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Background Info / Introduction
Can you please start by making a few comments about yourself to include your trading style and what products you trade, your experience in years, and what other things of a trading nature take your time on a regular basis (e.g. writing trading books/contributing to forums/coaching/speaking engagements)? I am the proprietor of the "Jim Wyckoff on the Markets" analytical, educational and trading advisory service (www.jimwyckoff.com). I am also a technical analyst for Dow Jones Newswires and the senior market analyst with TradingEducation.com, a consultant with the highly respected "Pro Farmer" agricultural advisory service. I was also the head equities analyst at CapitalistEdge.com. I have spent over 20 years involved with the stock, financial and commodity futures markets. I was a financial journalist with the FWN newswire service for many years, including stints as a reporter on the rough-and-tumble commodity futures trading floors in Chicago and New York. As a journalist, I covered every futures market traded in the U.S., at one time or another. It didn’t take me long to realize the successful traders in every market—be it pork bellies, Treasury bonds or stock index futures—had a common thread among them: nearly all relied on technical analysis to give them a trading edge. Not long after he began my career in financial journalism, I began studying technical analysis. I found it fascinating. By studying chart patterns and other technical indicators, I realized the playing field could be leveled between the “professional insiders” in the markets, and traders like himself. How can this be? This is how: Market (or stock) price activity and price history, including volume, is a composite reflection of every news event and-or other fundamental factor known to all traders. Price activity also factors in ideas and speculation about the future prospects, and future news, for the market (or stock). If an individual trader tried to study and learn all there is to learn about a stock or a futures market, including knowing all the fundamentals that impact, or could impact the stock or commodity, it would be nearly a full-time job. And even if a trader did spend all his time studying a market or stock, he still would not know as much, as soon, as the professional insiders. This is why successful traders employ technical analysis. Importantly, Jim also spends time studying the fundamentals in markets. I believe traders who have been involved with commodity, financial and stock index futures markets have a trading advantage in today’s stock market environment. This is because the more volatile stock market environment of today is just like the volatile commodity and financial futures markets that have been around for many years. Being a successful trader in volatile markets requires specialized entry and exit strategies, in order to maximize profits. Successful futures traders have been forced to deal with volatility on a routine basis. Following are just a few of my most important trading tenets: * Like success at any other job, successful trading requires hard work. There are no short-cuts. Do your homework before initiating any trade. * Simple trading strategies work the best. I have read the classic technical analysis books and talked face to face with the best trading professionals in the world. Most agree that, as my friend Stewart Taylor says, “Simple is Simply Better” when it comes to employing successful trading strategies. All the neural networks and powerful computers in the world won’t compare to a good, basic and well-researched trading plan. Don’t confuse simple strategies with easy trading. Simple trading methodologies still require a lot of preparation and work. On the personal front, I was born and raised in Iowa, where I now reside. I have a wonderful wife and two great children. I work hard on the job, but I also play hard after work, as I love adventures. From driving a Jeep across the highest mountain pass in the continental U.S., to summertime speed-boating, to snowmobiling, to extreme winter camping in the Boundary Waters, to hiking in the jungles of South America, I am always up for a new challenge. It is fair to say that most people are initially attracted to trading by money. Is this what initially attracted you or was it something else? That's probably the case. That's not what got me into the business. I feel fortunate to have been introduced to the fascinating field of markets and trading as a journalist. What are some of your good and bad memories of your early trading days? Thinking I knew more than I really did about markets and how they trade and react to events. My best trade I ever made was early in my career, and it actually made the endeavor seem easier that it actually is. How would you describe a couple of your biggest mistakes in your early trading days? I put on a copper spread one time, not knowing about the potential for the extreme volatility that a nearby futures contract can exhibit as it nears expiry. I did not get burned, but I surely could have been. Looking back to the beginning, in the face of the usual challenges, what motivated or inspired you to learn to trade well? I love learning about markets and trading. My hunger for market knowledge is still insatiable. That desire to continue to absorb market and trading knowledge should be a trait for all traders. On reflection, was there a single moment in time or situation that ultimately had the greatest influence on your trading? No, not really. Gradual learning and gaining experience have had the greatest impact on me and my trading success.
