Three Things I Deliberately Do to Improve My Trading

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5 Deliberate Things to Do to Improve Your Trading

Many traders are simply putting in the hours, thinking that if they spend enough time around the markets, analyzing charts, reading books and studying courses, their skill level will improve. “Putting in hours” is necessary when you are starting out, as there is a lot to learn. But putting in hours won’t necessarily increase your profit potential. If you always do the same thing and make the same mistakes, putting in the hours will just ingrain those habits even more. To improve, make repeated and deliberate choices. Here are five thing to start doing today to improve your performance.

Key Takeaways

  • Trading can be challenging, especially for those just beginning in the markets, but many early missteps can be corrected with education and experience.
  • If you can’t figure something out, ask for help! Even if it seems like a small issue, there are are several resources both online and offline that you can seek out.
  • That said, stick to your guns! Others can lead you astray and lead you to act emotionally instead of logically.
  • Practice, discipline, and focus are key to keep you trading smart and strategically day in and day out.

Get Help

Have someone in your life that makes you accountable for your trading. Call them your trading referee. Lapses in discipline can happen to anyone, so having someone in your life that keeps you accountable will keep those lapses to a minimum and the mistakes less costly.

This person could be a mentor, coach or a just a friend or family member (not necessarily a trader, but it could be) who you’ve told your plan to and who you keep updated on your performance. Often just knowing that you need to show your trades to someone—and those trades have to align with the strategy you told them you were following—is enough for most traders to avoid some mistakes. (See also: Get a Trading Referee and Improve Performance.)

A chat room, forum or regular meeting with people you respect is another option. Share what you are doing, what you are struggling with and what you are having success with. Ask for feedback. Anyone can get sidetracked, so be open to being told when you’ve gone astray. When your own discipline and self-awareness fail, you’ll have someone to help you get on track. Choose your trading referee carefully. Choosing the wrong person can do as much harm as good.

In addition to help from people, there are several online resources for trader education and training, and of course there are also reams of books on the subject that can and should be consulted when in need.

Avoid Other’s Opinions on Trades

Talking about strategies with other traders, or discussing your performance with your trading referee is fine, but avoid the opinions of others when it comes to specific trades. Trade your trading plan, your way. It doesn’t matter if a trader you respect says they are going to buy when your plan says to sell. You must follow your own plan. That is only way you can see what works for you—and keep your stress levels to a minimum.

Constantly changing your mind based on what other people, the news, TV or websites say will cause stress and lead to poor performance. Even great traders make losing trades, so trust your own plan. Avoid discussions while you are trading that could cause you to second-guess your positions, or abandon your methods all together. You put time into researching and creating your strategy. Don’t let someone’s else words ruin all that work.

Practice

A strategy may seem simple on the surface, but even a simple strategy is hard to implement in live market conditions. Every day, every trend, every pullback is slightly different; nothing looks exactly the same as it did in the textbook examples. To get proficient at implementing a method, practice it, a lot. Trade it in a demo account until you consistently see profit from it.

In sports, you do drills to create muscle memory, so you can instinctively act when the time is right. In fast moving market conditions, if you have practiced a strategy, you’ll be able to implement your skill at the right time. If you haven’t practiced, you’ll likely miss the opportunity, enter too early, or make mistakes with your position sizing. Build your skill base in practice sessions, so you’re not learning the hard lessons when real money is on the line.

Mental Clarity, Everyday

Each day take one minute before you trade to make sure you are feeling clearheaded, focused and present. Also take a couple seconds to reiterate that you’re here to trade, not check your social media accounts, email or watch online videos. When you trade, focus on trading. Close your eyes, center your attention on your trading plan and visualize following it. Check the economic calendar to be aware of events that may move the market so you aren’t taken by surprise during the day.

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These small steps can save you thousands of dollars over the course of a year. If you’re angry, upset or unfocused, avoid trading. It only takes one day, or just one trade, to lose an entire account when not in the right frame of mind.

Take a few minutes and prepare for each day. Foster a state of mental clarity before you begin trading, and if you can’t establish that mental clarity, don’t trade that day. (See also: Characteristics of Successful Traders.)

Record Every Trade You Make

Monitor and review every trade you make. Take screenshots of your trades with entries, stop loss levels, targets and your technical/fundamental notes so you can easily review your trades at a later time. A screenshot is worth 1,000 words in a trading journal, because it shows exactly what you did in those exact market conditions.

