Icoachtrader Consulting Servicewww.icoachtrader.weebly.com

WELCOME TO

Trading Boot CampDay 3

David Ha NgoTrading Coach

Phone: 1.650.899.1088Email: icoachtrader@gmail.com

The information presented is for education purposes only.The coach does not give trade advice.

Copyright © 2010 Icoachtrader Consulting Service. All rights reserved.Icoachtrader reserves the right to change without notice

Trading Boot Camp

Seminar Agenda

Day 1� Section 1: IPC of Traders 8:00 AM – 11:00 AM� Section 2: A Complete Mechanical Trading System 2:00 PM – 5:00 PM

Day 2� Section 3: Swing Trading 8:00 AM – 11:00 AM� Section 4: Technical Trading 2:00 PM – 5:00 PM

Day 3� Section 5: Fundamental Factors 8:00 AM – 11:00 AM� Section 6: Truth of Day Trading 2:00 PM – 3:30 PM� Section 7: Trade for Life 3:30 PM – 5:00 PM

Day 4� Section 8: Trading Psychology 8:00 AM – 11:00 AM� Section 9: Team Trading 2:00 PM – 5:00 PM

Day 5� Section 10: Intraday Trading 8:00 AM – 11:00 AM

Recap

Section 1 – IPC of traders

Section 2 - A Complete Mechanical Trading System

� Section 1

� Trading is a career

� Why Traders Fail?

� Three types of traders: Scalp, Day, and Position Traders

� Section 2

� A completed Mechanical Trading System

� Markets – What to buy or sell

� Position Sizing – How much to buy or sell

� Entries – When to buy or sell

� Stops – When to get out a losing position

� Exits – When to get out of a winning position

� Tactics – How to buy or sell

� Last Change to become an Enlighten Super Trader

Recap

Section 3 – Swing Trading

Section 4 – Technical Trading

Section 4

Fundamental Factors

What is the World Economic Indicator?

� World Economic Indicators are specific indices and measures that indicate not only the overall health of the global economy, but also provide some insight into its future.

� Leading indicators are those which are believed to change in advance of changes in the economy, giving you a preview of what is going to happen before the change actually occurs.

� Lagging indicators, which change after the overall economy, but these are of minimal use as predictive tools.)

� The FED watches many of these indicators as it decides what to do about interest rates.

� Gross Domestic Product – GDP

� Consumer Price Index – CPI

� Producer Price index – PPI

� Employment Indicator

� Retail Sales Index

� National Association of Purchasing Management – NAPM

� Consumer Confidence Index

� Beige Book

� Durable Good Orders

� Employment Cost Index – ECI

� The Productive Report

http://www.investorguide.com/igu-article-288-economic-trends-leading-economic-indicators-explained.html

Economic Calendar

Whose speeches to keep an eye on?

� Chairman of the Federal Reserve Bank of USA

� Secretary of the Treasury

� Chancellor of Bank of England

� World economy leaders

US DOLLAR

� Because US dollar is involved in over 80% of all currency trades, US economic data tend to be the mot important in the currency market and commodity market.

What moves EUR/USD?

1. US Non Farm Payroll — measures new jobs created in States.2. Interest rates — FOMC rate decisions.3. US Trade Balance, European Trade Balance — a proportion between

exports and imports in US economy.4. US Current Account5. US Treasury Inflow Capital (TIC) Data — a measure of how much foreign

buying of country's securities takes place.6. US Gross domestic product (GDP)7. Federal Open Market Committee (FOMC) Rate Decisions — data about

changes in currency rates.8. US Retail Sales — a measure of strength of consumer expenditure.9. Consumer price index (CPI) — a measure of inflation in Europe

What moves GBP/USD

1. All US indicators should be watched

2. UK Housing Prices — number one indicator for Pound, UK Housing Prices are primary gauge of inflation in the UK.

3. Bank of England Meeting — provides an outline of monetary policy and changes to currency interest rates.

4. UK Unemployment rate

5. UK Retail Sales

What moves USD/JPY

1. All US indicators2. Bank of Japan Monetary Policy Meeting — decides on measures to preserve

strength of the currency.Japanese Trade Balance — Japanese imports versus exports.Gross domestic product (GDP) — growth in an economy.

