CBOT veteran Jeff Wecker offers nine ideas for traders based on his new book: “How to Become a Black Belt Trader.”
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Becoming a Black Belt Trader is not easy, and similar in difficulty to going through a 10-mile obstacle course. I know. I’ve been through it, having served four years in the U.S. Air Force. And you have to “go through it” to get to your objective.
I remember my ten years trading in the pits of the Chicago Board of Trade, where I was a member.
The pits were every bit as physical as they were mental. Besides having to be a great trader, you were constantly being stabbed with pencils, elbowed and being pushed down the steps by a throng of bodies.
And then there were “out-trades” where you thought you bought a thousand bonds but the other trader denied it the next day and you were out a small fortune. Oh yes, it was like going through a mine field every day.
During this process, I Iearned the importance of technique and timing. But more importantly, I learned the art of giving way to force in order to overcome a larger and stronger opponent.
And consequently, I teach traders how to react to force rather than pushing forward with your own opinion. I have made far more money reacting to market moves than trying to predict the move myself. A wise person once said, “Prediction is very difficult, especially when it pertains to the future.”
With the pits virtually gone, some of today’s traders sit in front of monitors, drink coffee, and let the Quants and Bots do the trading. But that’s not where the big money is. The big money still comes from being a superior trader who can deal with all kinds of situations.
First, realize that you are not in this business to trade; you are in it to make money. And to do that you need patience.
In fact, I would say that lack of patience is the number one problem of traders who come to me for coaching, and we always solve that before we move on.
Now, here are some specific things you have to think about and understand, otherwise you’re likely just grist for the mill:
1. A currency or stock or commodity gaps up or down overnight. What do you do? There are choices and you have to know the odds for each.
2. Do you use stops? If so, you’re just making the brokers rich and guaranteeing losses on your part. If you had traded in the pits at the CBOT or Merc, you would know that markets trade toward the stops and traders like myself pick them off and go the other way, taking the profits that you thought you were going to get. Stops are also a sure way for the market to take you out just before the big move is made. This doesn't mean you should expose yourself to unlimited risks. It just means there are better ways.
3. Statistics show there are certain times to fade various chart formations, oscillators, and other technicals. There’s tremendous money to be made here. Why? Because all of those trading standard formations will be scrambling to get out when they fail, and they'll help push the market in your direction.
4. Do you know when to reverse your position? Since the market loves to catch everyone going the wrong way, this is a great and highly profitable tactic, but you have to know how and when to do it.
5. How do you handle your swing and long term trades? Do you try to trade in and out of them or leave them alone? Statistics show you which works best.
6. On your day trades, how do you ensure you have the least number of contracts on when the market turns? How do you feed your winners out to the market?
7. Do you know the exact differences in accuracy between the various time lapse charts? In other words, looking at all the charts from a tick chart to monthlies, which ones are the most and least reliable when applying various studies and formations? Which ones can you fade?
8. And here’s one of the most important things: How to make a plan. One of the big causes of trader failure is a lack of or loss of confidence which basically comes from not having a plan. It’s the plan that keeps you from panicking, from hanging on to losers and taking profits too quickly. And finally, it’s the plan that prevents you from making the same mistakes that have hurt you over and over again.
One of the best trading plans involves using DPIs (Direction Point Identifiers). DPIs are a proprietary quant strategy that gives you an exact price to be long or short. They require no evaluation of infinite possibilities. They are the easiest way to enter a trade at low risk (5-15 ticks), hang on to your winners, and get out of your losers quickly….the essentials of successful trading.
9. One of the Black Belt Trading mantras is: “Trade less. Earn more.” It’s better to make 6 ticks with 95% certainty than to try to make 50 ticks with only a 10% certainty. And with this strategy, you keep your liquidity costs low and add to your earnings at the end of the year.
