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    I am Matthew Hagemann, an analyst working at a multi-national bank and I trade my personal account on the sidelines since 2007. After having been mentored for a full year, I now withdraw consistent profits from the stock market.

    In my bachelor thesis I wrote about “The Psychology of Financial Markets: A Study on Nonrational Trading by Market Participants” in which I analyzed the many faults in human behavior often leading to distorted trading decisions and poor investment returns. With my trading experience and findings in behavioral finance, I help traders reach consistency in their performance and understand themselves better.
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  1. What zdo writes is intellectual trading at its best and extremely inspiring. Although it takes a few times to read before grasping the whole content, zdo is perhaps providing the most valuable advice a novice trader can receive. Manifesting a ubiquitous concept of how you see the day-to-day price action is an essential foundation to every trader. If you cannot get behind, seeking up a reputable mentor with such a concept is the next best thing to do. Whichever way you decide for, it takes commitment and constant reflecting of how you perceive the market and seeing if the market confirms your theories. These are most definitely not conspiracy theories that so many failed traders love to resort to and that you read about in these forums.
  2. clmacdougall, I define a trend according to the Dow Theory. A sequence of higher highs and higher lows is an uptrend, and a sequence of lower lows is a downtrend. Furthermore, you have to know that a market moves in swings. This means that price whips several points up and down within such a trend, while it creates new significant highs/lows that must not be penetrated for the trend to remain intact. Swings in the ES are normally as big as 30 points. New highs/lows are areas at which you can adjust your stop to, so you get to secure increasingly more profits. Yes, I use trend lines, but I also watch for the aforementioned crucial highs/lows. The best is to illustrate these words with an annotated chart that I made recently (see attachment).
  3. I wonder why people keep pounding on this picture. It's a year old and I still look the same. Sorry for looking young, but I'm late twenties.
  4. It is also my observation that successful traders tend to have a sound theory for what they are seeing and why things are happening the way they do. I had a mentor myself and he looked at the market philosophically as a battleground for bulls and bears on which both groups constantly fight for control. This was inspirational to me. Here is an elaborated attempt at putting my mindset in words: http://www.traderslaboratory.com/forums/markets/11630-managing-understanding-nature-trends.html The reason why I suggested to make printouts is because it makes you reflect on price action even more. You figure out a method with more attention on paper than on screen. Working on screen is too slack. Once you have a method and have seen it perform in real-time, your belief in it grows, and hence your discipline.
  5. I agree. It only works if you are watching a limited selection of markets (or, say, if you exclusively trade the ES). To actually grasp the fundamentals of price action and trends, it is perfectly sufficient to focus on a select few. Takeshi Kotegawa or Tim Sykes come to mind. Two very different personalities, but two individuals who seem to have made serious money from day one. To get back to your question, I have been swing trading stocks since 2004 and futures since 2007.
  6. The market has a language and many fail to interpret its language. In frustration, some say the market was random, or the market was impossible to beat. Some even resort to far flung theories such as believing that a powerful group of individuals is controlling the market. When traders do not understand price, market movements appear to be random. But they are not. There is an incredible degree of order. And when traders say that the market cannot be beaten, it is typically said in response to appease their own failure. Trading is not suited for everyone, just as being an attorney is not for everyone. Some traders defy the typical learning curve and excel from day one. That is an excellent gift to have. Even though I’ve seen videos of such prodigies, unfortunately, for many, a rocky road is the price for learning this profession. Experience cannot be served on a hot platter. It must be earned. I highly recommend you to take physical printouts of market activity in different time frames and study them well. Studying them on screen will not replace the pen and paper. I used the 1H time frame back then, but nowadays I would recommend to go with the 1H for equities with regular trading hours, and the 4H for markets trading around the clock (such as futures or currencies). You will easily see the trends I am talking about here and following with great success. Try to feel and touch the market because there is a lot of psychology involved behind the price action. You do not need to know the exact economic data behind. That is nonsensical information overflow. The reason that many traders have a difficult time understanding markets is because they cannot understand the underlying reason why markets move. If greater attention was placed on understanding price, more traders would be having success. I’m sure you have heard that there is no better indicator than price. This is what many traders are attempting to decipher but cannot. The real pulse of the market remains elusive to them. If we don’t know why, the markets will tie us up in knots and will seem like a mystery that can never be solved. What do most amateur traders use to address this problem? They use technical indicators. Indicators do not stimulate critical thinking skills. You rely on something to give you the answer because you don’t know the answer yourself. Imagine a familiar scenario for a moment: three indicators tell you it is now good to be long, while one indicator says you should not. Is this really having real insight on why markets move? A successful trader’s mindset is very hard to put into words, hence I understand if this article appears abstract to you. What I strongly want to encourage is self-study and critical thinking with regards to what you see in your printouts. Feel free to contact me anytime, through. Chances are smashingly slim that you will make it as a trader, however, do not believe those that tell you that the odds are stacked against you. This is a myth. If you develop a consistent method, the odds are not against you. Struggling traders always find excuses for why the market is bigger or stronger than me or you. The world is filled with those that say it cannot be done. An agenda to prove something to someone is always up their sleeve, so they can finally tell you, “I told you so.” Do not waste your precious time with these individuals.