3. Consumer price index (CPI) — a measure of inflation.4. Industrial production index — a measure of activity in the Japanese

manufacturing sectorRetail sales — a measure of strength of consumer expenditure.

5. Tankan report — assessment of Japanese business conditions: proportion of "optimistic" businesses to "pessimistic" ones.

6. Unemployment rate

Section 5

The Truth of Day Trading

90% of Traders Are LOSERS in the Markets?

� This raises two questions:

� if 90% of traders are losers in the markets, does it mean that you have a 90% chance of losing in the markets?

� And, what is it about the 10% who are winners that sets them apart?

� What do the winners do that the losers don't?

� What makes them the winners?

Understanding How Trading Profits Are Generated:

Probabilities

� Profitable trading can be summarized under six key concepts:� The probability of a profitable

trade;

� The average dollar amount of a profitable trade;

� The average dollar amount of a losing trade;

� The opportunity to trade - or the number of trades taken;

� The size of the trading account;

� The behavior of the trader.

The Probability of a Profitable Trade

Probability of a profitable trade

+

Probability of an unprofitable trade

=

100%

Possibility Theory

� Toss a coin, let it fall to the ground, note the result (head-H or tail-T), then pick it up.

� Answer this question: if the result was a head on that toss, what is the probability of a head appearing now, on the next toss?

� Of course, it is 50%. The previous toss will have no effect on the result of the toss to come. Each toss of a coin is said to be independent.

� Let’s imagine we have tossed a coin five times, and each time a head was the result. The result, then, looks like this: H H H H H.

� What is the probability of a head on the next toss?� The answer received will be that the most

likely result on the next toss is a tail. Of course, that answer is incorrect. The probability of the next toss being a head (or a tail) is still 50%. And yet, it is a misunderstanding of this point that leads to what is known as the Gambler’s Fallacy.

The Gambler’s Fallacy

or Trading’s Fallacy

� The Gambler’s Fallacy is the belief that when there is a series of the same result observed in a random sequence, then a change in the series is due.

� The theory behind the concept is a fallacy because each trial (toss of the coin, or trade, or roll of a roulette wheel) is independent of the previous trial.

� Example: Roulette players are one of the most obvious exponents of the Gambler’s Fallacy in action. After a series of reds on a roulette wheel, many players put money on black (or vice versa). Yet, on any fair roulette wheel (if it is not fair then we have a different issue completely) each roll of the ball is independent. A series of reds does not increase the probability of a black on the next roll.

The probability of a series of consecutive profits or losses

� We will start with a consideration of the probability of two consecutive profits (or, indeed of two consecutive losses), assuming that the probability of profitability on any one trade is 50%.

� Continuing with the coin toss analogy, one method of calculating the probability of a series of wins or losses is to draw an outcome tree as shown:

� Probability of an outcome

outcomes = Xn

Trading Probability of 5 Trades

� If we risk 50% of our initial trading capital on each trade we take, for instance, it will take a string of two consecutive losses to lose all our capital and be forced out of trading.

� If we risk 33% of our initial trading capital on each trade we take, it will take a string of three consecutive losses to lose all our capital.

� If we risk 25% of our initial trading capital on each trade we take, it will take a string of four consecutive losses to lose all our capital.

� This brings us to the realization that we must manage our trading capital very carefully.

# of trades: 5Case 1: WIN = $100; LOSS = $100Case 2: WIN = $100, LOSS = $50Outcome Possibilities: xn = 2 5 = 32

Probability Outcomes

Case 1 Case2

� Possibility of all WINS = 1/32 = 0.03125 = 3.125% $500 $500� Possibility of all LOSSES = 1/32 = 0.03125 = 3.125% -$500 -$500� Possibility of 4 WINS and 1 LOSS = 5/32 = 0.15625 = 15.625% $300 $350� Possibility of 4 LOSSES and 1 WIN = 5/32 = 0.15625 =15.625% $-300 -$100� Possibility of 3 WINS and 2 LOSSES = 10/32 = 0.3125 = 31.25% $100 $200� Possibility of 3 LOSSES and 2 WINS = 10/32 = 0.3125 = 31.25% -$100 $50

� This understanding brings us to a conclusion due to the nature of probability a trader can suffer a series of profits or losses while doing nothing wrong!

