Target Huge Trading Profits Without Risking a Dime Using This Simple Approach

in Trading Systems

Mechanical TradingThere are significant risks when starting any new business from scratch because your carefully thought-out business plan that took you six months to write could still be utterly flawed. You can never have a high level of confidence about whether a traditional brick-and-mortar business will work before investing your money. However, wouldn’t it be nice to have some sort of an idea about the amount of profit (or losses) you could expect before investing large sums of money into an enterprise? Well this can be accomplished in trading and I will explain how in this article.

The trading business is a truly unique one when compared to almost any other type of business in the world. Why? Because you can test the feasibility of your business plan without actually investing your real hard-earned capital. For instance, a McDonald’s franchise would cost you anywhere from between $100,000 to $2 million dollars to establish. A Subway franchise would cost you from $70,000 to over $200,000 before you even see your first customer. Nonetheless, these brick-and-mortar businesses have the same end goal as the trading business. That is: to earn an acceptable return on your investment capital.

As with any business, there are no guarantees of success with the franchises mentioned above. If sales happen to head south, you will still be left with the physical assets (buildings, store equipment, etc) that will need to be liquidated, more than likely by the bank, in order to recoup some of the investment.

Trading is a risky undertaking but it is different from your traditional brick-and-mortar businesses in one respect: trading is a pure cash business. You invest cash into your account and hopefully you pull out more cash than you started with. But even that’s not the real beauty of trading for legitimate business income. The huge advantage of considering trading as a serious business opportunity is that you can test the validity of your trading idea (i.e., business concept) under simulated but realistic market conditions before ever risking a dime of your money. As a result, you are inherently reducing the costs that are typically associated with traditional businesses.

To begin the process, you must first find an edge in the markets that can be exploited. An edge is simply a repeatable cause-effect set of events that consistently results in profitable outcomes. It could be as simple as “whenever the current close is greater than the close N bars ago, then the market tends to do X”.

Finding real market edges is excruciatingly difficult and is the most challenging part of this process. You can compare it to creating a unique product or service that no one else has ever thought of before. It could literally take you months or years to find a true edge that can be applied to all markets and timeframes. However, this robustness across markets and timeframes is one telltale sign that the edge is genuine. Based on my experience, less than 5% of ideas result in profitable edges that are successful in both back tests and forward tests.

You should also be able to reduce your trading idea down to a set of objective rules in which ten different people would come up with the same outcome based on following the rules. Codifying your rules into a mechanical trading system is the key ingredient in producing consistent outcomes. The best test of objective trading system rules is being able to program the rules into a set of instructions that could be carried out by a computer program.

One of the best ways to come up with inspiration for a trading strategy is thru observation of past market behavior. Study numerous charts over different timeframes and look for common chart patterns that have historically lead to profitable outcomes while keeping in mind that any discoveries are only tentative with a very low chance of being a true edge. I would, however, urge you to steer away from common chart patterns that are already in the public domain such as head and shoulders, double bottoms, etc. These patterns may have worked well in the past but I believe their effectiveness have been diluted over the years. Instead, you should try and find chart patterns that are truly original and not widely known by other traders. Ideally, you don’t want to see the pattern listed anywhere in trading literature or places like trading forums. Based on my experience, the best patterns are the ones that only you may know about.

When you are seeking an edge, it is a good idea to keep the trading system rules for entry and exit as simple as possible. Sophisticated trading ideas do not always translate into better strategies. In fact, sophisticated ideas tend to lead to curve-fitting the results. Curve-fitting occurs when a trading idea only works for a certain historical time period because the idea is fit specifically to the past data. Curve-fitted strategies fall apart and perform dismally in forward tests. For example, if a mechanical trading strategy made substantial profits during the period January thru March, the strategy was most likely curve-fitted if it looses substantial money during the next three months. This could occur because the actual data series of prices will be different during those two time periods. Therefore, be careful in falsely concluding that you have a profitable strategy solely based on back tests alone.

After you have found a potential edge that has worked well in back tests, the final thing you want to do is use a realistic trading simulator to test the mechanical trading system using a forward test. Interactive Brokers and OptionsXpress have really good trading simulators just to name a few. However, there are many online brokerages that offer some form of trading simulator for their customers.

Once you have found a good trading simulator that can mimic real life trade fills, test your trading system on the trading simulator. Continually make improvements to your strategy until it consistently makes the amount of profit you need. A good rule of thumb is to keep trading on a simulator until you have doubled your simulated account.

After you are satisfied with the amount of profit the strategy makes in a simulated environment, begin trading it with real money. Start out slowly with very small position sizes initially. Then, gradually increase your position size based on the more money you make.

I have given you the essence of the risk-free trading approach but a word of caution is in order. When testing your mechanical trading system on the trade simulator be careful not to employ unrealistic and overly risky money management practices. Refrain from using money management techniques like doubling the amount of trade size after a few winning trades or anything similar. You should always employ conservative money management techniques because aggressive techniques can distort the true performance of the strategy. Conservative money management approaches will help keep you from trading a system that was simply a statistical fluke.

How To Go From a Losing Stock Trader To A Winning Trader In 5 Minutes

in General Stock Advice

Winning TraderI’m asked all the time if there is one simple thing that can be done to become a winning trader. And, usually my response is that the only thing that separates losing traders from winning traders is the fact that the later has more information than the former – i.e., winning traders know something that the losing traders don’t.