  7. Opening a new trade is generally less complicated than closing it. Technical hurdles aside, you will most likely find it easier to enter a new position with a fresh approach, than dealing with uncertainties inherent in financial markets when already in a position. You might choose to hold on, or doubt your target, and altogether clutter your decisions with second thoughts. The relative easiness does not liberate you from proceeding with great discipline and care because the entry decides upon the outcome eventually. The entry decides whether you will be enjoying a smooth ride, or getting yourself into trouble. When, where, and why you open a position should depend on your own tactics, but there are a few criteria which apply to all traders. Support and resistance levels: Be especially aware of potential S&R levels which can be horizontal or in the formation of obvious trend lines. This is your preparation work. Without it, you are clueless about what is happening in the market. It is not an exact price, but more an approximate level which is visibly identified in recent price action. I generally find the 4H time frame best for instruments which trade around the clock such as futures or currencies. The 1H time frame works better for stocks that have their regular trading hours. Identify areas where buyers or sellers gained or re-gained control. In any case you are buying into a downtrend with the ambition of trading a turnaround, look closely at what happens near former support areas. They can pose a threat to bullish traders by acting as resistance. Large Version: http://www.streetcoup.com/wp-content/uploads/2011/12/trendlines.png The reaction: Once you know where the support or resistance is, watch how price reacts at those levels. Do not blindly buy or sell into it. Observe price action closely instead. If the price is visibly moving down below resistance or even breaking support zones in the process, you have your short entry. A long entry is at hand if the market is rallying up from support and breaking resistance areas. Stop-loss order: Stops are placed right after the entry to protect your equity and limit the maximum potential loss. In a short position, it is commonly placed above a recent peak, or below the recent trough for a long position. By gradually adjusting your stop after each minor pullback, you are effectively securing more and more profits. There is no need to look for target areas unless your strategy is based on different methods from trend following. Always expect the opposite of your plans to materialize, and plan accordingly. By doing so, you automatically minimize the risk and maximize the potential. For example when you enter a trade, you obviously hope that it will be profitable. Do a mental switch: You have to fear that the market will go against you instead. This will make you respect risk and set a protective stop at all times. On the other hand, when you are in a good trade and consider to close it with each pullback, you have to be greedy and hope for it to turn around in your favor. This will prevent unwanted emotions from taking over your trading decisions.
  8. While starting out as a trader, you have likely read most of the classic books on trading, technical analysis, money management, or psychology. You might have even executed a few trades with meager success. From a theoretical experience you are not a newbie but from a practical standpoint you still are. Being a trader is commonly associated with an erroneous picture of freedom. You may be drawn to the flexibility of lifestyle, not having a boss, and having geographic independence. That’s like saying you want to become a racing driver because of the high salaries and traveling around the world. But to be a good racing driver you need to love racing. Not everyone loves racing. Similarly, to be a good trader you need to love markets. Showing “passion” may be overrated for this business, but strong interest coupled with the right approach does correlate with performance. Committing to doing something brings with it the duty to do what is required. Someone who ponders about making $1 million per year with no boss, and getting out of a job which he hates, he is definitely looking at trading for the wrong reasons. Trading doesn’t work like that as it is not a consistent income. Furthermore, it is not a steady progression like most careers. Success (if it comes) is rather unpredictable, comparable to the evolution of an entrepreneur. You can have great periods and you can have dead periods. A great method can suddenly stop working after years of success, and you may have disasters where you lose a lot of money. If not pursued earnestly, trading can offer excitement for the time being and serve as a big dream of a glorious life in riches. In reality, chances of prosperity in this case are as likely as with playing the lottery. Those who claim they wish to be traders but are secretly unwilling to do the work, will never get there. As a mentor, I am honest and blunt to aspiring traders, just as the professor is to an aspiring medical doctor. They won’t be told that due to the hard work in their profession of healing it would be better done in a country where there are less medical regulations with worse tools and technology than you find in the West. If you kill a few poor patients along the way, it would not matter because you are unlikely to be sued or prevented from working further. That is not the discipline you want to see in someone. Becoming an independent trader must not be taken lightheartedly either. Education is of utmost