� Since strings of consecutive losses (and, of course profits) are going to occur from time to time, it is critical that we plan for these occurrences (for example, case 2 is a plan for these occurrences.)

Normal Distribution (Gaussian Distribution)

Bell Shape Curve: Skew Trading Strategy

All Losses3.125%

All Wins3.125%

4 Losses, 1 Win15.625%

4 Wins, 1 Loss

15.625%

3 Losses, 2 Win

31.25%

3 Wins, 2 Losses

31.25%

A Total of 62.50%

Skewed trading strategy derives their name from the shape of the probability distribution of the P&L’s they generate. The study indicates the shape of the distribution for the P&L: it is symmetric. This strategy will, on average, break even before financing and transaction costs. This means that the distribution will have an expected P&L of zero. Fifty percent of the time the strategy makes money. Fifty percent of the time it loses money.

High Probability Trading

Non Skew Trading Strategy

� Because of the negatively skewed distribution, there is now a high probability of making a little money and a low probability of losing a lot.

� Overall, there is at least a sixty percent probability of making money and a forty percent probability of losing money.

� Those probabilities can be made more extreme by increasing the skewness of the distribution.

� Watch the trader who makes consistent money. He is the one who is going to blow up.

The Expected Profit of a Trade

The Probability of a Profitable Trade

EP = (PPT x AP) - (PPL x AL)

where

EP = Expected Profit

PPT = Probability of a profitable trade (%)

PPL = Probability of a losing trade (%)

AP = Average profit ($)

AL = Average loss ($)

� The expectancy equation uses averages to give us some sort of expectation of profits over a series of trades.

� The longer the series of trades, the more the actual profit results should approximate the expectancy equation results.

� Knowledge of what the expectancy equation is actually showing the correct way to go about trading.

� To trade is a verb it is something we do.

• Successful traders recognize the inevitability of having losing trades, but their success stems from an acceptance of this fact and the ability to manage the losses. Managing one’s loss means to keep the average loss size small . Average loss size is kept small by using a tool called a stop loss . A stop loss is a price that is nominated by the trader as being the point at which the position will be exited, if the price falls.

• Stop losses should never be lowered from their initial point; a trailing stop loss can only move such as to reduce the risk on a trade, not increase it. As the share price moves up, a trailing stop loss may, in time, be placed at a level above the entry price. When the stop loss is above the entry price the stop loss is said to be a stop profit .

The Expected Profit of a Trade

EP = (PPT x AP) - (PPL x AL)

where

EP = Expected Profit of a Trade

PPT = Probability of a profitable trade = 76%

PPL = Probability of a losing trade = 24%

AP = Average profit ($) = $2,730.36

AL = Average loss ($) = $1558.09

EP = (0.76 x 2730.36) – (0.25 x 1558.09)

EP = 2075.07 – 373.95 = 1701.12

This is the profit we can expect to make on any trade.

The Opportunity to Trade

The Number of Trades Taken

PO = EP x NP

Where

PO = Profitability over time

EP = Expected profit

NP = Number of trades over time

� The number of trades taken over time is dependent on the number of entry signals given by the trading plan, and executed by the trader.

� The number of trades taken will be dependent on how the market behaves.

� The trader only has control over how he or she behaves, not over how the market behaves.

The Trading Account Size

� The size of the trading account impacts upon the results we achieve in trading in only one way: the larger the account, the greater the return in dollar terms. Percentage-wise, the return will be exactly the same, regardless of account size.

� For example, assuming a per-contract margin requirement of $1,000, a trade that profits by 10%, for instance, will return $100 on a one contract position, $1,000 on a 10 contract position, or $10,000 on a 100 contract position.

The Behavior of the trader

The Need to Be Right

� If one focuses on being right (i.e. making money) on individual trades, one is ignoring all the other factors that go into a profitable system. The focus should be on making money over a series of trades (i.e. positive expectancy).

� The definition of being RIGHT needs to be doing the right thing: TRADING PLAN

CORRECTLY and TRADING

SYSTEM PERFECTLY.

Technical IndicatorsDo you really think all of the indicator will help you to make

profits in daily trading?

