The Wits of Learning Professional Trading

The "privatization" events of the late 1980s and early 1990s, in Paris, France, introduced me to the power of investing and, later on, to real-time trading. I did some quick thinking...If it was that easy, why shouldn't I try to learn it by myself even if it would be the hard way...numerous daily hours (10+), weekends occupied with the study of inter-market analysis, investing of 10s of thousands of my euro funds in books, seminars in the USA and video-cassettes -- CDs weren't available in those times.
The first net profitable results came after three years of hard labor, but they did come, and the outcome was worthwhile. It's very important to know that, in order to get quicker results, the novice trader needs to follow a specific sequence of learning modules, which I will outline in this article: The basics of trading, trading strategies, money and risk management and the psychology of trading.
Once you have studied these topics, you must follow that with a second learning sequence; you should then assiduously perform virtual trading, followed up by real-time trading of small tick value markets, such as the E-minis.
After being profitable for 15 days in a row, which might seem long for some novice traders (careful: I am not saying 100 percent profitable intraday trades), the trader is then ready for the "Big Bang" of his or her life -- real-time trading of any financial instruments.
This long-term education process might seem somewhat exaggerated for some inexperienced traders, but our experience as educators, for more than 10 years, has taught us the value of psychology and money and risk management...Keep close control of your pocket...Without the capital, there is no trade, and without the trade, there is neither trading nor investing.

The Power of Epistemology

I was lucky that my medical school studies in Paris and theoretical physics studies in New York exposed me to the science of epistemology -- the method of learning involving knowledge blocks. I applied this method continuously since then, and years later, I am transmitting it to my students.
Epistemology always has the last word.
Discovered around 1856, epistemology, as explained in Webster's Collegiate Dictionary (2002), was initially: "used for the study of nature and grounds of knowledge especially with reference to its limits and validity."
Throughout the years, epistemology became the science of learning, building the basement of assimilating knowledge, depicting its limits and its validity.
Even if you are lucky and have discovered, by your own study or through mentorship, the most consistent and symbiotic trading technique, there remains the problem of assimilating and practicing it.
This method of building knowledge blocks (modules, as it were) is used whenever a student studies almost anything that requires continuous progress learning in a series of steps, with the ultimate goal of performing a process rapidly and easily. This type of learning also facilitates access to these modules for immediate memory retrieval and application.
The methodology used to explain the concepts is simplified in such a way that the novice would understand it efficiently without prior knowledge. I have made full use of it, throughout my entire life, including for trading, teaching and academic work. I sincerely believe that this science of learning should be taught starting in high school and carried through to the university level.

Going through the Bushes...or around Them?

You can't imagine how many obstacles can get in the way of the learning curve. I will present here just a few of them.
First of all, in order to know yourself, you must trade. Then, you'll be amazed to find out what kind of person is under your skin. Once you have made the right diagnosis (as to what kind of person you are), you should be on your way to adapting your personality to the various indispensable requirements of trading. It takes a lot of hard work to reach the professional level through the labyrinth of the learning curve.
Secondly, we should talk about the indispensable personality traits that make an excellent trader: Perseverance, patience, mastery of impulsive behavior, giving up of some of one's long-held beliefs, training oneself in the feel and practice of routines and specific attention to details...As you can guess, the list is long. The trader who isn't capable of changing, creating or re-inventing these traits will have a very difficult journey in the learning curve.
Thirdly, I should also mention that any previously practiced profession -- other than that of trader -- may or may not influence the learning curve and the practice of trading. For example, I don't know about other physicians, but my previous training helped me a lot. Medicine taught me how to deal with huge volumes of information, which must be sorted out when a diagnosis is made.
We medical students learned to gather evidence for multiple diagnosis choices and then progressively eliminate the less probable ones until we were left with a single one. When a doctor reaches this step, much is at stake: If it's a vital diagnosis, the physician must be sure that it's the right one. Otherwise, he or she will lose the patient.
In trading, the diagnosis environment is replaced with the trading scene, and the list of diagnosis elements is replaced by fundamental and technical elements, indispensable for the decision-making process.
In my opinion, pianists make the best traders. Why? Well, it's simple: Their sense of profound musical note analysis, fast reading ability of those notes, huge calligraphic sign memory and a touch of symmetry.