If you’re a day trader, review your trades weekly and monthly. If a longer-term trader, establish a time where you’ll review your trades, such as quarterly or semi-annually. If your trades last a long time, take a screenshot at the time of the trade, and a screenshot when you get out (showing everything that happened between entry and exit).

Careful review of your trades will show what your common mistakes are—which you can deliberately work to improve (practice)—and what you’re very good at, which you could potentially capitalize on more.

The Bottom Line

Being a profitable trader takes constant work. Profitable trading is not a destination; it’s only a state made possible by deliberate and practiced actions and choices. As soon as a trader stops following those deliberate and practiced actions, they will fall out of the profitable state. Having someone to keep you on track will help keep these lapses to a minimum. So will avoiding the opinion of others on particular trades. Be focused every day you trade, and if you are not, don’t trade that day. Finally, record everything you do, taking screenshots and keeping notes. This will give you definitive feedback you can use to continually and deliberately improve your trading methods.

Three Steps That Will Greatly Improve Your Day Trading

Like mastering the oboe or throwing a perfect spiral with a football, the only way to become a better day trader is through practice. But practicing isn’t enough. It’s only the first step in the three-step process of practicing, reviewing, and adapting that will enable you to dramatically improve your day-trading skills.

Once a day trader knows hows to place orders, calculate the ideal position size, and manage risk and has developed a basic strategy to follow, they should practice the art of day trading so they can consistently and correctly take the split-second actions necessary to make money under fast-moving trading conditions.

Then they need to take the time—on a daily, weekly, and monthly schedule—to review their individual trades and their trading strategy to determine what works and what doesn’t.

Finally, they will adapt their trading plan based on what they learned from their review. These changes will be done incrementally so trades that are carried out based on them can be practiced and reviewed and new adaptations to the strategy can be developed.

Practicing Day Trading

Reading articles or watching videos isn’t enough. Day traders need to repeatedly practice what they are learning before it will become ingrained enough to be useful in making trading decisions in ever-changing market conditions.

Practice isn’t just about putting in hours. It’s possible to day trade for years, putting in hundreds or thousands of hours, and never see improvement because you’re not working on a specific activity.

To practice effectively, focus on a particular activity. This is where the trading plan comes in. A trading plan is a document that specifically outlines how, why, and when a trader will enter and exit trades; how they will control risk; and what their position size will be. It also details which markets will be traded and when.

Practice involves following a plan so that progress can be tracked. If trades are taken based on random factors or psychological whims, then the trading results will take on the same unpredictable and random nature.

Practice day trading one component of the trading plan at a time, in a demo account, until the strategy becomes second nature. For example, you may go through charts and pick out entry points for your strategy. Do this until you can see all the entry points that your strategy gives. Day trading requires quick reflexes and precise timing. Practice so that entries occur exactly when they are supposed to, based on the strategy.

Then move on to placing the stop-loss correctly. Then practice placing the profit target correctly. It could take a couple of weeks to a couple of months to master each element of the strategy. After you get skilled at placing your entry points, stop-loss levels, and profit targets based on your trading plan, start to incorporate other elements of the trading plan. Practice having the perfect position size on each trade (risking 1% of account capital per trade is recommended) and every other trading element the trading plan covers.

While it may sound a bit odd, this whole time you are also practicing what not to do. Your goal is not only to follow your strategy and take all the trades it tells you to take (when conditions are favorable, based on your trading plan) but you are also practicing sitting on your hands when your strategy isn’t telling you to a take a trade.

Trading is as much about the trades you don’t take as it is about those you do.

If your strategy doesn’t provide a trading opportunity, then do nothing. The patience required to wait for a valid trade signal is lacking in most new traders, but it can be acquired through practice. Practice being patient and pouncing when a valid trade opportunity arises.

The length of time traders should practice each element of their trading plan will vary. Typically, you should work on each element of the trading plan for 10 to 20 days. When you have mastered one element, add another, and then practice those two elements for 10 to 20 days, and so on. After about six months, a trader using this approach will have a good grasp of their trading plan, will have practiced their strategy for about 120 trading days, and will have a good idea of how to utilize it in all market conditions.

Over a six-month period, the trader will likely have seen very volatile days, very quiet days, trending days, ranging days, up days, and down days. Practicing in one type of market isn’t good enough. A trader needs to practice trading—and not trading—in all types of market conditions. For this reason, practice implementing the specifics of trading for at least six months before utilizing real capital.

