Joe's Tidbit Blog
Joe
has been writing Trading Tidbits and articles for the past
15 years.
The Trading Tidbits are his thoughts in answer to questions
he received via emails from other Traders expressing their
problems or asking him questions.
These articles are written to explain a particular subject
by exploring it in greater detail. Articles are also generall
inspired by topics brought up by trading students who have
taken private training, seminars or who have read Joe's books
on Trading.
We display new tidbits every week, so please come back and
enjoy reading them!
You can also enjoy different ones in our weekly Chart Scan Newsletter!!
Hey Joe! What do you mean by “being flexible?”
By being flexible I mean that over time, your trading philosophy will undergo changes. These changes are brought about because of external events (economic considerations, natural disasters, political events, etc.), and because of internal events, usually my own mistakes.
My views change as economic, political, and technological changes occur both on and now off our planet. My views change as I see the market change. It is imperative that I be willing to change my thoughts and actions to meet new conditions. So, I am always looking to adapt my trading to the market conditions. Example: In recent years, markets failed to trend as long and as far as they used to. These days, primarily because of computerized trading, markets tend to swing between perceived over and under valuation. If I hadn’t adapted to this reality, I would long ago have lost my money and probably would no longer be trading.
Hey Joe! Can you explain to me what a secondary stock offering is?
Secondary offerings can be used as a stock market indicator similar to "insider selling." It occurs when traders that have the most knowledge about a stock sell it to those with the least amount of knowledge. These offerings are made by large sharehold¬ers or groups of shareholders, who no longer want to own their stock and are seeking to raise money. Perhaps the company's credit is over-extended and they can not borrow against it. The secondary offerings take money from the public diluting funds that may have been spent on other stock. More stock supply decreases a company's share value, and the overall market. Large amounts of secondary offerings are generally bearish to the overall markets. Another market top indicator is a widely publicized take over war. Two companies engage in a bidding war and their share values rapidly increase in price, as does the object stock of their bidding. This usually results in the winning bidder over-paying for the prize, and an over-valued market due a bidding war. Short sell the winner's shares when the deal is done, the loser and market may soon follow.
Hey Joe! Have you ever heard of something called a “jump open?” Does that differ from a gap open?
A "jump open" is an open in the range of the previous price bar. A "gap opening," or opening gap, is an open above or below the previous vertical bar's range. Gaps are an important area of study for all traders, who should know the probability and amount of a higher or lower close based on the amount of ticks a market gaps open.
Retracement studies from gaps create trading systems within themselves. High percentages of gap higher openings close above the previous close over 80%, but also close below the opening price over 70% of the time. Know these gap close and retracement probabilities for individual markets, if you day trade or short term trade.
Let’s say one market closes limit up. The next day's average higher open is 20 cents but it closes below that price 70% of the time. After selling the higher open, we buy below the previous close, since the market closes higher than the previous close over 80% of the time. When the market gets above the open, we reverse and sell short. All this trading as the result of a gap retracement study.
Hey Joe! I heard that it is possible to use the pivot points that the pit traders use. What can you tell me about them?
Pit Pivot Points
form the base trading method used by the locals (traders on the floor of
the exchange). The skeleton for defining expectations for today's trading
is the historical Support/Resistance, High, Low, and Close, of yesterday's
day session.
Crunching these prices in a very simplistic formula, they project the most
powerful anticipated Support/Resistance level for today's trading, the fulcrum
or "Pivot Point". (A secondary fulcrum called the "Mid"
is also calculated as the middle point between yesterday's High and yesterday's
Low.)
Again using simple formulae,
floor traders next extrapolate how far the market is likely to move, up
or down from the Pivot Point. The first projected/anticipated level of Resistance
above the Pivot Point (fulcrum) is "R1".
The next higher calculated Resistance levels are "R2" and "R3",
respectively. Similarly, the first level of projected Support under the
Pivot Point is "S1". The next lower levels of Support are "S2",
and "S3", respectively.
During the upcoming session, unless the price is influenced by non-quantifiable outside forces such as economic reports or news, locals will trade up and down rather strictly between these calculated points.
Knowing how the market
makers will be trading gives us our edge.
I have not found these levels to be of much use for the e-minis. One other
point I’d like to make. From time to time as more and more people
figure out what these levels are, the pit traders change the formula. It
used to be a Fibonacci number. Then it was changed to another method that
had nothing to do with Fib number. Since I no longer trade the open outcry
S&P, I have lost touch with the formula.
Hey Joe! I read this somewhere. What do you think? “The trouble with self-fulfillment is that many people have a self-destructive streak. Accident-prone drivers keep destroying their cars, and self-destructive traders keep destroying their accounts. Markets offer unlimited opportunities for self-sabotage, as well as for self-fulfillment. Acting out your internal conflicts in the marketplace is a very expensive proposition.”
I have to agree with what you wrote. We all too often see self-destructive traders passing in and out of our office. Traders who are not at peace with themselves often try to fulfill their contradictory wishes in the market. If you do not know where you are going, you will wind up somewhere you never wanted to be.
