best to start out by balancing our personality and desire to trade in a certain way …with our current circumstance.  By this I mean…it is very hard to be an active day trader… if the person also has a full time job.  So we need to be realistic about what and when we will trade.  From there…we can begin to develop strategies that cater to our lifestyle, personality and the particular market we have chosen to trade.

Cory…You have broken the trading  plan down into 3 parts…Money Management….Entry rules and Exit Rules….so let’s address each of these specifically…and how our plan will not work without mastering them all.

First off… you call it Money Management…I call it risk management

It seems obvious that we should be concerned about this… but so many traders overlook it.  First… we have to determine what our maximum loss will be on each trade…but  every trader has different risk tolerances and equity ..

In fact our primary goal shouldn’t be to make money….our  primary goal should be capital preservation…our secondary goal should be to make money.

4.  what is a good rule of thumb for someone…as far as what to risk on a trade?

Many traders think of a dollar amount first when considering risk. And I think that can be dangerous.  It is better to gauge risk as the percentage of the entire trading account which is being risked on each trade.  The amount that is risked on any given trade should be 1-3% of the trading account.  From my experience, traders that last it seems lean toward risking a very small percentage of total capital on each trade…therefore, we should risk only about 1 % of our capital on a trade.

Although, as our accounts grow we will find that we risk less and less percentage wise.  A $500,000 account trader does not risk $5000 on every trade…no way…the risk may be only a couple hundred.  So when this occurs, and percentages are no longer useful, a trader will normally use a dollar risk, such as $300, $500/trade or whatever the case may be.

And …speaking of Rules….Rules are really what this is all about right Cory?

5.  Can we have a plan without written rules?

If we can’t articulate our plan if we have none

The rules should to be written down.  If they are not written down we have no idea what has made money and what hasn’t, because we can’t remember what exactly we did on each trade over the last month or year – and chances are if someone doesn’t take the time to make a plan, they aren’t going to take the time to write down each trade in detail either…but if we have a plan we will know what is working and what isn’t…and we can fix it by altering the trading plan.

6.  And our rules have rules… Don’t we need a contingency plan for every situation?

Yeah…We need to know how we, personally, are going to respond to a situation.  The market can go crazy and we don’t need predict every movement, but if we have a well laid out plan we will know how to handle our current trades based on current conditions.  So yes, our trading plan takes all the guessing out of what to do while in a trade – it lays out our course of action no matter what occurs.

Lets talk about entries and exits…your other two keys.  Now… most people concentrate on entries and don’t really consider exits right? But that is where our profits or losses lay.  Anyone can get into a trade…but it is getting out that is really going to carry the day.

7.  In your opinion…what are the most important rules or steps we should have for exits?

The first thing is we should always have a stop in place.  This stop is what limits our risk to a very small percentage of our total account mentioned earlier…the 1-3%…or less…or our set dollar risk per trade…mentioned earlier.

We can also exit a trade with profit targets.  Profit targets based on logical technical analysis allow the trader to see exactly what they can expect in return for the amount of risk they are taking on.  If a trade does not appear like the rewards will outweigh the risk…the trade should be avoided.

I generally use multiple profit targets and exit part of our position at each different target.  Using stops and profit targets lets me know exactly what my risk to reward ratio is before the trade even takes place….and  I will talk a bit more about this when we talk about position sizing.

OK   Let’s talk about position sizing is and why this is so important. I think this is a difficult concept for a new trader to get.  Most people think that they should have a default quantity on every trade but that is dangerous…especially if you trade different equities every day.

People think they can make up a stop…”I only will risk 10c or 50c or whatever… But not all trades are the same.  A stop should be based on some data or criteria like time right? And once you determine a proper stop…that will dictate your positions size.

8.    Can you give us an example of proper positions sizing works and what kind of exits you use in your trading?

Sure, First let’s assume we have a $10,000 trading account…I will try to keep the numbers simple….  Risking 1% of 10,000 on this trade means we can risk $100.  And let’s say we want to buy a stock at certain price – we look and see at what price this trade would be proven wrong.  Let’s say there is a support level 30 cents below our entry, and this is where we place our stop.  Since we know our stop is 30 cents, we divide the $100…the total we can risk on the account… by our 30 cent risk on the trade to give us our position size.  In this case we can buy 333 shares, or 300 when rounded down.  We now have a logical stop in place and an ideal position size…

From there we need to look at our charts and determine a proper profit target.  For me to actually take this trade there would be to some chart formation or something logical and tangible (not emotional) which would indicate this trade would make me at least 2 to 3 x my risk level.  In other words, I need to reasonably expect that I will make 60 cents or more (preferably 90 or more), for my 30 cent risk.