When it comes down to it, trading in it’s purest sense is simply entering buy and sell orders into an order platform based on information and then letting the trade play itself out. Hopefully for the better. Now some will say: but isn’t part of the reason winning traders consistently win is because they have a better psychology than losing traders? Personally, I believe that’s a bunch of…for lack of a better word…poppycock. Could it not also be that winning traders have a better psychology because they are winning? It’s the old chicken or egg dilemma.

After years upon years of putting real money on the line and exhaustively studying an extensive library of trading books, I came up with a narrowed down list of three essential factors for consistently making profitable trades. Now does this mean you will never have a losing trade again in your life? Of course not. But these factors should put you on a clear path of profitability. If they don’t, email me and together we’ll figure out where the problem lies.

So what exactly are these magical beans for which ye speak?

Factor #1 – Determine What The Overall Market Is Doing At The Time Of Entry

First and foremost you must always factor in how the broader stock market is performing prior to taking a trade. It took me years to figure this one out. Are the pressures in the broader markets going in the same direction as the trade or against it? If I had to identify the biggest contributor to losing trades, it would be taking positions counter to the prevailing tide of stocks on the New York Stock Exchange. Irrespective of how perfect the trade setup looks, you will get poor and inconsistent results by going against the buying and selling pressures of the broader market.

It has been my experience, that as much as 40% – 60% of the outcome of any trade is dependent on whether the broader market is going in the same direction as your trade. In other words, if you’re taking a long trade then you want to see buying activity in the issues that make up the NYSE, and if you are going short then you want to see selling activity in the NYSE issues.

Unfortunately, this buying and selling pressure is not discernible with the naked eye. In other words, simply looking at whether prices on the NYSE Composite Index are going up or down on a price chart will be misleading. For this analysis, I use the TRIN to determine buying and selling pressure in the broader market. In a nutshell, if the TRIN is rising then you should prefer short trades, and if the TRIN is falling then you should prefer long trades. You can find more information on this subject by clicking here.

Factor #2 – Determine Whether Higher Timeframes Confirm The Trade

Due to the fractal nature of markets, your ability to assimilate what’s happening with respect to larger timeframes will be a cornerstone of consistently making high-probability trades. Multi-timeframe analysis works well as a filter for finding good trades because in every timeframe there are other timeframes with similar patterns. Therefore, when you see bullish patterns appearing simultaneously in more than one timeframe, your odds of a successful trade outcome are greatly increased.

A quick and dirty way of confirming trades using multi-timeframe analysis is a pattern I call the Butterfly Pattern. Essentially, you make sure that the 20-period SMA is above the 200-SMA in two different timeframes that are larger than the timeframe in which your entry occurs. This is a solid pattern that has filtered out many losing trades because market sentiment has to undeniably be in favor of the trade in order for the Butterfly Pattern to appear in both larger timeframes.

Factor #3 – Trade Pullbacks Instead Of Price Breakouts

Finally, you will have much better success trading stocks if you focus on entering them using pullbacks as opposed to price breakouts. Of course, this is all based on my experience. Early in my career I tried countless ways to trade price breakouts with pretty dismal results. This alone wouldn’t be a convincing argument for avoiding price breakouts if it weren’t for the fact that the vast majority of other traders I know have also experienced similarly dismal results.

Let’s analyze this a little bit further. Everyone knows that the only way to profit from buying a stock is to “buy low and sell high”. Well, if you are entering a stock based on prices breaking-out from some previous swing high then you are violating that most basic tenet for making money trading stocks. You are in effect attempting to “buy high and sell higher”.

Laughably, during the internet boom of the 90s, many were purporting this mantra of “buy high and sell higher”. I must admit that it worked well during that period of time when all you had to do was close your eyes and randomly pick any stock and it would likely explode to the upside. However, since the period starting with the bear market that occurred after the internet boom, I suspect that using price breakouts as an entry method has been a net losing strategy for all but the most gifted of traders. It’s funny how now you don’t see as many people preaching the “buy high, sell higher” mantra. Professional traders know that they will beat you like a rented mule day in and day out if they are able to get a cheaper price than you. The best way to get a cheaper price than the competition is by entering stocks on pullbacks.

Where To Place Your Stops To Avoid Getting Stopped-Out

Many traders are constantly stopped out of trades because they don’t understand the science of stop placement. There’s nothing more frustrating than having your stop loss order triggered only to see the trade immediately reverse and become a winner after you’re no longer in it. If you have traded equities long enough then you have [...]

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Fibonacci Trading The Right Way

Every stock is in a constant state of change throughout the day by fluctuating above and below a certain equilibrium point. Sometimes these fluctuations lead to new trends, but more often than not, it is just random price movement. The beautiful thing about stock price fluctuations is that they can be somewhat predictable. Of course [...]

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Finessing the Pullback Entry using Role Reversal

One of the most common methods used by traders to take a position in a stock is entering on a pullback in price. Although it would be nice to pull up a price chart, calculate a 50% fibonacci retracement entry level, and then count your dough as the stock moves in your favor, this outcome [...]

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A Time Tested Filter for Making Perfect Trades

My previous post revealed to you the Butterfly Pattern, which is one of my favorite mechanisms for filtering out losing stock trades. Now I will reveal an equally important tool that I use to keep me on the correct side of the market for the majority of trades I take. I have found that between [...]

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