Mentorship: A Question of "To Be or Not to Be..." a Successful Trader

It is unfortunate but true that, at the time I began trading, I thought I didn't need a mentor; after all, I thought to myself, I'm a self-educated person. Well, all these years later, I realize that I was wrong, completely wrong. It would have saved me a lot of time, for the same invested money in my non-mentorship education.
This topic goes even deeper than it might appear. It's directly related to learning guidance. It reminds me of the question that I get from almost every student of our trading seminars. It goes like this: "How can I become a consistently profitable trader?"
To be successful in trading you need to do one of two things:

• Go through the learning curve on your own as I did -- As I stated earlier, this requires a lot of time, money, and very frequently, the trader won't be able to grasp alone, correctly and methodically, the principles of money management and the psychological aspects of trading. These two elements together make up more than 90 percent of trading.
• Or, go through the learning curve with the assistance of a mentor -- This way takes far less time, and the money side of it will be more visible because you'll be spending it within a shorter period of time. If a mentor doesn't assist you, you may lose far more money, with poor or even non-existent results.

Most novices aren't even aware of how much fraud occurs in this learning business. Traders call it snake oil. But, there are many ways to avoid it. Mainly, you should look for the credentials of the people providing the education.
If they are not registered with the National Futures Association (NFA) at http://www.nfa.futures.org/ (controlled by the U.S. Government) and do not have the title of Commodity Trading Advisor (CTA), they can't advise anyone legally in futures trading, under penalty of punishment that goes up to prison time.
The mentor should be a successful trader -- not just an advisor and educator. He or she should also be keeping up to date in new trading techniques, so this person can improve his or her consistency. This is best done by publishing research work in well known, serious technical magazines, such as Traders' magazine in Germany and Technical Analysis of Stocks & Commodities and Futures magazine in the USA -- to mention just a few.
The mentor should belong to Market Technicians Association (MTA), a professional organization that maintains high standards for teaching the science of technical analysis.

The Psychological Aspect of Trading...Can It Be Learned?

Psychology is the continuous process of fueling the decision tree in the trader's mind, which is an indispensable factor influencing the trade outcome. One person -- should I better say "a scientist of the mind" -- has helped illuminate my thinking on this. Dr. Jonathan Baron, a 65-year-old psychology professor at the University of Pennsylvania (http://www.sas.upenn.edu/~baron/) dedicated many years of his life to the study of judgment and decision-making, which he describes in detail in his latest book, Thinking and Deciding (2007).
I warmly recommend this book -- even if you read it only for what it tells about the omission phenomenon, as well as inaction and decision-making processes -- even just these three will greatly enhance your trading performance.
The saying, "Human nature tends to see what it expects to see," is the idea behind some of Professor Baron's teachings. How can trending traders enter their trades earlier than the first third of the trend? They can't...because they weren't trained to do so. Thus, they can't expect to be able to do so.
In order to enter at the trend's inception, during the first swing, the trader should get familiar with many other more sophisticated elements that do not belong to classic technical analysis but rather to its modern version; he or she should be aware of Gann stealth levels, Gann main levels (G1 through G4), Jenkins True Trend Lines (JTTL), Elliott and Wolfe waves and many more. After one is trained in all these elements, and after using them becomes everyday routine, intuition will knock at trader's door, and the trader will be able to enter the trend in its first tenth, not just in its first third.
Speaking of the psychological aspects of trading, the "trigger-shy" syndrome is a classic. It occurs when the trader tries to perform a trade; even if he or she has the willingness to enter, the power to execute the trade isn't there. The behavior is somewhere between mental inaction close to paralysis and shyness. It seems as though some thing is keeping him or her from doing it!
Willingness comes from the fact that, consciously, the trader believes that he or she is ready to trade and become rich quickly, but the subconscious mind doesn't agree and blocks this enthusiasm. It seems that there is an internal conflict between the two I's ...One is protecting the other...to put it bluntly, and in terms a trader will understand... it's a sort of psychological stop loss of common sense!
To avoid this syndrome, the trader must have a very strong personality, first, by understanding the cause and, then, by taking the appropriate approach to getting rid of it -- either by him or herself or with some exterior help. The origins of this syndrome are numerous -- insufficient time spent to acquire knowledge, insufficient capital, probable psychological instability, fear of immediate danger, fear of losing and getting wiped out, and many more.