We can do this by having one target but generally I set multiple profit targets because we can take a quick profit on part of the position but the last portion of the trade can be left to really ride for a bigger profit….of course it does not always work out as planned, and that’s ok, that’s why we try to make more on profitable trades than we lose on the ones that go bad.

Having a trading plan will allow us to review our trades and correct our problems. But many students…especially those that have been trading a while…don’t really care to put in the time to review their mistakes and reinforce their rules.

9.   What do you say to those people who don’t want to take the time to write down their rules and review their mistakes?

It may sound harsh but the financial markets require that there are winners AND losers.  The people who lose over the long run are the ones who don’t put in the time to plan out and review their ventures in the markets.  If you do plan and review, you have a much better chance at success.

Thanks Cory…for joining us on Traders Talk Live today.

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I got asked to post a chart of the intra-day trends I mentioned in Stock Market Outlook – Key Support Broken.  What follows is not my actual chart from the last two days, but have recreated here to show the general idea.  I have used SPY in the chart.  There are fantastic tradable moves which are capturable, the only caution is avoid lines on extreme angles.  These will of course be broken, but does not in anyway confirm a reversal.  Also, look for simple signals of reversal, such as moving higher to take out a recent swing high after failing to move below a low, or vice versa (heading lower after failing on an attempt to move past a swing high).  The idea is to enter with trend as price moves to the trend line.  Trade the micro trends, but be aware of the dominant trend and give credit to the dominant trend if micro and dominant paths converge.  Exits should be near or just past recent swings (lows in the case of downtrend, highs in uptrend).  This does work best in volatile markets, but can be used even ranging markets as price moves back and forth within its box.

As one trendline is broken, another can be drawn as swings are made in price.  Broken trendlines are not always reversals, but simply a change in the angle of the current trend.  By drawing trendlines of main trends present it should become apparent when this is occurring in real time.

Not all trendlines have been drawn, but the more obvious ones have.  Having the trendlines as well as marking horizontal support/resistance on the chart as they occur intra-day can provide key insight into the dynamics of how the market is moving.

SPY - Intraday trendlines

You might be interested in the four complimentary videos on Trend TV:

VIDEO 1. Basic Indicators to Analyze Markets

VIDEO 2. Advanced Trading Applications of Candlestick Trading

VIDEO 3. Day Trading Made Simple

VIDEO 4. Using “Differences” to Spot Shifts in Momentum

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Cheers,

Cory Mitchell, CMT

~Know your risks when trading. Please read the Legal Disclaimer page.

What an interesting week it was for the stock market.  Here we look at the S&P 500 for the shortened trading week of January 19-22.  But first, it was an interesting past week, and shows us a lot about what to expect going forward.

First off, some non-technical notes:  Wednesday was interesting; a MASSIVE order of more than a quarter million went through in the S&P minis!  That is a notional value of about $12,961,800,00.00!

There are rumors that the market is being kept higher by the Fed…that they may in fact be the mystery buyer of this market.  I don’t know if that is the case, but either way this market was marched higher in after hours trading during the last few months of 2009 and now intra-day we are seeing aggressive buying come into the market at key technical levels to keep this market in a technical uptrend.

No matter what the reason, price is what matters and here are the levels to watch for the upcoming week as shown on the chart.  Key support comes in between 1132-1130 which held off aggressive selling on Friday.  A break of that level does damage to the uptrend.  Some support comes in at 1128 with further support coming in at 1123.50 and 1116-1114.80.  The target for the breakout below 1130 is 1110.

The rising trend line which was broken on Friday (see chart) will act as resistance on the move back higher – on Tuesday this will be between 1140 and 1142 but will increase over time.  A push back above that line indicates a move towards the upper trend channel with resistance along the way at 1144, 1148 and then recent highs at 1150.  With “nothing but air” on the upside, resistance beyond comes in just below 1154, followed by 1160 and 1168.  After this little resistance remains until 1180.

The average weekly true range stands at just about 30 points.  Keep in mind it is also a shortened week for stocks due to a holiday on Monday.

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S&P 500 - 15 Minute Chart

Have a great week(end) everyone,

Cory Mitchell, CMT

~Know your risks when trading. Please read the Legal Disclaimer page.

I just wanted to take a quick look at the SPY.  With shallow volume and seemingly limited retail interest, the market is being driven around by algorithmic orders based on technical price levels.  When we break down the chart of movement so far this year, the stock market (we will use SPY, the S&P 500 ETF, as our gauge because it itself is easily accessible) has reacted well along trend lines.  Aggressive buying or selling comes in at the trendlines.

