Three things kill newer traders and they are all related: Having too small of an account, not really defining and accepting risk, and focusing on every tick. All of these things will cause you to trade scared. And we all know that scared money never wins.
If you are struggling to be a consistent trader one of the best things you can do is get rid of your 1 minute chart. A one minute chart causes you to put too much emphasis on every tick. This makes you more likely to be whipsawed on a trade. It will give you unnecessary stress, and in turn cause you to panic out of GOOD trades. It doesn't have to be this way.
New traders come in and think that they have to try to capture every tick. So what better way to do that than to watch the 1 minute chart – after all it shows every tick, right? Of course you could drive yourself really crazy and watch a single tick chart LOL. We laugh but how hard would it be to trade off of a SINGLE tick chart. Nearly impossible right? The same holds true if the ONLY thing you are watching is a 1 minute.
This really affects 1 -2 lot small traders who are struggling to be consistent to begin with. Trading a 1 lot is at least 2X as hard as trading a 2 lot for the simple fact that you are either all in or all out – you can't scale. How do you panic out of trades with a 1 minute chart? Because it causes you to do stupid things like move your stop to b/e too soon or get out before your target is hit.
Say you have a certain level you want to long or short and your "standard" stop is 20 ticks. For this example say you want to short 10540 YM. The market moves up and you get short 10540. Quickly the market moves 8 ticks in your favor right out of the gate. Watching every tick you think to yourself I'll move my stop to b/e so I don't give any back. The market then moves to 10543 and stops you out. (This all happens in 2 one minute candles btw). From there the market moves to 10535 and you go "damn it I got whipsawed" so you short again at 10540 on the next move up. This time the market keeps going up to 10552 and now you are really pissed. Not only did you get whipsawed but now you are in a 12 tick "loser". Since you are watching every tick on the DOM and the 1 minute chart you are getting more and more agitated and the need to get back to b/e is growing stronger. The market moves 4 more ticks against you to 10556 (4 ticks from your stop) before moving SWIFTLY in your favor down to 10528. Now that you have a 12 tick winner you think okay I'm not going to get stopped b/e again so you move your stop to - 5 from your normal - 20 tick stop. The market moves back up and takes you out at 10546 – 1 tick over your new stop before dumping down to your eventual target at 10480.
What would have been a good trade (60 ticks of profit), and never would have hit your normal 20 tick stop, manages to turn into a loser. Two times. This kind of thing, and worse, happens all the time.
I use a 4 minute chart for my entries and exits. Sometimes I will go off the 2 min. For whatever contract I trade I have the 2/4/10/30/60 up intraday. The 2/4 is like a path through the forest and the 30/60 is the forest. If you needed to get from one side of the forest to the other you could just hop on any path and hope you make it, but wouldn't it be better if you could stand on top of a cliff and see where each path leads before you get on it? That is what the 30/60 minute charts are for intraday – which way is the market leading?
*In the example above I mentioned a 20 tick stop. For the record I do NOT advocate using a standard stop for every trade. This may work for some people but I have found it doesn't work for me. For me every trade is unique, and therefore deserves a unique stop. As a general rule though if you are trading the YM and going all in on your entry (not pairing into a position) for an intraday trade a stop somewhere between 13 -30 ticks should be sufficient. In really fast markets (fall 2008) that number is obviously higher.
5 comments:
Excellent post!
Very good post thx
As an 8-yr veteran, I agree wholeheartedly.
After I posted this blog post someone emailed me who had been taken for a lot of money by a certain chatroom that advocates using the 89 tick chart. This was my reply and my thoughts on the 89 tick chart:
Well they have you use an 89 tick because 89 is a Fibonacci number. Those types of charts are geared for pure scalpers. Unless you are purely scalping there is NO need to use that type of chart and newer traders have NO business using that type of chart for any reason. That is the fallacy - that you have to trade a LOT every day. All that does for most people is run up commissions and cause frustration.
That is why I started adding the highest odds trades FTU and FTD for every contract in the TraderSmarts Updates. All you need is ONE good trade a day to achieve consistency. Trading is one business where there is virtually no limit to its scalability. Once you are consistent with 1,2,3 lots etc. then you can increase your size and increase your earnings. For the most part earnings are not increased by trading more but rather by increasing size. Usually trading more causes you to decrease your earnings. So yes to answer your question there is a place for an 89 tick chart - but it is not on my screen :)
I agree with you in many aspects. I think it is worth saying that everything works but it does not work for everyone at all time.
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