Category: General

Back Testing for Better Trading Results

Posted on by The INO.com Team

In today's guest blog post I asked Ingela Troha to talk about something that has plagued me, and millions of traders each and every year...it's back testing! Please read the full article, and put the info to good use!

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Back Testing can be a dirty word for traders who are too impatient to test their trading plan. Just the thought of it feels like an inconvenience, and a delay of getting into the live markets. Also many are confused about what the process involves, or completely unaware of how valuable it is to the bottom line of their results.

The benefits of back testing are extensive; years of experience can be gained over a shorter time frame (sometimes within hours) which further develops the traders intuition as the get to know their trading plan intimately; there is also the advantage of using your trading system through various market conditions and not just the current market type; plus testing new indicators and tweaking old ones; or creating a trading plan tailored to your own personal style.

The back testing process involves taking what criteria you have within your trading plan and applying it over at least 4 years of data – pick a period including all movements; bull, bear and sideways conditions. Your trading criteria must be well defined and not open to subjectivity – if it is get rid of it and find a new indictor. Trading rules should be very clear, for example: “Enter 1 daily close above the XX Day Simple Moving Average, with a Stop Loss 25 points away…” and so on. Trading criteria must be so precise that if you were to give the information to 10 different people they would come back with the same results. If there is too much room for interpretation within your rules, you will find it hard to repeat your successes
and avoid losing trades.

Once you have applied your trading criteria over a historical period, carefully noting each trade, you will be able to reflect on each position you took and identify a number of things; you may be able to minimize the risk of each trade by moving your stop loss closer or minimize the probability of being unnecessarily stopped out by having it even further away. For example, if over the 4 year period you made a total of 100 trades where 60 were winning and 40 were losing, you could analyze all the losing trades and see if any of those could have been eliminated or minimized. You could bring in an extra rule or indicator that would have avoided the placement of those losing trades, (however, remember that a new indicator could also have subsequently not allowed you to enter some of the most profitable trades so these need to be tested for viability).

The scenarios that you can back test are endless, and the process may at the time feel quite daunting or monotonous but it is actually deepening your feel for the market by training your eye to look for market movements and patterns that repeat…setting you up as an agile trader to effectively stalk the live markets.

Back testing of course cannot replicate the emotions you will feel that fuel the live markets, but it will add to your profit margin in more ways than one. Happy back testing…

Ingela Troha

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Ingela Troha is a professional trader with over 14 years experience
within the financial services industry – www.unearthedfinancial.com.au

Trading Successfully in a downward trending market

Posted on by The INO.com Team

Today our guest blog posting will cover something that's been on our minds for the past few months...a Bear market! I'm often asked, "what can I do?" There isn't enough time in the day to help someone who asks me questions like that to be honest. If you don't have a place to start, or a strategy in place you're already behind and destine for failure. So read the article below from WallStreetSurvivor and set up your plan.

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Making money in a down market may seem impossible, but there are proven strategies that allow you to profit and seize opportunities that are available in almost any Down, or Bear, market.

When there is turbulence in the stock market, and there appears to be widespread pessimism about stocks, should you simply throw in the towel, sell all your holdings and wait for the market to turn bullish again? The answer is NO! The key is to turn these bumps into plateaus of opportunities. There are several proven strategies to turn market losses into your gains.

Here are three:

* Shorting Stocks
* Buying Bear Market ETF's
* Buying Defensive Stocks

Shorting Stocks

So... Shorting is a way to make a profit from a stock falling in price when the market is bearish.
In 'short', it's a bet that a certain stock will fall.

If a stock looks like it will start losing value, then you can bet against it and make money as its price drops. When you short, you are actually borrowing the shares from your broker with the intention of selling them in the future. So basically, it's a loan of the shares. But the price you sell them at is all profit.

Let's look at an example. If stock ABC is trading at $30 and you expect it to go down, you would 'short' sell it. This means if your broker has loaned you money to buy ABC at $30/share and it falls to $25/share, you make a profit $5/share. That is, you sold the stock for $30/share, and you only paid $25/share for it, even though you sold it before you paid for it. Shorting stocks allows you to make money on a stock when it falls in value.