The phenomenon is likely to continue as long as the current market environment stays about the same.   Now that we have had movements which give us short-term trendlines on both the upside and downside, these trendlines can be used to aid us in the future.

These trendlines are not perfect, as hardly anything in the market ever is.  But moving forward the implied levels of the trendlines are likely to exact some impact on the market.  I will not lay out in detail the levels since they will change over time since the lines are sloping, instead I have attached a chart which shows the trend lines and important horizontal support lines.  The two circled price areas are just where aggresive breakouts occured, but which quickly corrected.

SPY (S&P ETF) 15 Min Chart

I have gotten quite a few emails from people over the last few weeks saying the enjoyed the 10 free trading lessons and found them very informative and helpful.  So in that light, I will post the link again.  Enjoy:

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Cory Mitchell, CMT

~Know your risks when trading. Please read the Legal Disclaimer page.

Overall, it was a fairly uneventful  week in terms of price action in the stock markets.  We had a lot of nice tradable moves during the week, but ultimately the market did not move into or out of any technical significant areas.  Volume was light, except for Friday which was due to index rebalancing and contract expirations.  In terms of the overall movement throughout the week, the S&P traded in a smaller range than average, only moving about 21 points all week; the weekly (14) average is just under 36 points and heading into this week was slightly higher.

Technically, the stock market (S&P and Dow Jones) are still range bound and that range is very much intact.  The S&P closed on Friday right around 1102.

Near term support is at 1094-1093 but movement below this level does indicate a high probability of retesting range lows.  Support near the lower range is 1086 and 1084.  A drop below 1080 (using a buffer below the lows) would punch us out of the range we were in.  The target for that breakout is 1055 which is just below a hourly trending support line (going back to Sept).  There is important interim support which will provide us with other signals if the breakout downward does occur.  There is little support, in the event of a break downwards, until 1072.  This is the top from a gap that occurred back in early November.  The low of the gap is 1070.  If that gap is closed by new price movement it is a bearish sign and prices are expected to continue to chart lower into the 1068-1064 area.  Support also comes in at 1060, therefore it will take fierce action, given our average weekly range,  to reach 1055 if in fact this market does break lower.

If we look at a daily chart, we see that the level we are at right now is right on a downward sloping trendline extending back from late 2007.  Really, the current range gives us our trading signals, as a breakout of the current range will also cause a break of the old trendline, a break lower out of the range will show that trendline has held.  But no matter which way the market breaks, old trendlines often have an impact on future price movements (see my article in the December issue of Stock & Commodities magazine), so it is worthwhile keeping on the charts.

On the upside we have resistance at 1104 which was respected during the afternoon sessions of Thursday and Friday.  Beyond this we have the Thursday open near 1106 followed by 1108 which will also act are resistance.  Beyond this is no significant resistance until 1116, although there is some minor levels at 1113-1114.  The resistance area near the highs is 1116-1120.  Moves have been fast and sharp up in this area, and it deserves respect.   If this range is broken out of, targets are 1123, 1128 and 1131.

The Dow Jones Industrials is another index can be looked at.  That market has been analyzed by my friend Adam Hewison.  He uses a few different tools to gauge this market, and also gives a slightly longer term view for those that are interested in looking beyond the next several sessions and are concerned about what may happen in the New Year.  So in that light, you can view the Dow Analysis video here: As the Dow Goes, So Goes the Country

With the holiday season I may not have an analysis posted next weekend.  So please pay attention to the range on the chart.  Have a wonderful and safe holiday season, and profitable trading in the meantime.  For those of you who view my EUR/USD analysis each night, well, I will see you soon, since we still got several sessions before Christmas.

Cheers and Happy Trading,

Cory Mitchell, CMT
Chief Market Strategist
-Know your risks when trading. Please read the Legal Disclaimer page.

The S&P 500 which is a good representation of the overall stock market is still very much range bound, and is likely to remain so until the new year.  A very quiet Friday with little volume did little to inspire confidence to the contrary.

1100 is the nearest main support level for the upcoming week, with a move below it indicating a test of 1098-1097 with the lower portion of the gap created Friday.  Support beyond is 1095-1094 but movement to this level does indicate a high probability of retesting range lows.  Support near the lower range is 1086 and 1084.  A drop below 1080 (using a buffer below the lows) would punch us out of the range we were in.  The target for that breakout is 1055 which is just above a hourly trending support line (going back to Sept).  There is important interim support which will provide us with other signals during the week.  There is little support, in the event of a break downwards, until 1072.  This is the top from a gap that occurred back in early November.  The low of the gap is 1070.  If that gap is closed by new price movement it is a bearish sign and prices are expected to continue to chart lower into the 1068-1064 area.  Support also comes in at 1060, therefore it will take fierce action to reach 1055 if in fact this market does break lower.  This is because the average weekly range for the S&P is just over 37 points, and the market closed on Friday right around 1106.

