To survive and thrive in trading managing risk is critical. The basic component in your risk management plan is the stop loss (how much you are willing to lose on each trade). Before determining the stop method you’ll use, make sure the dollar amount of the loss truly fits your personal risk tolerance. 

There are many types of stop loss methods including:

1. Fixed dollar amount

2. Maximum Adverse Excursion 

3. Volatility

4. Moving Average

5. Time

6. Opposing entry signal

7. Percent Retracement

Just like your choice in style of trading, your stop loss method needs to resonate with your personality. You must trust, even like it. 

Given that markets change in volatility constantly the volatility stop is an excellent choice. This method will adjust the distance from entry to stop based on present time volatility. One simple formula uses a multiple of the Average True Range. This method will tighten the stop when the market is calmer and widen the stop when the market is volatile....

Legendary golf coach Harvey Penick wrote in his best-selling Little Red Book that you could build a solid game of golf around one club, the 7-iron. If Harvey were coaching you he would say “Simplify. Focus. Pick one club and master it.”

While that’s a sound plan to get started it won’t win you any tournaments. 

The same goes for successful trading. Focusing on one strategy or style of trading until you’ve mastered it is a great start. But market conditions change, and strategies get hot and cold. You’re best served by having the skill to trade effectively in varied conditions. 

Is the market trending or range-bound? Is the market volatile or quiet? Pick your “club!” 

Once you master your first strategy make sure the next one is complementary not competitive. Make sure it addresses different market conditions and allows you to trade in different timeframes. Have trend, reversal, day, and swing trading versions. 

Our trading teams focus on multiple strategies for day trading futures...

Pre-Paying

Before online retailing we went to a brick-and-mortar store. We saw, touched, used and/or fitted the merchandise. Then we decided and paid. Very safe, the sequence of paying afterward. 

I recall the first time I wanted to buy shoes online. It was a hard decision. I wanted to try them on, feel the fit, and not have the hassle of shipping them back for a refund. Eventually I gave in and judging by the growth of online retailing, most everyone did too. 

If you’re comfortable now with buying from an online retailer, you are one step closer to being an unemotional trader. 

Think about trading this way: The price you’re paying to enter a trade is your pre-determined stop loss. That’s the most the trade will cost you. The “merchandise” you’re expecting is the profit target(s). Pay a fixed amount in advance, receive an unknown amount back. 

Imagine you’re writing a check to Mr. Market when you enter your trades. If you have this mindset that the "check" was cashed and out of yo...

It’s easy to get lost in the price charts, technical indicators, price patterns, and economic data looking for trade setups. However, when it comes to identifying why any tradable asset may move significantly in price, few factors are as influential as a catalyst.

Today, the FOMC releases an interest rate decision and holds a press conference announcing their view on the economy and future interest rate direction. A catalyst like this is easy to manage. We can prepare our response since we know when it’s coming.

If you’re trading stocks or options your primary catalyst is earnings season (MSFT, META & TSLA report tonight). We don’t know the direction a stock will take until after the announcement, but like the FOMC release, we can prepare ourselves for a trade decision in either direction. 

The best catalysts are those that are unknown to the public: the “surprise” news announcements. The price reaction to these can be extreme because traders are caught off guard. 

Here’s the good ...

If trading is 80% psychological that leaves 20% to the edge your strategy has. We really don’t know if the 80% figure is accurate but you’ll hear a big number like that from many skilled traders and coaches. Regardless of the accuracy, how we behave as traders is vitally important. 

Back when racquetball was popular I was a competitive player and hired a coach to improve my performance. Here’s the dialog from our first lesson. 

Coach: “Why do you want to play racquetball?” 

Mike: “Exercise, gets me in shape, fun.” 

Coach: “You have it backward. You don’t play to get IN shape. You get IN shape to be a winning player.”

Mike: “Aha!”

I was approaching the game out of sequence. That first lesson ended with me getting a detailed exercise regime and the directive to follow it precisely before next week’s lesson. 

