At the weekend I turned 33 and on Monday I walked out of the office for the last time. A 10 year career in IT was over. There were some very nice words and gifts from colleagues and friends on both occasions. So it has been a very positive uplifting few days.

I am leaving behind the dry sterile office environment, soulless technology and deadlines. No longer will I be applying my abilities and enthusiasm to a subject which is drier than 3 day old toast. No longer will I feel like a corporate drone. A cog in someone else’s money making machine. And no longer will I struggle with the overwhelming sense that this is not what I am supposed to be doing in life.

Today is the beginning of a new life. What will it be like? A rich trader with a bulging bank balance, a Rolex and Bentley perhaps. Hell no! I want to play my guitar, see my family and friends, do karate, travel and possibly study. I want good food, exercise, sleep and relaxation. I want to feel the sunshine on my skin not stare at through an office window. I want the quality of life that only time and financial freedom enable.

It isn’t about being rich it is about being FREE. Today I feel so so free! It is just wonderful!

Answer this question: If you loose regularly and you loose more often than you win are you a looser?

The answer is yes unless you are trader.

Being a winner under such circumstance is entirely counter intuitive. It is in direct opposition to everything we have been taught and have observed whether this be at work, in sport or in life. However if you suspend your learned response, your scepticism and/or disbelief I will explain why.

Technical or fundamental analysis only allows one to gauge probability. Therefore a trader deals with a high level of uncertainty in his decision making. There is always an element that is beyond our control or our perception. This is not a science. Therefore you WILL loose. Most, possibly all, traders loose more than they win.

Therefore a winning trader embraces the inevitability of loss. Embracing it allows you to manage it. It allows you to win big and loose small. Here is how:

Define your Terms of Reference

Define your Maximum Risk per Trade: This is defined as the % of trading capital that you are prepared to loose per trade. A suggestion would be 2.5%. That way you can loose 40 times before you are cleaned out. A nice safety margin.

Define the Risk for your current trade: The risk is your maximum loss expressed as a percentage. This requires a stop loss. If you don’t have a stop loss on every trade go and flush your money down the toilet right now.  Use this formula:

Long: (((strike price – stop loss) * £’s) / trading capital) * 100
Short: (((stop loss – strike price) * £’s) / trading capital) * 100

Define the Reward for your current trade: The reward is the expected gain defined as a percentage. This requires a target. Using technical analysis you should always define a logical point at which gain is realized. Use this formula:

Long: (((logical out – strike price) * £’s) / trading capital) * 100
Short: (((stop loss – strike price) * £’s) / trading capital) * 100

Test Two Golden Rules

(1) Is your % ‘Risk’ on the current trade greater than your ‘Maximum Risk Per Trade’. If so DO NOT trade.
(2) What is your ‘Risk to Reward Ratio’. If you reward isn’t more than double your risk DO NOT trade.

Otherwise trade.

During the Trade

If your trade is going wrong you will be tempted to move your stop down rather than take the loss. This is a cardinal error. Now you won’t loose small you will loose big. You will loose more than your ‘Maximum Risk Per Trade’. You will be closer to be cleaned out. And all because you couldn’t take a small 2.5% loss. I broke this rule early on in my trading life and lost 50% of my capital! Embrace the inevitability of loss.

If the trade moves in your favour let your winner run. To do this you can wait till it hits your reward point and/or trail your stop. Try not to sell out at the reward point but trail a stop underneath it in case it carries on. Should it do so your Risk:Reward ratio grows. You might make 3 or 4 times what you risked for example.

Understand the Long Term Implications of this System

To come back to the original point. How can someone who looses regularly and looses more often than he/she wins be a winner?

Because you only play trades where your potential wins significantly eclipse those small regular losses. Over the term this creates steady profit.

Remember you can tell a winner by the way he or she looses. This is never more true than in the world of trading.

As discussed in Tuesday’s post I had placed automated orders just outside of the box. Today I was watching to see if price would break out. Price hovered not far under 780 (top of the box) for most of the day which I was grateful for as it seemed to confirm my analysis that it is an important S/R line. I am in no rush to see a break in these situations as the price action is just strengthening my position.

The break came with the Fed decision. The actual decision itself is of no consequence to me as I don’t try to interpret news but rather make all my decisions from chart behaviour. So at 2.30pm EST it broke 780 with violent abandon. My buy order (780.9) was triggered and an ‘if-done’ associated protective stop (777.8) was placed.

It is worth noting that all the decision making was made the day before and programmed into my trading tool. So up till this point I hadn’t had to make any quick reactive decisions. This is very good as it keeps a person calm and to plan. But now I had to make some quick decisions about where to get out. The technique used was to trail a stop under each pullback thus locking in more and more profit. I had the ultimate likely turning point in mind (800, at the 50d MA and next big resistance) but I prefer to trail stops to deal with the unexpeted. That way I can let my winners run. I trailed twice on the way up to 800.0 and was stopped out at 797.0. I was very happy with catching 161 points of this 240 point move.

The final score was a 5R (5 times original risk) profit. I risk a maximum of 5% of my overall capital in any one trade. The overall trading capital grew 26% in one trade!!!

What is a box trade? It is playing a break from within two particularly important Support/Resistance lines. The more imporant the lines the better chance of a clean break above or below the S/R line.

Monday for instance:

On Tuesday the price makes it to 780 and is flirting with a break:

My strike price is long 780.9 and short 739.8. My concern here is that my long, which we are very close to, may be executed in out of hours trading. Out of hours price doesn’t seem to show the same respect for S/R that it does during market open hours.

