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FROM FAILURE TO SUCCESS IN TRADING

by David M. Knight TradeCraze

http://123DayTrade.com

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Manuscript on Trading INTRODUCTION:

What are my thoughts concerning trading over the years?

As I sit at my favorite place to think, my local Barnes & Noble Bookstore here in Greensburg, PA. I am reminded about how lucky I am to be alive and to be able to do the one thing I am most passionate about trading ... outside of God, and my family.

Being an independent trader is the most enjoyable experience, I believe a person can obtain. More importantly, here is one arena where a person can start with next to nothing, and make themselves into something. You have the ability to truly reach for the stars; if you fall short you can still reach the moon.

My first immediate thought on becoming a successful trader has to be the learning process is a hand’s on job. There is no experience quite like your own experience as it relates to trading.

What do I believe is true is it relates to trading?

The next conclusion concerning trading over a lifetime; you have to be able to survive and thrive through turmoil.

The best teacher for a trader is experience. Many years ago, I use to wonder how a person gains experience, if no one is willing to take the time to train a person. In my pursuit of becoming a successful trader, my trading experience has been filled with many twists and turns throughout my career.

There have been way too many books written on the subject of trading. My library is filled with many of these so called trading ‘masters’. Whether they are a true master or not, is not for me to say.

What do I know about trading?

To become a successful trader, think of it as a building process. Much like any profession that requires training, you have to start at the foundational level to make any progress on the journey.

I believe the toughest concept concerning trading is the overwhelming desire to make money quickly, in this cut-throat environment. There has never been a week and now with the lightning speed of email, a day, where I don’t see a 'get rich quick in trading scheme' come across my trading desk.

In my early trading career, I fell for the same hyped-up mumbo jumbo sales letters. The millions in a year stories. The latest greatest bread slicer trading method/system ... just send $XXXX to this address or website.

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Why am I writing a book on trading?

My purpose in writing this book is to talk to the small account trader working hard to make a living trading. The grinders out here, that have the never say die attitude. The, I will survive, mentality it takes to become a success as a trader.

Being a trader is not for the faint of heart, after all, you may find yourself at the mercy of the market, if you allow it to take control. Let’s talk a little bit about control … there is no such thing as a single person having control of the market.

You may be able to influence the market as a big account trader for a short period of time, but the market is much bigger than any one person or company.

Enjoy the Journey!

I believe, the journey a person goes on, can be the greatest gift I may be able to give you. So enjoy the ride ... YOU ... the aspiring trader looking to take this journey with me.

The chart above is the eMini Dow Daily OHLC Bar Chart. My first trading course I put online was called the eMini Bull Bear Trading Method.

In 2009 on YouTube, I recorded 9 videos documenting this trading strategy: eMini Bull Bear Trading Strategy.

We will start our next discussion, in areas, I believe are important to understand as a trader. They are: TRENDS, WAVES, and SUPPORT and RESISTANCE.

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TRENDS: HOW TO DETERMINE OVERALL TREND OF THE MARKET

The TREND (overall) as a DAY TRADER is determined from the DAILY Chart. This is the big picture of the market you are trading, as a day trader. In addition, I like to utilize the 50 Bar Simple Moving Average (SMA) relationship against the 200 Bar Simple Moving Average (SMA) to help me determine the overall trend.

I believe, simply trying to trade a moving average crossover, without a momentum indicator, is my definition of insanity. I have used all kinds of momentum indicators in the past. Other traders use indicators like: CCI, MACD, RSI, Stochastic, Williams PercentR and many other numerous indicators to help them trade in the markets.

What I honestly believe about trading, now after years of experience, is the most important component to consider ...

What is the Mass Trader Psychology (MTP) of the Overall Market?

If you can determine MTP as a trader, then you will make more money than you lose. Understanding MTP of the market you are trading determines the ultimate success or failure of an individual trader.

In my opinion, the most efficient way to quickly determine MTP is to determine the overall trend of the market you are trading. The chart directly below shows the first two components of the eMini Bull Bear Trading Method.

They are Price Action represented by the Open, High, Low and Close (OHLC) Bars and the 50 Bar Simple Moving Average (SMA) Line, represented by the rising black line cutting through prices.

