Friday, March 9, 2012

My Golden Trading Rules

This is my strategy for success as a professional trader. As a professional there is nothing more important than acting like a professional. Here are my rules:

goal #1not to break trading plan under any circumstance. This is the golden rule of trading.
goal #2learn to deal with losses that happen do to the law of averages. In other-words you can't win every trade.
goal #3exercise extreme discipline.
goal #4exercise extreme patience.
goal #5participation! participate in the market either by real trading or demo. This yields experience.
goal #6lock in profit, repeat formula, increase trade size as account gets larger.
goal #7reward myself for doing my job

Under no circumstance should a trader break the trading plan. If you as a trader can't master the trading plan; the other rules become useless. If the trading plan doesn't work it means that the trading plan needs work and there's no reason to have any other rules. For that reason "trading plan" is goal number #1.

When goal 1 is achieved the other goals became easier.

There are going to be times when no matter what---losses will occur.

Goal 2 is a reflection of goal 1 - stick to your plan as long as it works on average but accept the losses when it doesn't. There's no trading plan that will work 100% of the time so those are the times to stick to the trading plan which includes stop losses and learn to deal with the law of averages or market randomness if you will. Sometimes it's just wise to stay out of the market which leads to another rule of patience.

Since there is no holly grail you have to accept losses! or even random gains but when they occur take the stop loss or the target point without question.

Also losses are like failures; Anyone who has ever tried to achieve something learns that failing is part of learning, as long as you learn from the failure and the failures are not too great. So learn to minimize a failure and learn why it did not work; essentially stop losses minimize failures.

Goal 3 is a reflection of 1 and 2. You must do what is required without question. If you write out a plan but don't stick to it, there's no point in having a plan. The main reason traders fail is because they don't have discipline required to look for good setups and get caught up in their emotions after placing bad trades.

Another way to put it is stick to your plan while being in control of your emotions at all times - that is discipline in trading. The law of averages might beat you here and there but if the plan is good enough it will equal out to profitability in the long run.

There are times when discipline is not enough so:
goal 4 is like goal 3 but you have to just wait it out sometimes. Discipline works when there are opportunities so a more refined quality is patience . In other-words wait until the opportunities are there such as when the indicators line up and avoid what I call "big emotion days" when there are major financial or political decisions being made that can cause major unpredictable volatility. With all that said don't confuse patience  with going to the beach and wasting time when you should be participating and keeping skills sharp. **Patience in trading is the discipline not to pull the trigger and wait for a better opportunity; you still watch the market and take notes.

Goal 5 Participate! The only way to gain experience is to participate. This does not mean to overtrade! Overtrading is avoided with patience but that doesn't mean to soak up rays on the beach when there's work to be done. A dull knife won't cut a path to success! While exercising patience  waiting for a trade - participate in sharpening up trading skills by reading, practicing in demo, ect..

Professional sports players spend most of their time practicing for competition. This shouldn't be an exception for any other profession that has a lot of competition. Trading is more competitive mentally than professional sports. Movie Quote "Nothing can prepare you for the unbridled carnage you are about to witness" Dan Aykroyd in Trading Places. That quote couldn't be more accurate. He goes on to say the Super Bowl and other sports finals are nothing in comparison. Everyday of trading is harder mentally than a Superbowl.

Goal 6 If the chips are falling into place and when all those things come together through exhaustive work and with proven success through repetition of the formula it is time to expand and increase the size of trades if there's leverage/capital to do so. **Don't increase lots if trading account is under-capitalized; this is surely a recipe for bankruptcy / blown account.

Goal 7 If you make it this far! Enjoy the profits! Take time off and enjoy relaxing vacations at the beach! Hey why have goals without rewards? I didn't say don't have fun - just don't do it when there's money to be made. Another golden rule is work before play.

Everyone thinks trading is easy - believe me if it were everyone would quit their job and become traders. When it comes to money people will lie, cheat, steal, and act poorly. Don't believe me - put $1000 bucks on the table with a group of people and ask them what they would do for it? On a second thought maybe don't - they might end up killing each other.

Trading requires one not to get emotional and follow mathematical rules without question. Even those don't always work but it's a learning process.

You may have even made money easy in the past but to hold on to a fortune requires that you follow rules if you are to trade with real money. For most of us, we have to follow many rules to work our way up into profitability.

Violating trading rules can lead to bad habits that could also lead to serious financial losses. In fact breaking rules of the trade is why many people don't succeed as traders. Personally, I've often looked back after a big loss to see I've broke a trading rule or a combination of them (eg violating trading plan, stop loss, patience, discipline).

Conversely, my profitable trades are usually when I followed the rules but there's always going to be losses do to the law of averages.

Rules must be followed to a T to take the emotion out of trading. It's the emotion that causes failure.

These rules sound easy on the surface but in live trading these rules are like life and death.