importance in this business, and working with a competent trader can be easier than being self-taught. Those who are relentless in figuring out a methodology are more likely to succeed. If you find investigation, research, problem solving, and frequent setbacks tedious, you would be well advised to do something else. Regardless of assistance, you should be fairly comfortable with experimenting on your own because even a personal mentor can only go as far as showing you the path. A strategy still has to be based on your very own decisions to be able to trade with confidence. Start with a $10,000 account and trade part-time outside your normal working hours. Set maximum drawdown goals by losing not more than $3,000, for instance. The point of this is not to make money, but to learn trading with real money without taking excessive financial risks. If by the end of year one, you managed to make a profit without losing 30% of your starting capital at any point, then you have some potential. Take your time and put more emphasis on gradual growth with a sound strategy than sudden wealth. What remains to be said about the brutal reality is that the vast majority of retail traders fail even to break even over their trading careers; let alone make a living from it. Those that do, tend to have an unusual aptitude and passion for markets and trading. Therefore you are generally better advised to keep your job until you have figured out a time-tested strategy. Not being able to watch the market during regular trading hours is not an excuse.
  9. Those who philosophize about the root causes of market movements will have certainly come to the conclusion that there is an ongoing battle between bullish and bearish participants. To help you understand this concept better, let us use a metaphor: Imagine resistance being an immense wall that protects a city. Across the wall you have guards who make sure that intruders will be kept off. As an encroaching army of buyers gets closer to the fortified city, their aim is to defeat the guards and break beyond that wall which is preventing them from pushing the market higher. If you were a defenseless inhabitant of this city, and you saw the immense wall crumbling before your eyes, would you honestly rush in to fight this influence? Believing that the buyers would suddenly ease off is a fatal illusion. That is why I keep warning my students about shorting near support and buying at resistance. It is simply not a sensible thing to do if you want to receive a rewarding outcome. Sadly, inexperienced traders often seem to be in emotional distress, and repeat such mistakes over and over. In summary, a support and resistance is nothing more than a congestion zone in which many market participants had an agenda to fulfill. One group wanted to break behind a wall that the other group needed to protect. Both sides have very opposing interests. Unlike indicators, price points out potential barriers with great precision. These barriers continue to have an effect after its break because those traders who hung onto their position will see an opportunity to exit with the least loss. This explains why former support barriers will act as resistance once price recovers back to it. If you are learning to read price action, you need this basic understanding to make sense of the market’s movement. So turn off all indicators for you to begin recognizing support and resistance areas.
  10. Commodity Trading Advisors (CTA) that utilize trend following through managed futures accounts have long known that there is no Holy Grail in investing. When following trends, they know that anything can happen, so they have completely abandoned strategies involving fundamental analysis or buy-and-hold fallacies. Many successful trend followers and CTAs have developed trend following systems based on multiple time frames with the objective to harness the trend that herding generates in the market. In order to do that, their primary focus lies in managing risk so that the return would somehow take care of itself. Whenever they engage themselves in a trade, the potential loss is always known upfront. In perhaps no other industry, subjective misjudgments become so blatantly obvious as in the trading business. Trend following tries to circumvent this. Behavioral finance has documented some of the investor biases explaining the rationale for trend following: Anchoring bias: Tendency to rely too heavily on one piece of information, specifically the recent price history to estimate “fair-value”. Bandwagon effect and feedback trading: Tendency for traders to act as a group and jump on the bandwagon of a rising price trend (herding). Confirmation bias: People tend to look for information supporting their beliefs and consider recent price moves to be representative of future prices. This leads investors to over-allocate funds to markets having already risen and under-allocate to fallen markets. This behavior favors trend continuation. Overreaction: Market participants overreact to new information, creating larger- than-warranted effects on market price and stronger trends. The trend following industry prefers to analyze trends on a meta-level according to the Dow Theory: Higher highs and higher lows for an uptrend, or lower lows and lower highs for a downtrend. Practitioners understand that the crowd is always collectively smarter and therefore do not bother to predict or outsmart the market with discretionary analytical methods. Instead, their goal is to participate in the crowd’s wisdom and follow the path as it is given to them without judgment.
