by Rick Ratchford
Do you have an open mind? When ideas and concepts differ from what you currently accept as fact, do you quickly dismiss them? If so, then this is likely to prevent you from learning that which you need to know.
To be successful in trading requires having an open mind. There is no single right approach to trading. There is only what we believe to be right or wrong.
Take for example a seminar dealing with a specific approach to trading. If just half of the people attending such a seminar actually learn a great deal that benefits their trading, what can be said about the half that did not? If you were to ask them, would they not point to the seminar’s material as being at fault or valueless? Most likely, they would.
However, if this truly was the case, then how would you explain the other half that actually benefited from the material presented? Again, if you asked the half that did not, some may reply that it wasn’t the material at all, but that those people did it all themselves. This would be true to the point that they effectively utilized what they have learned to some degree that had a positive affect on their trading. If they weren’t doing as well until after receiving the training, then of course this fact should not be ignored. So what about the half that did not?
Quite possibly, they have their own ideas about trading and are not open to suggestions that require some degree of change from their current beliefs. Without an open mind, the door to wonderful possibilities and trading success may never be opened. Therefore, if a trader currently falls short of their ideal of success in trading, then it becomes essential that the trader realize that change is required if to improve. To change requires modifying ones beliefs.
My trading concepts are my beliefs. Everything you’ve been taught and believe to be fact is your belief.
What is a fact? It is simply something that depends on some assumptions and your perspective, all based on your current beliefs. If you don’t agree with the assumptions and perspective another is using to prove something a fact, then at the moment, it may not be a fact to you. Obviously then, it would be to your benefit as a trader to be more flexible and open minded, accepting that facts are based on beliefs that can be changed, thus changing the reality we see ourselves in.
What is fact, my belief is that we each see reality differently. Why? Because our beliefs are different, thus our outlook on life is different, our opinion about books, movies, people and so forth are different. It is the same book, movie, and people, but we “see” things differently although subject matter is the same.
That a God exists is a fact for millions, as well as there, not being one. Yes, there are some obvious facts that most can agree on, such as water being very important to sustain life. Yet, we may differ on what degree such importance has on human life. Once we understand this about the connection of facts and our beliefs, and accept it, we can then start to open our minds to possibilities we previously shut our minds to.
When something differs from what we hold to be fact, instead of just dismissing it or ridiculing those who find value in it, consider if there is any chance that this information may prove to be a valuable belief to have. By asking yourself this every time you come across information that is not part of your belief model, you may find yourself open to new ideas and concepts that start to enhance your understanding of the markets and trading.
Closed-minded individuals consider what they “believe” to be facts. That is why it is hard for them to “see” the markets in its various forms. Ever know a rigid long-term trader that can’t see the trees within the forest? The short-term trader who sees the trend moving down in a market that has been appreciating more than 10% a year?
Our perspectives are based on our beliefs. If in reality we are not satisfied with our trading results, which is based on our current beliefs, then such beliefs must change if we are to alter our perspective and improve our reality. Change requires we alter our beliefs, which requires that we be open-minded to allow this to happen.
There are many excellent books on trading. Each book differs from another, because the perspectives are different. An excellent example of this is the book called Market Wizards. The traders interviewed are considered by many to be successful (this is again their perspective or opinions), yet their viewpoints in trading all differ. What lesson can be learned from this? That there is more than one-way to skin a cat (to all animal lovers, this is just a metaphor).
I’ve written several articles dealing with the psychology of trading. Obviously, it is my belief the subject is very important if we want to do well in the markets. My beliefs about the psychology of trading is molded by the many works I’ve read on the subject over the years from people I consider more qualified than I am. If my mind were not open to this, much in the way of valuable advice would have been lost on me. Many mistakes would have been repeated (still repeat a few of course), and my perspectives about the market would be extremely narrow and counter-productive.
“A man without an open mind is likened to a car in snow without tire chains.”
What do you currently believe about trading and the markets? Write them down. What are your objectives in trading? Write those down. Do you believe that your current beliefs are fulfilling your objectives? Be honest with yourself. Doing otherwise will only hurt you and nobody else.