Trading Plan
We could spend days comparing technical and fundamental analysis, and many traders tend to favour one and dismiss the other – do you prefer one over the other? Do you use a combination of both? Briefly, why? I use both, but rely more on technical analysis, especially for market entry and exit. One should try to learn about the fundamentals in the markets in which one is interested in trading. However, it's incorrect for a trader to assume he knows and can react to a fundamental event before the market already has begun to factor that event into prices. Do you have written trading plan detailing your approach? How would you describe it (e.g. long/short, detailed/broad, complete/work in progress)? Here are my Top 10 trading rules--much of which is my trading plan. I know that a "Trading Checklist" of prioritized criteria not only will help me decide when to execute a trade, but will also help me identify potential winning trades. What kind of stuff should a trader put on a Trading Checklist? That depends on the individual trader. Each trader should have his or her own set of criteria, or rules, that helps determine a market to trade and the direction to trade it--including when to get in and out. Below are my Top 10 rules on my trading checklist. 1. Are shorter-term and longer-term charts in agreement on price trend? I've told readers for years that this is my No. 1 trading rule. If the weekly, monthly and daily (and sometimes intra-day) bar charts are not in agreement on price trend, I'll likely pass on a trade. I'm usually a trend trader, and the "trend must be my friend" before I make a trade. 2. Is this potential trade within my financial risk tolerance? To be a successful trader, I not only have to have winning trades, but I must survive the more numerous losing trades I am likely to encounter. If I see a potentially profitable trading "set-up," but the market is too volatile, I'll likely pass on the trade because of the potential for a big drawdown or even a margin call from my broker. An example is the energy markets a couple years ago. They were highly volatile. Certainly, there were some big moves (and trading opportunities for some) in the energies--both up and down. However, when a 75-cent, or more, daily move in crude oil is a "routine" trading session, that market is too volatile for my risk tolerance--at least when trading straight futures. 3. What is the potential risk-reward ratio of the trade? My risk-reward ratio in a futures trade should be at least two to one on maximum profit potential. In other words, if my risk of loss is $1,000, my maximum profit potential should be at least $2,000. Anything less is not worth making the trade. Now, any eventual profit that is made may not always attain that two-to-one risk-reward ratio, but the point here is there should be the "potential" for a profit three times greater than your capital at risk in the trade. 4. Has there been a price "breakout" from a trading range? One of my favorite trading "set-ups" is when prices have been in a trading range--between key support and resistance levels--for an extended period of time (the longer, the better). This type of trading range is also called a congestion zone, or a basing area when at historically lower price levels. If the price breaks out of a range (above the key resistance or below the key support), I like to enter the market--long on an upside breakout or short on a downside breakout. A safer method would be to make sure there is follow-through strength or weakness the next trading session--in order to avoid a false breakout. The trade-off there is that I could be missing out on some of the price move by waiting an extra trading session. 5. Is there a potentially good entry point if the trade looks good? Entry points in trades most times should be based on some type of support or resistance levels in a market. If I see a potential set-up for a long-side trade, I will wait for the market to push up through a resistance level and begin a fledgling uptrend. Then, if I do go long, I'll set my sell stop just below a support level that's not too far below the market. And if the trend does not develop and the market turns back south, I'm stopped out for a loss that's not too painful. Another way to enter a market that is trending (preferably just beginning to trend) is to wait for a minor pullback in an uptrend or an upside correction in a downtrend. Markets don't go straight up or straight down, and there are minor corrections in a trend that offer good entry points. The key is to try to determine if it is indeed just a correction and not the end of the trend. 6. Is there a support or resistance level nearby, at which I can set a protective stop when I enter the trade? This is my exit strategy, and is one of the most important factors in trading futures. On when to get out of a market, I have a simple, yet very effective method: Upon entering a trade, if I place a sell stop below the market if I'm long (buy stop if I'm short), I know right away approximately how much money I could lose in any given trade. I will never trade straight futures without employing stops. Neither should you. Thus, I will never be in a trade and have a losing position and not know where my exit point is going to be. 7. Do "fundamental" market factors raise any warning flags? Those who have read my features know I base the majority of my trading decisions on technical indicators and chart analysis--and also on market psychology. However, I do not ignore fundamentals that could impact the markets I'm trading. Neither should you. There are U.S. government economic reports that sometimes have a significant impact on markets. Associations also release reports that impact futures markets. Even private analysts' estimates can move markets. I make it a priority to know, in advance, the release of any scheduled reports or forecasts that have the potential to move the market for which I'm thinking about trading. I don't like surprises when I am in the middle of a trade. 8. What do computer-generated indicators show? (RSI, DMI, Stochastics, etc.) Some traders use the Directional Movement Indicator (DMI) as a complete trading system. Also, some traders use the Relative Strength Index (RSI), Slow Stochastics or other computer-generated technical indicators solely for determining entry and exit points. I do neither and here’s why: I consider these computer-generated technical indicators to be secondary, yet still important, trading tools. I will use these "secondary tools" to help me confirm or reject ideas that are based on my "primary tools"--which are basic chart patterns, support and resistance levels, trend lines, and fundamental analysis. 