It occurs to me that I talk a lot about having and following a trading system but maybe you don’t know what makes up a system.

So, today, we are going into the details of an effective system. Once you have a clearly defined strategy or system, you can learn to execute it, with the trading rules set in advance.

Of course, an important factor is combining of various indicators and criteria to develop a winning system so I’m going to explain the foundation of a good system – the indicators to use and optimizing them properly.

Basically, a trading system means, "Here's what I'm gonna do and how I'm going to do it."

This may seem overly simple but defining your trading system is the first step toward trading success.

First, the Indicators:

Just like execution, the process used in the formulation of a new trading system, should be standardized. This way, traders don't find themselves wanting a system or indicator to work and letting that skew their conclusions.

For this we assume you are using software such as TradeStation or MetaStock to conduct your tests.

Your first step is to decide which indicators you will use for your system. There are lots of indicators (I’ll have to do another article on most of them) so how do you know what indicators to use?

Some of the most widely used technical indicators are:

• Moving Average (MA)
  An MA is an average of price over a defined period of time for a symbol or index. The line generated by this formula will signal a trending (upward or downward) or a non-trending price direction of a stock or index.

  You’ll frequently see a combination of two time periods  applied to a chart. Popular combinations are:
  10-day and 30-day
  20-day and 50-day
  50-day and 200-day (better for weekly charts).

  There are two common, but slightly different MA calculations:

  • Simple Moving Average (SMA)
    The SMA is calculated by taking the closing price of a stock or an index for a number of days, adding them up and dividing the figure by that number of days to get a SMA of price.
  • Exponential Moving Average (EMA)
    The EMA is basically the same calculation except more weight is given to the latest data focusing more emphasis on what an index or stock price is doing more recently.
     
• MACD – Moving Average Convergence Divergence
  A trend-following momentum indicator that shows the relationship between two moving averages of prices.

  The MACD is calculated by subtracting the 26 day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.

  There are three common methods used to interpret the MACD:

  1. Crossovers – when the MACD falls below the signal line, is a bearish signal, which indicates that it may be time to sell.

     Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum.

     Many traders wait for a confirmed cross above the signal line before entering into a position to avoid getting getting "faked out" or entering into a position too early. I personally don’t like crossovers, because Divergence is a much better indicator.

  2. Divergence – When the security price diverges from the MACD. It signals the end of the current trend.

     And not just MACD, this can also be used on RSI, Stochastics and many more indicators.

  3. Dramatic rise – When the shorter moving average pulls away from the longer-term moving average is a signal that the security is overbought and will soon return to normal levels.

     Traders also watch for a move above or below the zero line because this signals the position of the short-term average relative to the long-term average. When the MACD is above zero, the short-term average is above the long-term average, which signals upward momentum.

     The opposite is true when the MACD is below zero. The zero line often acts as an area of support and resistance for the indicator.

• Stochastics – A technical momentum indicator that compares a security's closing price to its price range over a given time period.

  The oscillator's sensitivity to market movements can be reduced by adjusting the time period or by taking a moving average of the result.

  This indicator is calculated with the following formula:

  %K = 100[(C - L14)/(H14 - L14)]

  C = the most recent closing price
  L14 = the low of the 14 previous trading sessions
  H14 = the highest price traded during the same 14-day period.
  %D = 3-period moving average of %K

• RSI – Relative Strength Indicator – A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset.

  It is calculated using the following formula:

  RSI = 100 – 100/(1 + RS*)

  *Where RS = Average of x days' up closes / Average of x days' down closes.

• Average Directional Index (ADX) – The average directional index rating is displayed in the form of the single black line that moves between a range of 0 to 100, though you will rarely see readings of exactly 0 or 100. It is a non-directional indicator, meaning that the line will rise to a higher rating even if the price trend is downward. The line simply gauges the strength of any trending price move. The default setting for the ADX indicator is usually 14 periods, but it can be adjusted if you trade in a shorter or longer time frame.

  There are two other important components to the average directional movement index rating there's a green line for +DI (positive directional indicator) and a red line for –DI (negative directional indicator).

  These additional lines help by indicating an upward or downward moving trend.

  The average directional movement index rating system is as follows:

  •  Below 25 is non-trending or a range-bound market or stock price
  •  Above 25 is the beginning of a trend
  •  Above 40 is considered a strong trend
  •  Above 60 is a very strong trend
  •  Above 80 is an extremely strong trend

There are many more specialized indicators, but the ones listed above are probably the most popular ones.