The SMA allows us to smooth out the Price Action. Additionally, it will show a snapshot picture of the market trend. The Daily Chart below is from the eMini Dow, (Dow Industrial 30 Stocks), which gives us our first glance of the overall trend, in the market we are trading.

When the simple moving average (SMA) is going up then the overall trend of the market is LONG a (Buy), meaning there are more buyers than sellers; the exact opposite is true for the SHORT a (Sell) of the market.

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Now, the 50 BAR SMA by itself, can be a little deceiving. This is why I like to use another simple moving average, the 200 BAR SMA, in addition, to the 50 BAR SMA. The combination of these two simple moving averages (SMA), really helps paint a picture, of the overall trend on the daily price action chart (OHLC).

For instance, if the 50 BAR SMA is above the 200 Bar SMA, then you would say the market is in an uptrend, and the reverse is true for a downtrend of the market.

So, if we correctly determine the TREND of the overall market utilizing the 50/200 BAR SMA relationship, then you will have a accurate picture of the market.

In the picture below, we would say the eMini Dow is in an UPTREND, because the 50 Bar SMA (black line) is above the 200 Bar SMA (purple line) on the Daily Chart.

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Wasn't that easy peasy lemon squeezy?

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WAVES: WAVES IN THE MARKET

One of my core beliefs concerning trading is this; a market trades in wave like patterns.

It will move up in a progression of waves, very much like when you watch a gentle tide roll in, at the beach. At times the ocean and waves are rough, and at other times the ocean and waves are very smooth; like glass. I would also agree, easier trading is completed when the waves are in a smoother; more predictable environment.

Another core belief concerning trading; how volatile and aggressive is a market. This can best be demonstrated in wave patterns; like a normal storm, a tropical storm or even a hurricane. There is a time to trade and not to trade. Perhaps, the smooth, predictable environment is like the consolidating trading ranges, when a market hasn’t shown anything tradable. I find the easiness of the market in calmer waves is a more enjoyable trading experience than extreme volatility.

Yes, it is a true statement, you need volatility in a market to trade it but ...

The market can become too VOLATILE to trade. The waves can become very violent and the up and down extreme swings of a market will leave many traders terrified and decimated, if they trade it. Extremely volatile markets should be a time when the small account trader must stand aside, or you will risk too much of your trading account per trade you take on.

So understanding the type of wave patterns, the ocean, will assist you as a trader.

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How is the water (WAVES) today? Is it the cold, January, water of winter, the hot, July, water of summer or somewhere in between?

Waves can be counted. This is the KEY to a trend with wave patterns.

Waves can be seen in Price Action, and in Moving Averages plotted on the chart. Price Action by itself can only tell you so much. I know of traders who have the ability to simply trade on the Price Action of the charts and nothing else. These traders are the true surfers and artists of trading. They find it completely natural to be in a market and understand Mass Trader Psychology (MTP) of a market.

For most of us; we need an indicator to help us in trading, but if you place too much information on a chart, then you will not be able to place a trade at the appropriate time. It is a fine line, between not having enough information to make a trading decision and having too much information on the chart.

When you have too much information on your trading chart, then you will find yourself paralyzed in your decision making process. If this happens to you in your trading, then you need to reconsider the indicators you are using. Determine which indicators are beneficial in your trading decisions or not.

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SUPPORT AND RESISTANCE: S & R in the Market

When you start talking about Support and Resistance, then you need to begin with the highest time frame you are looking at to make decisions from that chart on correct trading levels.

On the chart above, this is the Daily Crude Oil Candlestick Chart with all of the data that is important as a trader.

Points of Interest on the Daily Chart:

• 50 Bar SMA • 200 Bar SMA • Pivot Points: PP, R1, R2, S1 and S2 • Major Support and Resistance Levels • Minor Support and Resistance Levels

All of this information is extremely helpful to traders, but what exactly should you be looking at on a daily basis.

We can determine the daily trend of the Crude Oil Market ... Down ... because the 50 Bar SMA (Gold line) is below the 200 Bar SMA (Purple line). Therefore; until proven otherwise, the crude oil market will make a better short (sell) opportunity than a long (buy) opportunity.

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It is important to note, we are in a Price Action Pattern of what is commonly referred to as a Trading Range or a Congestion on the Daily Crude Oil Chart. We are able to subdivide the Support and Resistance areas into our daily target trading levels.

