Tips For Newer Traders

  • October 8, 2003
  • Rob Hanna

Both the Nasdaq and
S&P opened up and traded within a fraction
of hitting new 52-week highs before reversing and trending lower on the day. So
will the market break through these obvious levels of resistance, or are we
forming a double-top? I have no way to know for sure, so my plan remains
the same. Trade both sides of the market with some extra caution, but
trade both sides of the market. (Note: breakouts are appearing
again on the long side.) Maybe I’ll have some more clarity on Monday.

One concept I frequently stress in this column
is the importance of sticking to your trading rules. Trade your plan. Don’t
make erratic emotional decisions, as these will many times turn out to be the
worst decisions you make. I’ve also spoken of designing your trading plan
in a way that it won’t be emotionally taxing for you to follow it. Trade
within your comfort zone and it will be much easier to execute without all of
the emotional whipsaws. All sound familiar? Great. One problem…

I’ve received some emails recently from readers
who don’t yet have what they would consider to be a complete trading plan. They
don’t know what their favorite setups are. They aren’t sure which they
hate more, missing a big winner, or entering a big loser. And they don’t
yet feel they have a “comfort zone”.

This happens with every new trader. You will
find that even what seems like a brilliantly designed trading plan at the start
will need several revisions over time. This “fine tuning” is what will
eventually make your trading plan uniquely your own. Without experience,
there is simply no way for you to know what type of trading you are most comfortable
with. So today I thought I would share a simple and effective idea that
allowed me to refine my trading plan over time.

One problem new traders experience is that there
are so many entry patterns and ways to trade that it’s difficult to know what
patterns may work best for you. So how do you determine what patterns are
the “best”? I would suggest that you track the patterns you use for entry
in your accounting software (or a spreadsheet).

Every trade that you enter must have a reason. Enter
it in a separate column. For some trades there may be more than one reason (perhaps
you entering based on a Landry Trend Knockout and a Connor’s Trading Window).
In that case you can either enter both patterns, or more simply call it a “combination”
trade. If you enter a trade based on a gut feel, rather than using a defined
entry pattern, enter “gut feel”. (I had several of these as a rookie daytrader,
until I realized just how much they were costing me.) After doing this,
you should be able to sort your trades so that you can see how much each strategy
has made or lost for you over different time periods. Over longer periods
of time, you’ll find that you are more adept at trading certain patterns rather
than others. Concentrate on those. Weed the others out.

A few things to note:

  1. You’ll need a fairly long period
    of time before you’ll be able to draw any definitive conclusions.
    This is because certain patterns will perform well in certain environments
    and poorly in others. For example, reversal patterns may be difficult
    to trade in a strongly trending environment. Longside breakouts won’t
    perform as well during a bear leg. Pullbacks fail at tops and bottoms.
    Make sure you view your trades over a period of at least 6 months or more
    so that you have a decent sampling.

  2. By identifying which patterns
    are regularly unsuccessful for you, it’s possible you may be able to make
    some adjustments in your profit taking, stop placement, etc. Trade management
    adjustments may sometimes turn what was once a losing strategy into a winning
    one. Of course if this doesn’t work, bag the strategy.

  3. Tracking the trade “reason”
    is an excellent way to establish discipline when trading. If you must
    have a reason for entering a trade, it will discourage you from making emotional
    trades. Once you realize the “gut feel” pattern is your worst performing
    pattern, it won’t take long before you stop trying these kind of trades.
    Then again, those of you that are gifted with ESP may have more success
    with this type of trade than I did.

  4. You may also want to consider
    using a 2nd, larger categorization for your patterns. You can
    group them together as pullbacks, breakouts, and reversal patterns. This will
    allow you to do two things: 1) Determine whether you are more comfortable with
    one type of trade than another. It isn’t necessary to trade all 3 types. For
    example, Dave Landry has become very successful by concentrating on pullbacks.
    2) If you do trade 2 or 3 of the above categories, you can then develop your
    own UUWNHI (Unofficial, Unscientific, Working/Not-working Hanna Indicator).
    This will help you keep in tune with the market and determine which types of
    trades you may want to focus on vs. those that you may want to approach with
    more caution.

Feel free to write me if you
have any questions about this.

Good trading,

Rob
Hanna

P.S. I recently finished

Derrik Hobbs’ new book and thought it was excellent. I would certainly
recommend it to anyone looking to gain a better understanding of how to apply
Fibonacci analysis to their trading or add a few new tricks to their bag. Nice
job, Derrik!