I recommended testing individual indicators by themselves.

Beginners should test indicators because they don't know what works and what doesn't.

Experienced traders should test basic indicators because they need to make sure that the indicators they were using 5 years ago still work.

You cannot simply say that you think an indicator works well; you have to prove it via testing.

Once a good trader tests his indicators, he/she will know what a good indicator is. A good rule of thumb is:

Multiply the average win/loss ratio (size of winners vs. size of losers) by the average percentage of winners. If it’s one or more, this is good.

Compared to a 50/50 coin flip, an indicator or strategy with a one reading is twice as effective a tool.

Pick a couple of individual indicators and read about them. Start looking at them comparing the information they provide with how the price moved on a group of charts.

A good book to get started with technical analysis is The Visual Investor: How to Spot Market Trends (Wiley Trading) .

If you read that book (or others) don’t get “analysis paralysis” because you will learn SO MUCH and many times different indicators will be saying the opposite of each other.

That is why my system does not have many indicators, because it’s a Price driven system.

There are two other components to developing a trading system: Optimization and Defining the System Rules.

Since I’ve already gone on a long time about the indicators,

I’ll cover those in a later email.

Helping You Retire On Time,

Big A

800-743-0385

These three mistakes will doom your trading day, week, month and career.

1. Not having a trading plan.

It almost doesn’t matter if you have a good plan or a bad plan all that matters is that you have a plan.

Most new traders know so little about trading they figure they’ll make it up as they go along – a big mistake that means most new traders don’t last long.

Before you risk a dime, even before you open an account, you must be willing to spend the time to make a trading plan (assuming you want to be part of the successful minority).

Trading, like anything worthwhile and potentially lucrative, requires learning new skills, practicing and evaluating your results.

You must have a plan to work to or you’ll simply drift with the currents and eventually into the rocky shoals.

Trading requires a certain level of contrary actions – you must zig when your emotional brain says zag.

If you have a plan, you’ll find it much easier to make the right moves, no matter what it feels like. A plan also gives you a basis to evaluate your actions and results – eliminating rationalizations.

Either you followed the plan and are successful or you did not; irrespective of how any individual trade added or subtracted from your account balance.

2. Forgetting that the purpose of trading is to make money.

If you want to be right, instead of rich, play a game like Trivial Pursuit.

If you want excitement, ride a Harley.

If you want to belong to a group, join the Rotary.

Only consider trading if you honestly want to make money.

If you’re desperate for money though, trading isn’t the place to bet your last dime. If it’s a steady income you seek, get a job.

We don't start taking out steady profits until compounding has taken over and 5-10k per month withdrawals still don't slow down the growing account.

3. Taking it personally.

Traders must be able to separate what happened with their trades from their feelings.

Admitting you (or your system) was wrong, making adjustments and moving on to the next trade is just part of trading.

Same when your trades go well. Instead of an emotional celebration, successful trader’s analysis profitable trades, just as they do the unprofitable trades, make any adjustments and move on to the next trade.

Got a good story that illustrates these points? I’d be happy to hear your feedback.

Helping you retire on time,
Big A

800-743-0385

Some of you know this and some of you don’t, but I grew up in Sacramento, then lived in Lake Tahoe until I was 24. After that I moved to Houston where I met my wife and stayed. That is why my office is in Sacramento, but I trade out of my house in Houston.

I own a second home in Lake Tahoe and go out there for 4-5 snow trips per year. On this last one my wife and girls were sick… 8 out of 8 days! But the crazy thing is, we still all had fun!

You ever have one of those trips or moments where you don’t feel good, but still have the best time?

It’s like that in trading sometimes.

We ate out a lot, played board games, went sledding, had snow balls fights and came back in into the warm house even worse off.

By the end of the trip I was sick too!

But I did not care.

It’s like one of my students told me once (Johnny R, you can hear his testimony on my homepage); that losing 300k with Madoff was the best thing that ever happened to him. Why?

Because if that did not happen he would never have found me and learned to trade himself.

So if my family was not all sick on the trip I know we would not have had as much quality time.

In trading you want to be hopeful when others are fearful, and “fearful” when others are hopeful. I’ll save the breakdown of that statement for another email.

