Category: General

The Four Main Types of Trades

Posted on by The INO.com Team

Today we welcome Corey Rosenbloom from Afraid To Trade, as our Guest Blogger!

Please welcome him and take advantage of his vast trading knowledge.

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Good Morning Trader's Blog Members!

I'm very happy that Adam and Trader's Blog have given me the chance to teach you today.

Let's get to it...

Although we all employ different trading strategies across different time
frames using different vehicles (stocks, options, futures, etc), there
really are a limited number of pure trades we can take which provide clean
entries and risk-management points, and it is helpful to know the major
types of trades we are employing in our trading plan.

The four major types I propose are the following:

1. Breakout/Breakdown
2. Retracements
3. Reversals
4. Rangebound Fades

This simple chart I created helps illustrate these basic concepts:

4 Types of Trades

1. Breakout Trades

When experiencing extended range consolidation, it is best to begin
considering playing for a Breakout in hopes of a new, sustained breakout
move. Recall that other traders will be attempting to “fade” the breakout
and if price continues, they will be forced out by their stop-losses.
Stops are placed conservatively just below the breakout zone or
aggressively below the area of most recent consolidation.

2. Retracement Trades

Retracements often have the highest probability of success when properly
identified (in a trending environment). Core trading strategies can be
utilized as well as swing trading strategies which seek to capture the
“sweet spots” or a simple 'leg' of price movement (these can be the
distance from a support zone to the most recent swing-high price). Stops
are placed conservatively below the support zone or aggressively below the
most recent swing low.

3. Reversal Trades

Although Reversals have the lowest probability of success, when they truly
occur, they can produce some of the largest profits if you capture near
the true reversal zone. Realize that calling tops or bottoms is a losing
game if you do not press your edge when the trade goes in your favor
because your win ratio will be so low. It is generally not a good idea to
fade a dominant trend even if you suspect a trend change due to a
potential price climax or exhaustion. When fighting a trend, you must keep
tight stops.

4. Rangebound Trading

Finally, Rangebound or Fade-Trades occur when you have identified a
rangebound, consolidating market with clear support and resistance
boundaries to provide profit targets and close stop-loss zones (just
outside the often parallel channel lines). This tends to be profitable
until a breakout occurs, in which you could endure large losses if you
trade without stops. Realize that price expansion often follows
consolidation, as markets do not consolidate (or trend) forever.

Typically, traders find it ideal to identify one set of trades or trade
set-ups and play those whenever they recognize them, rather than trying to
interpret complex signals or varying your personal trading style on
perceptions of possible market behavior. In other words, it might be best
to identify which types of trades you are most comfortable executing given
your psychological and risk tolerance and then adhering to those
strategies instead of being tossed around by market action.

Keep in mind that these trade types are applicable to technical analysis
and short-term trading, but even fundamental analysts can benefit from
learning basic market structure, especially trend structure analysis An
ideal trade has a fundamental reason for buying which is supported by a
low-risk entry provided by basic technical analysis and the trend
structure.

In your own trading, identify which set-ups you take most often and see if
they fit into any of these above patterns. Learning where you fit in the
“Grand Game of Trading” can lift your confidence and give you that
psychological edge needed over the competition who is driven by emotion
and fails to study market structure.

::::::::::::::
Corey

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Please learn more about Corey Rosenbloom, his strategies, and his analysis at his blog:
http://blog.afraidtotrade.com

Are you trading at the right 'pace'?

Posted on by lindsay

Guest Post by Norman Hallett, CEO of Subconscious Training Corporation

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A group of 1000 traders were recently asked, "What is the single most important mental/emotional concern you have that is preventing you from being the most successful trader you can be?"

The second most frequent response was the fear of blowing out their account. (For the record the first was fear of "pulling the trigger".)

Why all this fear?

The answer is multi-fold, but one of the main causes is likely that we are overtrading or trading too much before we are ready... what I call trading at the wrong "pace".

The more you put at risk, the higher level, or "pace" you are trading at.

When you first start out as a trader, you begin by paper-trading. You put no money at risk and you practice executing your trades the way your trading plan commands that you do. / No stress, no emotions/... there's no money or ego at stake. Your (phantom) "equity" seems to rise with ease.

You're chomping at the bit to up the pace. You're ready to trade with "real" money.

You begin to trade the minimum number of contracts to effectively run your trading plan. For the first time you are now dealing with your emotions and notice that they are causing you to stray from your trading plan.

You recognize that emotions play a big part in your ability to trade successfully and you take the steps necessary to get back to trading with ice-in-the-veins confidence.

When you experience the degree of success you are looking for, you feel you are now ready to step up the pace of your trading again... to the level that you always wanted to trade at. Full speed!

Your first trade in the big-time went well. Wow!... this is great! But then it happens... an unexpected move against you. And it's a big one. You never knew your emotions could be so debilitating!

Thoughts are racing through your head and you're tempted... I mean REALLY tempted... to pull your protective stops because you want the market to rebound and get you out of trouble.