9. Do volume and open interest provide any clues? Most veteran futures traders agree that volume and open interest are also "secondary" technical indicators that help confirm other technical signals on the charts. In other words, traders won't base their trading decisions solely on volume or open interest figures, but will instead use them in conjunction with other technical signals, or to help confirm signals. As a general rule, volume should increase as a trend develops. In an uptrend, volume should be heavier on up-days and lighter on down-days within the trend. In a downtrend, volume should be heavier on down-days and lighter on up-days. Changes in open interest also can be used to help confirm other technical signals. Open interest can help the trader gauge how much new money is flowing into a market, or if money is flowing out of a market. This is helpful when looking at a trending market. Another general trading rule is that if volume and open interest are increasing, then the trend will probably continue in its present direction--either up or down. And if volume and open interest are declining, this can be interpreted as a warning signal that the current trend may be about to end. 10. What is the prevailing general opinion of the market? (Possible contrary thinking.) When I was working on the trading floors of the major futures exchanges, traders would many times "fade" (or trade against) the featured articles on commodities in the major newspapers, such as the Wall Street Journal. They figured that if the general financial press had picked up on a market (such as a drought driving grain prices higher), then that uptrend must be about over. Contrary opinion in the trading business is defined as going (trading) against the popular or most widely held opinions in the marketplace. This notion of "going against the grain" of popular market opinion is difficult to undertake, especially when there is a steady drumbeat of fundamental information that seems to corroborate the popular opinion. If you've read books on trading markets, most will tell you to have a trading plan and stick with it throughout the trade. A main reason for this trading tenet is to keep you from being swayed or influenced by the opinions of others while you are in the middle of a trade. Popular opinion is many times not the right opinion when it comes to market direction. On a scale of 1 (simple) – 10 (complex), how would you rate your trading approach(es)? Do you have any comments on the simplicity or otherwise of them? Probably a 4. I've learned through the years that too much complication and too many inputs to a trading plan can cause confusion, frustration and lack of winning trades. But remember that a simple trading plan does not equate to easy profits! Many traders acknowledge that having a trading plan is a key to success – it is essential. Yet, most people don’t know where to start to begin writing one, even though they understand the basics of trading. What would be your advice to someone stuck in this situation? Make a trading plan. See previous answer on my trading plan and Top 10 trading rules.
Trading Mindset
Equally, profits and losses can have a significant psychological impact on traders. How do you deal with them? Indeed. It's all about the psychology of trading. The following are some valuable "nuggets" regarding trading psychology that I gleaned from a trading workshop I attended several years ago. It's my hope that one or more of these "nuggets" will help you better understand your own trading psychology and the importance of psychology in trading markets. * Remember that becoming a profitable trader is a journey, not just a destination. The perfect trader does not yet exist. Try to become a better trader each day and enjoy the progress you make. Concentrate on learning the craft of technical analysis and on improving your trading skills, rather than focusing solely on the amount of profit or losses in your trading. * Congratulate yourself and feel good about a trade when you have done what you were supposed to do, according to your trading plan--regardless of the profit or loss on the trade. * Don't get overly excited about the winning trades or too depressed about the losing trades. Try to maintain an even keel and a professional outlook regarding your trading. * Do not expect certainty in a trade. You are looking for a preponderance of evidence, not proof beyond the shadow of a doubt. * The pain of standing aside and missing a good trade that your method told you to take is much worse than the pain of losing on a trade that you entered and exited properly and according to your trading plan. * Your own life experiences shape how you think about trading. If your first experience with trading was a negative one, the odds are high that you will not trade in that particular market again for a long time--and maybe never. The psychological impact of loss and defeat can be much greater and last much longer than the effects of physical pain. If you were not defeated psychologically by a negative trading experience, then the loss does not have such a negative and lasting impact. * Education plays an important role in shaping the way traders think about trading. A formal business education can give you an edge in understanding the economy and the market in general--but it is no guarantee of success in trading. Most of the information you learned in a formal college setting will not give you the specific knowledge necessary to be a successful trader. To succeed in trading, you must learn to perceive opportunity where most others see none--and you must seek out the information which gives you the knowledge necessary for success. * Your ego and winning can make you broke. Winning can create powerful emotions that distort reality. The more you win, the better you feel, and your ego takes over. The joy of winning is what gamblers seek. A gambler will lose as many times as necessary just for the thrill of winning once. * Always remember this: You are the sole person responsible for winning or losing in trading. Don't blame the market or your broker. Losses are an opportunity to focus on whatever problem occurred during the trade. Don't get caught up in personal denial. * A successful trader quantifies, analyzes and truly understands and accepts risk. Emotional and psychological acceptance of risk is what determines your mental state in each trade. Individual risk tolerance and preferred trading timeframe make each trader unique. Select a trading methodology that reflects your preferred timeframe and risk tolerance. * The market is not physical. It's an