Trading can be a lot of fun and profitable, or a nightmare and very costly. It really just comes down to understanding the key areas that will make or break your trading.
I have received a few emails asking me to explain more about how I stay disciplined, making sure my emotions don’t get the better of me. Some questions asked are:
How do I pick a trading strategy that will work for me?
What reading material and habits do I recommend for keeping focused?
What are some of my experiences?
I will cover all of these questions for you below because trading discipline and managing emotions is by far the most important and difficult aspect of trading.
How do I pick a trading strategy that will work for me?
Your strategy should be in line with your ability to read the market, and also focus on a time frame that suits the time you have available to trade each day, week, or month. In other words, you should not be trading ETF options if you cannot profit from trading ETFs without leverage. Also if you don’t understand how options work in depth, then you need to spend some time learning about this type of trading vehicle before you ever place a trade using options. Simply put, if you don’t understand everything about what you are trading, then you will eventually give all your money to the market, leaving you with an empty account, decreased trading confidence and frustration.
The point I am trying to make here is that you should focus on trading the types of vehicles where you understand the daily price action, how to trade that investment, what makes it move, whether there is leverage, and what time frame you should focus on so that it works with your schedule. If you can only look at charts at night after the markets close, then you should not be focusing on day trading. Instead pick something you like, understand, or want to trade and learn everything about it. Then find a trading system, or create one yourself that is profitable using the time frame and risk tolerance that fit your personality.
Over the years my trading strategy has changed, as will yours. The more time you spend trading, the better you will become, and the more you will find yourself trading more of one type of investment that consistently makes you money. When I started trading back in the late 90s I focused on stocks, but as time went on, my strategy evolved and now my main focus is on trading indexes and gold with a hybrid intra-day and swing trading strategy that I created. My focus is on ETFs, because you can select different levels of risk/reward with the 1, 2 or 3x leveraged funds. While ETFs are fantastic to trade, they do have some limitations. Because the indexes and gold trade 24/7, you are not limited to only regular market hours, 9:30am – 4pm ET. That leads me to the topic of Futures and CFD trading.
Depending on the type of trade and time of day a setup occurs, I will jump from ETFs to futures or CFDs. Let me explain: if there is a setup early in the morning before the regular market opens, or after the close late in the evening, then I trade futures or CFDs because it allows me to trade 24/7 and catch moves which would not even be seen by most North American traders. There are not alot of these trades per year but enough to make it worth trading.
What are some of my experiences?
Virtually every trader will eventually reach a tipping point when they will either lose enough money and/or become so frustrated that they will debate whether or not they should continue trading.
I reached this point many years ago and I still remember it crystal clearly. I had lost most of the money in my account, almost every trade was going against me and I had never been so frustrated and upset in my life. I’m sure many of you know what I am talking about… Unfortunately trading does break a lot of people down financial and emotionally, causing them to give up. But others reach this point and realize that if they can be wrong all the time, then someone who knows what they are doing should be making good money and that they just need to learn what they are doing.
This is the point at which you decide whether to give up a lifelong dream of trading full time to go back to your day job, or you step back to re-evaluate your situation and seek professional help. All successful traders have or have had a mentor at some point and it does not matter which career you are in, learning from someone who knows how to do what you want to do is the fastest and most effective way to learn.
Those who decide to continue and take trading seriously shift their mind set from “Trying to Trade” to “Learning to Trade.” It is at this point where trading becomes fun and profitable again. My point here is that trading is not something you can learn quickly on your own. You should get help from someone who is successfully doing exactly what you want to be doing, and then shadow their every move and seek mentoring from them. This usually costs more than just buying a book or mini e-course. There is no comparison between what you get out of them by obtaining practical experience. This is what I provide at FuturesTradingSignals.com
What reading, and habits do I recommend for staying disciplined?
There is no easy answer, as everyone absorbs information differently. Some prefer reading and studying charts, listening to audio, watching videos and some prefer or need live mentoring and real-time examples.