Let's dive into a few more facts about shorting and risks associated with shorting. To start with, borrowing shares means margin and while you short-sold a stock, if the company announces a dividend, you would have to reimburse the owner for the dividend. Meanwhile, your downside risk is equivalent to how high the stock may rise after you short-sold which is potentially unlimited downside risk.

Another way to look at a bear market if you're not a big fan of shorting is...

Bear Market ETFs

An alternative to shorting stocks or indexes is to buy Bear Market Exchange Traded Funds (ETFs)

Bear Market ETFs are designed in a way that when major indexes go down, these ETFs gain value that matches the drop in the index. Moreover, a type of ETF called Ultra Short ETFs allow you to multiply your gains (or losses) by investing in leveraged ETFs. What that means is for a 2:1 leveraged Ultra Short ETF, if the underlying index goes down by 4%, your ETF would go up by 8%. For example, the Ultra Short ETF - Short Ultra Financials (AMEX: SKF) has a 2:1 leveraged relation with the underlying Dow Jones U.S. Financials index (INDEX: DJUSFN). Beginning in November 2007, if you would have bought SKF, with a 10% loss in the index value; you would have gained 20%. Not bad, huh?

In summary, with Bear Market ETFs, you could still reap the benefits of shorting in a down market, without worrying about margin or the unlimited risk associated with shorting a stock. Additionally, Ultra Short ETFs provide an interesting alternative to multiply your gains or to hedge a downturn by investing in leveraged securities.

More Bear Market ETFs:

* UltraShort Consumer Goods (AMEX: SZK)
* UltraShort Health Care (AMEX: RXD)
* UltraShort Oil & Gas (AMEX: DUG)
* UltraShort Real Estate (AMEX: SRS)
* UltraShort Semiconductors (AMEX: SSG)
* UltraShort Utilities (AMEX: SDP)

Bear Market Index ETF's:

* UltraShort Nasdaq (AMEX: QID) is designed to profit when the Nasdaq index of technology stocks goes down.
* UltraShort S&P 500 ProShares (AMEX: SDS) is designed to profit when the S&P 500 index goes down.
* UltraShort Dow30 ProShares (AMEX: DXD) is designed to profit when the Dow Jones Industrial Index goes down.

Defensive Stock Picks

Seema Garg, Program Manager at Wall Street Survivor

Looking for more ways to profit in a Down market? Here are six industries to BUY in a Bear market that could make you money while others may be selling:

Wall Street Survivor

http://www.wallstreetsurvivor.com/Public/Learn/DefensiveStockPicks.aspx

What's the hardest thing a trader will ever have to do?

Posted on by The INO.com Team

Today I've decided that we need to show our support to our huge Aussie following by giving Dean Whittingham, a native Aussie and trading mentor, the ability to teach us a thing or two about what he's learned while trading in Australia. He's been a mentor, trader, teacher, and technical analyst for years and today he'll be blogging about the hardest thing a trader will have to do.

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Visit forums, join memberships, purchase tuition with member areas for support, read books, talk to fellow traders etc and you can be guaranteed you will come across many who will be struggling with a whole host of reasons why. Some will even appear as experts but beneath the surface are struggling with some aspect of their own trading system or style. But do you know what the hardest thing any trader will have to do is?

1. Learn the jargon – no way, this is easy and it just takes time.

2. Find a profitable trading system – there are hundreds of thousands of them, in fact many are just given away for free nowadays.

3. Back test and paper trade – c’mon, I know many people don’t like hard work but you’re way off here.

4. Learning to read charts – kids like reading charts as they look at the green thing and they say, “Hey that’s going up”, or if they see a red thing they say “that’s going down”.

5. Setting goals – important because if you don’t have a goal, you’re floating aimlessly; but not the hardest.

6. Thinking successfully – no matter who you are or where you are there is always something you are good at. If this is so you already know how to be successful.

7. Being true to yourself – knowing who you are is indeed a quality that sets one apart from the rest and is therefore one of the hardest things a trader will ever have to learn, but not the hardest.