Reviewing Your Day Trades

When you practice and follow a specific plan, you are making deliberate headway toward your goal of becoming a consistently profitable trader, even if the original plan isn’t a good one. The review process is where you get to critique both your ability to follow the plan (what you need to work on) and the plan itself (what changes the plan may require).

Self-review should be done a daily basis, while a trading plan review should be done on a weekly and monthly basis.

Self-review is looking at all your trades for the day and assessing how well you followed your trading plan on each. If you took lots of trades that weren’t part of your trading plan, that is a problem. If you look at the chart for the day and see trades that you were supposed to take but didn’t, that is also a problem. Additionally, look for trades where you may have deviated from your exit plan—holding on to a loss for too long, exiting a loss too early, or exiting at a different price than your profit target. In the future, you should pay special attention to reducing (and eventually getting close to eliminating) these problems.

At the end of each week and each month, go through all of your charts for that time period. Look for problems or areas of improvement within the strategy itself. This is your trading plan review. Ask yourself questions like:

  1. Did the price continue to move past my profit target with regularity? This may indicate that you could expand your profit target, extracting more profit (on average) from each trade.
  2. Did the price stall and reverse just before my profit target? This means your profit target may be a bit too large. Reducing it may actually improve the profitability of your strategy.
  3. Did the price often move just past your stop loss, then start moving toward your profit target again? This is a common problem and indicates your stop loss is poorly placed or the trade is poorly timed. Adjusting the stop loss or looking for a slightly later trade trigger will help alleviate this issue.
  4. Does a certain time of day correlate to more losses or wins? The success of a strategy varies during different parts of a trading day. Stick to trading only during the high-profit times, and take a break during the times you notice poor results.

There are a host of factors you can assess when it comes to your trading plan, but the four questions above will get you started. As you do daily, weekly, and monthly reviews of your trades, you will surely come up with some other ideas on how to improve your own trading and your trading system.

One of the best ways to review your trades is to take screenshots throughout each trading day, with all your trading points on them (entry, stop loss, profit target, and actual exit).

Adapting Your Trading Plan Based on Your Review

After a full month of trading, you are allowed to make small changes to your trading plan based on what you learned from your trading plan review sessions. Trades based on these small changes in strategy should be practiced for another month and then reviewed. Changes shouldn’t be made to the plan before the one-month period, as it becomes very easy to make changes based on individual trades (where anything can happen) as opposed to overall results (which are indicators of true performance).

The issues that arise in your self-review are worked on daily. With the self-review, your only goal is to follow the trading plan, whatever it may be. As the trading plan changes over time, so will your trading, but your goal is still to follow the plan. Your daily self-review doesn’t change the trading plan; instead, you work on your personality traits so you can follow the plan.

Strive to keep monthly trading plan changes small. This allows you to practice the small change effectively and monitor how those changes affect your trading. If you make lots of changes to your trading plan at once, it will be harder to isolate exactly which changes worked and which ones didn’t at your next review session.

The same concept applies to your daily self-review. Work on one problem at a time. Trying to correct too many problems at once means you aren’t focusing on each problem enough because your attention is too widely spread.

It’s better to focus on one issue at a time—and really make progress on it—before tackling the next issue.

How to Make (and Lose) $2,000,000 Day Trading: The System & The Story

I’ve tried and failed to write this article ten times.

Even after I finished, I thought it was terrible–actually I was just scared to share the story. I sent it to a reader who had asked me about trading. He replied:

It’s different than most that I have read because there is no bullshit to try and look past and all of your readers appreciate that.”

Thanks Garrett, here goes nothing:

A Kind of Introduction To Day Trading

This is about the lessons I learned while trading. The pitfalls people fall into and the ways people destroy themselves. There’s also the time I raised money for a hedge fund. Then my partner turned $30,000 into $2,000,000 in three months. It only took him two months to turn $2,000,000 into virtually zero.

We’ll get into the details later.

I mean trader as in “day trader”. From the time I was 15-22 I sat in front of 6 computer monitors watching charts go up and down. Why am I not doing it now? I didn’t make the billion dollars before hitting 22.

Traders are unique in that they might be the only group of people more delusional than entrepreneurs.

I say this lovingly.

