I posted this a while back:
I like to post a guide of a trader I respect a lot, just food for thought:
Why guidelines and not rules? Because there are no rules.
1 . Everything that you see is in a gray fog. Nothing is perfectly clear. Close
is close enough. If something looks like a reliable pattern, it will likely
trade like a reliable pattern.
2. Every bar is a signal bar for both directions and the market can begin
a trend up or down on the next bar. Be open to all possibilities and
when the surprise happens, don't question or deny it. Just read it and
trade it.
3. Everything makes sense. If you know how to read price action, nothing
will surprise you because you will understand what the market is
doing. Beginners can see it on a printout at the end of the day. The goal
is to learn how to read fast enough so that you can understand what is
happening real time.
4. Simply understanding price action is not enough to make you profitable.
You must learn how to take the best trades and follow your
rules.
5. Trading is a job, and if you expect to make serious money, you need
a business plan, just as you would have with any other business, and
you must follow your plan. The plan can be simple, such as only taking
two or three types of setups off a single 5-minute chart, scalping half
and swinging the other half with a breakeven stop. However, you must
follow your plan. The profit margin is tiny in this business so even a
couple lapses in discipline a day can keep you in the red.
6. Don't tum the market into a casino, because that kind of math is relentless
and unstoppable and will destroy you. Many strategies work
often enough to make you believe that you will eventually be able to
make a living off of them, but the math is against you. Trading off the
I-minute chart is the classic example. You win often enough to believe
that you will eventually hone your skills to the point that you will make
a fortune. The reality is that many of the best trades happen too fast to
catch and you will be left picking among the less profitable ones and
make less than you would off the 5-minute, if you make anything at all.
7. There are no reliable Countertrend patterns, so never trade Countertrend
unless there first has been a break of a significant trendline.
And even then, first look for a With Trend trade that should lead to a
test of the old trend's extreme. If the market once again reverses near
the old extreme, then you should be entering in the direction of the
new trend.
8. All patterns fail, and the failures often fail, but a failed failure is a second
entry in the original direction and has a high probability of success.
9. When you see that one side is suddenly trapped, the reliability of a
scalp in the opposite dire"Ction goes up. Trapped traders will be forced
out as you are getting in, and they will likely wait for more price action
before entering again in their original direction, so the only traders left
will be in your direction.
1 0 . Seeing traders getting trapped out of a trade on a stop run is as reliable
a signal as seeing them getting trapped in a trade. If the market suddenly
runs stops and then resumes its trend, this is a reliable setup for
at least a scalper's profit.
1 1 . Many beginners want excitement and tend to overtrade. Many great
traders find trading to be lonely and boring, but very profitable.
1 2 . Simple is better. You don't need indicators, and you should only look at
one chart. If you can't make money off a single chart with no indicators,
adding more things to analyze will only make it more difficult. Also,
only trade the very best setups until you are consistently profitable.
1 3. Decide if this is a hobby or a job. If it is a hobby, find another one
because this one will be too expensive and it is dangerously addictive.
All great traders are likely trading addicts, but most trading addicts are
or will likely end up broke.
1 4. If you can't juggle one ball, don't try to juggle two or three. If you
are not yet making money, start with one chart, one market, one
time frame (the 5-minute), and one concept (price action and not
indicators).
1 5. Begin trading using a 5-minute chart and entering on a stop. Take some
or all off on a limit order at a profit target, and then move the protective
stop to breakeven on any remaining contracts.
1 6. Beginners should consider swing trading stocks instead of scalping
or swinging Eminis because stock charts are usually easier to read
and often trend well. The Eminis or bond futures become important
when your trading volume gets too large to allow for good fills in
stocks.
t 7. When starting out, you should consider trading the SPY instead of the
Emini. One Emini is identical to 500 SPY, and trading 300 to 500 SPY
would allow you to scale out as you swing part of your trade, yet not
incur much risk. Once you reach 1,000 to 1 ,500 SPY, if you are thinking
that you will continue to increase your position size, then switch to the
Emini. At that size, you can scale out of the Emini and you can increase
your position size tremendously without slippage being a significant
issue.
t 8. If you find that you did not take a couple Emini trades in a row and
they worked, you are likely trading too large a position size. Switch to
trading 100 to 300 shares of SPY and swing for at least 20 to 50 cents.
Even though you won't get rich, at least you will make some money
and build your confidence.
t 9. Buy low, sell high, except in a clear and strong trend (see chapter on
trends). In a bull trend, buy High 2 setups even if they are at the high of
the day, and in a bear, sell Low 2s. However, the market is in a trading
range for the vast majority of the time. For example, if the market has
been going up for a few bars and there is now a buy signal near the top
of this leg up, ask yourself if you believe that the market is in one of
the established clear and strong bull trend patterns described in this
book. If you cannot convince yourself that it is, don't buy high, even if
the momentum looks great, since the odds are great that you will be
trapped.
20. Every segment of every chart commonly can be classified as more than
one pattern, and almost always the patterns will point in the same direction.
All you have to see is just one to place a trade. For example,
a Failed Final Bear Flag long can also be a Double Bottom Bull Flag,
and this might also be a Bull Spike and Trading Range Reversal that
reversed up after overshooting a trend channel line and a larger bull
trend line, and it can progress into a Spike and Channel Bull. If you
recognize any of these, you can place a trade even if you do not see all
of the others.