The most significant point on any Daily Trading Chart will be the Pivot Point. Notice, on the Crude Oil Trading Chart above, this is located at 4558. This number will normally change on a day by day basis. This is the most significant point of value where traders are more apt to be short below the Pivot Point line, and long above the Pivot Point line.

Also looking at the Daily Crude Oil Chart, we are much closer to the Major Support level, than to the Major Resistance level. To get these Price levels you look for the Highest Point for Resistance on your chart data, normally going back a couple of months worth of data from the charts. Likewise; we are looking for the Lowest Point for Support.

On the Daily Crude Oil Chart Shown Above These Levels are Currently:

• Major Support: 3850 • Major Resistance: 6400 • Minor Support: S1 Line 4407 and S2 Line 4311 • Minor Resistance: R1 Line 4654 and R2 Line 4805

Additionally, what is seen on the Daily Crude Oil Candlestick Chart is our 50 Bar SMA and our 200 Bar SMA levels are above Price Action. Once again, this confirms that traders would much rather be a seller, than a buyer given the current Price Action of the Crude Oil Market.

In summary, the best chart to start formulating Support and Resistance Levels is the Daily Crude Oil Price Action Chart, then working your way on down to the chart that is utilized for your trading decisions. By accomplishing this task, you will have a top-down approach to your trading decisions and you will take advantage of the best possible trading opportunities as they develop.

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3 V's OF TRADING: Volume, Volatility and Velocity

What did Nikola Tesla and William Delbert Gann have in common?

This got me to think about the significance of these two individuals and the time they lived in. Once again, I am a firm believer that there is nothing new under the Sun.

At some point, they got it ... and now I am starting to become clear about the significance of their discovery ... or should I say ... their rediscovery of ancient knowledge used in their own time.

It is quite simple in scope, but extremely deep when you really contemplate and logically summon and harness your power in understanding the simple with the complex.

The rest of this discussion will center around the numbers 3, 6 and 9 ... and for my purpose how this information can be interpreted to help us as traders as I have come to understand Gann and Tesla in their time brought to our time.

What are the 3 V's of Trading: YouTube Video

1. Volume 2. Volatility 3. Velocity

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Pretty easy concepts to start seeing when you know what you are looking to achieve on any given trading day. I believe, we make trading harder than it should be, because of two key factors; fear and greed.

Have you ever given any thought about how small we are in relation to the universe? Do you remember when your dad was your Superman? I do.

I also remember the beatings I received as a child right or wrong is not for me to decide, but the luster of the Superman wears off as time moves on doesn't it.

But I do believe in a Creator God of this Universe from the tiniest molecule to the vastness of space, if you seriously take the time to look and ponder ... you will see intelligent design of everything.

As traders, we are taught different concepts called Chaos Theory and Occam's Razor. Are they one in the same or completely different trading models?

We are taught about the Madness of Crowds like the Tulip Crisis of Holland. This coincides with the loser is the last one holding the bag when the air is let out, right? In other words, the market will go up as long as there is a 'greater fool' than you that will buy it.

Back to design ... intelligent design. Have you ever watched ants at work? They are what I will call driven insects with a purpose, just like the ordinary honey bee.

Honey Bees work in concert with the flowers of Spring. This allows the beauty and wonder of Spring, while giving and receiving nourishment from each other. But there is design in the simple honeycomb.

So this is all great and good, but what does this have to do

with Gann and Tesla? Here it is in a nutshell ... reference to Austin Powers. I believe, if you limit yourself then you are simply allowing yourself to see the small picture instead of the big picture. You need to be aware of both when you are trading.

Yes, there is design and there is intelligent design. You see the world over and over ... you can see the six sides of the honeycomb, or the entire beehive plus the honey bee(s) that created the honey.

To have a market, it has been said, you need a buyer and a seller. This is true to the extent that there is an event, much like when the bee arrives at the flower. There is an exchange and there is a consideration given to each side. The market continues to march

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on with or without us, but regardless, there is design in everything you see, feel and touch.

When you start seeing the market through the lenses of 3,6, and 9, then I believe that is what Gann and Tesla were trying to communicate. There is design and a purpose for the design.

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VOLUME VS RISK: Volume versus Risk In Trading In my humble opinion, I have struggled as a trader in placing the 'R' (RISK) over the years working on the CL Power Trading Method. In other words, should I be at 1/2R, 2/3R or at 1R on my stop loss after I enter the trade.