8. Cut losses short – it is hard to do this for many but it is definitely not the hardest.

9. Logging trades – as we are lazy this is done by a very few, but this does not make it the hardest, not by a long shot.

10. Keep emotions at bay – trading without emotions is very hard, but as we are humans the proper definition is more like managing emotions; but either way it is not the hardest thing a trader will ever have to do.

11. Remain independent – listening to other’s advice whether it is a newsletter, internet forum, or just your buddy next door is very easy to do as we like to follow other people by nature so to do the opposite is hard, but not the hardest.

12. Sticking to the rules of a plan or system – this is indeed hard but not the hardest. Many people trade with only rules for analyzing or entering, but most never have a complete set of rules anyway, but even those that do, it is not quite the hardest and you're about to find out why.

13. Letting profits run – BINGO!

The hardest thing a trader will ever have to do is to let profits run. It doesn't matter whether a trader uses trailing stops or profit targets, the ability to let a trade run its full course is the hardest thing a trader will have to consistently do.

Why is this so difficult?

For one, most place more emphasis on seeking opportunities and rules for entering than on anything else to do with running a trading business. And this is exactly how the whole “trading” thing is marketed. Very few traders have rules for exiting.

But even those that do have rules for exiting, only a small minority will stick to them, and this is because we as traders can not get past thinking about the money. Money rules us as traders and probably rules us in our lives too.

If you go back over all the points above I can tell you that all of them contribute in some way to the most difficult thing a trader will do; hold on to winning trades.

For example, if you think you’re a successful trader then why would you cut your profits short?

Because if you thought you were a success you would know yourself and where you need emotional management, you would learn any jargon and how to analyze, you would have a goal, and you would have a plan to go with it, which means you would have a system with rules for analyzing, entering and exiting, and you would have a fair idea how this system performs, which means you would have back-tested or paper traded it, and you’d cut losses short and you’d log all trades, you’d remain independent, and finally you’d stick to all the rules.

What a trader will face is the situation where they cut a profit short and take a look at what they made for that trade; this will send out a good feeling throughout their body. What will compound this feeling is if they look a little later on to see their decision was justified because the trade would have resulted in a loss if they’d not closed it out earlier.

The problem is this good feeling we are experiencing is encouraging bad behaviour whether it’s breaking rules, trading without a plan or whatever. To continue on this path will lead you to having to find more winning trades because the trades you do get wrong will cost you more than what you make from the profitable ones.

Now here comes the litmus test: If you cut a profit short only to see it would have been a lot more profitable had you held on longer or used your exit rules then this should hurt – I mean really hurt, but not because of the lost opportunity but because you see it as a failure on your part. If it doesn’t then success means very little to you.

All traders will go through the process of seeing themselves in a winning trade only to see it end up as a loss. This is inevitable. Apart from having someone look over your shoulder to prevent you breaking rules or cutting profits short, the only person who can do this is you! If you find yourself cutting profits short then look for your weakest links in your trading business. I have given you many here to ponder.

Dean Whittingham

http://www.atradersuniverse.com - Stock, futures and forex trading system development for all traders.
If you'd like to learn more from Dean I highly suggest his latest report on The Subtle Trap of Trading

My First Experience In Forex Trading

Posted on by lindsay

Today I am pleased to introduce you to Thierry Martin from OnlineTradersForum.com. I asked Thierry, an expert Forex Trader, to talk about his experience in Forex and how the market has changed since he first started.

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by Thierry Martin / OnlineTradersForum.com

Like so many long-time stock traders, I have noticed over the last few years a constant stream of ads with the purpose of getting stock traders open an account to trade foreign exchange, or forex. These ads make it sound like we're in the wrong business, because they usually point out all the advantages of trading forex compared to all the disadvantages of trading stocks. If you are like me, you were curious, but never bothered to actually go through with it and give it a try.

Well, finally, I gave in. What triggered my decision to get my feet wet was that I opened a new stock trading account with a company that also offered forex trading. The minimum deposit needed for the stock trading account was $2,000 but for the forex account it was $250, what they call a "mini" account. This sounded like a reasonable amount to risk on something I knew very little about, so I went ahead and funded it.