Helping you retire on time,
Big A

A friend sent me this website with some really funny quotes that go on posters, t-shirts and coffee mugs.  They are spoofs on those motivational posters.

Quotes such as:

“Challenges” I expected times like this – but I never thought they’d be so bad, so long and so frequent.

“Economics” The science of explaining tomorrow why the predictions you made yesterday didn’t come true today.

 “Government” If you think the problems we create are bad, just wait until you see our solutions.

Those are just a few. If you have a sense of humor like me, check them out.

If you’ve been on my email list for any period of time you know I’m a pessimist, but optimist (when it comes to individual achievement), so this website was right up my alley. I even bought a few posters.

Here is the site: http://www.despair.com/

Helping you retire on time,
Big A

I don’t know how much Freud knew about the Bible. Or about investing for that matter. But one of the theories he “discovered” is actually a 2000-year old Biblical principle.

Freud called it, Transference: where the patient feels all sorts of things about the psychiatrist (hate, love, suspicion, trust, dependence) as they work through whatever’s bothering them.

Freud’s goal was to help people realize it wasn’t the psychiatrist… but their OWN feelings they were “transferring” ONTO him. This is also called projection.

For example, if Mom, Dad, sister, and brother are all watching a kid on a bike:

• Mom thinks he’s careless.
• Dad thinks he’s brave.
• Sis thinks he’s cute.
• Brother thinks he’s rich…

But it’s the same kid!

It’s OUR OWN perspective and beliefs that shape what we see.

So when you boil it down, it’s all about being honest with ourselves, seeing things more realistically, and that it’s not “those People, or “the Markets” that are causing our missed opportunities and frustrations in life.

It was a BIG lesson for me when I was first learning to trade and working for a large fund.

I saw so many wasted opportunities because the clients believed it was THE MARKETS that did it to them!

They were POOR mentally regardless of their net worth. But it wasn’t Freud who originally figured this out.  A couple thousand years before, in the Bible it was said: Remove the plank from your own eye, before you remove the speck from your brother’s eye.

Now you may be wondering why the heck I’m even talking about all this, but it’s because of the questions people ask me.

They wonder how I’ve become successful in trading, when so many others have tried and failed.

But it’s so simple, it’s ridiculous… and certainly not some kind of “secret” (although some people never seem to have heard of it).

You just learn the rules of a winning system, how to read the charts and take the prescribed trades without trying to project your views on the markets.

You think gold is overpriced? So what. If it shows you a long entry indicator you buy to open and set your stops according to the charts, not by transferring your beliefs unto the trade.

Anyway, excuse today’s preaching, but frankly, if you DO make a lot of money but can’t sleep at night, what’s the point?

So I can only help with the money part… you do the soul searching.

Today’s trading opportunities are right there, waiting for you in the ETF, Stock, Options, Futures markets… and more.

The indicators will continue to flash, with or without you.

Don’t be left on the sidelines watching, as the opportunities pass you by.

Don’t project your beliefs about the markets or a stock into your trading. Just trade your system.

Helping you retire on time,
Big A

Chris Rock is quoted as saying when his first daughter was born that he instantaneously knew that from that moment on he had only one purpose in life. Not to make money. Not to be a success. Not to win an Academy Award… but to keep her off “the pole” at any cost.

If you’re a trader it’s the same thing: your one purpose with your trading life is to avoid the “suicide trade” at any cost.

Maybe you think that it is insensitive and superficial to compare the actual loss of life or losing a daughter to stripping with blowing up a trading account?  

Well I am not talking about a twenty something college student losing his birthday savings account at Charles Schwab. I’ve had numerous people well into their 40′s and beyond tell me, after they find out I teach trading, about blowing up their life-savings or retirement accounts and loosing major parts of their lives like their spouses, their children, or their homes.

Some are now suffocating under a mountain of debt (credit card cash advances that funded a trading account). One did all those in a three-month period of insane trading.

And if you throw in the “Madoff’s” of the world, it’s easy to see that the damage the suicide trade can cause can be as bad as (and in some cases proceed) the actual loss of life.

I’ve got three rules for avoiding a suicide trade:

Rule #1: There is no amount of good work that can’t be undone by one bad decision.

You’ve had a good day trading?  A good week?  A good quarter?  Maybe even a good year trading.

