10 Common Elements of Trading Success

All traders can make money in the markets, there’s no doubt about that – even with different trading concepts, different systems and methodologies, and some taking the opposite sides of the same trades…BUT only when they all use trading methods and systems with 10 Common Characteristics.  In other words, whichever trading method(s) you ultimately use in your trading, they must possess ALL of the 10 characteristics outlined below:

 

  1. Your trading methodology must have a tested, positive expectancy that has proved to make money for the markets for which it was designed to trade.
  2. Your trading methodology must fit you and your beliefs.  You must understand that you will only make money with your method(s) because your trading methods fit you.
  3. You must totally understand the trading principles you are trading and how those trading concepts generate relatively low-risk trades.
  4. You must completely understand that when you get into a trade, you must have exact rules as to when to exit the trade.
  5. You must evaluate the ratio of reward-to-risk in each trade that you take.  For more mechanical traders, this is part of their trading system.  For discretionary traders, this is part of their evaluation before they take the trade.

Here are five more qualities that are just as important, and in some cases more important than the ones just listed.

  1.  You must have a Business Plan to help guide your trading.  Many companies have a plan to raise money; similarly, you need a business plan to help you treat your trading like a business.
  2. You must use a Position Sizing method.  You must have clear (profit) objectives written out, something that most traders/investors do NOT have.  You must understand that position sizing strategies are the key to meeting those objectives… and you must have worked out a position sizing method to meet those objectives.
  3. You must understand that your overall trading performance is a direct function of your personal psychology, and you must spend a lot of time working on yourself.  You must learn to become efficient, rather than inefficient, decision maker when it comes to your trading…or you will not make it as a trader.
  4. You must take total responsibility for the results you get.  You can NOT blame someone else or something else.  You can’t justify your results.  Also, you shouldn’t feel guilty or ashamed about your trading results either.  You ultimately have to understand that YOU created your own results and that you can create better trading results by eliminating your mistakes.
  5. You must understand that by not following your trading methodology and business plan rules is a huge mistake.  The average trading mistake can quite easily equate into costing you a lot of money.  So, even if you make only one trading mistake a month, you can turn a profitable trading methodology into a losing one for the month…because of that one simple mistakes.

A Formula for Trading Success

Trading formulas come in a myriad of sizes and shapes, but I have crafted this formula to be all encompassing, and it seems to suffice nicely.  I’ll give you the equation, and then  we can discuss it:

(Trading Knowledge X Practice) + Persistence + Consistency = Success

My hobby (my passion) is playing chess, and I had the privilege of playing postal chess (sending chess moves through the mail) with the United States Champion, Sammy Reshevsky. While I never came close to winning a game, I did glean insights into his success. For one, I observed that he took the knowledge that he had acquired and practiced over and over and over. He would review his games, and if he made a rare mistake, he would identify the issue, make adjustments, and then return to the chess board. For the trader it’s the same, and hence the first part of the formula is to constantly sharpen your knowledge by multiplying it with much practice. Knowledge is most important, and practice is the key to using that knowledge correctly.

Now we take your trading knowledge, which you are multiplying by practice, and add to this the next part of the formula:  persistence.  Persistence is the cornerstone of your trading competitive drive, it is your motivation for doing what you are doing, and for having the unshakeable vision that you will be doing this for the rest of your trading life. It’s your assurance that this  training will sustain you, and it is  your preparation to meet  trading opportunities  favorably. Also, it’s not allowing yesterday’s trading loss to break your concentration or your mental processing, or to make you think that you must jump back into the market quickly (even without  a proper setup) just  because you foolishly have the notion that you must get your money back instantly. Instead, persistence  molds behavior, and gives  the boldness  to continue learning the markets and to learn them correctly.

Consistency, the third component of the formula, a byproduct of knowledge and persistence, encourages the trader with trading performance,  builds strengths, completes the equation, and yields a sum total of trading success.

So focus on this formula, use it  for introspection of your own  personal progress, and you should learn to build a career that will be gratifying and  profitably rewarding for your  trading lifetime to come.

A Momentum Oscillator With Pizzazz

Traders often ask me “What’s your favorite oscillator?”, and I usually hedge, and hem and haw around the answer, because in general, I use very few indicators. I lean more toward the pure price action side of  charting. However, there is one oscillator that truly  caught my attention: it’s called the Coppock Indicator, and I often share it with people when they ask.