The Emotional Side of Trading

A professional trader has few emotions. Many readers may be surprised to hear this, but I will mention the word "confidence"...and they will understand quickly. Nothing can be done without confidence. No trader will use a trading strategy without having full confidence in its efficacy. But, it is hard work to gain confidence. It takes many months, even years, to get acquainted with the optimal tools you have tested and re-tested and that are prone to provide the best trading results.
Confidence is a rare friend that, once acquired, will assist the trader day after day. Would you be surprised if I told you that confidence is based on trial, routine and ritual? Of course not! These are the only methods by which we gain experience and go to the next step in the learning curve.
Whenever you have to make a hard decision, you will be at peace because you know the odds beforehand and because you've seen this before. And, anyway...the loss was planned, and you can't lose more than "tiny bits". After a losing streak or a huge profitable trade, you should be experiencing the same type of mood -- serene, free of anguish and ready to start all over again.
Your attitude is based on the confidence you have in your store of experience. Keep in mind that slumps and joys are two indispensable, frequent feelings during the trading process. Being under pressure should never change your attitude of confidence. At the end, there will always be a new day, and the sun will rise again...with one condition...if you've preserved your trading capital because you have obeyed the rules concerning the "tiny bits" stop losses.
As you can see, the foundation of learning and trading consists of three parameters:

1. The psychological aspect
2. Risk and money management
3. Trading strategy

...in this precise order, with the first two representing the bulk of it.

How Many Trading Set-Ups Does a Trader Need to Learn?

I don't define a trading approach by the number of set-ups. Let me explain, please! Every market has its own behavior; every time period also has its own personality. Neither the market nor the time period is constant throughout any given week. Moreover, a EUR / USD Monday morning trading period can be quite different from that of a Dax Futures Monday morning.
For instance, Dax Futures have two probable high-momentum periods -- the morning and the afternoon, after 15:30 hours CET, at the S&P 500 opening. In order to catch the majority of it, the trader must adapt one of his or her numerous techniques to the idiosyncrasy, not only of the traded market, but also of each time-of-day interval.
All of this is valid with two conditions, if you:

1. Use a common decision tree
2. Have a fluid, optimal set-up that can be instantly applied to a specific trading situation whenever that occurs: Opening, post-opening or pre-close

To give you a precise answer to this question, I can mention that I describe a few tens of set-ups along the way in the 1,224 pages of my three books. To be more exact, they all have in common the same decision tree and the same degree of evaluated momentum based on three sets of approach choices one can take:

1. Directional or non-directional
2. Support or / and resistance
3. Volatility

For instance, the last of the three uses a dual Bollinger Bands technique, well described in several pages of my latest book, excerpts of which are on my website:
http://www.pitchforktrader.com/vol1_excerpts.pdf
http://www.pitchforktrader.com/vol2_excerpts.pdf
http://www.pitchforktrader.com/vol3_excerpts.pdf

The Three-Pawn Technique: Don't Trade without It

We used to kid around with our students by saying, "Don't leave home without the stop loss!" My students now understand that every trade must have its stop loss and its target(s). I helped instill this in their minds through the use of "The Three Pawn Technique", which is a "to be or not to be" trade situation or a "to make or not to make" entry decision. This progressive-order technique consists of three steps:

• Step 1 -- Find the most optimal entry of various mechanisms and place the first order.
• Step 2 -- Scrutinize for the best stop loss location -- and then immediately enter a stop order, right after the entry order is executed. This will be the second order.
• Step 3 -- Find the most appropriate logical profit objective and then calculate the optimal reward / risk ratio (R / R ratio). This will be the third order, right after the stop loss order is sitting on your broker's waiting list.

Most of the time, these three progressive trading orders, labeled the "Three-Pawn Technique", are pre-arranged at the moment the trade decision is made. It is vital for capital preservation's sake, that once they are established, they should never be changed.
Because of the reliability and automatic nature of this technique, we named it "the automatic trading mode". It is one of the best remedies for the "trigger-shy" trading syndrome.
If only two orders are pre-arranged, we are in a semi-automatic mode. If the three orders are not pre-arranged, we are simply in a manual mode.
As for the exact location of the stop loss, we always locate it near a technical level, and we fix the stop loss 2 to 4 ticks away. We never use percentages as other folks do.

