Phase 1 - SEARCHING FOR OPPORTUNITY

This part is fun for the first hour of the day. After that I start getting a little bored.

Phase 1 is simply looking over charts or reading trade rags or whatever, to find setups for the type of trades you like. This is primarily an intellectual process. However, there are emotions that creep in that can really hose you up.

Say you like to trade breakouts. You have just spent an entire hour looking for a breakout the fits your criteria. You haven't found one. You did, however, find that you missed about 3. What is your emotional state of mind at this point? Suddenly, a setup that is a lot like one of your breakouts shows up. However, it is not exact. Your state of mind will push you towards entering that trade. An hour ago, when you were fresh, you wouldn't even consider it. Now it miraculously looks great and you enter another losing trade.

You need to define your process of looking for opportunity and stick to it. If you get bored then, find some creative angle to keep your interest up. If you get upset over every missed opportunity then find another profession.

Phase 2 - OPENING THE POSITION

This part must be reflex. From the time it takes to spot a setup until your order is in should be seconds. I have setups where I hit the offer and others where I bid for the stock. Know your setup and how to trade it. When the setup is identified, no matter how you go about it, open the position. Now. Go. Indecision Kills. If you don't have confidence in your phase 1 process then change it, but DO NOT go into phase 2 and start second guessing. That is the sure sign of a wimp. Wimps lose because they do not trust their own background work. Enough said.

Phase 3 - MANAGING THE POSITION

Well here it is. This is the most difficult part of the whole trading game for most of us. Your money is on the table and it is time to panic. Reminiscence of a Stock Operator has a great quote on comparing the professional to the amateur on this point. He says that for amateurs when the price moves against them they hope it will come back and when they profit they fear the market will take it away. They end up cutting their profits short and letting their losers run. Professionals are just the opposite. When they are losing, they fear the market will take more and when they are profiting, they hope it will continue.

Sound advice. If this is your area of trouble let me suggest something: Go ahead, fear, greed, hope, dream, but learn to ignore them. If you are successful at ignoring them, they will start to go away. The trouble is you will find that these emotions are fun, but will ALWAYS result in failure. What you must do as a professional trader is follow your rules regardless of what you feel like.

Here is what I do. I review my trades at the end of the week and see if I followed my rules exactly. Then I look to see what would have happened if I did follow them. I total all the results and get a bottom line figure. Would following the rules to the letter result in more money? If so, I keep trading until I can follow the rules. If not, I change the rules.

It takes time to develop confidence in your rules. However, it is time well spent. Your rules are the only weapon you have against yourself. "Luke, Luke, follow the force" only works in movies. With the market, you need cold hard realities outside of your own perceptions. When the emotions are at their highest, the quality of your decisions are at their lowest. Since Phase 3 is the most important and this is where emotions run the highest, is it any wonder most people lose at trading?

One of my favorite trades generates a lot of emotion for me. So, for this trade I have a very clear, objective exit plan. Why? Because all that emotion messes me up. When the trade is reaching the profit objective it always feels like there is more to go. I have reviewed this trade over and over and found that my written exit is the most consistent I can get. So, how do I manage the trade? When the exit signal is given I hit the bid (or offer), period. I don't hem and haw. I don't play "what if" games. I don't dream about a better trade this time. After I open the position, I get the close order ready. I have the confirmation button under the mouse. My eyes are focused, waiting for the exit. Signal, click.

Are all my trades like this? No, just this one. Because it is so emotionally charged I can't afford to do it otherwise.

Phase 4 - CLOSING THE POSITION

Just close it.

Once again this is a reflex action. From phase 3 to 4 you switch from "when do I do it?" to "how do I get out?" At this point my brain is not thinking about the trade, profits, loses, commissions, or the Futures. I have one thing to do: get out. Island, ARCA, whatever, just get me out.

Phase 5 - ANALYZE

Is this important? Ask any professional trader and you will get the same answer: Yes!

Dr. Alex Elder has an interesting way of finding out if a patient is an alcoholic. He will ask the patient to write down every time he has a drink; how much, what were you doing at the time, etc. In a word, keep a diary. If the patient refuses or questions then he is an alcoholic. If not then he is probably not.

The same goes for traders. If you are unwilling to keep a diary of your trades then you are probably addicted to trading for its own sake. You're a loser. Sorry to be so blunt, but someone has to tell you.

Do you want to be a professional trader? Then act like it. Keep records, review your performance. See what works and what doesn't. Find out what conditions goof you up the most. Search for ways to improve and work around those conditions.

If your analysis consists of looking over lost opportunities and pining away the evening you are just creating emotional baggage. You are not analyzing.

One other note on analysis: You cannot form an opinion on a setup based on one or two trades. Think about it. Does every setup/plan work every time? Of course not. You might have found the best trade in the whole world. However, it only works 1 out of 4 times, but when it works it generates huge profits. If you try something and it fails 3 times in a row it may or may not be a bad idea. Paper trade, backtest, do something to boost your confidence in your idea and then give it some time.

Analyze with real data and objectively. Then take that information back and improve Phases 1 and 3. Keep this up and the money will come, the money will come.

PUTTING IT ALL TOGETHER