According to my calculations, there’s no reason I couldn’t have made a billion dollars day trading. Never mind that 99.9% of traders are losers. Forget the fact that 80% of traders are depressed middle-aged men going through their mid-life crisis. (I saw one in the local library yesterday, he looked like he was avoiding his wife. I saw another today at Starbucks, he didn’t buy a drink and he smelled funny.)

I was the exception. I was going to get my billion-dollar pay day before my 30 th birthday.

And I actually was the exception. I made a nice chunk of money before stopping. I treated the thing with respect—not some get-rich scheme.

It breaks my heart when I see people tell me they day trade and then see them following some bullshit newsletter or some coach with a fudged track record. When I see someone watching another FOREX algorithm sales pitch or drooling over some penny-stock report I just want to shake them and say You have potential! Stop letting yourself get scammed! Stop scamming yourself!

If you trade without the proper preparation you’d be better off in Vegas. This is not an exaggeration. Not only are there free drinks, sexy ladies looking for fun, and an obscene selection of Cirque du Soleil shows… your odds at pretty much any casino table are better than the markets. I mean this literally (like “literally” as defined by a dictionary)—you are guaranteed to lose money over any decent period of time unless you learn to trade well.

And then even once you’re prepared and you feel you know everything there is to know about the markets, you’re still not guaranteed to win. That’s just the nature of the beast.

That’s why I started meditating at 16. Trading is intense. In college I would make $5000 in the middle of class and then lose $10,000 a few hours later while watching a movie.

That kind of thing gives you a different perspective on money.

One last thing before we get into the meat of the post: Like Garrett said, this is probably different than anything else you’ve read on trading. Why?

  1. I don’t want to sell you anything. I don’t give a shit if you trade or not. Actually, I would almost rather you not trade… most people would be better off spending their life doing other things.
  2. I’m not currently trading. I’ve double-checked my methods and they still work, so the information is current, I’m just not spending my life using it.
  3. The focus isn’t on the method—although I’ll give you all the dirty details. You’ve got to be fluid as a trader. The top hedge funds in the world hire mathematicians, physicists, meteorologists… they are constantly shifting algorithms. How do you compete with these people? You don’t. This will make more sense later.
  4. I don’t have any stake in you listening to me. For real: nothing is for sale. I’m not going to teach you to trade. People that teach people how to trade or run newsletters giving trading ideas make more money by selling their ideas than using their ideas. They all have their own stories about why they are being so generous with their SECRET knowledge but it’s bull. (Not that all this information is bad, it’s just that you got to be careful—don’t follow anyone blindly.) (Wait, so what are my incentives for writing this? I just want you to like me—I want you to like me and this article so much that you subscribe for our newsletter and I can write more things. Also, I’ve been thinking about writing this for way too long and I had to do it.)
  5. I’m not trying to convince you the world is ending.

Okay okay it’s time for the meat and potatoes.

Meat and potatoes? Ha! You’ll be eating liquid gold with the information I’m about to give you! Yes, you too can be a Rich Kid of Instagram!

Just kidding, you probably won’t do anything with it. (And that’s probably a good thing.)

Someone did make $2,000,000 with this information though. For real, I watched it happen.

Before we get to that story, we’re going to go through some of the major pitfalls new (and experienced) traders fall into.

[Note: I’ve provided the meanings of some words but I’m going to leave the glossary work to you, Google, and other places on the Internet that like defining words more than I do.]

What Not To Do

Why start with what not to do? Because not smoking cigarettes is more healthy than eating all organic. Because if you lose all your money then trading becomes kind of impossible, doesn’t it?

“You can do a lot by avoiding bad as opposed to seeking good.” – Paul Graham, founder of Y-Combinator

DO NOT: Use Real Money Before You Know What The Hell You’re Doing

Warren Buffett’s #1 rule in investing is to keep your capital. He says that his regrets have mostly been acts of omission instead of commission. That is because he doesn’t throw money at something that he doesn’t think will work—and so he misses out on making money on tech bubbles but doesn’t lose his ass when they bust. (Honestly, Warren Buffett isn’t a trader… he plays the long term and hasn’t done anything but acquire massive companies—or huge pieces of them–for decades… he is one of the world’s best money-getters but not someone who will give you anything useful in trading.)

What does this mean for you? Paper trade before you put any of your capital on the line. (Paper trading is when you make trades with a fake account. There are tons of platforms you can use for this, I used TD Ameritrade’s Think or Swim.)

How do you know when to start putting money on the line? When a system has proven itself.