Sometimes what we’re looking to achieve has a hidden sequence. In trading, knowing yourself and addressing weaknesses should be early in the sequence. How much time do you spe...

Imagine starting in trading without any historical information. No price charts. No patterns to study. No economic information. No annual reports. What would you use to determine if it was time to buy or sell? 

Thankfully, we needn’t dwell on that question at all. We have incredible historical information available that we can research for potential edge in our trading. But the fact is that historical information is not a perfect predictor of the future. We can’t control the market. 

The future we can control is our behavior. The result of every new day, every new trade is mostly controlled by how we behave. Were we disciplined following our rules? Were we emotional about wins and losses? Were we prepared? Were we curious about improvements? 

While we depend on historical data to give us an edge, that edge is only as good as how we act in present time. This brings us to the cornerstone of successful trading: self-mastery. In a world where the market’s movements are beyond your contr...

Three celebrated authors on trading success, Mark Douglas, Van Tharp, and Alexander Elder, all agree that one aspect of trading is crucially important: 

"The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading." - Mark Douglas

"Successful trading is not about being right; it’s about being disciplined. Discipline is the ability to follow one's trading plan, regardless of emotions or external influences." - Van K. Tharp

"Discipline is the bridge between goals and accomplishment in trading. It's the ability to stick to your plan even when fear, greed, and doubt try to derail you." - Alexander Elder

How does one become disciplined? According to trader psychologist Dr. Brett Steenbarger, “Loss of discipline is not the problem. Loss of discipline is the result of a problem, and we have to diagnose that problem to figure out how to address it.”

And once you’ve diagnosed it, Willpower author Roy Baumeister sug...

The worst situation to be in trading Futures or options is having one contract. You have little flexibility with your exiting decision. 

Fortunately, with many micro contracts in Futures to select from even smaller account holders can trade multiples. This gives you the flexibility to “scale out” of the trade one contract (or more) at a time. 

Ultimately, your size is a function of your acceptable risk. How much you’re willing to lose when you stop out will determine your size. Trading micro contracts, if you’re willing to lose $120 on a trade and the per-contract risk is $30, then your size is obviously 4 contracts. 

The challenge you have with day trading is market noise. The bigger picture trend may look smoother than the trading timeframe chart. Sometimes that "noise" will stop you out prematurely. One way to mitigate this is to set an initial high probability profit target as your first exit. Call it a “risk management profit target.” It gives you a little win, reduces your ris...

Traders can learn from so many great sources that have nothing to do with trading. Whenever I’m reading any topic unrelated to trading my thoughts often drift to how I could apply the same information to trading. 

If you think about it, trading is more psychological than mathematical. That means your ability to improve your results rests more on improving your behavior than your strategy rules. 

Here’s a great example: Charles Darwin said, “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”

So true in life and in trading!

Reading this quote, agreeing to it, and then doing nothing to systematically apply this truth to your trading would be a shame. 

Here's a suggestion on how to apply Darwin's observation. My friend and colleague Dr. Woody Johnson, author of Secrets of the Peak Performance Trader, encouraged me years ago to start a “thought journal.” Rather than simply documenting trade results and associated data,...

Trading success is more psychological than mathematical. When I first realized this I was disappointed. I like math and wanted to find my success in formulas, indicators, and statistics. These are all valid tools for finding edge, but that edge won’t translate into positive performance until you get your head right. 

I’m intrigued by the number of biases we might have that hinder our success. Here’s a look at some less obvious biases that interrelate. 

Narrative Fallacy: This occurs when you create or believe in simplistic stories to explain market behaviors, even if the data doesn’t support those stories.

For example, you may believe  a market “story”—such as “Tech stocks always lead the market”—and ignore data that contradicts it. This can lead to biased decision-making, missed opportunities, and unnecessary losses. 

This is an easy one to catch yourself with. Anecdotal stories are obvious!

Here’s the fix: Focus on data. Prioritize quantitative analysis over storytelling. Play D...