Don't Ever Neglect Money and Risk Management

Would you go to the supermarket without knowing exactly how much cash you have to spend? No smart shopper spends more than he or she has. Suppose you have a fixed monthly allowance for food, and you go to the supermarket four times a month. You won't be surprised to find that every person knows exactly the amount he or she will spend every week...Otherwise, the money will run out, and the person will spend out the monthly amount ahead of the month's end.
Well...the same thing happens with the well trained trader. He or she opts for the Gann approach to money and risk management:

1. Divide the entire capital into 10 equal parts, to be used for 10 opportunities.
2. If less than 10, divide the entire capital by the appropriate number.
3. Don't take any trade by risking a $1 for a $1. Always enter the trade with a minimum risk of $1 for a probable reward of at least $2.5. (We seldom recommend making 2 to 2.5 R / R ratio trades -- and, even then, only if they have a high probability of success. Never forget that our main purpose is capital preservation. There is always another opportunity but only if you still have capital. Our purpose is not to make any home runs. We are only looking for low-risk, high-probability trades.)
4. Don't forget that you are the Chief Executive Officer of your own economic entity -- the responsibility for the investing or trading mechanism and the performance of your capital rests only on your shoulders. Follow the rules if you don't want to lose...If you do lose, you are the only one to blame.

Does the Current Financial Crisis Influence One's Trading?

There is no such thing as luck in trading -- except, sometimes, beginner's luck! Some traders make some money in the beginning -- just before the catastrophe of their life occurs -- when they find out that trading is a profession and that the market isn't a casino.
You are either a real professional or a novice! Professional traders always count on the probability of a price move or on scenario patterns. Most of the time, they make only intraday trades aligned on daily and 60-minute time frames.

Figure n° 1. Scenario n° 1 for the Dow Jones Industrial on a 240-Minute Chart
The chart in Figure n° 1 considers that the wave B correction has a high probability of being already terminated at the 11258 key level and that a devastating Elliott down wave C is in progress, which is capable of dropping, not only to the old low key level of 6470, but even further down (also see Figure n° 2).

Figure n° 2. A Dow Jones Industrial Monthly Chart, Illustrating the Highly Probable Fall of a Devastating Wave C
The highly probable fall of the wave c to the 6470 key level (or as in scenario n°1) illustrated in Figure n°2 must comply with three conditions; the following 3 key level supports must be broken:
- 9835 (the low of second wave X of wave B) -- visible on Figure n° 1
- 9757 (the low of wave (v) of wave 1 of wave C) -- visible on Figure n° 1
- 9595 (the apex of the leading triangle of the wave 1 of wave C) -- visible on Figure n° 1

Figure n° 3. Scenario n° 2 of the Dow Jones Industrial on a 240-Minute Chart
The wave B correction in Figure n°3 is not yet terminated, and we are currently developing a flat pattern: The sub-wave (ii), or rather (iii), of wave (c) belonging to the Z flat pattern of wave B. If market flux climbs to the termination of wave (a) at the 11258 key level, we will have an expanded flat pattern. Otherwise, in case of a wave (c) failure, we will be satisfied with a running flat pattern.
The crisis does not influence intraday futures trading performance because the intraday swings are always there; we can trade either way: Short or long!
Remember the old dictum concerning the intraday trader? "Never sleep with the markets!" At the most, exit the trades a few minutes before the close!

What Is the Most Optimal Charting Software Around?

We freely recommend to our students the professional software that we have used for more than 18 years -- eSignal, Advanced GET Edition (www.esignal.com); it takes approximately 20 hours to be thoroughly proficient with the software, so we work with our students to help them gain proficiency with it.

Figure n° 4. Our First Emphasis -- Learning the Basics of Classic Technical Analysis
After emphasizing the basics of classic technical analysis (as illustrated in Figure n°4), our students then "graduate" to state-of-the-art modern technical analysis (refer to Figure n° 5).

Figure n° 5. Our Emphasis for Professional Trading -- State-of-the-Art Modern Technical Analysis
Our Excel files back up the type of professional analysis illustrated in Figure n° 5. We offer freely to our readers and students 44 Excel files taken from the Advanced GET software -- worth more than $2,500 and indispensable for trading strategies based on modern technical analysis: Fibonacci-, Gann-, Jenkins-, Elliott-, Lucas-, Mark Fisher- or Wolfe-based methodologies and also for money and risk management strategies.