While waiting the three days for the account to be processed, I started learning how to trade forex by using a simulator account, something that almost every forex dealer offers. These accounts are funded with virtual money, and operate exactly like a live account with the obvious difference that you can't lose your money if your trades go south. I found this very useful, since I made a lot of mistakes that would have cost me real money otherwise. The simulators or "practice accounts" are a very good way to learn forex, although
you need to remember that your trading will be less relaxed when you are trading with real money.

Many forex firms offer the practice accounts to anyone who wants to open one, even those who aren't funding a real account. So you really have nothing to lose trying your hand at forex this way, and finding
out whether or not you want to trade later with real money.

Experiencing the forex market with a practice account, I started to see the validity to many of the claims I heard over the years. I am a late-night person, and it was great to be able to trade at 2:00 a.m. - some of the currency pairs were trading thinly at this time, but there were others with massive moves and huge volume.

Trading long or short was simple, with the same amount of risk, in contrast to shorting stocks where you need to follow certain restrictions. I was able to get out of forex trades going in the wrong direction and reverse my position immediately, and often recoup my losses quickly.

Another great advantage with forex trading is that you don't need to worry about day trading rules - you can trade in and out of a position as much as you want, scalping for small profits 24 hours a day, and you can start with as little as $100 with some forex brokers. (You should probably start with at least $250 though, this is the minimum you need to allow you to make mistakes without getting wiped out completely.)

In my next article I'll point out some more "advantages" to forex trading versus stock trading.

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Thierry Martin operates the popular stock trading forum OnlineTradersForum.com - http://www.onlinetradersforum.com & the new forex trading forum ForexSuperForum.com http://www.forexsuperforum.com

How To Have Complete Confidence In Your Trading

Posted on by lindsay

Today we have the pleasure of introducing Dr. Barry Burns from Top Dog Trading. Dr. Burns knowledge has come through extensive study, dubious research, and thousands of his own dollars learning from professionals. His intent was to expand his knowledge and share it with others! Without further delay, please welcome Dr. Barry Burns.

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Good Morning Trader's Club Members!

Traders often get frustrated when they see the market doing the "unexpected."

This occurs because they have a pre-conceived idea of what the market "should do." And when it doesn't behave according to their Wave Count, or their Gann calculations or their Fibonacci cluster or their indicators' clear signals ... well, they just get frustrated.

This comes from a belief that the market has a pattern that is knowable and should be followed consistently.

People much smarter than I have been studying the markets for many, many years. Yet the debate is alive and well as to whether or not the market is simply a "random walk."

The fact the subject has not been settled among the greatest thinkers is significant.

My belief is ... yes, it mostly is chaotic. It is completely unpredictable. It is impossible to forecast.

But, and this is an important "but," there are times ... and it isn't most of the time... but there are times when certain patterns occur that put the PROBABILITIES of a certain action occurring.

Note that this is not predicting or forecasting. The truth is, the market can do ANYTHING AT ANY TIME.

You should never be surprised, confused or frustrated, because that indicates you had some expectation of the future.

Let me clarify ...

You should never be surprised, confused or frustrated about what the MARKET does. You should only be surprised, confused or frustrated about what YOU do. This is because you cannot control the market. The only thing you can control is your own behavior.

Therefore to master trading is not to master the markets, but it is to master yourself. And you will have done this when you only trade when probabilities are clearly on your side, as evidenced from thorough testing that you yourself have conducted to your own satisfaction.

To master yourself means (among other things):

1. Do not pass on trade setups that meet your criteria.
2. Do not trade while tired or under emotional stress.
3. Do not over trade.
4. Master money managment.
5. Keep your stops - maintaining small losses.
6. Let your winners run for big profits.
7. Don't give up on a valid methodology when it goes through a normal drawdown period.

These are just 7 of the most common psychological challenges every trader must wrestle with.

Your success or failure will depend much more on how you handle these challenges than which indicators you use or which time interval you trade.

As someone once said: "The consistency you need is in your mind, not in the market."
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BIO:

Dr. Barry Burns writes a blog and produces videos for Top Dog Trading

He offers a 5-day free video trading course which can be accessed here:
http://www.topdogtrading.com/enter.html