During a year when  the US landed  its first rocket on the moon, and the first Wal-Mart opened, Edwin Coppock developed his Coppock Oscillator. Designed for the S&P 500 index, this “guide” or “curve”, much to my amazement, has been faithfully identifying and signaling the start, and end, of bull market runs, and it’s been doing it for decades passed! I found that it has also been applied to similar stock indexes, like the Dow Jones Industrial Average as an example.  So what makes up this indicator that I appreciate so much?

This trend-following, averages-based oscillator is designed for use on a monthly time scale only.  Using a ten-month smoothing of the averaged eleven-month rate and fourteen-month rate of change in the S&P 500, this oscillator will reverse direction when the momentum in the stock market runs out of gas. If you wanted to diagram it, this is what it would look like

WMA [10] of (ROC [14] + ROC [11])

If you are looking for a buy signal, this is generated when the indicator is below zero, and turns up from a trough. If you want to know when it is time to take your money “off the table”, look for a double top without the curve falling to zero between the tops. This shows a very strong market that has not partaken of any normal market corrections, and  broadcasts “trouble is just around the corner.”

If you think the Coppock Indicator might not be all that it’s cracked up to be, then  just take a look at some of the statistics that I uncovered.  This “double top” has occurred six times in the past eight years, and the indicator nailed it every time:  October 1929, -86%, May 1946, -39%, February 1969, -36%, January 1973, -48%, September 1987, -33%, and April 1998, -18%.  In 2007, the curve told us that there was trouble on the horizon, and sure enough, by late 2008 the S&P was off over 47% from the highs seen during 2007.

So if you and I should ever be talking, and the word “oscillator” comes up in our discussion, be prepared for my dissertation on Mr. Coppock. He might just be worth a little additional research.

 

Futures Trading Glossary | Commodities Terms

At‑The‑Close: A customer’s order that specifies it is to be executed at the closing price of the market. If the order is not executed at‑the‑close, it is canceled. This type of order does not have to be executed at the closing price.

 

At‑The‑Open: A customer’s order that specifies it is to be executed at the opening price of the market. If the order is not executed at‑the‑open, it is canceled. This type of order does not have to be executed at the opening price.

 

Auction Market: A market in which buyers enter competitive bids and sellers enter competitive offers simultaneously. The NYSE for example is an auction market.

 

Basis: The difference between the spot or cash price of a commodity and a futures contract price of the same commodity. Basis is usually computed between the spot and the nearby futures contract.

 

Bear Market: A market environment in which prices of commodities or stocks are falling.

 

Bid:An indication by a trader, investor or dealer of a willingness to buy a commodity or stock.

 

Breadth‑Of‑Market Theory: This is a technical theory that forecasts the strength of the market based on the number of issues that advance or decline in a particular trading day. This is the same as the advance/decline line.

 

Breakeven Point: The market price that a commodity must reach for the trader to avoid a loss if they choose to exit the trade.

 

Breakout: The movement of a commodity’s price through an established support or resistance level.

 

Broker: (1) An individual or firm that charges a fee or commission for executing buy and sell orders placed by another individual or firm. (2) The role of a broker firm when it acts as an agent for a customer and charges the customer a commission for its services.

 

Bull Market: A market environment in which prices of commodities or stocks are rising.

 

Cash Commodity: The actual, physical good being traded, rather than the futures contract on that good.

 

Cash Market: Transactions between buyers and sellers of commodities that entail immediate delivery of a payment for a physical commodity.

 

Chartist: A commodities or stock analyst who uses charts and graphs of past price movements on those same commodities or stocks to predict their future movements.

 

Churning: Excessive trading in a customer’s account. This implies that a broker ignores the objectives and interests of their clients and is only interested in increasing their commissions. This is the same as overtrading.

 

Clearing Broker: A broker‑dealer that clears its own trades, as well as trades of introducing brokers.

 

Clearinghouse: An agency of a futures exchange, through which transactions in futures and option contracts are settled, guaranteed, offset and filled. The clearinghouse may be an independent corporation or exchange‑owned.

 

Close: This is the last transaction (price) for a commodity on a trading day.

 

Closing Range: This is the narrow range of prices at which transactions take place in the closing minutes of the trading day.

 

Commission Broker: These people are the same as floor brokers. They are members eligible to execute orders for customers of the member firm on the floor of the Exchange.

 

Commodities Futures Trading! Commission (CFTC): The federal regulatory agency established by the CFTC Act of 1974 to administer the Commodities Exchange Act. There are five CFTC commissioners and they are appointed by the President.