We will see what happens today.

There has been a pronounced downtrend which will be heaven for some short biased traders. However my favourite strategy is playing the ‘box’ and this requires some volatility contraction and range bound activity.

So I was pleased to see an ‘inside day’. This is defined as a range within that of the previous day. The candle will be shorter than the preceding day with the high and low within the range of the previous day.

It means that the market doesn’t have the energy to break to new highs or lows and is often the sign of an upcoming turn or slowing of volatility.

So I’ll be watching to see if price becomes short term range bound. If so we should have a potential ‘box’ play.

I’ve created a far clearer image of the box play using StockCharts.

You’ll notice the price broke through the lower support at 740. Unfortunately the re-test was unsuccessful and price broke back into the box. Therefore my short play at 739.0 was stopped out at 743.0.

Was this trade therefore a failure? I’d say not as it was executed to plan with risk limited in the proper fashion. There isn’t much more a person can do. If I keep executing in such a manner I know I will win more than I lose.

I had thought that a complete lack of recent support below 740 would cause a serious break but this doesn’t seem to be happening. What interests me far more is that 5 of the last 7 candles have bounced off 780 showing it is a very strong resistance line. I have a trade programmed in to go long on that break as the probability of significant intraday upside energy is high.

I have two pending trades programmed into my trading platform. These are 2 long speadbets on the S&P500. I have identified a box around the current price. It is used to frame the trades.

My strategy is generally to play S/R breaks at key lines. The stronger & more important the line generally the more powerful the break. Usually I play short from the lower line and long from the upper. Stop Buy or Sells are set to get me in slightly above resistance or below support. ‘IF-Done’ (IE contingent stop losses) orders are set within the box should the trade reverse on me in order to limit losses.

Note the banding that encloses the candles between 20/2 and 25/2. The upper line is extremelly strong with 5 recent touches on the support/resistance at c.780. The lower line is also strong as it runs in parallel with important ‘milestone’ lows of 21/11 and 2002/3.

Playing The Box

In this instance both trades are long. The reason for this is that I think there is a higher probablity of a successful re-test of 740 not a break. Therefore the lower entry is just above 740 with a stop below.

We will see what happens tomorrow.

On Tuesday I made a trade which took my total gain to 100% over a 12 week period.  That is a BIG milestone for me.

Let me explain.  It has been nearly 2 years since I did my first (and only) introductory stock seminar. Since then I have tried varying strategies and been building up my competence in basic skills.  For a long time I did this with imaginary money, then small amounts of real money and eventually larger (though still modest) sums. I also have a full time job.

And now it seems my slow & steady approach has succeeded. I now have a strategy which makes a return so far in excess of anything I could get anywhere else and I am very excited about it.  Why?

Firstly this isn’t  a fluke. I made 35 trades in those 12 weeks and those trades fell withing a specific strategy. The extensive evidence I collected in excel shows clearly a trend and a system at work.

Secondly I am thrilled by the prospect of compound growth (yes thrilled). All my winnings get re-invested and I can potentially double my cash four times in a year.  That translates to having 16 times the initial stake after one year.

Thirdly I am still evolving as a trader. Each trade I documented has comments associated that have allowed me to spot and correct my errors.  I am confident  I can reduce my 12 weeks double time. A reduction of 2 weeks produces a yearly compound of 32 times initial investment.

Fourthly my strategy is to trade only the highest probability trade within one chart pattern on one index. Keeping it simple is the key. This means I am a low frequency trader which gives me time to do all sorts of other things. It is not a full time job.

Fifth. Using the power of the iphone I can trade anywhere and therefore am not shackled to my PC or compromised at work.

Sixth (and this is the one that really freaks me out!) the return of 100% in 12 weeks is it seems better than anyone currently publishing their rate of return.  I see all these trading professionals publishing rates that come nowhere near. I don’t understand but am quite thankful for it! All I can say is keeping it (very) simple seems to work.

As a newbie I’ve been wondering just how volatile these markets are in a historical sense. Respected bloggers see it as unprecedented in their lifetimes it seems.

Well thank god for that! I can’t see how I’d ever make a living if this was normal.

Or could I?? Because over the last month my performance has improved dramatically. I’ve erased all my losses and seen a nice average return. And if I can do that in this storm maybe I’d be good in better days.

I feel a bit like lower league team player that has drawn the champs in the cup. I’ve had to raise my game so much & the adversity has in fact made me better.

Till the market hands me my balls on a plate tomorrow of course!

EDIT: Post market…I’ve fought like the Spartan 300 & I’m up $80 bucks or so……jezus wept…….this can’t be right. None the less I feel pretty good about my trading today. 90% there.

I haven’t posted for a month and in that month I have gone from to despair to happiness. I caught the last 3 swings of the market correctly & banked some nice coin. In fact I have wiped out 2 months of losses and am now in real profit for the first time! Yahooooooo!

What I did differently:

1. I stopped trading every day. I try only to trade over or under sold market conditions.
2. Entries on pull backs or peaks (in a bearish market). Previously I was entering as resistance or support broke. I dislike this strategy as it makes (3) harder.
3. Cut losses short (easy to say but hard to do). This has been a hell of a lot easier with better entries. Because I usually know quickly if I’m wrong.

If my success continues I’ll post some charts. Example real world trades to illustrate what I do.