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Traders Toolbox: Lesson 2 Discipline

Discipline Of all the "tools" available to the trader, none is more important than his or her own mind! Lack of mental discipline has to be the primary cause of losses in the marketplace. Why else would traders with years of experience and reliable systems fail to be consistent winners? Show a 6-year-old child a chart and he will tell you if a market is going up or down by simple observation. Yet, 80% or 90% of all traders end up as losers. The market doesn't beat you; you beat yourself!You are your own worst enemy!

Challenges of a trader's mental discipline exist in many areas of the marketplace and appear in many different forms. Virtually every trader who has spent any amount of time in the commodity business has experienced one or more of the following upsets to his mentality: My broker says ... ; the report said. .. ; the weather will be ... ; but this time is different; ABC is buying; XYZ is selling; it's too high to buy; it's too low to sell; if I get out today the market will turn tomorrow; I saw it coming but my broker (wife, husband, brother, friend, etc.) talked me out of it; and my favorite "They say..."

The trader lacking confidence in his own abilities will seek advice from anyone who will agree with his position. In doing so, he often finds the group of experts called "they" quoted. Invariably, he will stay with a bad position or prematurely abandon or exit a good position because "they" said so and so. Interestingly, in all my years in the business, I have never been able to locate a government agency or an advisory service under the title of "THEY." Do not take the advice of anyone unless you are sure they know more than you do.

Contrary opinion or bullish consensus is a measure of mental attitude. When 80% to 90% of traders are bullish, a market may be termed overbought. How does a market become overbought? High bullish consensus readings develop when traders are "sold" on the idea a mar- is going higher. The idea is promoted by market action and by media attention. A prime example was the media blitz during late 1987 which said foreign currencies would never experience another down day. Finally, everyone was convinced the sky was the limit and, as usual, when everyone knew what the market was going to do, they were wrong. When a person is bombarded by a multitude of news re- ports,it is extremely difficult to examine a market from an unemotional and objective point of view.

However, to be successful, you have to develop such a mental discipline. mental discipline is necessary in any competition you enter. The competition the trader faces is the battle he has with himself. He must be able to avoid the emotional forces constantly tugging at his mind. He must defend against im- pulsive greed when a market is "leaving" without him and against fear when a market is moving against his position. He has to maintain the confidence that his analysis is correct and enter orders based on this confidence even when it is "obvious" the analysis can't be correct. When he suffers a loss, the trader must fight the "I have to get it back" syndrome. When he succumbs to this malady, he begins to trade equity instead of the marketplace and he is doomed to throw good money after bad.

My observation has been the most dangerous period a trader can face is when he first becomes a winner. I have had the good fortune to catch some significant moves in the past and have received a number of calls from people who were overjoyed with their positions; in some instances, the callers were nearly euphoric (probably long hogs or bellies).

All too often I have watched new winners gain the feeling of overconfidence and indestructibility. Greed sets in and one- or two-contract traders become five- and ten-contract traders. They hit on another trade or two and the ego goes limit up; now they can do no wrong. Suddenly, they are one of the "big swingers"; then disaster strikes. The hot streak turns cold and the equity leaves faster than it came. Their emotions leave an island top and they plunge into mental despair. They become another statistic marked to the loser category.

Where do the new winners go wrong? In general, they have not learned the lessons of past losses and do not have the discipline to continue the trading strategy which finally brought them into the winner category. What is different about the consistent winners? First of all, most of the consistent winners were losers at one time. They learned from their losses. They went on to study which tools work and then implemented those tools.

But most importantly, they have undergone a self examination to determine their mental flaws and how to correct them. Like a championship boxer, they realize they can win the first 14 rounds of a fight, but if they let their guard down and relax, they can still lose by a knockout in the final round. It takes work to become a winner and even more work to stay a winner.

Now this would get my undivided attention!

Imagine you're in your favorite restaurant enjoying a nice dinner. All of a sudden a beautiful young lady jumps up on the table and starts dancing even though there is no music.

Would that get your attention?

I know it would get my attention, not because it was a beautiful lady, but because it is out of the realm of normalcy for this restaurant to have anyone dancing on their tables.

The point I am making is this... sometimes markets act a little out of the ordinary despite what everyone is saying and thinking about them. When this happens you need to pay close attention to that market.

Why? Because that market maybe getting ready to do something totally contrary to prevailing sentiment.

For the first time in 20 months we have received a signal that many would consider out of the ordinary and going against popular sentiment.

I have prepared a short video that I would like to share with you today.

Here's the video link.

Let me know how you enjoy the video and if you found it helpful. You can reply back to [email protected].

Thanks for reading this e-mail and every success in the markets and in life,

Adam Hewison
President, INO.com

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Traders Toolbox: Trading tools for today's markets

To some, technical analysis is a mystical method used by individuals to look into the future. Much of the glamour comes from the use of technical analysis as a predictive tool. While predictions can invigorate in a manner such as taking a joy ride, the end result will often feel like a ride gone bad. Although less exciting, the better use of technical tools can be likened to the tools a doctor uses to diagnose the condition of a patient. Similarly, a technical analyst applies his tools to determine the present condition of the market. Once a diagnosis has been made, a trader has a guide on how to approach a market. The understanding and application of tools is an important step in the development of an analyst or a trader. Properly used, various technical tools allow the drawing together of pieces of evidence to determine the market's present condition. While no one can guarantee the correct analysis of a market, the more evidence you gather, the better your odds. Once the evidence is gathered, diagnosing a market often ends up in a process much like jury deliberation. Each piece of evidence is considered; some will be accepted as valid, others may be suspect. Often one or two pieces of evidence prove to be the key in making a final determination. Once an analysis is made, based on the preponderance of evidence, a trader is ready to plan a course of action. TOOLS OF THE TRADE: The purpose of the series is to expose the reader to various analytical tools and to allow an insight into their applications. Hopefully the reader will have a better understanding of why a final diagnosis of a market's conditions has been reached.

Happy Fathers Day from the Traders Club Blog

I wanted to wish a happy father's day to all the dads that read our blog. It's not often that we get a whole day of credit for how much we do on the other 364 days of year.

We cut the grass, balance the checkbook, kill the spiders, move the couch, the list is endless.

I wanted to give you a special something as a thank you to all the dads and fathers out there who continue to do the things that are often not recognized.

We'd like to offer you a "2 Week Free Trial" to MarketClub. There is no billing information required, just enter your information and start browsing around the MarketClub site.

Click Here to start your 2 week trial

This offer only comes ONCE A YEAR...kinda like Father's Day. The trial gives you access to ALL the tools that MarketClub has to offer. This promotion will be offered to the public tomorrow, but we wanted to extend this free trial to you on this special day.
So take the trial by using the link below:

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Have a happy father's day and enjoy the gift,

The MarketClub Team