Most of the time, 1/2R is enough to make the trading decision on the CLPORT Method, but at select times it is not the optimum level for the stop loss.

Trading days like today happen where I take on more trades than what I would like trying to position myself on the trade. Before I can get positioned for the profitable trading day, I run into my Max Daily Loss inside the trading day.

Looking at the chart below, and the video I placed up on YouTube: Volume Versus Risk, I hope this helps you in your trading as it will help in my trading decisions going forward.

By implementing the R-Risk versus the V-Volume in Trading ... I will be in effect allowing the market volume spike bar to determine how many ticks I should be risking given the trade.

In a nutshell, I have determined a level of ticks for a stop loss from 400 in Volume to above and beyond 2,000 in Volume on one Volume Bar.

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In today's trading example, we had a Volume Spike Bar of 1725 at 7:39AM CST. This means it is above 1000 in Volume ... so this should tell me for my CLPORT Method trade I should use 1R in RISK for the trade.

Today, this would have meant a 23 tick stop loss on the trade entry of 4425. This would have placed the Stop Loss on the Long Signal at 4402 in the Crude Oil Market.

Bottom line, you need to determine how far and how much you should be willing to RISK on any given trading opportunity.

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VOLATILITY VS RISK: Volatility versus Risk in Trading What can I say ... I had to eat a piece of humble pie on Wednesday, as I hit my Max Daily Loss and lost my Funded Trader Account. I will talk more on it as I feel like talking about it.

CLPORT Method: Trade #1 Short 2 at 5000 at 8:11AM CST.

I think one of the toughest things about trading is getting back up on the horse after it has kicked you off. I am working on the $50K TST Trading Combine now; instead of, the $30K TST Trading Combine.

I am starting my sequence at 2 trades now. I would like to move to breakeven on the move to 1P, but you have to respect the $50 a barrel level on this trade. I am looking for a 3P profit target on 2 contracts this Friday.

What I really want you to get in this section is the following; trading setbacks will happen. It is how you handle the trading adversities, which will determine your eventual failure or success in trading.

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Crude Oil Market reaches down to 1P and then marches back to $50 a barrel. I took what I could from the trade ... trading 2 contracts. 1 Contract Trade Exit at 1P at 4972 and the 2nd Contract Trade Exit was removed at 4997 a little bit later as the market went back to $50 a barrel.

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Profit Factor on trade was 31 ticks versus 26 ticks overall. I was risking 2 trades at 13 ticks each. I was able to get 28 ticks on the first contract and 3 ticks on the second contract. The Crude Oil Market moved back to breakeven and back to 5000 level.

Over the years, I have debated about how many ticks I should take on the 1st contract ... should it be 1P ... 2P ... or 3P? This has and will be a continual debate for me. Today, I wanted to give the market room to run down quickly, and then I took one contract off as the market was getting stronger on the way up as the trading chart shows above.

Trading is definitely a balancing act. But the most important component as it relates to TST (TopStepTrader) is to NOT ruin your chance at trading real money. I did this on Wednesday. As you know, I don't like to track my dollars versus my ticks, and I ran into the max daily loss as I had my 1R at 23 ticks on Wednesday. I took two quick losses and it brought me over the mark with slippage and I lost my funded trader account at TST.

I am not eligible for the Trading Redevelopment Opportunity, because I broke rule number one, which is very disappointing. I have been moved to the $30K TST Trading Combine.

Yep ... I am back in the TST Combine ... sucks to be me man! I had only 5 days in the TST Funded Trader Account before I screwed it up. It isn't the loss I am disappointed in, as I have had much greater losses and recovered from them.

My disappointment comes in the fact that I was in ... and now I am not. I was looking forward to a cash Christmas, now this will not happen. I got the cart before the horse.

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Volatility versus Risk is a very key component to your trading plan. But, as you are trading at TST, you also have to consider risk of ruin against the Max Daily Loss every trading day. I have been very good at stopping before I got to it. This did not happen on Wednesday and I am paying the price for it.

As first, I thought I would be eligible for redevelopment, because the program doesn't mention anything other than a negative trading account balance to go into redevelopment. I still honestly believe this is a true statement, but those with the gold ... they make the rules don't they!

We will continue this discussion on Volatility versus Risk on another training blog post.