On the upside resistance is at 1109-1111.  A move above this area represents the likely scenario that range highs will be tested.  The resistance area near the highs is 1116-1120.  If this range is broken out of, targets are 1123, 1128 and 1131.

My friends over at INO are currently offering 4 free online video seminars from master traders via the link below.  After that you can decide if you wanna see more… INO TV is the only place where members have access to over 150 experts and 500 hours of seminars, for one price. INO TV gives its 30,000 members access to massive amounts of educational material that has been handpicked to provide you with the most for the least.

Find out what makes INO TV the right place for you.

Cory Mitchell, CMT
Chief Market Strategist
-Know your risks when trading. Please read the Legal Disclaimer page.

The following is a predominantly technical analysis view of what to expect to in the stock market in the upcoming wee (Dec 7-11).  We will use the S&P 500 as our reflection of the market.  This can be used by day traders, swing traders or investor to gain insight into what is unfolding, what to expect and what to look for.

Intra-day traders saw large and swift moves occur this week.  If an hourly chart of the S&P 500 is pulled up for Nov 10- Dec 4, we see a range which is peppered with aggressive buying and selling into the extremes and then pulling back off the levels and heading to the other side.

Something very interesting to note is that on 3 consecutive days (Dec 2, 3, 4, always early in the day) the market went above the previous swing high, triggering stops and buy orders, and then pulled back into the range.  The lack of conviction above 1115 indicates this market is not likely to move aggressively higher…and if and when it does it will be in the new year.

This does not mean we won’t see tradable moves above 1115, but with circumstances right now -  volume light, global risks, disconnects between intermarket relationships- this area is a danger zone until volume picks up and we successfully break above this area, move higher and then on a pullback successfully hold that level.  In other words, patience will be required.

Massive moves are expected in all the following major markets: currencies, commodities and the stock market (bonds too, but I don’t focus on them too much).  We may have started to see this on Friday.  How easily we jump from bubble to bubble.  What catalyst sets off the fireworks is yet to be determined.

But lets’ move to focusing on the actual technical levels of importance:

In the upside, 1115-1120 is a resistance area determined my multiple false breakouts.  I would use at least a two point buffer above this level.  As mentioned above, with light volume I much prefer not to trade the breakout but wait for the breakout to falter and then short the market as it falls back through the resistance area (that is not advice…that is simply what I am watching for).  If a legitimate breakout does occur, even on light volume it can scamper quite a ways.  Targets are 1123, 1128 and 1131.

On the downside 1096 is important.  A move through there takes out the Friday low and would successfully close the window (gap) opened on Dec 1.    Such a move indicates a movement to test to lows of the range.  1087 is the most likely target followed by 1085.

A drop below 1080 (using a buffer below the lows) would punch us out of the range we were in.  The target for that breakout is 1055 which is just above a hourly trending support line (going back to Sept).  There is important interim support which will provide us with other signals during the week.  There is little support, in the event of a break downwards, until 1072.  This is the top from a gap that occurred back in early November.  The low of the gap is 1070.  If that gap is closed by new price movement it is a bearish sign and prices are expected to continue to chart lower into the 1068-1064 area.  Support also comes in at 1060, therefore it will take fierce action to reach 1055 if in fact this market does break lower.  This is because the average weekly range for the S&P is just over 37 points, and the market closed on Friday right around 1106.

Trade with the trend, but don’t become attached to it.

My friends over at INO are currently offering 4 free online video seminars from master traders via the link below.  After that you can decide if you wanna see more… INO TV is the only place where members have access to over 150 experts and 500 hours of seminars, for one price. INO TV gives its 30,000 members access to massive amounts of educational material that has been handpicked to provide you with the most for the least.

Find out what makes INO TV the right place for you.

Cory Mitchell, CMT
Chief Market Strategist
-Know your risks when trading. Please read the Legal Disclaimer page.

The following is the stock market outlook, using the S&P 500, for the week of Nov 30, 2009  – Dec 4.  This analysis can be used to help in day trading or swing trading decisions, as well as for investors to gain technical insight into the current market.

Events like which occurred on Wednesday, with Dubai World saying it would not be able to pay it’s debt, are the type of events which will be the catalyst for this market going lower.