2 t . Good fill, bad trade. Always be suspicious if the market lets you in or
out at a price that is better than you anticipated, but if the setup is
good, take it. The corollary of bad fill, good trade is not as reliable.
22. Trends are always forming pullbacks that look like terrible entries but
are profitable and reversals that look good but are losers. Most trend
pullbacks follow just enough of a climax to make traders wonder if
the trend has ended and trap traders out of entering on the pullback.
Also, the trend reversals are just good enough to attract and trap Countertrend
traders. If you trade Countertrend, you are gambling, and although
you will often win and have fun, the math is against you, and
you will slowly but surely go broke. Countertrend setups in strong
trends almost always fail and become great With Trend setups, especially
on the 1 minute chart.
2 3 . The easiest time to make money is in the first 90 minutes, and some of
the easiest trades to spot are failed breakouts and breakout pullbacks
of patterns from the prior day. Beginners should avoid trading in the
middle of the day and in the middle of the day's range.
2 4 . When you are about to take any trade, always ask yourself if the setup
is one of the best of the day. Is this the one that the institutions have
been waiting for all day? If the answer is "no" and you are not a consistently
profitable trader, then you should not take the trade either. If
you have two consecutive losers within 15-minutes or so, ask yourself
if those were trades that the institutions have been waiting hours to
take. If the answer is no, you are overtrading, and you need to become
more patient.
2 5 . Those who talk don't know and those who know don't talk. Don't
watch TV or read any news. The traders who are making the most
money trading are too busy to be on TV. Ask yourself, if you are netting
even just two points in the Emini a day on large positions, do you
really want to bother with going on TV? So why are you listening for
trading ideas from someone who can't even make a couple points a
day? Trading is a business, not a religion, so don't look for a trading
savior.
26. Every bar and every series of bars is either a trend or a trading range.
Pick one. Throughout the day and especially around 8:30 A . M . PST, you
need to be deciding whether or not the day resembles any trend pattern
described in this book. If it does and you are looking to take any
trade, you must take every With Trend trade. Never consider taking
a Countertrend trade if you haven't been taking all of the With Trend
trades.
2 7 . The best signal bars are trend bars in the direction of your trade. Doji
bars are one bar trading ranges and therefore terrible signal bars. You
will lose if you buy above a trading range in a bear or sell below one in
a bull.
28. You will not make consistent money until you stop trading Countertrend
scalps. You will win often enough to keep you trying to
improve your technique, but over time your account will slowly
disappear.
29. You will not make money until you start trading With Trend pullbacks.
30. You will not make money trading reversals until you wait for a break
of a significant trendline and then for a strong reversal bar on a test of
the trend's extreme.
3 1 . You will not make money unless you know what you are doing. Print
out the 5-minute Emini chart every day (and stock charts, if you trade
stocks) and write on the chart every setup that you see. When you see
several price action features, write them all on the chart. Do this every
day for years until you can look at any part of any chart and instantly
understand what is happening.
32. If you lost on two or three trades in a row or if you lost money on the
day, you are overtrading and not being patient. You might be fooling
yourself and looking for "low risk" early entries on the 1- or 3- minute
charts, or you are trading Countertrend, or you are trading in Barb
Wire. Bad habits always erase more than your winnings. You are on
the path to a blown account, even though you might be moving slowly
in that direction. But you will eventually get there.
33. You will not make money long term until you know enough about your
personality to find a trading style that is compatible. You need to be
able to follow your rules comfortably, allowing you to enter and exit
trades with minimal or no uncertainty or anxiety. Once you have mastered
a method of trading, if you feel stress while trading, then either
you haven't yet found your style or yourself.
34. Always look for two legs. Also, when the market tries to do something
twice and fails both times, that is a reliable signal that it will likely
succeed in doing the opposite.
35. Never cherry pick because you will invariably pick enough rotten cherries
to end up a loser. Either swing trade and look to take only the best
two or three of the best setups of the day, or scalp and take every valid
setup. That, however, is the more difficult alternative and is only for
people with very unusual personalities (even more unusual than the
rest of us traders!).
36. Beginners should only take the best trades and either scalp or swing.
It is difficult to watch a screen for two or three hours at a time and not
place a trade, but this is the best way for beginners to make money. If
your overriding goal is to make money, this is what you must do. If you
do not, then you have other goals that are interfering with what should
really be your only goal.
37. Discipline is the single most important characteristic of winning
traders. Trading is easy to understand but difficult to do. It is very
difficult to follow simple rules, and even occasional self-indulgences
can be the difference between success and failure. Everyone can be
as mentally tough as Tiger Woods for one shot, but few can be that
tough for an entire round, and then be that way for a round every day
of their lives. Everyone knows what mental toughness and discipline
are, and everyone is mentally tough and disciplined in some activities
every day, but few truly appreciate just how extreme and unrelenting
you have to be to be a great trader. Develop the discipline to take only
the best trades.
38. The second-most-important trait of great traders is the ability to do
nothing for hours at a time. Don't succumb to boredom and let it convince
you that it's been too long since the last trade.
39. Work on increasing your position size rather than on the number of
trades or the variety of setups that you use. You only need to make one
point in the Eminis a day to do well (100 contracts at 1 point a day is
seven figures a year).
