On your way to becoming a better trader: phase 3

In the last article we have been dealing with phase 1: The unsuspecting and phase 2: The semi-informed.

Today we try to shed light on what you can do in phase 3: The Semi-Pros to improve your existence as a trader. Semi-Pros are basically characterized by the fact that they have absolutely understood what this business is all about and actually have what it takes to be really successful. But in this phase, one experiences again and again setbacks which hurt very much and tear deep holes into the account.

Semi-Pros are mostly well educated in trading, have spent a lot of money on training and coaching and in most cases have also bought/rented good software and have often afforded one or the other AddOn for analysis assistance.
But that you are aware that the best software and the most expensive AddOn doesn’t make a Semi-Pro yet. A lot of preliminary work is necessary.

Pro traders also suffer from deep holes, but the difference is usually that in the semi-pro area, besides the drawdowns, which simply arise despite technical correctness, there are also the avoidable mistakes – where the necessary consequence is missing and one can be carried away to expensive experiments, which are based on greed or quite simply lacking perseverance of his strategies.

The biggest enemy of the Semi-Pro is doing the things for the sake of it, i.e. you believe you have to act although there is nothing to act.  Mostly out of the situation to wait for hours in front of the computer for the signal and it doesn’t come – and then out of the urge to have to do something you start to do things you wonder about later in the analysis yourself.

The cause of doing the things for the sake of it, however, is actually to have a strategy which is or can only be applied to a few symbols. The most traded instrument in German-speaking countries is the DAX. Now one should ask oneself why?
Why can’t it be BMW, Daimler, Allianz – why not DNDN, CTOS, BAC, S&P Mini, Nasdaq Mini, Corn, Wheat, Soya or whatever?

But if you look around at trader exhibitions etc., the DAX seems to be the last end of wisdom and the only instrument that makes a real trader. For example, if you don’t talk about the DAX at WorldOfTrading as a speaker, you don’t seem to belong to it, or the first question from the audience is usually where you will see the DAX in the near future.

If you talk to a broker when you want to give a lecture, we are often asked to talk about the DAX as well. Of course, as a trader you will also be ‘educated’ to trade this symbol and maybe one or the other symbol (gold, dollar, oil), but then it’s already over.
Only one forgets that in these 4,5,6 or 10 symbols there can be phases where nothing happens in all symbols and exactly then the grossest mistakes happen, that one suddenly sees ghosts, which one would never trade in the normal case actually.

A big contribution to force this kind of action lies mostly in the used software. The large number of software products also does not allow more than a handful of symbols to be observed simultaneously. You may have the most colorful black and free-flying charts, but the producers of these software products have set up the platforms to have 6, 8 or 10 screens to watch a few markets.

But if you have a chart in front of you all day long, you start to interpret it too inevitably and recognize market opportunities that are not market opportunities and even less fit to your own trading rules. Those who begin to interpret begin to torpedo their strategy and begin to disregard their rules.
And thus one creates free space for big mistakes and even bigger losses.

A strategy works best when you have identified market situations which work in every instrument, or at least in a large number of instruments. This has the advantage that you can scan your signals from a variety of symbols. Once you have found such multiple market situations, you can let the computer work for you to find these signals. The US market alone offers about 5000 highly liquid stocks, which can be traded in 5 minutes timeframe.

Many times, you hear – and let’s get back to the DAX – that you know your instrument so well and that’s why you trade it. I have added 4 charts in the 5 min Timeframe, one of them is the DAX, the others are Netflix, BMW and CTOS.

Which one is the DAX? And even if you recognize it – why should you trade it and not one of the other symbols?

I believe the majority of readers of this article have read ‘Das große Buch der Markttechnik’. I could not recall, for example, that only the behaviour of a single instrument was described here, but the market behaviour in general, which is applicable to every liquid symbol.

From this we can see that it does not make much sense to limit oneself to a few values, but that diversity is the recipe for success. What works in the DAX probably works with many/all other instruments in the same way. Except that the DAX is designed to tear holes in its account due to its heavy weight.

Now you are probably wondering why I am so busy with the topic DAX. Quite simply, the majority of traders who achieve great success look for markets in which movement is currently taking place, i.e. instruments that are in ‘play’ and then deliver the signal that promises success. And you can only find this if you look for trades from a universe of many symbols.

A good trader diversifies … in two ways.

  • A good trader diversifies in the selection of the signals so that he reduces the number from a large number of symbols to such an extent that he finds those which have the potential to have large movements in front of them.
    Once you have compiled this list(s) in which you can buy, you wait for the right signal and are sure at this point that it is a symbol that is in motion and on the other hand a signal also proposes an entry that confirms the expectation.
  • The second type of diversification is to divide the risk of your trades between several/many small positions and thus make individual losses absolutely bearable. Thus, one does not concentrate on the profit and loss of a single trade, but on the totality of his trades.

If a well-trained trader, with good and expensive software does not get ahead and suffers again and again large setbacks, which throw him again and again mentally, psychologically and emotionally off track, then it is with the greatest probability that one makes this mistake again and again because one concentrates on too few instruments and/or acts only a handful of symbols and the consequence is that one must give too large risks into single titles in order to have the chance to make profits … But great risk usually means great fear and fear leads to mistakes.

The next advantage of signaling from many instruments is that you never interpret a chart, but always wait for a signal from a scanner and only analyze a chart based on the signal – and that’s the big difference.

Very important: in order to cushion unforeseen market situations, you should additionally keep your account in a long/short balance, which means that you should hold approximately the same capital in long or short positions. Of course, it doesn’t help to build up short positions in an extreme long market. But here again the diversification approach helps. If you choose your trades from 1000s of symbols, you will find under guarantee symbols that run against the general trend and thus offer trading opportunities in the opposite direction of the market. You will not have this possibility with a few markets and therefore you are very often in a cluster risk.

The AgenaTrader has also started to provide help here again to implement the CorrelationMatrix. This gives you the opportunity to find values with extremely strong anticorrelations in order to build the best counter-positions from these values. So, if you belong to the semi-pros, but are always struggling with setbacks, please think very hard about the diversification approach and its truth.

Those who know the AgenaTrader will probably understand why the software was built like this and not like many other software products on the market. Probably now it will also become clear why we get the feedback from traders and brokers that users who use the AT in the markets perform much more stable than users of other software products. You will probably also understand that the users who use the AgenaTrader correctly will never give it back again.

The next issue will deal with the optimization potential of already successful traders (i.e. phase 4).

 

Disclaimer:
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. Hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. All information on this website is for educational purposes only and is not intended to provide financial advice. Any statements about profits or income, expressed or implied, does not represent a guarantee. Your actual trading may result in losses as no trading system is guaranteed. You accept full responsibilities for your actions, trades, profit or loss, and agree to hold this information harmless in any and all ways.

Risikohinweis:
Börsengeschäfte sind mit erheblichen Risiken verbunden. Wer an den Finanz- und Rohstoffmärkten handelt, muss sich vorher selbstständig mit den Risiken vertraut machen. Eventuell dargestellte Analysen, Techniken und Methoden stellen keine Aufforderung zum Handel an den Finanz- und Rohstoffmärkten dar. Diese dienen ausschließlich der Veranschaulichung und Weiterbildung und Informationszweck und stellen keine Anlageberatung oder sonstige individuelle Empfehlung dar. Sie sollen lediglich eine selbstständige Anlageentscheidung des Kunden erleichtern und ersetzen nicht eine anleger- und anlagegerechte Beratung. Der Kunde handelt gleichwohl auf eigenes Risiko und auf eigene Gefahr. Beachten Sie bitte die aktuelle Fassung der AGB.