When has a proven system proven itself? For me, a month of profitable trading (and a statistically significant number of trades).

This infers the next DO NOT:

DO NOT: Day Trade Without A System/Method

If you’re trading willy-nilly you’re going to lose.

I don’t even know exactly what willy-nilly means, but if you have to ask if your trading would fall under the “willy-nilly” category, then stop trading right f*&#ing now!

You’re not George Soros, you don’t get to trade on your gut.

You don’t need an algorithm running on a supercomputer—but you do need some sort of system that won’t let you be an idiot.

You will tell yourself you don’t need a defense against being an idiot. This is you being delusional. Believe me. I betrayed myself too many times before committing to my systems. You don’t win every time if you follow your methods but you do do a hell of a lot better.

How Do I Create A System?

So what makes a good system? We’ll get into this more later when I show you the exact system I used (don’t skip to it, this post will be useless if you do that). For now, this will be helpful when thinking about how to approach your trading:

  • Offense. It tells you exactly when and how to enter a trade. Maybe it’s “3 of the 5 requirements must be met to invest 1 share, if 5 of 5 are met – 2 shares”. This is one line of emotional defense: trading will make you think that you can make a million dollars today, this is very exciting, you will want to fudge the rules. Warren Buffett only broke his rules when he got bored—notice when you’re bored. If you think you can take advantage of more opportunities in the market then alter your system, test it, and implement it. Remember: no willy-nilly!
  • Defense. It tells you exactly how to exit a trade. This means stop losses. (These are orders that automatically get you out of a trade when the market you’re in hits a certain price.) A common rule is to take 50% of your position (your money in the market) at a certain profit point, maybe 100% maybe 68.2% (this is a Fibonacci number that is extremely popular among traders). It also defines exactly how much of a loss you are willing to take on a certain trade. This must be determined before you enter a trade. If you don’t put a stop loss in your brain will justify your position over and over to you while your hopeful trade ends up losing you your house (and family). This is even more important than a strong offense—don’t go broke!
  • Adding to a position. Sometimes you may want to make your position bigger as the market moves in your favor. You need to have a set of rules determining how you’ll do that.
  • Don’t complicate it. Every tool seems so powerful, so prophetic! Early on I had a habit of adding signals that I would wrap up into my system. I theory they should make your trading better. Maybe it does for a Harvard physicist, it didn’t for me. The more complex I made my system the worse I did, over and over. I would start simple, screw it up by adding a bunch of things people recommended, then go back to the drawing board. The best method I ever used was dead-simple (that’s the one we’ll get to in a little bit).
  • Give yourself a ton of room for failure. Eight out of ten trades failed for me. That was fine because when I hit a winner it won big. But if you’re averaging eight out of ten trades failing, then it will be common to fail 20 times in a row. I’ve gone through streaks of 40 failed trades in a row. You’ve got to be able to survive those. My recommendation would be to risk 1% (or less) of the money you’re willing to lose on each trade. That gives you 100 chances for failed trades before you go bust. It shouldn’t happen. (Of course, when I was twenty I was risking 10% on some trades… if I went bust it wasn’t that big of a deal.)
  • It has to work. Again, test the damn thing. If it doesn’t make fake money then it certainly won’t make real money.

There is a time and place for throwing caution to the wind and just going for it. Trading is the worst place for that kind of bullshit. The adrenaline that comes from the potential of losing thousands of dollars in a minute is enough—you’re mission is to keep a cool head.

DO NOT: Get Big Fast

If you do this right, you have the potential for making a lot of money faster than any other method out there. (Excluding entrepreneurs who are insanely talented and simultaneously insanely lucky.) The potential—chances are it won’t go that way.

Chances are you’ll lose money.

Or you’ll make money, feel like a god, trade like a god, and lose all your money.

When you put real money on the line the game completely changes again.

You think you’ve tested your method. You’ve gone the first month and everything looks solid. Great.

Then you put money on the line. Shit gets real. You can’t seem to follow the system like you did in the test month. The market seems totally foreign again.

You don’t believe me, that’s fine. For you it’s different.

I don’t know how many times I told myself that. I’m different.

It doesn’t matter though, you’ll feel it the same as I did.

To save yourself some money though, trust me, start small.

DO NOT: Trade When You’re Emotional

I told you I started meditating at 16. It’s not because I was excited about being “in the moment” or that I was into Eastern philosophy. It was because if I didn’t I couldn’t trade. I’d mess it up.