Doesn’t matter; one bad decision and you can give it all back.

Rule #2: There is an inverse relationship between the amount of time and work needed in order to create and the amount needed to destroy.

You can spend hours each day looking at charts, talking with other traders or following them live in trading rooms, running scans, reading all the SEC documents you can get your hands on just to locate a low risk high reward trade that gives you an edge in your trading and…

One stupid “gut” trade, input in a few seconds, and it’s all for naught.

Rule #3:  Sometimes, your worst decision will be your last decision.

If you make a trading decision that is bad enough:

Ignoring your stops,
Adding to a losing trade,
Miscalculating the risk or
Over-leveraging your account,

It won’t matter what your real intent is, it can be your “suicide trade”.

This last rule is the most critical, of course.

Trading in the abstract can be about many things; control, ego, risk, stimulation, but at the end of the day/week/month/year, your success is measured in dollars.

If you have more of them when you finish than you had when you started, you are a success. The thing is, as long as you are still trading, you are never finished, and you’ve still got a shot at success.

Helping you retire on time,

Big A

Good morning,

This letter has nothing do to with business.   I simply want to share a thought that struck me today.

None of us Know…

None of us know how many more Christmases (or whatever you might celebrate this time of year) we will be around to celebrate.

So Many Leave So Soon…

Years ago, my dad (the best dad one could ever hope to have) didn’t know at the age of 48 his time to celebrate Christmas had come to an end (he died the day before my 5th birthday, about a month before Christmas).

None of us knew that a few short years later, Timothy, the first (and only) cousin of mine, Ronnie would be taken from us at the age of 26 in the blink-of-an-eye in a car crash.

Four years ago, I didn’t know my best dog-pal ever, “Tricycle” would be there one day and four days later succumb to a disease I never knew existed.

They Meant the World to Me, and yet…

They all meant the world to me, and yet, when they were in my life I took them for granted and rarely took the time to let them know how much they meant to me.

For me, hardly a day goes by where I don’t wish I had that one more chance to do that with all of those living, breathing “gifts” I no longer have in my life and there is no way to get that one last chance back.

Material Presents or Material Presence?

I didn’t mean to be morbid, but it struck me this time of year the focus is on material “presents” and  we overlook the gifts that we are truly blessed with, the living, breathing gifts who make our lives what they are by virtue of their material presence in our lives.

In the “Material” Sense, 2011 “Stunk”.

In the typical “material” sense, 2011 wasn’t a great year for so many of us around the world and quite possibly the typical material presents will be nowhere near what they may have been in the past.  Sure I made money trading, but it was nowhere near the gains made in other years.

The Gift that Costs Nothing and Means Everything.

But, unless you have lost any of your most important gifts of the living, breathing kind (the true gifts that can never be replaced); you still have the chance to give them a gift that is priceless.

You can hold them near at this time of year, dig down deep and tell them what they mean to you and let them know what your life would be without them.

Doing so is a gift that costs nothing and means everything.

Don’t Take Their Presence for Granted.

Don’t take their presence for granted, because I can tell you first hand, you never know if this Christmas will turn out to be the last chance you will have to do so with any one of them.

On Behalf of the Greatest Team.

On behalf of the greatest team of living, breathing “gifts” I have ever had the pleasure of working with, I wish you all a Merry Christmas.

(And, to the best wife a man could ever hope to have, Mary, I love you more than you will ever know.)

Merry Christmas, everyone,
Big A

P.S – If upon reading this you think you will find it hard to tell those around you how much they mean to you (my dad was like that), feel free to take any part of my message as your own, or forward it to them and tell them you were thinking of them when you read it.  They’ll “get it” (but it would have a far greater impact if you said it out loud, to their face, while holding giving them a hug.)

I’ve had a lot of students ask over the years about what the best trading books are.

Since I’ve read hundreds it was hard to narrow it down. Below is the list and they are not listed in order of importance.

I suggest buying them all, then reading the first few pages of each and seeing which one will help you the most first.

I’ve also included a list of other GREAT books that are not trading related that I think you will love, or at least open your eyes.

Trading Books:

Market Wizards by Jack Schwager – Interviews with top traders. Really only his first book is good.

Trading in the Zone by Mark Douglas – The best book on trading psychology. His first book The Disciplined Trader is also good.