I learned charting from the well known analyst, John Murphy, through his book “Technical Analysis of the Financial Markets.” This is a massive book with over 500 pages explaining technical analysis. This book is a lot to digest, but there is a lot of great free information online, which will allow you to read about the basics of trading including: chart patterns, volume, candle sticks, support & resistance levels and trend lines. Once you understand these key concepts and are able to read the charts, then you are literally ready to start paper trading and applying or creating a trading strategy, which manages entry, exits, scale out prices, and manages your money.
As most of you know, I am a very patient trader waiting for risk setups in the investments, which I understand best and have consistently traded for many years. Because of my strict trading setups and rules, which I have set for myself, it does cut down on the amount of trades the market provides. My focus is on low risk, high probability setups, which I completely understand, and that’s all I trade. This trading strategy works on any time frame allowing me to use it for day trading and swing trading.
The question everyone wants to know is how to stay so disciplined and keep emotions from taking over?
This takes me back to the Tipping Point mentioned earlier. I always ask myself if the trade meets my setup criterion, which is a simple yes or no answer because my setup criteria is clear in my head. Either it has the characteristics I am looking for, or it does not. Sometimes the setups are very close and I will admit it is very tempting to take the trade, but I always step back (walk away from the computer) to clear the emotions flying around in my head and ask myself, do I want to break a rule that almost broke me financially and emotionally once before? The answer is always No. So I pass on the trade and wait for another one to unfold.
When I was first learning to day trade, I quickly learned that I did not have to take every setup that looked like it had potential. I realized that no matter what condition the market was in, there would always be another trade just around the corner, so it’s not a big deal. I admit, I hate to see an investment make a large move without me like the 7-day rally in gold happening right now, because my setup criteria was not met. But I know there will be many more trades through the year in gold and other investments that will provide me with great returns. People who think they need and must catch every big move in the market in order to make big money on yearly basis, are looking at things completely backwards. It only takes 5-10 good trades per year to outperform the market so I don’t understand people when they panic about every zig and zag the market makes.
Ok, let’s take a look at the gold chart, which I have overlaid with two cycles, which I use to help time gold.
9 day gold cycle
The daily chart of gold below has my 9-day cycle overlaid on it. You can see how this cycle relates to the price movements of gold. After the recent low cycle, we saw gold continue to move higher and this is because the trend in gold turned up in March and the long term cycle is also moving up at the same time. These two bullish forces can overpower the short term 9-day cycle at times.
That being said, the 9-day cycle will be topping in 2 days (Tuesday) and that should put some selling pressure on gold. I expect to see a pullback or consolidation (sideways movement) in the coming week.
29 day gold cycle
This cycle allows us to see the big picture and underlying trend for gold. This larger more powerful cycle of gold will top in one day (Monday) and that should put a damper on this rally. You can see how I think gold will play out from the lines on the chart.
Combined cycles on gold
This chart clearly shows how both cycles will top this week which should put some selling pressure on gold and silver and one of the reasons I have not chased the price of gold higher buying in a panic.
Gold trading discipline conclusion:
In short, trading discipline is something you can become educated about from books, but the only way to actually take control of your trading is to be honest with yourself. Think of it this way: every time you break a trading rule, you are setting yourself up for failure. Do you really want to sabotage the most important person in your life, which you will have to live with every day (You)? If you cannot trust yourself from sabotaging and lying to yourself, what type of person would you be? Do you want to lose money by taking positions that are proven not to work and will cost you money in the long run? Of course you don’t!
So the next time you see a trade that is close to your setup but no exactly what you are looking for, just walk away and wait for the next one.
As for the current price of gold, I think we are about to see lower prices, or at least a pause, which will last for 5-15 days.
If you would like to receive my ETF Trading Signals please check out my service: www.TheGoldAndOilGuy.com
Chris Vermeulen