James Altucher talks about how he created algorithms for each of his methods and then let them trade for him while he was depressed an losing everything. I wasn’t smart enough for this (and my methods inevitably had some level of subjectivity to them) and so I manually entered all my trades. (Entering a trade or “putting on a trade” or “entering a position” just means you’re buying (or selling short) into a market.)

James got to trade emotionally because he wasn’t actually trading.

If I got emotional then I would get silly.

You’ve got a system so this shouldn’t matter. But it so matters.

Imagine this: You’ve just gone long the corn futures market for 2 contracts. You’re up $5000 on a trade in two hours. Awesome, right? Hell no!

This is what happens in the two sides (side 1 and side 2) of your brain:

1. I want to take this $5000 off the table now, that’s a great win.

2. Yeah, but look at this pattern—this could be the BIG trade—this could be $100,000 if I add contracts.

1. Yeah, but it’s more important to conserve capital. $5,000 is a great win. Maybe I could just take half off the table.

2. Don’t blow it. That’s $50,000 instead…

1. Fuck. The system says to sell now.

2. Yeah, but the system isn’t perfect. You made it anyway—you can change it. You can feel it!

1. Yeah. But, the system…

And then on and on. I said “imagine” but that exact inner-dialogue is something I went through twenty times a day every day for a long time.

When did I make the right choice? (The right choice being following the system, not making money. A lot of people make money with a shitty trade and then think they have some special talent… of course they go bust within the quarter.)

I made the right choice when I let reason reign.

When did I make the wrong choice?

When I was either excited or scared. Both fear and greed will destroy you. (Immediate greed that overtakes your rational decision—which has longer term greed in mind.)

I’ve said this earlier, but it’s important to repeat:

A. Some days you will feel like a worthless human being who has done and never will do anything worthwhile. You will enter trades you aren’t supposed to because you’re afraid of missing out. You will exit trades before you should because your stomach is weak.

B. The next day you will make a winning trade and feel like a god. You will forget whatever it felt like to lose and you will make trades outside of your method. You will enter trades you shouldn’t because you have the feeling that you can’t do wrong (the market may validate you for a couple days and make the problem worse). You will stay in trades too long because you “know” that the market will turn in your favor—no way could you be wrong!

Your trading decisions need to come from numbers and predetermined rules. After years of deliberate practice and success you may actually get an intuitive feel for the market. Then begin introducing those feelings into your systems. Before then, no way José.

DO NOT: Trade Based on Some Purchased System or Newsletter

Listen, if someone has a really kickass way to make money trading they sell it to a hedge fund or use it themselves. They don’t sell it to you for five easy payments of $300.

That being said, there are some decent newsletters out there. The James Dines letter being one of them. It may be worth signing up for a couple, but don’t rely solely on them. Experiment with their information. Test their ideas against your method.

Do not follow them blindly.

Think about the incentives at work… there is nothing in your favor.

(This means, by the way, don’t follow the method below without testing it first. Just so you know–if I were actively trading it right now I probably wouldn’t have shared it.)

DO NOT: Get Caught Up In Stories

if you see this image – RUN!

Your system either works or it doesn’t.

People will devise elaborate narratives around their ideas they want you to buy into. They will spend countless hours telling you about this thing and why it’s the next took to make you a millionaire.

They will scare you by telling you you’re going to miss out on the next big thing. They will tell you that you need them.

You don’t. You need a system that works. Incorporate their idea into your system if you believe in it, see if it actually works. If it doesn’t, take it out.

DO NOT: Trade

This isn’t a joke. Most people shouldn’t trade. If you’re not willing to give everything to the market then it’s not worth messing with. Do what Warren Buffett says and put your money in the Vanguard S&P 500 index fund and go about your life. (Or invest in your own business.)

Of course, as terrible as trading is, it’s also freaking awesome for the right people. To this day I get a warm fuzzy feeling when I see a price chart. I’m not joking. I feel at home and I see patterns and I get the urge to dive in… Maybe I will again. Who knows.

For real: you should only trade if you are extremely drawn to it and if you can behave rationally (while remaining delusional).

Alright. here it is:

The Method

I was on break before going into my junior year of college. I was trading, doing pretty well. I was having a particularly good morning when I received a picture message on my phone. It was a screenshot of my partner’s trading account.

A couple weeks prior I received one that said $250,000. He had started with $30,000 only a few weeks before. I was freaking amazed.