� None of them. Technical indicators are simply small components of an overall trading system, and not systems in and of themselves. They are like a couple of tools in a tool kit, not the kit itself.

� A technical indicator accounts for typically 10% of the overall trading success of a trend following system.

� The following predictive indicators are NOT used in Trend Following:� Bollinger bands

� RSI

� MACD

� OBV

� Stochastics

� ROC

� Williams %R

� P/E ratios

� Momentum

� Advance/Decline lines, etc.

Trend Following� The first part is 'trend.' Every trader needs a trend

to make money. If you think about it, no matter what the technique, if there is not a trend after you buy, then you will not be able to sell at higher prices ... 'following' is the next part of the term. We use this word because trend followers always wait for the trend to shift first, then 'follow' it.“

� Trend trading is reactive by nature. It does not forecast or predict markets or price levels. Prediction is impossible! Trend trading demands self-discipline to follow precise rules (no guessing or wild emotions). It involves a risk management system that uses current market price, the equity level in your account and current market volatility.

� Trend traders use an initial risk rule that determines position size at the time of entry. This means you know exactly how much to buy or sell based on how much money you have. Changes in price may lead to a gradual reduction or increase of your initial trade. On the other hand, adverse price movements may lead to an exit for your entire trade.

� Historically, A trend trader's average profit per trade is significantly higher than the average loss per trade.

Trading System

� A Trading System is simply an idea. It's a trading idea for making buy and sell decisions in any market. A trader takes an idea, turns it into a mathematical formula and trades it to make money.

� A good trading system doesn't buy low or sell high; it rides trends. Great trend followers' success comes from the discipline to follow their rules no matter what.

� The best trend following trading systems answer the 5 critical questions:� What market do you buy or sell at any

time?� How much of a market do you buy or sell

at any time?� When do you buy or sell a market?� When do you get out of a losing

position?� When do you get out of a winning

position?

Money Management

� Money management is risk management. Risk management is the difference between success or failure in trading. Trading correctly is 90% money and portfolio management.

� Professional risk and money management strategies are the foundation for success. Essentially, money management tells you how many shares or contracts to trade at a given point.

� Unfortunately, this is a fact that most people want to avoid or don't understand. Once you have your money management under control, your discipline and psychology is 100% of your success.

� Money management is a defensive concept. It keeps you in the game to play another day. For example, money management tells you whether you have enough new money to trade additional positions.

� Don’t confuse money management with stop placement. Stop placement does not address the how much question.

Section 6

Trade for Life

Professional Day Trader

� Becoming a professional Day Trader is a very realistic goal. It does, however, require a firm commitment and dedication to succeed.

� Consider this; the hours are great, you work from home, and the income is unlimited. If that's not enough, you need no employees, there is nothing to sell, and no service work to perform.

� To achieve success, a day trader must have a proven trading method, discipline, and control of his emotions. These are all learned skills.

A Trading System

� Chart Setups

� Trading strategy

� Description of Indicators

� How to find the right setups

� How to determine the Trend

� Knowing where to place Stop Losses

� Knowing where to place Take Profits

�When to pull the trigger

� Trading rules

� Day Trading Plan

Money Management

� The Kelly Criterion:

� Win probability - The probability that any given trade you make will return a positive amount.

� Win/loss ratio - The total positive trade amounts divided by the total negative trade amounts.

These two factors are then put into Kelly's equation: Kelly % = W – [(1 – W) / R]

Where:W = Winning probabilityR = Win/loss ratio ($ average gain / $ average loss)

� Never commit more than 20-25% of your capital to one equity.

� The output is the Kelly percentage, which we examine below.

� W = 76% = 0.76; L = 24% =0.24� R = 2730.36 / 1558.09 = 1.75� Kelly % = 0.76 –[(1 - 0.76) / 1.75] = 0.62� Never commit more than 25% although

the %K = 62%

The Disciplined Super Trader

� Discipline is a HABIT

� Discipline is a mix of Will Power, Persistence, and Repetition

� SELF DISCIPLINE BUILDS SELF ESTEEM.

� SELF ESTEEM REQUIRES SELF MASTERY.

� SELF MASTERY IS SELF DISIPLINE!