September 28th, 2011 — Issue #603

In This Issue

1. Trading Edges

Janice Dorn, M.D. Ph.D.

Janice Dorn, M.D. Ph.D. is a Financial Psychiatrist and Financial Futurist. Dr. Janice Dorn might be the only Ph.D. (Brain Anatomist) and M.D. (Board-Certified Psychiatrist and Addiction Psychiatrist) in the world who actively trades, writes commentary on the financial markets and coaches fellow traders. She has written over 2000 articles on trader and investor psychology, and coached over 600 traders.

The heart and soul of trading is neurobehavioral.  There is no way to deny this, as evidence continues to build that traders bring themselves and their brains into every aspect of trading.  With this comes rat-brained thinking and biased-based mistakes.

The only way for a trader to succeed, i.e. perform in a consistently profitable fashion, is to have an edge.  Those of you who have coached or mentored with me for any period of time will recognize immediately that I continually stress three critical elements of trading: risk control, money management and edge.  What is an edge?

In simple terms, an edge is what separates the amateurs from the professionals.  An edge refers to that specific brain (synaptic) strategy that you have practiced until you are as familiar with it as breathing.)

The majority of traders lose.  This is the harsh reality.  Most enter the markets with ill-conceived beliefs and proceed to wipe out their accounts in a short period of time.  They are not trained and their behavior in the markets is somewhat akin to driving a race car blindfolded.  In essence, they might as well be throwing darts at the markets.  They have little to no strategy or planning.  Trading is a serious business and no businessman in his right mind would think about starting a business without a defined business plan.   It is no different with trading.  The saying is: Plan the trade and trade the plan.  This is simple, but not easy.

The major reason traders don’t adhere to “plan the trade and trade the plan” is that they have not trained their trading brain to dampen down the emotional components which come rushing in as soon as real money is placed in the markets.   Everything changes once money is on the line.  First, there is the element of risk. Every time you have monies in the market, you are in the realm of risk, and it is your responsibility to control that risk by adhering to rigid practices of stops. If you do not have a strategy for risk control, you have no edge.  If you deviate from your strategy by giving yourself a “little slack” as regards stops, you have no edge.  If you enter a position without a clear stop and profit potential, you have no edge. If you turn a trade into an investment, you have no edge.

Trading is a game of probabilities, not of black and white.  The worst thing that can happen to a novice trader is to win immediately. This is the winner’s curse because of the hubris and overconfidence it creates.  He or she will become overconfident and believe that he or she has it all figured out.  It won’t be long before the trader begins to take more and more risk, becomes careless and takes a big loss.

Back to the edge.  Edges are statistical and represent some aspect of market behavior that you can exploit for your own profits.  This has some predictability and is likely to recur.  In trading, the best edges are those which relate directly to thinking (cognitive) biases. I will review a couple of these at the end of this article and introduce you to the neurobehavioral aspects of support and resistance.

For now, understand this:  In order to develop your edge, it is critical to find points of entry in the market that present the greatest probability for success.  This means that it is your task as an edge trader to find those price points where the markets have the greatest probability to move in a direction that favors your position and vice versa.  Said another way, you want to enter with a target price point.  You enter with a target and a stop.  If the market moves in your direction, you take profits at or close to the target and you hold through until profit is reached.  If the market moves against you, you take the stop immediately.  There is no holding or hoping in losing positions.  Losing is losing, period.

The term “trading edge” is nothing more than the exploitation of recurring market inefficiencies.  If you study diligently, you will find edges and profit from them.  If you are able to consistently find and exploit edges, you will make money. If you do not find and exploit edges, you are trading “efficiently” priced assets and can only hope to profit if the information coming into the markets (this information is readily and instantly available to all) is favorable to your position. This is expected to occur with a probability of about 50:50.  That is not an edge or a probability that lends itself to the risking of your hard-earned assets.

Janice Dorn, M.D. Ph.D.

Trading commodity futures and options involves substantial risk of loss. The recommendations contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results. This is not a solicitation of any order to buy or sell, but an opinion provided by a third party. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!

2. Overview of Trading Tools at Cannon Trading Inc.

Good day futures traders!

We at Cannon Trading would like to dedicate part of this week’s newsletter to covering the educational materials and tools we offer for futures traders of all experience levels to sharpen their skills with.

Futures Market Charts — at both Cannon Trading and E-Futures we host a powerful charting program that allows you to create custom indicators, create comparative charts and more for a wide range of futures contracts.

Futures Trading Webinar — a daily program from 6:30am PST to about 1:15pm PST put on by the Cannon Trading Vice President, Ilan Levy-Mayer. This service is targeted at experienced self-directed traders and is meant to act as a futures trading guide. In it he covers his trading strategies and charts.

Daily Support and Resistance Levels — Every day Cannon Trading publishes support and resistance levels as well as market commentary and the schedule for economic reports that day. You can find it and sign up to receive it via email at Cannon Trading .