Technically this market rally is on shaky ground at these levels.  We have divergence on multiple time frames, not to mention inter-market divergence (markets moving contrary to the general relationship).  Divergence can last for a long time and is a not a trading signal in itself, but when news such as that of Dubai World is released, hardly ever does it come alone.  There are still many systemic problems, and no matter how much money is thrown at a problem, traders and investors still get scared.

Right now the trend is still up, and should be traded as such, but be cautious.  Support is Friday’s low at 1084.  A drop below that would punch us out of the range we were in.  The target for that breakout is 1055 which is just above a hourly trending support line.  There is important interim support which will provide us with other signals during the week.  There is little support, in the event of a break downwards, until 1072.  This is the top from a gap that occurred back in early November.  The low of the gap is 1070.  If that gap is closed by new price movement it is a bearish sign and prices are expected to continue to chart lower into the 1068-1064 area.  Support also comes in at 1060, therefore it will take fierce action to reach 1055 if in fact this market does break lower.

The average weekly range for the S&P is just under 37 points, and the market closed on Friday right around 1091.

If the upcoming week brings rainbows and butterflies, here are the levels to watch on the upside:  To move higher the first resistance point is a short term level at 1100.  We also have resistance at 1105 followed by1108 and 1110.  Beyond this are recent highs in the market, right around 1114.  A break above that indicates another upswing.  Volume should be rising if this occurs, but so far this market rise has not occurred on large volume, so look for volume to at least remain steady.  A decline in volume on a breakout is likely to result in a failed signal.

Targets beyond 1114 are 1118,  1123, 1128 and 1131.

Trade with the trend, but don’t become attached to it.

My friends over at INO are currently offering 4 free online video seminars from master traders via the link below.  After that you can decide if you wanna see more… INO TV is the only place where members have access to over 150 experts and 500 hours of seminars, for one price. INO TV gives its 30,000 members access to massive amounts of educational material that has been handpicked to provide you with the most for the least.

Find out what makes INO TV the right place for you.

Cory Mitchell, CMT
Chief Market Strategist
-Know your risks when trading. Please read the Legal Disclaimer page.

Hope you all have a good trading day today.  Just wanted to let you I have an article in the December issue of (Technical Analysis of) Stock and Commodities magazine.  The article is about using old trendlines, broken trendlines, to predict where prices will go to in the future.  This is an unconventional use for trendlines, as they are being used more for price projection than for just slowing rising (falling) support (resistance).  If you have a chance, check it out, it is available at major book stores throughout the US and Canada.

Have a great day everyone,

Cory Mitchell, CMT

I was talking a with a trader the other day who is struggling and he mentioned a tendency that he has.  I think all of us have done this at some time or another, but if we don’t grow out of it, it WILL end our career.

The problem could be described as Risk Spikes.  They win slowly and conservatively, trading by their rules and risking a small amount of capital, but then all of sudden they get sick of the slow capital growth.  Instead of realizing that by waiting another day, a month or a couple months their positions will continue to grow in size (proportionate to their account), they charge into a trade taking excessive risk and gambling on making a big profit to speed up the process.

Let’s face it, this may work and give us a nice bump in the account.  We may even be able to do it several times in a row and we promise ourselves this will be the last time.  But the psychology which starts that need to speed up the process does not just go away.  It needs to stop completely and never be done.

If Joe-Trader is day trading 200 shares, and collecting small profits, those profits will grow and over time we will be able to trade more and more shares (and more more and more money).  But if he trades 200 shares, and then all of a sudden grabs 1000 shares on a particular trade (assuming same price area, volume, volatility and all that) it has the potential to wipe out a lot of little profits if the trade goes sour.

There is strong desire in certain people to say “I can afford to take the risk.”  In life we do take risks, and often they pay off, but if you want to trade as a career for the long haul, if are we saying this to our self it is obvious we are about to deviate from our trading plan.  Our trading plan which was created when we weren’t under stress or pressures….created when our mind was clear and logical.

Every trade has risk attached to it.  We know this.  We have a standard level of risk we take on each trade that will not do much harm to overall capital.  If we start to say “I can afford the risk” we are likely planning to do something that is well beyond what we normally risk.  We are groping for reasons to make the trade and this is not a good sign.

In times like these take your standard position.  Then, tell yourself that if it moves in your favor you will add to your position (in alignment with your risk tolerance) when it passes through another critical level.

Don’t give respect to a move that hasn’t happened yet.  Let it impress you with what it actually does, and when your original position is onside you can add to it in a conservative way.  Risk spikes will only bring frustration, regret, stress and an empty account over the long run.

~Cory Mitchell, CMT

Follow the Trend But Don’t Get Attached to It.

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