 

Commodity: Any bulk good traded on an exchange or in the cash (spot) market, such as foods, meats, metals, grains, energies and lumber.

 

Commodity Pool Operator (CPO): An individual or organization involved in the solicitation of funds for the purpose of pooling them to invest in commodities futures contracts.

 

Commodity Trading Advisor (CTA): An individual or organization that makes recommendations and issues reports on commodity futures or options trading for a fee.

 

Confirmation Statement/Customer Statement: A statement of a customer’s account showing positions and entries. The SEC requires that a customer statement be sent to a customer every time a trade is initiated and closed out.

 

Congestion: A narrow price range (from high to low) in which a commodity has been trading for an extended period of time. Many technical analysts consider congestion a sign that a market is getting ready for a strong move. This is the same as consolidation and a sideways market.

 

Contract: One unit of trading in futures. For example, one contract of wheat trades in units of 5,000 bushels.

 

Contract Market: A CFTC designated exchange on which a specified commodity can be traded. For example, the S&P 500 is traded on the Chicago Mercantile Exchange (CME).

 

Contract Month: The designated month in which a particular futures contract may be satisfied by making delivery (the contract seller) or taking delivery (the contract buyer). For example, the S&P 500 contract months are March (H), June (M), September (U), and December (Z).

 

Day Order. An order that is canceled if it is not executed on the day the order is placed.

 

Day Trader: A trader who initiates a trade(s) after the opening of the market and closes out the same trade(s) before the closing of the market.

 

Delivery: The change in ownership or control of the actual commodity in exchange for cash in settlement of a futures contract.

 

Delivery Month: The month specified for delivery in a futures contract. For example, March, June, September, and December are delivery months for foreign currencies.

 

Dow Jones Industrial Average (DJIA): The most widely used market indicator, composed of 30 large, actively traded issues.

 

Dow Theory: A technical market theory that seeks to interpret long‑term trends in the stock market by analyzing the movements of the Dow Jones industrial averages.

 

Eurodollar: U.S. currency held in banks outside the United States.

 

Exchange: Any organization, association, or group of people that maintain or provide a marketplace in which commodities or securities can be bought or sold. Exchanges can also be electronic, as well as physical places. For example, the New York Stock Exchange (NYSE) and the Chicago Mercantile Exchange (CME) are both exchanges.

 

Floor Broker: This is an exchange member who enters transactions only for his own account from the floor of the exchange. These people are also called locals.

 

Foreign Currency: The currency of another country other than the one in which the trader lives. Both futures and option contracts trade the foreign currencies. Examples are the Australian Dollar, British Pound, Canadian Dollar, Deutsche Mark, Japanese Yen and the Swiss Franc.

 

Forward Contract: A cash market transaction in which a future delivery date is specified. Forward contracts differ from futures contracts in that the terms of forward contracts are not standardized and are not in contract markets.

 

Forward Market: The nonexchange trading of commodities specifying delivery at some future date.

 

Fundamental Analysis: The study of basic, underlying factors which will (should) affect the supply and demand of the commodity being traded in futures contracts. This type of analysis in commodity markets use crop reports, weather conditions, unemployment statistics and other similar factors in its analysis. In individual stocks, this type of analysis evaluates the intrinsic value of a stock by evaluating the overall economy, industry conditions, and the financial condition of a company. Factors such as these are called the “fundamentals”

 

Futures: The term used to designate the standardized contracts covering the sale of commodities for future delivery on a commodity exchange.

 

Futures Contract: A standardized, exchange‑traded contract to make or take delivery of a particular type of grade of commodity at an agreed upon place and point in the future. Futures contracts are transferable between parties. Examples are Wheat, Unleaded Gasoline, Corn, S&P 500, T‑Bonds, Soybeans, and so on.

 

Futures Exchange: A centralized facility for the trading of futures contracts.

 

Futures Market: A continuous auction market in which traders buy and sell commodity contracts for delivery at a specified point in the future. Trading is carried on through open outcry and hand signals in a trading pit.

 

High: The highest price in which a commodity trades to during the trading day.

 

Leverage: The use of borrowed capital to increase potential earnings.

 

Liquidity: The ease with which something can be bought or sold in the marketplace (converted to cash). A large number of buyers and sellers and a high volume of trading activity are important parts of liquidity.

 

Long: This means to own (buy) a commodity or stock. Specifically speaking, the trader wants the price of the commodity or stock to move up in price so they can sell it back to capture the price difference. A purchase of 3 S&P 500 futures contracts would be referred to as going long 3 S&P’s. Long is synonymous with buying, bought and bull market.