These people have no firmly defined objectives. They have no plan. They have never taken the time to examine themselves to find out who they really are. They are unwilling to make the effort to step back, stop trading, and figure things out. I think the greatest story I ever hear about a trader, is the one I heard about Tom Baldwin the great bond trader. The way it was told to me was that Tom leased a seat on the CBOT in order to trade T-Bonds. He then stood in the pit and never made a trade for an entire year. During that time he figured out what was happening and what he needed to do to make money. When he finally began trading, he never had to look back. He was almost immediately successful, and went on to become a great trader.
Q: "Hey Joe! How do I get my ego out of my trading? I want to be market-centered, but I find myself consistently being self-centered."
One thing I know for sure, your self concept has to be separate from the trading. You began as an individual long before you ever thought of trading. And you exist as an individual beyond the time you spend trading.
When personal self-worth gets tangled up with your trading, it not only damages your concept of your personal worth, it sabotages your trading.
You must not allow your trading errors to ruin your feelings of self-worth. You must not internalize the mistakes you make. You have to avoid feelings of guilt, persecution, and despair.
You must learn to divorce your ego from your trading.
In my first manuscript on trading, Trading by the Book, I said that trading is a business in which there is no competition. I meant that in the sense that the only competition in trading is yourself. The market is impersonal. It doesn’t know you or care about you.
Your job as a trader is not to will the market to go where you want it to go, but rather to discover which way the market is going and join it – get in step with it.
That means total surrender of your will to that of the market. Surrender to it and go with it. If you set your will against the market, you will invariably be smashed. Forget being right! Concentrate on the fact that the market is always right.
Uncertainty is a part of trading. But we cannot allow uncertainty to become part of the image of ourselves. Consider, are you making any of the following ego-centric mistakes?
·
Trading without a predetermined exit point.
· Not pulling the trigger on a trade, or hesitating
before pulling the trigger.
· Trading too large a size, or trading too often.
· Marrying a trade, or marrying a market.
· Adding to a losing trade.
· Not taking profits when they are there on the table.
How can we separate our ego from our trading? How do we keep from taking trades personally? How do we avoid internalizing what happens in the market, good or bad?
Discuss this article in our Online Trading Community Forum
Q: "Hey Joe! From time to time you give us some helpful hints or steps we should follow when trading. Can you give us a few more?"
Certainly, there are always guidelines that come to mind. At the expense of repeating myself, here are five:
1. Focus on markets, trading vehicles (i.e., equities, futures, options, spreads), strategies, and time frames that are comfortable for you and that suit your personality. The trades you make have to be “yours,” not mine or those of anyone else.
2. Identify non-random price behavior, while recognizing that markets are random most of the time. Look for repetitive price patterns but realize that once you begin trading them, they may become short-lived.
3. Absolutely convince yourself that what you have found is statistically valid and tradable in the way you like to trade. Not all statistically valid situations will be comfortable for you, nor will they fit your management style.
4.
Set up trading rules, but remember, rules may have to change.
5. Follow the rules, but never to the point of destruction.
You created the rule, if it stops working, change the rule,
or throw it out entirely.
The
bottom line: Personalize your trading to yourself (independence);
And do the right thing consistently (discipline).
Discuss this article in our Online Trading Community Forum
Q: "Hey Joe! To what extent can I trust my broker? Is it a good idea to give him full discretion to trade my money without me calling the shots? Do I need a full-service broker?"
Broke
is the financial condition of your account when you place
too much trust in persons called “brokers.” The word
broker originates from the French “brokiere," which
means to open up a cask of wine. These days brokers specialize
in opening your wallet.
In 14th century England, the term broker was applied to mean
a "love merchant," i.e., a pimp. Unless brokers
know profitable methods that successfully trade markets, or
possess keen market knowledge, you don’t need a full-service
broker, you are better off use a discount firm and compare
total costs.
Does the broker trades his own account? If he does so successfully, then why is he still a broker? I have never known of a broker who was also a successful trader. The weight of evidence is that brokers are not successful traders. Since they do not successfully trade their own money, why should the broker be trading yours?
Beginning traders will definitely benefit from an experienced broker to assist them in their ordering and perhaps even with their stop placements. After three months, the trader should be able to place his own orders with a discount broker. However, in many cases a broker may still be required to follow intraday price action. In such a situation, because you have other things to do, you instruct the broker as to what you want done and the broker monitors the trade for you intraday. I have no problem with that, and you should expect to pay a bit for the service.
Market-wise brokers are few and far apart. Paying a higher commission rate is justified for the rare professional broker who loves his work and knows it well.
Here’s my take regarding brokers: A good broker is worth more than you are paying him/her. A bad broker is worth nothing at all. Call 1-800-289-9999 to check out criminal proceedings against stock brokers, and 1-800-621-3570 for commodity firms and brokers.