  11. Traders that are new to the industry are too easily scammed into dubious trading products or subscriptions. So-called trading gurus permeate our society to exploit the starry-eyed eagerness of a trader trying to learn. It is marketers and their never-ending sales pitches like, "You need this system. This one will make you the star trader you’ve always dreamed of. The new and improved version is guaranteed to double your money instantly or you get your money back." Gossip tabloids exploit readers that crave sensational news. Did you hear the latest on Brad Pitt? The National Enquirer tells me so. What will your car salesman, who needs to achieve his quota for the month in order to pay for his new house, tell you? "You look successful. This car will represent you perfectly in your next business meeting." You try on clothes in a fashion boutique and ask the salesgirl whether it suits you, "Fits perfectly." Whatever you try on, it always fits perfectly. These people just want to sell you stuff! The sooner you understand it, the better. What will a politician tell his supporters? "If you want change, then vote for me. I will deliver change for you, my friend." We live in a capitalistic world where people will always inevitably seek to exploit the ignorance of others. The original intentions may be good, but trading products are often marketed in a way as to guarantee positive performance. A guru is under no obligation to disclose his profit and loss column to you or anyone. It is pathetic to hear traders complain how gurus are out to extract money from them. It is up to them to separate the wheat from the chaff and some unfortunately are horrible at separating fact from fiction until it is too late. Usually money is lost as a penalty for not being properly informed. There is a learning curve involved in this business of trading and struggling traders are repeatedly seeking a quick solution to their problem that typically requires months or mostly years to reach proficiency. Just because a trader can show proof that he can make money does not insinuate that he is also a good teacher, and vice versa. The very best thing to do is apply common sense while learning as much as you can (ideally with the help of a trusted mentor). Every trader is individual in his personality, so you need to find out what strategy, time frame, market, or position size suits you best. A mentor can only provide advice. You have to continuously test and improve while risking the least amount of money. This will increase your chances of emerging financially unscathed and start a profitable trading journey.
  12. A trend represents the evolution of public sentiment, specifically, the psychology between optimistic market participants (bulls) and its pessimistic counterparts (bears). Moreover, the angle of a trend can determine whether the market’s mood is extremely optimistic or extremely pessimistic. One thing that is very common of traders is that they consistently take a pounding from the market because they do not understand the underlying forces of trends. If the market is visibly moving down, sellers possess greater authority while buyers are countering against the seller’s strong influence. In the bigger perspective, such upswings are mere counter-moves on the way down. Buying is thus a much more challenging proposition than going with the dominant force. The opposite applies to rising markets in which buyers are in control. If a market is in a decline and a trader is short, there is no point in covering, buying, and shorting again lower and lower because he will not be accomplishing anything of greater significance. What is the advantage in being exposed to new risk if a market is in an obvious decline already? You should stay short in a downtrend and not be overly concerned about reversals against you. On the contrary, there is no point in buying into every dip in hope for a massive recovery rally. New spikes on the way down are a necessity and a chance for bears to adjust their stops lower, thus reducing their risks or even secure increasingly more profits. If you think about why markets move up and down: It is because there is an ongoing war between bulls and bears. These two opposing groups behave like armies on a battlefield. The aim of the bulls is to push markets up because they make money if they are successful, but they forfeit money if they are not. Then you have an opposing crowd that is just as intense as bulls in moving markets to the opposite direction. We basically have two enemies with two very different goals. The bottom line is that all up and down movements are actually the result of a dynamic battle being fought out between these two forces. Significant battle lines are drawn days to weeks before, and have an immense impact on how the market moves the following day. A fight for control is taking place at these lines and are what we call a support or resistance area. As the bulls advance, the bears retreat and regroup at the next resistance. There, more bears enter the market in hope to overwhelm the bulls in a larger number to push the bulls back down toward support. Bulls regroup at support with the goal to push the bears back up towards resistance again. It is a cycle that appears in all markets. What is being exploited for profit is the dominant trend of the market. We do not make money by predicting support and resistance areas, but by catching turnarounds there. Once a trend is initiated after such a turnaround, it is not going to stop right away, but it will continue for an extended period. The ignition will trigger a chain reaction of orders that will predominantly serve the winning army’s interest. In an uptrend, bullish traders are making more and more money while bearish investors need to cover their shorts and reverse their position which, in turn, gives further boost to the ongoing uptrend. Obviously, those market participants holding long positions will not easily give up their money-printing machine and stick to this position for as long as possible. Same for the former bearish participants who are finally starting to profit, expect the trend to continue. A trader’s fear that the market would turn against him any moment is usually unjustified. The challenging part is to stick with a position through thick and thin until the position is stopped out for good. Prior to this, a trend follower’s job is easier than you might imagine: wait and sit on your hands.