By Neal Vanderstelt
Forex Trader, Market Analyst, Trading System Designer
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Thursday, March 1, 2012

MACD calculation

MACD (Moving Average Convergence Divergence) Calculation

MACD Line: (12-day EMA - 26-day EMA)

Signal Line: 9-day EMA of MACD Line
MACD Histogram: MACD Line - Signal Line

The MACD Line is the 12-day Exponential Moving Average (EMA) less the 26-day EMA. Closing prices are used for these moving averages. A 9-day EMA of the MACD Line is plotted with the indicator to act as a signal line and identify turns. The MACD Histogram represents the difference between MACD and its 9-day EMA, the Signal line. The histogram is positive when the MACD Line is above its Signal line and negative when the MACD Line is below its Signal line.

The values of 12, 26 and 9 are the typical setting used with the MACD, however other values can be substituted depending on your trading style.

Where to get MACD for metarader
Macd is a free tool in Metatrader and is found through the navigator in indicators. Simple drag and drop on the chart.

Historically, the MACD was invented by Gerald Appel in the 1970s. Later, Thomas Aspray added a histogram to the MACD in 1986, as a means to anticipate MACD crossovers, an indicator of important moves in the underlying security.

Today, MACD is a common indicator in Metatrader and other trading platforms. MACD is often the basis of other advanced indicators and trading systems.

Indicator Components

The graph above shows a stock with a MACD indicator underneath it. The indicator shows a blue line, a red line, and a histogram or bar chart which calculates the difference between the two lines. Values are calculated from the price of the stock in the main part of the graph.

The period for the moving averages on which an MACD is based can vary, but the most commonly used parameters involve a faster EMA of 12 days, a slower EMA of 26 days, and the signal line as a 9 day EMA of the difference between the two. It is written in the form, MACD (faster, slower, signal) or in this case, MACD(12,26,9).

Standard Interpretation
Exponential moving averages highlight recent changes in a stock's price. By comparing EMAs of different lengths, the MACD line gauges changes in the trend of a stock. By then comparing differences in the change of that line to an average, an analyst can identify subtle shifts in the strength and direction of a stock's trend.

Traders recognize three meaningful signals generated by the MACD indicator.

**the MACD line crosses the signal line
**the MACD line crosses zero
**there is a divergence between the MACD line and the price of the stock or between the histogram and the price of the stock

Graphically this corresponds to:
the blue line crossing the red line
the blue line crossing the x-axis (the straight black line in the middle of the indicator)
higher highs (lower lows) on the price graph but not on the blue line, or higher highs (lower lows) on the price graph but not on the bar graph

Signal–line crossover
Signal–line crossovers are the primary cues provided by the MACD. The standard interpretation is to buy when the MACD line crosses up through the signal line, or sell when it crosses down through the signal line.

The upwards move is called a bullish crossover and the downwards move a bearish crossover. Respectively, they indicate that the trend in the stock is about to accelerate in the direction of the crossover.

The histogram shows when a crossing occurs. Since the histogram is the difference between the MACD line and the signal line, when they cross there is no difference between them.

The histogram can also help in visualizing when the two lines are approaching a crossover. Though it may show a difference, the changing size of the difference can indicate the acceleration of a trend. A narrowing histogram suggests a crossover may be approaching, and a widening histogram suggests that an ongoing trend is likely to get even stronger.

While it is theoretically possible for a trend to increase indefinitely, under normal circumstances, even stocks moving drastically will eventually slow down, lest they go up to infinity or down to nothing.

Zero crossover
A crossing of the MACD line through zero happens when there is no difference between the fast and slow EMAs. A move from positive to negative is bearish and from negative to positive, bullish. Zero crossovers provide evidence of a change in the direction of a trend but less confirmation of its momentum than a signal line crossover.

The third cue, divergence, refers to a discrepancy between the MACD line and the graph of the stock price. Positive divergence between the MACD and price arises when price hits a new low, but the MACD doesn't. This is interpreted as bullish, suggesting the downtrend may be nearly over. Negative divergence is when the stock price hits a new high but the MACD does not. This is interpreted as bearish, suggesting that recent price increases will not continue.

Divergence may also occur between the stock price and the histogram. If new high price levels are not confirmed by new high histogram levels, it is considered bearish; alternatively, if new low price levels are not confirmed by new low histogram levels, it is considered bullish.

Longer and sharper divergences—distinct peaks or troughs—are regarded as more significant than small, shallow patterns.

The MACD is only as useful as the context in which it is applied. An analyst might apply the MACD to a weekly scale before looking at a daily scale, in order to avoid making short term trades against the direction of the intermediate trend. Analysts will also vary the parameters of the MACD to track trends of varying duration. One popular short-term set-up, for example, is the (5,35,5).

False signals
Like any indicator, the MACD can generate false signals. A false positive, for example, would be a bullish crossover followed by a sudden decline in a stock. A false negative would be a situation where there was no bullish crossover, yet the stock accelerated suddenly upwards.

A filter can be applied to the signal line crossovers to ensure that they will hold. An example of a price filter would be to buy if the MACD line breaks above the signal line and then remains above it for three days. As with any filtering strategy, this reduces the probability of false signals but increases the frequency of missed profit.

Analysts use a variety of approaches to filter out false signals and confirm true ones.

By Neal Vanderstelt
Forex Trader, Market Analyst, Trading System Designer
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