Determine what kind of trader you want to be. Determine what kind of trader you currently are. What is your current preferred time frame for trading? Does it feel natural to you? In other words, are you trying to trade long-term while the pressure within you wants to trade everyday? Or are you trying to trade everyday when you know that a longer-term approach would be less stressful for you? Only you can answer these questions. Be open to the answers your mind is likely to provide you.
Just as long-term trading is not necessarily better than short-term, and vice-versa, there isn’t one method or approach to trading better for everyone over another. Keep in mind if half a classroom of individuals is able to improve their trading from the information they received, just because the other half fails to “see” what they see does not make it worthless or invaluable.
The next time you become critical of another’s approach or beliefs about the markets, ask yourself if it appears to be valuable to some others. This single point alone holds out knowledge that the world around is much bigger than we might be allowing ourselves to believe. Have an open-mind to viewpoints of others, which will help you reach your trading goals that much sooner.
Getting the Swing of It
The second component favored by a Time and Price trader is of course discovering Price. The methods used to do so vary, and several are as valid as another. Trend lines, Andrew’s Pitchfork, Fibonacci or Gann Ratios, Gann Angles, Fibonacci Spirals, my Divisional Lines, and Previous tops and bottoms are just a few techniques available.
To use many of these techniques effectively, the chartist needs to be able to identify previous market tops and bottoms on his or her price chart. No doubt, some will immediately think that this is simple, and this is true.
However, as simple as it is to do, most do not really see all the swing tops and bottoms that actually exist in any particular chart formation. Failing to do this denies the chartist very important information that he or she could have learned about the formation in question.
I am going to describe the procedure of drawing a minor swing chart. It is not the only type of swing chart that you can construct. There are intermediate and major swing charts that can be constructed as well. I am going to leave the latter two up to you to investigate and study. For now, please follow along as I describe this simple procedure for a minor swing chart.
On your price chart, whether it is daily, weekly or monthly, start from the most recent clearly defined swing top or bottom to draw your swing line. A clearly defined swing top is one that you can spot easily at first glance. It looks like a mountain peak, where a price bar stands higher than those to its immediate left and right. A clearly defined swing bottom looks the same upside down. For this example, we will start from a swing bottom.
As each consecutive price bar makes a higher high and low than the price bar before it, our swing line continues to move up. Once a price bar forms a lower high and lower low than the price bar before it, our line ends at the high of that previous price bar, and then swings down to the low of our new lower low.
As each consecutive price bar makes a lower high and low, we continue to draw that line down to the new low. This changes once a price bar makes a higher high and higher low once again. We end our swing line at the low of the previous lower low and then move it up to the new higher high. Continue this process as each bar either continues up or swings down, or continues down and then swings up.
There are of course exceptions to this rule. At times, you will come across a price bar that makes neither a higher high or lower low. This is called an Inside Bar. These you must treat differently, and require waiting for the bars to follow before continuing your line.
At times, you will come across a price bar that makes both a higher high and lower low. This is called an Outside Bar. Here, two swings are forming in short order. Usually, the swing has occurred first during the forming of the bar before the outside bar. But this will not be obvious looking at the price chart because the bar before the outside bar will not have a lower low or higher high than the outside bar itself. The trick here is to note the intraday pattern to determine whether the outside bar formed its bottom or top first.
For example, say price bars have been making lower highs and lows. We then come to a price bar making both a higher high and lower low. Do we draw our line to the lower low first, then up to the new higher high? Or do we draw our line from the low of the price bar before the outside bar to the high of the outside bar, and then back down to the low? It all depends on which way price actually went from the close of the previous price bar, does it not?
However, noting the intraday prices for both price bars, you can quickly tell where the actual swing occurred and whether the outside high or low formed first. Then you can continue your line from there. One quick way is to simply note which way price moves after the outside price bar. If the next bar makes a higher high, it is likely that the outside bar’s low formed first with the high last. If the next bar makes a lower low instead, you then can assume the outside bar’s high formed first, then it’s low.
Now, once you have constructed your swing chart, and can see swing bottoms and tops where you did not know existed before, you are ready to apply some of those price methods mentioned earlier to these swing tops and bottoms. Ratios can be applied using the large as well as the small ranges created by these swing tops and bottoms. You are on your way in getting more information out of your price charts than you may have previously.
