Leslie Jouflas in her excellent book “Trade what you see” tells that the Chicago Mercantile Exchange has a slogan: “Where there is no such thing as no such thing”. I suggest that this slogan has been quoted not just occasionally. It tells us that absolutely anything could happen in the market. Since we’ve already estimated that trading is a business – you have to care about it to have stability and safety in any case. In fact in terms of outstanding events we should speak not of “if it will happen” but “when it will happen”. Any market disaster could hit each trader differently. It could totally destroy the account, it could lead him or her to solid benefits, or it could stay neutral. But if a trader has prepared for these things, he can deal with them calmly and with cool head.
Do you ever think about why professionals in different spheres spend a lot of time on disaster case training? Pilots, army, medical doctors and nurses, police and others – all of them spend a lot of time on training for disasters and abnormal situations. So, if a trader will spend some time to create a “what if” plan – it could let him stay in business at some time and not lose his account. Others will get their “deer in the headlights” look and most probably will fall into “negative panic” that will paralyze them mentally as well as physically. If you will not prepare for it, you will be under shock, and won’t think clearly.
A human being has a mind protection system that when he gets shocked this natural brain protection system put us in some kind of euphoria. You think that all is OK and can’t realize that this is an emergency. In other words, you’ve stunned and can’t clearly analyze what is going on.
So you have to be prepared for this. There are a lot different scenarios – Fed rate hikes without any notice, terrorist attacks, unexpected news announcements, political events, and catastrophes and so on. Markets hate abnormal situations, emergencies and uncertainty and react violently. This is huge reason always to have a stop-loss and never neglect money management. Yes, the market could show significant slippage and your order will be executed much worse than under normal conditions but this let you to survive and stay with this business. Otherwise, if this is on your favor – take your profit fast, since fast reactions usually do not last for an extended time, and counter reactions often come soon.
Along with types of rare occurrences, there are a lot different events that could happen much more often:
1. Power outages. This event could hurt your computer, phone and internet connection. The best way to deal with it is to have laptop or UPS, mobile phone with possibility to charge it from USB – this will allow you to make at least a single call to your broker and close positions. A second nice device is a 3G mobile modem or possibility to trade from your mobile phone or at least use it as GPRS internet connection module for your laptop. Be sure that your mobile phone is always charged when you trade!
2. Computer damages. You have to know what to do if you computer will crash, so that you will not be able to track your position and/or will not have access to data. So, probably it’s better to have some reserve variant such as a net-book or at least have a broker that allows you to manage positions by phone – either just to call or via mobile internet connection;
3. Entry with excess position value. What if you enter the trade and incorrectly make it with greater volume that beyond your risk management limit? The wise decision will be to immediately close the rest and hold only necessary amount of lots;
4. Buy and sell muddle. First, you have to fix all of your positions in some trader’s journal (we will speak about it in later chapters). So you have to check your order when it has got filled, but not just leave it and forget about it till the end of the day. If you have made a mistake – close immediately and re-enter correctly. It’s better to pay spread/fee than loose a lot later.
5. Incorrect statement. Another point in a favor of trader’s journal. Fix any trade that you’ve made, since it could appear that by some mistake in statement you will find some positions and trades that you didn’t do. That once has happened with me, when I saw on my account 8 S&P 500 contracts still were opened, while I thought I closed them at the end of previous day. Think yourself what might have happened if I had not checked my open positions against my journal.
6. Unexpected exchange closings or news releases. Here we talk about just devastating cases – such as 9/11 2001, when all exchanges were closed and orders were cancelled. What to do then? The one way is to try to hedge your position on another market with some highly related asset. For instance, stock index futures could be hedged, some currencies and commodities. If this is not the case and market opens at disadvantage – exit as soon as you can. Leave this loss behind and continue – there is nothing that you can do. Remember the proverb: Change what you can, but leave that you can’t. One way somehow be prepared to that is apply volatility of current market to your money management. So, if you apply 3-standard deviation rule, so there is high probability that market will not open worse that 3-deviations of close price. If you will calculate this value and regularly will update it – you may adjust your trading lot so that even this drastic move will not destroy your account and you will survive.