amalgamation of the mindset of all trading participants. The daily tug-of-war between the bulls and the bears reveals what they are thinking on a daily basis. Make sure to look at the market's close in relation to the session high and low. * Never buy just because the price is low, or sell just because the price is high. Never average a losing trade. Don't become impatient with the market. Always have a good reason for initiating every trade. Remember, the markets are always right. * Traders need to listen to the market. To listen effectively to the market, traders need to know and pay attention to their trading methods, but also pay just as much attention to themselves as they pay to their charts and the market. The trader's challenge is this: Learn who you actually are, and then consistently and consciously develop the qualities that allow you to trade well. * As traders, the more we can detach ourselves from the emotions of hope, greed and fear, the better our chances for trading success. Why are there hundreds of good technical analysts but few good traders? Because they need to spend more time on their personal psychology than their analytical methodology. * "If I had eight hours to chop down a tree, I'd spend six hours sharpening my axe."--Abraham Lincoln. I like this maxim, because it is similar to trading: Research and learning are very important. Preparation for trading takes much longer than executing and watching the trade. * The market has far more patience than the majority of traders. There is an old saying that the market will do whatever it takes to drive the largest amount of traders crazy. Trends can persist as long as there are traders fighting them. Don't fight the tape. Isabelle, 36 is a mother of two children and stays at home with them during the day. Her husband works full time and his salary meets all their financial obligations comfortably. Isabelle arranges an appointment with you to discuss trading – she has never traded before but knows you can help her get started with some initial guidance. What will be the 3 most important things you tell her in the appointment? 1. Don't have unrealistic early expectations. You don't become a successful doctor, lawyer or dentist, or any other skilled worker in a matter of weeks or months. It takes experience and continuing education to have success at any challenging endeavor. 2. Don't spend money trading that you cannot afford to lose. That puts a huge psychological burden on you that is virtually impossible to overcome. 3. Sound money management is paramount in trading markets. Use protective buy and sell stops. Jack, 58 is a very successful business owner who wants to start trading as he slowly moves into retirement and away from work. He has arranged a similar appointment to Isabelle – would your advice to him be identical to Isabelle’s or different? It would be nearly the same as above. Is trading as difficult as many people appear to make it seem? Much more difficult. What are the 5 most important character traits of successful traders? Please feel free to briefly explain them. 1. Having a properly sized trading account--one that is not too small. 2. Perseverance. 3. Hunger for knowledge. 4. Does not have a huge ego; can "lose" his ego without too much difficulty. 5. Being happy in all aspects of his life--family, financial, health, spiritual. Trading can be a very solitary existence – especially in the early days when you are learning, and often feel as though you have no idea what you are doing. Do you find trading a lonely experience? Does this sit well with you? If not, how do you deal with the loneliness? Find a trading peer if you experience loneliness. Read books on trading. Surf the internet. There are many others at your same trading experience level. Seek them out. What would be or has been your most significant weakness in trading? Have you learned to overcome it or do you continue to work on it? Probably setting protective stops that are too tight, and then getting stopped out of a trade, only to see the market then turn in my desired direction. I am a very conservative trader, sometimes too conservative. But, I have survived and have been successful with this approach--even if I have missed some bigger price moves and winning trades because of my conservative approach. Assuming you are now consistently profitable, do you still have times when you experience self doubt over your ability to trade? If yes, how does this make you feel and how do you overcome it? Not much any more. But I know the markets very well. They are unforgiving. That's why when I do have a string of losses, they are manageable because I set tight protective stops. Ideally, we would like to be emotionless when we trade – we would certainly make more sound trading decisions more often. How do you control your emotions when assessing potential trading opportunities or open positions? Do you get very emotional at times? Most traders do experience at least a little joy when a winning trade is accomplished, and at least a bit of dread when a loser is absorbed. That's human nature. Same with me. But I don't get overly emotional. I move on. If you experience a large profitable trade, do you reward yourself in any way? No. In your entire trading career, what are the biggest lessons you’ve learnt and how did you learn them? I've learned that I do not "know" what the markets will do at any given time--and I admit it. Anyone who says they "know" what a market will do, and exactly when, is doomed to eventual failure. The best any trader can do is make prudent trading decisions based on his trading experience, on past price history, on knowledge of the human psychology of trading, and knowledge of market fundamentals and technicals. I don't "know" exactly what a market will do and when it will do it, but I can prudently react to market action, including placing protective stops. To finish off, if you were to start trading all over again now, what would you do differently to what you did originally? I am proud to say that I would not change anything. I have been so fortunate to have started out as a journalist, being able to talk to the best traders and analysts in the world, to attend trading and market seminars and workshops--usually for free--because I was a journalist who would report on the event for the news wires. I read many books and still enjoy seeking out knowledge of markets and trading.
About Jim: Jim Wyckoff is the proprietor of the "Jim Wyckoff on the Markets" trading advisory, educational and analytical service. He has a website at www.jimwyckoff.com Telephone: 1-319-277-8643.
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