  13. During my trading journey I regularly encounter very interesting people from various fields. Their unprofitability in trading is what often unites them, however, which is why they are seeking advice. Aspiring traders are unable to reap consistent profits off the financial market despite having been involved for many years and having tried various approaches. I assert that this is due to the lack of a fundamental understanding of trends, which is why my attempt is to demonstrate how price action is interpreted correctly. I personally had the luck to be taught by a mentor myself, and forged a trend trading strategy on top of this precious teaching. The nature of trends is the first thing an aspiring trader needs to fully comprehend. Trends do not stop from one moment to the other but last for a significant amount of time. A trend evolves in a sequence of support and resistance levels along its way, and reversals always take place after breaking an aforementioned level. Hence, there will be enough time to recognize a reversal and to adjust your position accordingly. If you look at the 1 hour chart of the ES for example. You will notice a repeated pattern of uptrends (higher highs and higher lows), downtrends (lower highs and lower lows), as well as support and resistance levels along the way. A break of such a level is taken as an entry opportunity to catch a reversal and follow a newly established trend. You never do anything prematurely and always wait for the market to tell you what to do. By doing so, you will avoid entering and exiting positions based on gut feel. That is all you need to boost your chances of becoming profitable. Let us think back to our childhood when we got our first bike. Our parents might not be particularly good cyclers but they knew one thing: to ride the bike we must be able to balance. Consequently, they do not bother teaching us which gear to use, or how to do dirt jumping. They leave it at the basics. But this is precisely what aspiring traders venture into. They start off with the most challenging stunts like scalping and picking tops without knowing anything about chart reading. Seeking answers in indicators is one of the major mistakes they succumb to. Whenever an aspiring trader comes to me, I will ask him to turn off all indicators, then give him the basic understanding he needs to start trading profitably. This includes price action, understanding the battle between bulls and bears, and trends. After that we go into more details such as risk management by using stop loss orders properly. To my surprise, many are able to find entries and manage positions with a bit of assistance within a few weeks, or have developed a totally new strategy with the help of the basics I provided. Most importantly, they do this without looking at any indicators that they used to love so much.
  14. Trading is a business like any other. Treat it accordingly. It’s about the evaluation of risk for a potential trade. Everyone who has been involved in the financial market for a while will know to appreciate a trading plan. Market participants who have been hurt with losses regret not having had one from the first moment on. After all, it is more exciting to jump into the first trade and get the drill immediately. Imagine you were about to buy property. Wouldn’t you balance the pros and cons of the location, the buying price, or your monthly annuity? You certainly will not buy the first property that comes across you. Unfortunately this is precisely how beginners approach trading. The hurdles of opening a trading account and depositing some cash are far lower than, say, registering your own business. Henceforth, trading is not taken as seriously. When composing your trading plan, you have to understand most of all yourself. Why do you want to trade? What are the specific goals you are trying to achieve with trading? How much time during the day can you dedicate to it? Can you handle a loss of $50, $1,000, or $5,000 per trade? How would such a loss affect you? Do you prefer to harness large trends, or quick trades throughout the day? The next step is to find the right market and the right time frame. For example, I have chosen the ES for myself because I want to focus on one instrument and trade it well. My primary time frame is the 1 hour chart. Going further, you need to know your specific trading strategy. Create one that is as objective as possible because such will stand a higher chance to last throughout various market conditions. I have abandoned all indicators and focus merely on the price. This is what every market participant is seeing. Define where your stop-loss would be at and what the potential loss is if it gets hit. I want to make sure to quit the trade if the original reason for entry is no longer given. I take visible peaks or troughs to put the stop-loss at. With the help of the 1 hour time frame, I am able to detect significant support and resistance areas which help me to find an entry. Everyone will notice if a new high or low is taken out. Do not miss to test your tactics on paper before risking real money. Prepare a trading journal once you have collected some experience and want to get to know yourself better. Write down your emotions, your reasoning for each action made, and a lessons learned for upcoming trades. It seriously helps at becoming more objective in your trading decisions. You engage yourself with the decisions made and will be more alert of making mistakes in future.
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