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VELOCITY VS RISK: Velocity versus Risk in Trading

Velocity and Volatility are very similar in nature, but there is a difference. Hopefully, during this trading discussion concerning Velocity Vs Risk, it will make a lot more sense.

Volatility is defined by how much the average movement of the market you are trading is moving on a day to day basis. For instance, a 1R or 10 tick movement in Crude Oil is less volatile, than a 3R or 30 tick movement for a stop loss. In dollar cost, this is $100 versus $300 as it relates to the Crude Oil Market.

When I first started the concept of "R" I used a concept of what I called Average Daily Range (ADR). I still use this concept to determine the Volatility. Velocity is closely tied to Volatility, because you can't have one without the other.

Crude Oil Futures Market: 5 Minute Candlestick Chart

How FAST is the Futures Market Moving?

Velocity is more specifically how "fast" the current market is moving. When you are trading the Crude Oil Futures Market, then this can be best seen right at the open of the trading session in the USA. Velocity is also closely tied in with Volu me.

When you are looking at your futures trading charts, then you may notice that a high spike volume bar will show up. This High Volume Spike (HVS) comes into the market,

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then the market seems to pick up steam and the trading bars (candlesticks) print much quicker.

When the market is moving slow or fast, then it is best seen on a tick chart versus another chart like a 5 minute chart.

Crude Oil Futures Market: 5 Minutes of Tick Data

In the Crude Oil Futures Market, you can count on one report each week, which will influence a quicken the pace of the trading day. Normally, on Wednesday's at 9:30AM, the Crude Oil Market Releases the Crude Oil Inventory Report.

The next trading chart below shows the open of the Crude Oil Futures Market on October 22nd, 2015, specifically the time period of 8:00AM to 8:05AM CST is bracketed off. This will allow you to see velocity of the market a lot better. Let's compare this tick chart against the tick chart right after the report release.

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Crude Oil Futures Market Tick Chart at the Open 8:00AM CST:

Crude Oil Inventory Report Releases at 9:30AM CST:

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How About Velocity and How Do You Trade It Profitably?

At other times, one minute of data can bring a lot of trading candlestick bars. Look at what happened on October 28th, 2015 at 9:00AM CST. Yes, this is just one minute worth of data being represented.

By now, you should be able to see, if you were able to know in advance which way the market is going, then you would be a very wealthy person. Now, becoming a successful trader is all about having an edge and trading your edge.

Crude Oil Futures Tick Chart 1 Minute Worth of Data:

Just comparing these three charts, then you can see the that one is three times greater than the other chart on the same 5 minutes worth of data component.

Here is where you can say, the Velocity of the market is triple what it is normally. Once again, both charts are tick charts and both are 5 minutes worth of data compressed into this manual to show you what each time period can look like at different periods of the trading day.

And on the other or third chart, then you can see how truly fast a market can move when it is either driven on an event or somebody or group of people positioning ahead of something they believe. You would call this people in the know.

I hope this helps in your understanding over Futures Trading in the Crude Oil Futures Market.

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THE MORAL OF THE STORY: From Failure to Success in Trading Honestly, there have been so many countless number of trading books written about of all things ... trading. What makes me different, you ask? Well, I can say without a doubt. I am a day trader. When you are NEW to trading it can be an overwhelming experience. There is so much information that will make your head spin and your body doing cartwheels. There is no short supply of opinions on the "HOW TO TRADE." What I know has been gleaned from the master teacher ... experience. By my failures, I have written this trading book. From my successes and persistence, the pages of this book come alive. So what can I possibly say that hasn't already been said before? The honest answer to this question is nothing. There is nothing new under the sun. It is only repackaged and sold again from another person that has learned his lessons as a trader. What works for me, may not work for you in your personal trading ... But, with that being said, I definitely know the principles I have taught in this short book are valid. The 3 V's Of Trading:

• Volume • Velocity • Volatility

These concepts will stand the test of time as they have already stood on the backs of other traders much better than myself in explaining these trading concepts. What I know is this ... The Market Has All Of These Characteristics:

• Trends • Waves • Support and Resistance

These are the main points of this short trading book. To learn these concepts and more importantly start seeing them correctly is my overall goal to you ... the day trader. In the end, if I have taught these concepts effectively and efficiently, then I have accomplished my goal of teaching you about day trading correctly.