This particular day, though, I didn’t believe it was real. The image read: $2,000,000 (and change, whatever). That was a “holy moly” moment, to say the least. I stared at it for a long time.

I texted back, “This isn’t real.”

How did that happen?

How did he turn $30,000 into $2,000,000 in three months?

Well, the method below.

But also! (And this is a massively important “but”.)

  1. He was more balls to the wall than I’d seen anyone ever before. Every bit of profit was immediately thrown back into the trade so his position ballooned like crazy. I actually used the term “stapled to the wall”.
  2. He was insanely lucky. See that lumber futures price chart below? You see that massive move down? Yeah, he got that at the top and rode it straight to the bottom. (He had a short position—meaning he made money as the price dropped.)
  3. He does have mental powers.

THAT is a move!ne

This combination ended up with massive losses in the next couple months. He still ended with an awesome five-month return… but you were a millionaire for a month and then not… well, it hurts.

I used this method with my balls about a foot off the wall and made great returns. I nearly doubled my personal account in six months and then was able to raise money from investors with that track record.

[Note: This method is specifically useful for commodity futures but can be applied more widely with certain modifications.]

Here is what we looked for:

1. Multi-Year High or Low

This method required constant awareness of price movements but not a lot of action. With this method you probably won’t be making more than two trades a week—often you’ll make one every other week. It’s also a bit unique in that we are trying to spot tops and bottoms of markets, something that most people will tell you is suicide: “like catching a falling knife”.

I just looked up the Corn Futures price chart at barcharts.com and found it sitting right at a multi-year low.

This is a weekly chart (each bar represents one week) so we can see that we’ve missed the bottom last week. We can zoom in to see if that would have presented us an opportunity.

The first is the simplest, this is the first filter I use to sort through charts: is it at multiyear high or low? You can see this quickly and skip it if the answer is no. If it is then go in for a closer look.

(I will keep tabs on a bunch of charts sitting at these areas while I wait for the other requirements to be filled.)

2. Hammer, Morning Doji Star, or Abandoned Baby Candlestick

[Note: I’m not going to get too technical here–just what you need to have a basic understanding and get started. I recommend you read everything at StockCharts.com’s Stock School if you have any sort of commitment to this. Candlesticks are just another way to view pricing information on a chart. An empty/white bar means that the price closed higher than it begun for the period of time measured by the bar. A red is the opposite, the bottom of the red bar is the closing price. The skinny area is the full area covered by price movement during the period covered by the bar.]

The second thing I would look for is a daily Morning Doji Star or Hammer Candlestick.

A Hammer Candlestick:

A Morning Doji Star:

Here is an Abandoned Baby:

Keep in mind we want these patterns at a multiyear high or low. Preferably with a gap. That means, for the corn chart above, we would want the price to open below where it’s current.

The gap shows one last push up. The two candlestick show consolidation of price movements. Basically, the price wasn’t able to follow through–signaling that this movement is out of gas.

Now, if you don’t see one of these right away, don’t discount it totally. Check for the third requirement.

3. The Producers Are On Your Side

General Mills buys a metric shitton of wheat. They move that market big time. It would be nice to know what companies like General Mills are doing so we could be on their side, right?

Yeah. And we can. And it’s pretty awesome.

Now, General Mills and other large producers use futures markets to hedge price fluctuations more often than trading for a profit like us. So we don’t take them with a grain of salt unless they are making significant movement.

Companies that trade over a certain amount of contracts are required to report the trades they make. These are collected in reports called Commitment of Trader Reports. You can get these reports here. You can get them in a more useful form (a chart) here.

Let’s see an example. I just looked up a promising chart of Soy Bean Futures:

We can see a great multiyear low (which is more obvious in the weekly chart, note that this is a daily) and some consolidation. Okay, let’s see what the producers are doing–this information is available to us in the red line in the mini-chart below the main one.

We can see here (and on here-just CTRL+F “soy” and you’ll see it) that producers (the RED line) are still significantly short soybeans and they aren’t in any rush to get long (“get long” means to buy).

Because of this I’m not going to make a trade but I am going to keep an eye on this over the next few weeks to see if a cleaner setup emerges. (A setup basically means the boxes for your method are checked off.)

We want to see the producers make a significant move in the direction of our potential trade. Here I would want to see a large movement toward zero.

