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Everyone trades a little differently. The trading method outlined below is
MY personal approach to trading. This method has worked for me for the last
30+ years, and has helped me to avoid big draw downs since the mid 1980's.
My trading strategy has helped me to make a good living trading.
It takes some time to learn my method of trading because it's based on tape
reading and getting a "feel" for the market. This is *not* about a fast,
easy formula to "get rich quick" while you sweat out every trade. Instead,
this is about developing confidence and trading consistently without fear
and without big draw downs.
Here is my 10 Step Approach to Learning My
Style of Trading:
Practice exiting trades at break-even, using a one-tick target, a two or
three tick soft stop (mental stop) and a 1.5 point hard stop. Never allow
the market hit your hard stop. Exit by moving your target toward your hard
stop, not by moving your hard stop towards your target. With time, all of
this must become a reflex. You won't always be able to keep your losses down
to 2 ticks, but only on rare occasions should you find yourself letting the
market hit your hard stop. ("Rarely" means only about once every 50-100
trades after you get the hang of it.)
Even though your entries won't be good enough in the beginning to make a
profit trading these tight soft stops, your entries will gradually improve
until you turn the corner and become profitable.
Learn exits and entries separately. Don't let the one influence the other.
Taking losses this way takes dedication and discipline, so stick with it.
It's the key to confident trading. If you never take large losses (and
rarely medium size ones), the fear of loss pretty much goes away, and your
confidence grows. Especially after your entries improve enough to support a
"scalping" type exit strategy.
Every trade in all market conditions begins as a
scalp. Let me clarify this: if you're in a choppy market and you're looking
to get small gains, like a point or so, manage your initial hard and soft
stops exactly the same way you would in a quick trend or any
other type of market. That means keeping losses as close to 2-3 ticks as
possible, taking lots of break even trades and exiting every time the market
doesn't give you instant gratification (within a minute or
No matter what the market is doing, you must demand that it moves in your
favor soon after you enter, otherwise you get out as close to break even as
possible. This means you'll be closing a lot of trades near break-even
within the first minute. This is the foundation of learning to trade for
Don't worry about the commissions on break-even trades. If you do, you'll
hold on to losing positions, begging them to turn around for you. This is
called hoping. In this business, this type of hoping
is the kiss of death. Your money-making trades must move your way in a few
minutes or less. When trades don't act right in the first minute or so, most
of them will hit your hard stops.
So don't get hung up on the fact that your broker loves you. Who cares if
he/she makes a living?
Your concern is
limiting losses. I care more about this than anything else in
trading. (Well-timed entries make my tight soft stops possible, so they're
almost as important as the exits.)
Practice your entries until your timing is so good that you can
reasonably expect the market to go your way immediately, before it
goes more than 2-3 ticks against you. This is not easy at first, but if you
stick with it, you'll get it.
Practice fading the emotional extremes on your entries. (Fading means
entering in the opposite direction of the market's last move.) When an
extreme NYSE-Tick (often above 1000 or below -1000) occurs at the same time
the market accelerates into a support or resistance area, look for a price
stall or reversal and fade the move. Fade the emotion.
6. Rarely, if ever, chase
the market on your entries. Wait for a pullback to get onboard a trend.
I favor shorts over longs... I can get out of a short position quicker than
I can get out of a long position. I don't know why. I like to say that I
"see gravity better than helium." In the rare strong-trending markets where
I may chase an entry, it's going to be a down trend, not an uptrend. I don't
trust up trends enough to chase them. Maybe it's just a personal quirk and
maybe not. I honestly don't know.
But it's interesting to note that most (not all) professional traders I've
met are Bears and prefer short positions over longs. You should give it some
thought and find out which direction works better for you. Are your losses
bigger on shorts or longs? Specialize in one direction and trade the other
direction only when things are looking real good.
Never let a gain turn into a loss. This will mean getting out of most trades
a little (or a lot) too soon. You just have to live with it. Swing for home
runs (greed) will ruin your trading. There is no mechanical formula that I
know of, (such as, "move your stop to break even after you get 3 ticks
gain") that will work. You have to develop a feel for how the market is
acting at the moment, and use your feel to reduce your target or advance
your hard stop. This comes with experience.
Develop a feel for the big picture movements of the market, not just the
intraday action. Use the end-of-day market internals to analyze the market's
mood and develop a daily bias.
Practice does not make perfect. Only perfect practice
makes perfect. I learned this in my younger years, pursuing a
professional baseball career. Perfect practice will keep your losses smaller
than your gains in the trading business.
There are a lot of things involved in perfect practice. When you get tired,
or when the phone rings, or whatnot, don't trade. Always,
exit trades exactly the way I've outlined above on every trade in every
market condition. Always wait for your pitch, the well-timed
setup for entering. Don't practice sloppy entries just because you're bored.
Only perfect practice will help you. Anything else just amounts to
practicing bad habits.
Get a mentor. I traded for 6 years before I learned to keep my losses small.
My trading turned around immediately after I met my mentor and talked to him
on the phone for one week. Is there any serious profession that you can
learn without a mentor? Maybe there is, but I don't know of any. It's
certainly not trading.
for my free Trading Tutorial, “Basic Guide to Support and Resistance
Mike Reed is author of TradeStalker's RBI Trader's Updates. Mike has been
trading the Market for 30+ years. When he got his start as a trader, Mike
was plotting prices on paper tape as the internet had not yet been "born" as
we know it today. Years of experience have really given him a feel for the
Market action. His support and resistance numbers have been published on the
internet since 1996. He has a wide readership that includes day traders,
floor traders, locals and hedge fund managers. His nightly support and
resistance zones are specific and accurate. He offers an unlimited free
trial of his nightly TradeStalker RBI Trader's Updates.– Copyright 2015 Mike
Reed and TradeStalker.com