I want to give you two great links, that I recently found and find very useful:

The 25-Point Mantra: Discipline for Day Trading by Douglas E. Zalesky.
Those 25 rules are what it’s really all about in trading. Being disciplined to master the markets each and every day. I have printed this 25 rules and from now on, I wil read it before I start my trading session to recap those rules and becoming a better, successful trader. You can get the PDF file here, if you want to print it, too.

Citations from successful traders
If you don’t want to read the whole books, you can find the most important citations about trading on this website. Those citations are from some of my favorite books:

• Market Wizards: Interviews with Top Traders
• The New Market Wizards: Conversations with America’s Top Traders
• Trading for a Living: Psychology, Trading Tactics, Money Management
• Trade Your Way to Financial Freedom

In my opinion, those citations are really helpful to understand how to become a successful trader. I mean, hey… those cited traders should know what they are talking about – some of them make millions of dollars each year.

How come that? After a couple of weeks, after I started trading, I began reading books and websites about technical analysis. There were plenty of chart patterns and indicators mentioned, and as indicators were easier for me to use, when it comes to identifying buy and sell signals, I tried many of them in backtests. One after another… RSI, MACD, Stochastics and some fancy indicators, too. And guess what – it worked very well. But by then, I didn’t know that I was over-optimizing the backtests to fit to a give timeframe. They performed well in the past, but were useless when it came to real trading – at least for me.

As soon as I found out, what I was doing wrong, I was thinking that I only had to combine different indicators to filter out false signals. I have been using moving averages, RSI and stochastics to find signals and used ATR for setting stop loss points. Many signals were contrary and signals were rare – and not as successful as I hoped they would be.

After a while, I have stopped reading books about technical analysis and started reading books from traders or interviews with traders. What I found out by reading this, was:

• There were about 40 different traders and 40 differents methods (technical and fundamental). Successful traders and successful methods so to say. There is not “the best system”.
• Many of the methods were very simple. They could explain their trading style in just a few sentences. Some used only one indicator, only trendlines, looking for a special pattern to occur or using no charts at all. But they all had one thing in common: they mastered their system to the excellence!
• What is very important is to find a system that fits to ones personality:
  • Going with the trend or following a counter trend approach
  • Trading in small or higher timeframes – looking for the big move or only for the next few pips
  • Trading only technical, fundamental or a mixture of both
  • …
• But most important is not to only find a system that fits to your personality, but to stick to it. You have your rules? – Follow them. Each and every trade, each and every day. Without discipline you won’t last very long in this markets.

There is no need to make trading more complicated than it needs to be. It’s still hard enough to stick to the easiest system, because we all are only human and we all make mistakes. Be it, because of fear, of greed or any other reason.

I once read that a successful trader said, that he could explain his trading system (profitable, of course)  to a second person in detail, but this person would nonetheless not be able to become a successful trader. Trading is learning every day in every trade. So keep your trading system simple.

Here’s a nice scene that illustrates this very well

This time, I want to focus more on trading hours and days – when it’s good to trade and when you should better stay away from the market.

As a daytrader, I hold positions for only a few minutes or hours, and only on accasion for more than a day. But what I try to avoid most, is having a position open on the weekend.

Holding positions over the weekend

The reason is quite simple: as a daytrader, I set tighter stop losses which results in bigger positions. If I had, for example, an account balance of $10,000 and would risk 2% per trade, that’s $200. With a stop loss of 500 pips, that would result in a position size of 0,4 lot, while it would be a 10 lot position if I had set a stop loss of only 20 pips. Clear? Clear.

The problem with weekends is, that there can be a gap when the market starts again the next week. Such a gap can sometimes have a hundred pips and you get stopped out at the next best price – and not your stop loss you set the week before. And now imagine what a 10 lot position with a 100 pip loss would do to your initial balance of $10,000 – it would be reduced by 10%, and not the 2% you wanted to risk, leaving you with $9,000.

How to avoid

Don’t open positions on friday a few hours before the market closes. Many traders close out their positions on fridays for that particular reason. This is also something you should be aware of:

Now, if for example the underlying trend of EURUSD is a downtrend, then every trader that has been short this week or day will close his or her position to not be unpleasantly supprised after a gap the first trading day of the next week.

Closing a short position is simply done by going long – you sold EUR before and now you buy it back. The effect is, that prices rise. You can see this quite often on EURUSD that a few hours before market stop on friday, EURUSD rallies and rises.

So even if you are on the right side of the market by going short, you can get into a bad situation if you open positions too late on friday and market didn’t move in your favor. You have two choices: closing with loss or holding the position throughout the weekend. And then you pray that the market will move in your favor on sunday when market opens again.

So: don’t open positions late on friday.

Same applies to trading on mondays. We have some gap filling, which means that after a bigger gap, the price often closes this gap but not always. Many traders open new positions and adjust their positions for the next week…

It’s better to let the market reorganize itself before you start trading.

Conclusion

Best trading days are tuesday, wednesday and thursday. Avoid open positions on friday and wait for the market to organize on monday.

If you hold positions for a longer period, then it’s not as important as when you are daytrading and hold positions only for a short time. In that case you must keep track of the events for this day and stop trading before and after bigger events – or at least be aware of bigger price movements that could occur, and react on it.

Here’s an example of GBPUSD from today. I was waiting for a break of the double bottom, and then some news came in and price rallied upwards.

Though the underlying trend is still bearish, such an outbreak of 170 pips can be harmfull to your trading balance. Catching such a big move can be very profitable, though…

“A method of increasing a position size by using unrealized profits from successful trades to increase margin.”

So what does this mean?

When you take a look at the examples on how to trade Point and Figure Charts you will see that I opened new positions along the way down or up the trend. I have made some profits with my former positions, which I have not yet realized – but I could in any second, if I would like to! So I treat this unrealized profits like as if I already had them on my account.

Pro and contra

The advantages is, that you can make some huge gains. Instead of only making 1.000 pips with one position, I make 1.000 pips with the first, another 600 with the second and maybe some 400 pips more with my last position. Instead of having made only $10.000 (1 lot each position), I have doubled my earning.

But pyramiding is a double-edged sword. The problem is, when you already made some nice profits and open a new position that goes against you, you can loose all the profits you made so far. It’s even possible that you end up with not only having your profits gone, but also making a loss.

Believe me, that it’s not nice to see your profit going from $4.500 back to $1.500 and being stopped out then, when you could have made tripple the amount of money. You can say “$1.500 is still a great result” - and you’re right. But that’s the psychology of trading:

You’re happier if you could turn a big loss into a small one, than you are when you have only made a small win instead of a big one.

How to reduce the risk

Pyramiding works best in trending markets. If we have the situation that market moves in a consolidation zone, we better do not use pyramiding.

I try not to open new positions if the price is to close to my last opened position. Best situation would be, when you have already locked your profits with a stop loss. Then it’s not possible to eat up all of your profits if the last trade is a losing one. If the price of the last positions is to close and the market moves against your trades, then your profits will turn into losses in no time.

Another recommandation is to reduce the size of each new position. For example, when your first order has a size of 2 lots, then your next one could be between 1 and 1.5 lots. The third position 0.75 – 1.0 lots and the next ones 0.5 lots each. By doing this, you don’t make as much money as you could have made – but you also won’t lose as much money as you would, if price is moving against your favor.

The key to success is – as always – applying a strict risk and money management! Use a stop loss to back up profits you have already made and always know how much you’re risking in every trade.

So the next time there will be a banking holiday, I will totally keep out of the markets! Lesson learned.