[This is a fascinating topic. Check out Trade Stocks and Commodities with the Insiders: Secrets of the COT Report, it’s freaking amazing. And if the $40 price tag looks too high, seriously reconsider trading as an option.]

4. (Optional: For the insane ones) Balls-to-the-Wall-Re-Buy

My partner was able to make such insane returns because he caught a great run and leveraged it to the hilt. He put on a huge position and then used all the profits from each movement to make his position even bigger. That means you’ve got to hit a home run.

I honestly can’t recommend anyone do that. This method alone demands more risk than most (even though you can use mini contracts to take smaller positions). I played more conservatively and did well. When I trade again, I’ll trade even more conservatively. Capital is the first requirement for trading–without it you’re out of the game.

5. Stop-Loss

You need to set a stop-loss immediately after entering your position. I would give different markets different leeway depending on how widely they fluctuated normally.

Corn might fluctuate 10 points daily on average while Crude Oil might fluctuate 20. I would give Oil more wiggle room (not willy-nilly, mind you!)

The most important thing is that you set a stop loss with a loss that you can manage. It doesn’t matter how perfect a setup might appear, it could still lose money. You need to be prepared to take losers.

Ideally your stop loss is below the previous low. Sometimes you won’t be able to catch it that close, but if you can you’re golden. (You trade seeing more of a movement for taking on less risk.)

6. Managing the Trade

Let’s say we get long Soy Beans. We’ve got our stop-loss right under the previous low.

Version #1: The market moves against us and takes out our stop (this means the stop-loss is hit and we are taken out of the trade, we are “flat”). This is the most common scenario.

Version #2: This is the more interesting version–the market moves in our favor! Yeehaw! We’re not out of the woods yet though.

Obviously we would love the market to take off in the direction of our trade and lead us to our fortune. If this happens then count your blessings and remember the feeling–because it won’t come often.

Even when we get a winning trade, we have to work with it. It will go up a while and then back down, then up and then down.

When we talk about “managing a trade” we are really talking about three things:

1. Adding to the position. We talked about this a little earlier. Essentially you can add to a position that’s working to double down. Say you get a strong movement in your favor, then it pulls back a bit to consolidate, you can add to your position to double-down on the move.

**2. Adjusting our stop-loss. This is the one you will use most often (as in every winning trade). I like to move my stop-loss to my entry price as soon as possible. This means that if that market moves against you then you still don’t lose any money. I will normally wait until there is a new solid level of “support” created and then move the stop loss up to this new level. A support level is a price at which there is resistance to the market moving below. This is usually created by a small pullback. Continue to adjust your stop losses as the market moves in your favor.

3. Reducing our position (taking money off the table). I alternated between taking 50% of my trade off the table when I had 100% and never reducing a trade unless I got out completely. Often taking 50% or 30% at a certain point is a good way to lock in trades, the only problem is that it limits your upsides.

4. Exiting. At certain reversal patterns I would exit a trade and not wait for it to hit a stop-loss.

how we used to trade

That’s It!

Scary simple, right? (There are a few minor things omitted just for the sake of simplicity… these items decided most of the decisions.)

You probably noticed that I didn’t give you any examples of perfect patterns (if you go back and look at a more magnified version of the lumber one you’ll see a perfect setup). That’s because it takes a massive amount of work to find a great trade. I may have to look through 200 more charts before finding a decent setup.

What Now?

If you’re really interested in this, go to BarCharts.com (or download a trading platform, I like thinkTDA) and look through every single commodity futures chart you can find. Look at a 5 year chart, then if one looks promising look at a 1 year chart, then a 6 month.

  1. Keep a list of ones that look promising that you need to keep an eye on. Review these every day.
  2. Once a week review ALL the commodities again.
  3. When you find a good trade, make it on paper. Either literally with paper or with your program (again thinkTDA is awesome… I don’t even have an affiliate link for them, they’re not sponsoring this post… but now I kind of think they should :P).
  4. When you start to get good at it, dip a toe in with real money.

That’s 4 steps and a ton of time.

I was going to recommend more books for you to read but I’m not. If you want them in the comments I’ll offer some up but the important thing is for you to actually apply this knowledge first. Go and spend an hour looking at charts right now.

Questions?

This post ended up being fairly long… but the topic is huge. I glossed over a lot of technical stuff on purpose. The goal here was to give you an idea of what it is to be a trader and an example of a method to begin using.

I’m happy to answer any questions you’ve got! Just put them in the comments below or email me.

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