 

Low: The lowest price in which a commodity trades to during the trading day.

 

Margin: The amount of money deposited by a trader with their broker for the purpose of insuring the broker or clearinghouse against loss on open futures contracts.

Initial Margin ‑ This is the total amount of margin per contract required by the broker when a futures position is opened.

Maintenance Margin ‑ This is the amount of money which must be maintained on deposit at all times. If a customer’s equity in any futures position drops to or under the level because of adverse price action, the broker must issue a margin call to restore the customer’s equity.

 

Margin Call: There are two definitions to this term. (1) A request from a brokerage firm to a customer to bring margin deposits up to minimum levels, and (2), a request by the clearinghouse to a clearing member to bring clearing margins back to minimum levels required by the clearinghouse rules.

 

National Futures Association (NFA): This is a self‑regulatory organization of the commodities futures industry to which all futures exchange members, CTA’s and CPO’s must belong. The NFA is responsible to the Commodities Futures Trading Commission (CFTC).

 

Nearby Contract: This is a futures contract with the shortest time remaining to expiration. This is the same as nearby delivery month.

 

Offer: An indication by a trader, investor or dealer to sell a commodity or stock. This is the same as the asking price, quotation or quote.

 

Option: The right to buy or sell a specified amount of a stocks, bonds or futures contracts at a specified price within a specified time. An option represents a right acquired by the purchaser, but it is an obligation only on the part of the option seller.

 

Overbought: A term used by technical analysts that a market has gone up too far (bullish market) and is due for some sort of correction back down. This upside price action doesn’t usually match with what the fundamentals are saying.

 

Oversold: A term used by technical analysts that a market has gone down too far (bearish market) and is due for some sort of correction back up. This downside price action doesn’t usually match with what the fundamentals are saying.

 

Price Pattern: A term used by technical analysts to describe a repetitive series of price movements on bar charts. These chart patterns are used in attempt to predict future movements of a commodity market.

 

Position Trading: When a commodity trader either buys or sells a position in the futures market as a means of speculating on long‑term price movements.

 

Position Size: The amount of commodity contracts owned (a long position) or owed (a short position) by a trader. For example, when a trader buys 3 Canadian Dollars, they are purchasing three (3) contracts on the Canadian Dollar.

 

Range: A commodity or stocks low price and high price for a particular trading period. A range can be for any trading time period (i.e. 30 minute, 60 minute, Daily, Weekly or Monthly bar charts). By subtracting the High from the Low of a trading day will give you the daily Range.

 

Registered Trader: These people are members of an exchange who trade primarily for a personal account and at personal risk.

 

Resistance: Technical analysts refer to the term resistance to describe the top (highs) of a commodities trading range. When markets approach these levels they will (should) react back down off these highs. Resistance becomes support (see support) when penetrated to the upside.

 

Scalper: These are traders who buy and sell numerous commodity contracts during a single trading day in the anticipation of profiting from small price movements. Scalpers rarely carry positions from one day to the next. Their numerous buying and selling throughout the trading day contributes greatly to the liquidity of the commodities markets.

 

Short: This means to sell (go short) a commodity or stock. Specifically speaking, the trader wants the price of the commodity or stock to move down in price so they can buy it back to capture the price difference. A sale of 3 S&P 500 futures contracts would be referred to as going short 3 S&P’s. Short is synonymous with selling, sold and bear market.

 

Speculation: The buying or selling of goods or commodities for the sole purpose of profiting from those trades, and not as a means of protecting other positions.

 

Standard & Poors 500 A market indicator composed of 400 industrial stocks, 20 transportation stocks, 40 financial stocks and 40 public utility stocks.

 

Support: Technical analysts refer to the term support to describe the bottom (low) of a commodities trading range. When markets approach these levels they will (should) bounce up off these lows. Support becomes resistance (see resistance) when penetrated to the downside.

 

Technical Analysis: An approach to analyzing futures markets or individual stocks that primarily use (bar) charts for all trading decisions. This approach uses price patterns, rates of change, changes in volume, open interest and various other analysis techniques for making trading decisions. Most technical analysts disregard the fundamentals (see fundamental analysis) altogether.

 

Volatility: The speed with which the price of a commodity or stock rises and falls within a given period of time. When ranges (see range) increase in size (from high to low) the volatility is said to have increased a volatile market. When ranges (see range) decrease in size (from high to low) the volatility is said to have decreased an unvolatile market.

 

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