And right before you click the mouse to lift your stop, you screech to a halt. "You MUST follow your trading plan", the voice in your head insists. You comply. You're stopped out and market continues to a free-fall.

You've lost money today... a bit more than you would have liked to, but you're proud of yourself and you actually feel pretty good.

Over the next few weeks and months you think back to that day... the day you could have blown out your account... and know that the profit you see now in your account would not be there if you were not ready, MENTALLY and EMOTIONALLY to trade at a full-out pace.

Now this little story is an ideal scenario. It happens to about 2% of real-world traders.

The fact is that most traders up the pace too quickly. They make 30% in their papertrading account in a month and kick themselves for not having the guts to use real money.

"Look at all the money I've left on the table," they cry.

So they move to level 2 (not the minimum number of contract to run their trading plan). The result:

Too much emotion, too soon. Losses result.

I could go on with examples of moving up your pace too quickly and not being emotionally prepared to handle it... but I won't.

I'll just let YOU think back to what got you where you are today and let THAT be your best example.

But don't beat yourself up... just scale back... now.

Then "train your emotions" to fit your trading pace and you too... YES, YOU TOO... can be in the trading elite.

It's not rocket science. It's including the development of your mind in development of your trading plan.

My best,

Norman Hallett, CEO
Subconscious Training Corporation

Makers of TradingMind Software

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Normal Hallett will be speaking at the Orlando 2008 Investors' Super Conference. Read more about the event here.

Trade Volatility not Affordability

Posted on by lindsay

By: Matt Zimberg

www.optimusfutures.com

Today we’re going to discuss the use of stop-losses.

As much as most traders dislike placing stops, they’re part of the building blocks of a successful trading plan, and it does get one used to the fact that there will be situations where you are right in terms of direction yet nevertheless, you can get stopped out in the short term because of high market volatility.

That brings me to the second point. Many traders place stop-losses based on affordability instead of market volatility on the contract.

For example, take the 100oz gold futures contract. From the all time highs, we’ve had corrections of more than $100 ($10,000). So placing stops like $10 (1,000) is not exactly in your best interest. Even if you are a highly capitalized trader, it would be a bit hard to trade ranges like that. What to do?

1) Don’t trade it. If you can’t afford certain market volatility and daily trading ranges, seek those markets where volatility is lower and within your risk tolerance.

2) If you are keen on trading a certain market, you can wait until the volatility has dropped, namely the daily and weekly trading ranges are smaller.

Lastly, I have a certain market belief which is a bit biased, but this is something that I truly believe in. If after placing a trade, the market becomes favorable quickly, you should adjust the stops losses closer to the current price.

If the market’s moving slowly, the stop loss should be kept further away from the current price.

Slower moving markets could signal a fundamental change as opposed to fast moving markets that just signal a highly speculative activity.

I hope this will help you in your trading.

Best,

Matt Zimberg

President

www.optimusfutures.com

STOP LOSS ORDERS MAY NOT LIMIT YOUR LOSSES TO THE AMOUNT INTENDED. CERTAIN MARKET CONDITIONS MAY GET DIFFICULT OR IMPOSSIBLE TO EXECUTE SUCH ORDERS. YOU SHOULD BE AWARE THAT THERE IS A RISK OF LOSS IN FUTURES TRADING. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

What's profit got to do with it?

Posted on by lindsay

By: Matthew Zimberg
www.optimusfutures.com

Traders have to detach themselves from the money they're trading.

Everybody wants to be a profitable trader and with the advent of the internet and the growing literature about trading, most people know that the 3Ms are essential to succeed: Methodology, Money Management, and Money (capital).

Will traders be disciplined and adhere to the 3Ms? Not likely. Why? Because after all we are talking about money... and from personal experience, I can say that the majority of us are attached to money and no matter how effective our "Methodology" is, we as emotional beings will often tend to outguess our system.

Why?

  • Many traders can not follow a methodology that loses 3 times in a row. Doubts will set in and consequently the trader will stop using the proven methodology and start looking elsewhere.
  • Traders bypass and "adjust"' their money management technique based on their risk tolerance instead of applying the methodology's risk management. For instance, a lot of traders are enamored with Gold but will not risk more than $1000 per trade, which represents a mere $10.00 in the price of Gold. This is an unrealistic expectation given that Gold can easily move $10 to $20 from low to high on a given day.
  • Traders are not necessarily investors. They often trade to supplement their income while trying to earn a living. Shouldn't an electrician do what he does best in his own field and leave the trading to the Methodology, for which he/she probably spent thousands of dollars to purchase?

By now you're probably wondering about the 3rd M (Money) and thinking why in the world am I even bothering to trade if NOT to make money? And what about all the money you spent educating yourself at seminars, reading technical books on trading? Was that all just a waste of time and money?

I'll let the reader answer that question. All I can tell you is "Trader, Know Thyself." But here's another perspective to all this: Making money is a by-product of success. What does that mean? It means that successful trading is the result of applying the 3Ms: Methodology, Money Management, and Money. There is nothing will guarantee you success, but following the 3Ms would help you to increase the odds of being a successful trader.

(PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THERE IS A RISK OF LOSS IN FUTURES TRADING)

The phrase "making money is a by-product of success" and does not include such things as "I HAVE to make money" or "I have to make the mortgage payment" and "I need to get extra cash." I think you get the picture.

I truly believe the concepts of fear and greed come to fruition when someone is trading money they can not afford to lose. So instead of taking a small loss, the undisciplined trader will let a $1000 loss turn into a $2500 loss. The truth is that trading has to encompass only risk capital. What does "risk capital" mean? It means that you need to allocate capital towards the building of your business. It has to be separate from the rest of your capital like your day to day finances, retirement capital, your children's college fund, etc.

That should help you mentally since this is theoretically money you can afford to lose. The following few facts should also be considered when trading:

  • Most traders will be losers.
  • Most profitable traders will be in the minority, so maximize your profit potential and don't exit too soon.
  • Your methodology sometimes will not hold during certain market conditions, but if it's been tested and proven effective than stick with it.

We can all live with the winners, but to stay calm during the storm is the strength that it takes to stay in the markets and hopefully become a "trader."

Hope this helps,

Matt
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURES RESULTS. THERE IS A RISK OF LOSS IN FUTURES TRADING. FUTURES AND OPTIONS TRADING INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS.

We beat 2000 of the biggest hedge funds in the world.

Posted on by The INO.com Team

Dear Traders Blog reader,

Last week we revealed the results of our Q1 “Trade Triangle” signals. Judging by the early feedback we've received, it seems like many of our members were delighted with their returns.

Over the weekend I had some time to catch up on my reading, so I picked up a copy of BARRON’S newspaper (March 31st). I had purchased the paper two weeks ago because of an article on the commodities run-up entitled, “Guess Who's Behind The Commodities Boom.” You may have seen and read the article.

If you still have the paper you will be able to independently confirm what I am going to share with you now.

After I read the article on commodities, I started thumbing through the rest of BARRON’S and happened to run across the trading results of 2000 of the largest hedge funds in the world.

I said to myself that these hedge funds must've done extraordinarily well during the last 12 months. So for fun I started searching through their results for triple digit returns.

What shocked me was that over the last nine months, MarketClub’s “Trade Triangle” results far exceeded the results of the top 2000 hedge funds in the world and not by one or two percentage points either.

The best return I could find by any hedge fund in the last 12 months was 217.33% and that was by the Balestra Capital Partners, LP. That’s a great return but we managed to do better than this top performing fund.


Okay, if 2000 of the top hedge funds couldn’t match our returns who could?

So I carried on perusing through BARRON’S looking for answers. It was there in the very same edition of BARRON’S that I ran across the results of the top 300 FUNDS of FUNDS.

Now to the FUNDS of FUNDS... I have always thought this was a dorky idea which puts another layer of fees on top of another layer of fees. The basic FUNDS OF FUNDS concept is to reduce risk through diversification (a good thing) and increase profitability. Unfortunately, when you reduce risk like the FUNDS of FUNDS you reduce profitability.

So with that in mind, I took the time and waded through the 300 FUNDS OF FUNDS data and found that the Merriwell Fund was the top performer with a 39.28% in the past 12 month period.

Good, but no cigar. MarketClub’s “Trade Triangles” were still in the poll position.

Also buried on page M54 of BARRON’S, I found the results of the top 200 Commodity Trading Advisors. Now this is more like it as these guys are smart, very smart and usually outperform the hedge funds and the FUNDS of FUNDS.

I was right! The top performing CTA was a commodity pool named AIS Futures MAAP (3x-6x) Composite with a return of 142.93%. Now this is a great performance and one of only two CTAs to crack triple digit returns in the past 12 months.


So there you have it. The best of the best in all three categories and they all came in short of MarketClub.

I was shocked, absolutely shocked as I thought everybody was doing extraordinarily well during this huge run-up in commodity prices.

MarketClub’s “Trade Triangle” approach far exceeded the biggest gains of the 2000 top hedge funds. Far exceeded the gains of 300 of the biggest FUNDS of FUNDS. Lastly, it outperformed 200 of the top Commodity Trading Advisors in the world.

Now you can see why I am in shock.

See how we managed to generate signals that show a return of 243% over past nine months. I think you'll be surprised at just how simple this approach is, and how you too can become the master of your own fate and stop paying fees to advisors.

I can't promise that you’ll make 243%. In fact, I can't guarantee that you’ll make any money. Not even the best hedge fund and FUNDS of FUNDS can do that.

The bigger the risk the bigger the return. That's how it's been since the beginning of time and that equation is never going to change.

I've just finished a very short video that shows how we managed to have such great returns. The video we put together is in theater style so you can watch the whole show or watch the results of individual returns.

You can check it out today. There is no charge and there’s no registration required.

If it all makes logical sense to you, then you’ll know what to do next.

Thanks for taking the time to read this longer than normal post.

Every success in trading and in life,


Adam Hewison
President, INO.com

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