Stacking the Odds in Your Favor
Being profitable in the high-risk business of trading requires a lot of work. So many advertise their trading services as a simple way to make lots of money, and this has been the downfall of many new trading careers. There exists a few (very few) trading programs on the market which instruct you when to enter and exit a market position with annualized percentage gains on investment. They require a large initial capital base and will usually experience large drawdowns from time to time.
Most new futures traders do not fit the requirements necessary to trade this way. Thus, they must learn to make their own trading decisions in the hopes of increasing their small stake in the markets. These are called “discretionary traders.” Many desire to trade this way even if they have the funding to trade using a trading program. Because discretionary trading requires that the trader make all the entry and exit decisions, work must be done to reap rewards from this type of approach.
A trading plan is a good start for any discretionary trader. The trader needs to adhere to a set of personal rules so that each trade is not some act of chance. Trading based on chance is no better than old fashion gambling, which trading is certainly not meant to be.
Trading is not some mere roll of the dice, where you have a 50/50 or less chance of success in a casino game. It is more like a merchant of a clothing store that must make fashion decisions each quarter, and if his insight into the market is a good one, profits will be made by the sales of his inventory.
However, a bad business decision and he is left with a rack filled with clothing nobody wants and a financial loss. His success depends on properly analyzing the market environment and acting accordingly. Trading is the same.
As a discretionary trader, the task is to stack the odds in your favor for any given trade consideration. The power to do this is in every trader’s hands. Do the job well, and you will be rewarded. Try to take shortcuts due to time restraints or laziness, and the outcome may be very disappointing. So how might a discretionary trader stack the odds in his or her favor? That is what we will now discuss.
See The Big Picture
Many new traders simply want to trade quickly and often. The desire to make quick money plagues many who enter this arena for the first time. In addition, they find little time to evaluate their approach to trading before jumping from one method to another. And the sad thing is, they may have come across a method that has helped many before them, but they were passing through at the speed of light and did not get the gist of it before moving on to something worthless and costly. I have seen this happen much too often.
Discretionary traders need to understand that time and study is very important if to ever achieve a good trading approach. So many common sense approaches are ignored for the quick and dirty buck. One such approach is simply to see the big picture. This author has written several articles relating to this very subject, and for good reason. It is not only a smart thing to do; it is also something most forget or are too lazy to do.
Market patterns and trends go beyond the simple daily price charts. They exist on weekly, monthly and yearly price charts as well. An uptrend on a daily chart may exist only as an one-bar rally on a weekly chart showing a strong downward direction.
And this weekly move may exist only as a bull trend pullback on a monthly chart. If you only focus on a daily price chart to base your trading decision on, you could be entering a market trending strong against your position.
Therefore, the wise thing to do regardless of the method you choose to use in trading is to start with the larger time frame (such as the monthly price chart) and work your way down to the daily time frame.
A good example of this is the use of a daily time reversal date. If a trader simply looks to enter a trade based on a daily reversal date, it may end up as a quick blip on the daily price charts in favor of the stronger trend long-term.
Trading small reversal blips are certainly not the way to go. To stack the odds in your favor, you will want to discern first the long-term direction (i.e., Monthly chart), then note the medium-term direction (i.e. Weekly chart), and if both are in agreement in direction, look to the daily price chart to time an entry in the same direction as your long and medium-term trends.
Keep in mind that the long-term trend will carry more power over the medium-term trend, just as the medium-―term trend will carry more weight than the short-term or daily price trend. As a trader looking to stack the odds in your favor, you want to get the heavyweights on your side before getting into the ring.
The quick way for those with limited time on their hands to determine the likely trend is to use a trend line. Draw it under your major swing bottoms or across your major swing tops on the monthly, weekly and daily price charts to see the dominant trend direction.
For those who wisely take more time at doing this, it is best to look closely at the different time frame charts and note whether it shows higher swing bottoms (for an up trend), or lower swing tops and bottoms for a down trend. Learn to draw swing charts (one book on this subject is called “Pattern, Price and Time” by James A. Hyerczyk), which immediately gives you a birds eye view of the trend direction.
If your monthly chart trend is up, and your weekly trend is up, then when you come across a daily swing bottom forming (especially on an expected reversal date and support price) higher than the previous daily swing bottom, you have one very powerful signal to go long (buy).