7. Large gaps and slippage. Sooner or later if you are a position trader you will meet this phenomenon. It could happen that price will open beyond your stop-loss order due to some events or news that could shake the market during weekend. In this case you may try to return at least some part of your losses. Huge gaps very often have a tendency to be closed, so if gap has happened – wait for 20-30 minutes. If market starts to move in your favor – place stop at extreme at opening. After that you can make different decisions – close position at your initial stop-loss order, or trail stop to reduce loss or even try to get some profit. Otherwise – you will be stopped-out at the extreme.
8. Stress times. In the life of all of us from time to time happens negative periods of high emotional instability and stress. This could be illness, divorce, death of a loved one. During these moments we can’t think absolutely rationally and it’s very easy to loose money during such times. That’s why it’s better to plan ahead – what you will do in such cases. Simple and wise decision – to take a pause in trading. Probably you even could continue to trade, especially if it will give you some psychological relief from “diving into work”, but make trading volumes very tiny.
The last thing that I would like to discuss in current chapter is a daily routine. The consequences of day-by-day action has very positive issues for a trader. First, it teaches you good habits to be prepared for trading, second it forces you to keep up with your trading plan.
There are different types of preparation could be – trading, mental and physical. We will start from the first one, since it links directly with the process. Applying this daily routine as an example you always will be in tune and cool-headed and calm in trading process, since you will be prepared for any scenario that the market could offer to you.
Trading preparation, in turn we can subcategorize in three groups – preliminary points before the trading session, issues during the session and deals after the session will be over.
So, on first stage the following steps might become useful:
- Review the markets for the period while you were absent. You may call it as the overnight session;
- Take a view of news and events that was released while you were sleeping;
- Renew the schedule of macro data and expected numbers that should be released during the current trading session. The same for possible speeches and testimonies of important persons;
- Review your trading plan and adjust it based on overnight market action. Here you should create a trading plan – what particularly you want to trade today as we’ve described in the previous part.
- Examine the daily statement for the previous trading session and be sure that it is absolutely correct;
- Take a look – do you have any open positions from previous days;
- Check the amount of free margin, that is available for trading;
- Place alerts on desirable levels according to your trading plan – that you will keep an eye on for entry/exit from trades.
Although it’s a bit of an early topic and we will talk about the trader’s journal a bit later, but this is very useful to make notes during trading session about possible scenarios and patterns that could realize in nearest future. You will remember easily these patterns that could be completed already at this time if you will review this journal on next day.
What to do during the session?
So you have prepared your trading plan and wait when corresponding levels will be reached by the market.
- Monitor how your trade, the potential pattern or setup that you intend to take part in, develops. Be patient! Wait for a clear set up for your expected pattern – don’t be hasty. Still do not count every tick – this leads to impulse trades and we don’t want that;
- If you find something, that is just starting to form and you definitely want to review it later – make a note about it in journal or notebook;
- Take breaks as in school, i.e. often enough;
- While you’re waiting and don’t want to count ticks – online chat rooms with traders are welcome, but do not apply some context that you do not totally understand. Do not use third side trading setups – follow your own trading plan;
- There is a proverb: “Bad speculator becomes good investor.” So your task is to not become a good investor if you have a loosing day trade – close it and sleep calmly. Don’t turn the current day's loss into a long-term position and do not even hold it overnight.
Still, if you are a very short-term trader – 5-min and lower time frame, you may be need to sit in front of monitor and follow the price. But if you trade on 60 min charts – place alerts and wait, don’t count ticks. If you trade on a part-time basis still – choose markets that are suitable for that purpose, Forex is one of them.
After session work
So, there is time when your trading session is over. It’s time to prepare for the next day and assess your current results:
- First of all – don’t close your laptop blindly! Check out your trading software that all positions that you have intended to close and closed during trading session are really closed. Second – that you have correct open positions that you really plan to hold for the next day;
- Compare your financial result of current trading session by statement from software with your notes during session and balance at the open. They should match each other;
- The same procedure should be done with positions, pairs and lots values. Check this out!
