How Price Targets Shoot You in the Foot

Establishing price targets hurt your trading performance.

Human beings are “bad” at prediction. There is not much science in guessing where a bull or bear run will end. Previous highs don’t necessarily infer a price point where a rally will stall.

Fundamentals do matter.

Institutions – the biggest traders in the crowd – place their wagers based upon fundamentals and their overall business. With billions of dollars on the line, they’re not much concerned with intraday price data. There’s no reason you should either.

Much of what institutions do on the commodity side is based upon DATE, not PRICE. Follow the elephants, not the piker traders dancing between their feet.

If you don’t have a simulator, you can trail structure with a protective stop. You’ll make much more money staying in your winning trades, rather than cauterizing them too prematurely. Plus, you save time in that when you wake up every morning, you already have winners in your portfolio. Leave them there.

Place your protective stop on your unrealized gains where you’ll be financially and psychologically ok if you stay in the trade and eventually get stopped out.

You can ask yourself “How much of my unrealized gains am I willing to risk in order to stay in the trade longer?” The recent bull move in the S&P is a good example of how you can (and should) let your winners run.

Once you experience this a few times, you’ll become very comfortable with this strategy. You’ll come to find that “you didn’t have to do anything extra” to make the additional gains.

Sit on your hands and forget price targets. Let the market tell you when the move is over.

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How to Recharge Before You Lose All Your Money

Take a mental health day whenever you feel you need it.

No one is going to be there to give you permission to do so. Trading is a grind and a marathon.

Doing the same thing day in and day out can become monotonous. You’re not loser nor are you losing focus by taking care of yourself.

If you’re taking 3-day weekends ever few months/weeks, you might not feel the burn that others feel.

I think it’s very healthy to put some distance between yourself and the market for no particular reason.

You don’t have to be in a massive drawdown to do this. Shake it up a bit and get back to center.

As you might have heard me say, “there are no external solutions to your internal problems,” changing your routine can be refreshing when you’re in a lull.

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How to Preserve Your Sanity in Drawdowns

Preserve your sanity by implementing maximum levels of allowable losses per day, week, and month.

When they are hit, you stop trading for that period of time.

For example, if you set a daily loss on your equity of 2% and you lose that much on your overall positions, you go flat.

If you have a 8% rule on your overall equity for the month, you quit for the month even if it’s only the 21st of the month.

You can put a “haircut” in place as well. As you approach 5% for the month, you haircut your overall trading equity (what you base your positions on) by 20 or 30% so that your losses will be even smaller. That means if you start with 100% and you’re down to 95%, trade the rest of the period based upon 70% of your equity. This is done to soften the financial and emotional blow of your drawdowns.

Being down might not be much for you, but when you get to 10%+, these rules mean a great deal. If you systematize them before you start trading, you’ll be sticking to your model during the drawdown. You don’t want to stop trading because you don’t know when the winners are going to hit.

If you trade with protective stops in place (and you should), you can calculate how much of your equity you will lose if they all get hit.

You can do this with open trade equity and trailing stops also. It’s a very helpful process.

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How to Trade with Imperfect Information

Chartists are discretionary traders. This is true for those who have a CMT designation.

How can you define your edge if you are looking at the same charts everyone else is looking at?

Charts need to be interpreted. That’s discretionary.

You don’t have the same emotional makeup that your chart-teaching coaches have.

You don’t have the same life experiences that they do.

If you haven’t backtested your rules, you don’t know your numbers. What is the expected value of a trade that you put on in a head and shoulders formation?

It’s integral to know if you are trading too big or too small for the risk that you are willing to take.

What is your optimal bet size for any trade that you put on?

What is your risk of ruin?

Don’t optimize for share size or contracts…that’s amateurish. If you’ve come this far, you’re beyond the skill of many. See it through all the way to the pro level.

Forget tiers…

Most indicators are lagging indicators, they don’t give you trade signals for entries or exits.

Indicators are emotional band-aids and won’t relieve you of having to live with the uncertainty that we are traders must live with. We must make decisions with imperfect and incomplete information. That’s the world we choose to live in.

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How to Become a Mindful Trader

Measuring your activity is a good way to begin improving your trading. Time blocking is more quantitative.

You can add qualitative aspect of it also by calculating the sum total of all your trading activity each day.

[Forget daily profit goals – focus on keeping your losses small and let time and leverage work for you.]

By the end of the week, you’ll be able to see what you’re earning per hour.

Marry this with your trading journal and you’ll be able to determine what your time and effort are worth fundamentally. This is the qualitative part…

How effective and how efficient are you at what you’re doing?

Challenge yourself to always get the most insightful information you can on your own behavior. That is what’s most compelling and informative about your trading success and ability.

Be brutally honest with yourself. No one else will and you don’t want to mindf*ck yourself into eternity.

Control what’s controllable. Surrender to the rest. Put your stops in. Tomorrow is going to be your best day ever.

Here is a great book on gaining insight on yourself. It’s free.

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