Trade like Jesse Livermore by Richard Smitten – Jesse was one of the best traders of all time.

Against the Gods by Peter Bernstein – Great book about trading and risk.

Fooled by Randomness and Black Swan by Nassim Teleb – Get ready for a ride, these are great trading books.

The Trading Tribe by Ed Seykota – Ed is one of the all-time greatest traders and this is the only book he ever wrote. This book is all about trading psychology.

Super Crunchers by Ian Ayres – Proves statistical trading (Auto trade systems) can (and does) beat the markets. This book is not all about trading, but worth reading.

Predictably Irrational – Not a “trading” book, but knowing human psychology, help you with the mass psychology of greed and fear that drives the markets.

Even Buffett Isn’t Perfect by Vahan Janjigian – I’ve read a lot of books on Buffett and this one is the best.

I could add 10-20 more, but the list above is the best. You don’t need all those technical trading books if you have my system and your personal trading psychology mastered.

If you read only the above books over the next 1-2 years you will know more than 99% of traders and financial advisors in the world.

Non Trading Books:

The Shack by William Young – One of my all-time favorite books.

The Creature from Jekyll Island by G. Edward Griffin – The truth and history of the Federal Reserve Bank.

Think and Grow Rich by Napoleon Hill – This is a best seller and has helped a high percentage of the wealthy get wealthy. I think it should be renamed, Think, Work and Grow Rich, if you don’t add the work nothing will happen.

The Top 10 Distinctions between Millionaires and The Middle Class by Keith Cameron Smith – A super short book and a great gift.

A Brief History of Time by Stephen Hawking – Got to love advanced science in everyday language.

The Total Money Makeover by Dave Ramsey – this guy can’t trade and loves the buy hold and pray method (bad idea). But his principles on living below your income and getting debt free impacted my years ago and has served me well.

Ben Franklin by Ben Franklin and adapted by Blaine McCormick – This is a book about the business side of Ben and a fascinating read.

I could list many more, but since my subscribers signed up to learn about trading I kept this list short on purpose. It’s more for my members so they can get to know me more.

Helping you retire on time and hoping you don’t have a heart attack on Thanksgiving,
Big A

P.S – Here are a few quotes I’ve taught my children that might motivate you: Learners are earners, Readers are leaders and The rich read.

If you have thoughts about the books above or some you want to recommend let me know on my blog here: http://www.etftrendtrading.com/free-blog.html

I believe there are certain questions any prospective investors MUST ask themselves before putting one thin dime into the market.

You truly need to know yourself – and realize you have certain characteristics and even some limitations – that can affect how you’ll approach and deal with the market.

Trust me… you really do need to know the answers to these questions up front.

What are some of these questions? Here are the crucial ones…

• How do you feel about losing money? (Because you will at some point, and you’ll have to deal with it).

• At what point does the thought of losing money make you uncomfortable? (You have to be able to sleep at night).

• How much volatility can you handle? Are you willing to ride out sharp swings for potential long-term gains, or would you rather have slow, steady progress? (This decision will help you determine if you’re going to be a day trader, swing trader, or long-term investor).

• Do you have money set aside for things you need, or are you putting it all in the markets? (If you’re trading the rent money, you may want to rethink that strategy).

• Do you understand what you’re about to buy, or are you willing to “let the chips fall where they may?” (I think you already know which decision is better).

• How quickly do you expect to see results? Are you patient? (I think that one’s self explanatory).

• Are you close to retiring, or have you just graduated college? (Your risk tolerances are obviously affected by that situation).

Once you honestly answer these questions, I believe you’re ready to kickstart your investment or trading career.

The good news?

No matter what type of investor or trader you turn out to be… from a high-adrenaline day trader to the sleepiest long-term investor…

There are dozens of ETFs just perfect for you. And I’m here to help you find them.

Please call or email my office with any questions.

Finding the perfect ETF for you,
Big A

800-743-0385

Last week a UBS trader was arrested for losing 2 Billion dollars of the Banks funds. UBS says it was not client funds (I’m not sure I believe that), but either way the stock jumped down.

This is another great reason why you should not trust your money with anyone, even a “professional” trader.

This is why I teach members to learn to trade for themselves.

Below is the link to the article (a very good read):
http://news.yahoo.com/ubs-trader-2-billion-loss-unauthorized-trade-071105601.html

Helping you retire on time,
Big A