- In most software each order has a number – always fix it in an excel spread sheet, even if it was not executed or been canceled. Usually spreadsheets includes fields as: date, pair, lot size, order#, entry price, stop-loss order, exit price. Also you may add profit/loss value in pips as wells as in money term and fees/commissions if any were paid;
- Update your spreadsheet where you fix your trading data;
- Update charts and make notes that could be useful as potential set ups tomorrow.
Some traders say that making notes on charts by hand is very useful.
Partially we’ve already touched this topic. The point is that mental strength and health is crucial for successful trading. This will not be a mistake if you will spend couple of days outside the market. Don’t worry – the market will be here tomorrow also. But it will let you to restore your trading tone and get strength.
Otherwise it could turn into a catastrophe. If you are not good mentally at the beginning of a session, you probably will end it with a loss – large or small. This, in turn, makes your mental condition even worse. That’s why from that perspective rest is the best choice. If you start to make mistakes – 2-3 in a row, this is a signal that you have to make a break.
Mental preparation continued
With some experience you will start to better understand the limit of your mental strength – when it’s better to stop and take a rest, and when time to return back comes. There are a lot of books on this topic, still, here are some points that probably will help you initially:
- Have you rested sufficiently – sleep well, and so on;
- Are some circumstances that press on you psychologically – positive as wedding eve, a new baby, or negative - family problems, some others that we’ve discussed that increase your
AsstModerator Note: Sive, are you spying on me?
- Have you made pre-session preparation?
- Hope you are not hung over after a party or wedding, because you need clear mind to trade;
- Think about the potential loss that you can get today. Are you ready to accept it? If you are not sure or this presses on you and disturbs you – then probably it is better to not trade today.
And finally, we have to struggle against stress and total consumption of our time by trading process. Here we could apply some physical issues:
- You should have a sufficient rest. It’s better to have stable daily schedule – when to go sleep and when to wake up – “early to bed and early to rise…”;
- It’s better to have a balanced diet. I hope you can pay it from your profit;
- Gym. I do not expect you to become a second Arnold S., but some exercises like running, Pilates, or cycling are welcome; "The best activities for your health are pumping and humping." - Arnold Schwarzenegger
- Spend some time each day away from trading – at least 2-3 hours, if you trade on full-day basis. This could be anything on open air – playing with children, walk or car repairing. You have to give your love to your family, or may be you love trading more?
- Reduce distractions – you have to be focused on the process. If your mommy calls you when you have your finder hanging ove the buy button in your 5-min trade – switch off the phone. Estimate an acceptable distraction level that you may deal with – and cut out all the others.
Sometimes, when you can get a vacation and being stepped out from your routine – you may feel that you’ve lost your connection and feeling of the market and be disoriented. That’s why it’s recommended not to trade large or common lots right after a solid pause. When you will return to your routine, it will give you psychological comfort and you feel ready for trading.
Apply all your strength to follow your trading plan
So, we’ve passed through the process of trading plan creation, amd I hope it will be useful to you. As a conclusion, just some things to remember:
- Since we create a trading plan – we have to follow it.
- A trading plan should be based on reality but not on hopes.
- A trading plan should your personalize trading plan. It has to be suitable personally for you, since it is based on your trading system, psyche, lifestyle, goals and risk tolerance.
- Once you have prepared your trading plan – follow it. The plan is not a short-term issue, it is created for a considerable period of time. Later it could become and probably will become subject to change, but only when you will see clearly what particularly there should be changed. It demands patience;
- To stick with your plan demands solid discipline. If you do not have it – you do not follow the plan. If you do not follow the plan – you will see it by the end of trading session, when you compare what you’ve written in plan and what you’ve done by fact. So your trading plan also shows you when you have no discipline;
- If you make occasional impulsive trades, trades by gut feeling that turns to gambling – struggle with it, estimation the reason of that is a first step to avoid it in future. Find the way how you can do this. One way is to place orders and close the computer, but this is not a rule of thumb. This issue is very common with lack of discipline.