Mind over Market- Grkfx review [Part 5]

Mind Over Market Part 5 of 7

Mark Douglas talks about how you need to be able to change the way you think.  He is absolutely right.

Not only do you need to change the way you think about money management and trader psychology.  Not only do you need to change the way you think about over trading.  You also need to change the way you perceive the market information that comes your way during the trading day.  Then you can become an order flow trader.

Douglas:  Basically, all it really takes is a sincere willingness to do it.  Honest to God.  It is just like anything else in our lives.  When we realize that there is a particular goal that we have and there is a strong desire to achieve that goal then we are going to take whatever steps we need to achieve it.  

He is absolutely right.  Just like I wrote about in a previous article.  Everyone gets what they want out of the market.

The problem lies in that many people think they want to achieve a particular goal, when in reality they don’t.  Or they want to achieve a goal, but their thinking and behaviors are not in congruence with achieving that goal.

For example, when I first started trading, I obviously wanted to make a lot of money and become financially free.  That is what I thought I wanted.  When in reality in my first year or two trading, what I really wanted was some form of action, adrenaline, doing something fun, a hobby.  That thinking and the actions I took by placing ten trades a day in the currency markets was not congruent with making a lot of money.  Eventually, I figured out that I was not going to be able to achieve my goals.

I was getting exactly what I wanted out of the market.  I wanted action, adrenaline, and I got it by over trading and spending countless hours watching profit and loss gyrate back and forth.

The other thing that I wanted to do was to place really good trades and know why I should place them, why the market should move in my favor, and why I was able to extract profit from the market.  That is what I wanted.  My thinking was aligned to that goal.  But my actions were not in alignment as I stayed stuck in the technical indicator, forex robot, chart pattern trading cycles.  Those were not able to give me the edge I was looking for.  They were not able to sufficiently explain to me why the market was making its movements.

And so, if someone really sets their mind to becoming an order flow trader, then they have in this website a resource that will drastically cut down the learning curve.  If they are willing to work and be committed to making money and learning about order flow, global macro, and news trading then traders can read my forex factory posts, read this trading blog, buy the recommended trading books, buy my order flow mastery course when it is available.

Or you don’t have to read this blog if you don’t like it.  But at least go out there and find the order flow and liquidity information somewhere.  Whether you feel you are better served on a trading forum, or with some other book, or other trading strategy.  Never stop searching for the true reasons why the market makes its movements.  For the moment you are able to determine the true reasons and series of order flow triggers and scenarios why the market moves, then it will change your trading forever.

Douglas:  What we set our mind at is how to change our mind.

Mark Douglas is absolutely right.  You have to be willing to change your mindset.  I had to do it on so many different levels.  My views about money management, trading psychology, managing a trade, order flow trades, how to view the market, etc.  It all involved substantial mindset shifts.

A lot of people are stubborn.  They don’t want to change the way they think.  They think they know best.  I used to be like that as well.  That was when I had trading cynicism.  I didn’t make much money during that stage.  Eventually, I figured out that I would rather stop being cynical and take the money.

Douglas:  They have to eliminate the potential to think that the market is going to disappoint them.

Unfulfilled expectations can be a very powerful force that can work in your favor or against you.  If you are disappointed after a trade, then the unfulfilled expectations will wreck havoc on your trading.  On the other hand, if you can identify when the big players expectations have been unfulfilled and they are forced to do billions of dollars of aggressive position re adjustment, then those unfulfilled expectations can do wonders for your trading account.

Host:  We did everything we could, we had our edge, it didn’t work out, move on. Douglas:  That is all it really is.  When you put on a trade and it doesn’t work, all it really means is this:  Some other traders didn’t come into the market that had the same belief that you had or the same conviction that you had about this market doing whatever it is you thought it was going to do.

This is slightly mediocre thinking.  It is good, but mediocre.  The truth is that most traders, when they place their trades, think they have an edge.  They do not actually have an edge.  They think they have an edge, and then the trade doesn’t work out, and they move on.

The problem is that they were fooled into thinking that they had an edge.  And since they were fooled, they will continue attempting to trade the same poor system again and again.  That is how I was trading moving average crossovers, MACD divergences, and chart patterns for two years with no success.

Also, truthfully, most people do not do everything that they could to place the best possible trades.  Most people only do the bare minimum.  Most people only look at charts, and go find the patterns, or the indicators lining up.  They love to do quick analysis.  It is definitely quick, but it is the lazy way to trade.  And the lazy way to trade does not mean that you did everything you could.  I know about this stage because I was in it for two years.  I thought I was doing everything I can, I even tried to do more by tweaking moving average settings or attempting to find the new holy grail indicator.

Eventually, I discovered order flow trading.  That is when I realized most people do not do their very best.  Most people are not going to attempt to find the stops and the option barriers.  They are not going to attempt to read the news or figure out what it means.  They are not going to attempt to figure out what the market sentiment, sensitivity, or positioning is.  Most people are not going to analyze the global macro environment.  Most people do not do those things, so they get poor or mediocre results.  The traders that actually perform the order flow exercises and attain the skills are on the highest point on the trading profit ladder.

Mark Douglas then proceeds to talk about how most people are not good at predicting other peoples behavior.  That is true for the above reasons that I mentioned.  If traders focus on moving averages and chart patterns, then those will not help you much in predicting other peoples behavior.  If however, traders focus on the order flow skills, then predicting other traders behavior and predicting the future order flow becomes much easier.

Douglas:  You have to understand that there is no possible way that these mathematical formulas can predict the outcome of these patterns on a trade by trade basis.  Only on a series of trades.

This is the same old trader trap of the mathematical formulas giving you a trading edge.  If the mathematical formulas cannot give you a trading edge on the very next trade, then I would seriously consider purging them from your trading system.  Does that mean order flow trading has 100% win rates?  No, absolutely not.  There are various forms of order flow trading.  You can have high win rates with mediocre reward risk ratios.  You can have high win rates with high reward risk ratios.  You can have 50% win rates with high reward risk ratios.  You can have low win rates with extraordinarily high win rates.  All sorts of different systems that you can create using order flow knowledge.

Douglas:  The odds are in my favor that somebody is going to come into the market and bid it higher from here if I bought or offer it lower from here if I sold.

I would say to take it a step further and place trades where you have the massive order flow, and thus massive odds in your favor where somebody has to come into the market to move it, for they have no other choice.  To place high probability trades.

[source: http://orderflowforex.com] 

Mind over Market- Grkfx review [Part 4]

Mind Over Market Part 4 of 7

The interview starts off with Mark Douglas talking about how believing in a random result affects your expectations.

Douglas:  We don’t want to get into trading with the possibility of being disappointed, dissatisfied, or betrayed.  A lot of traders feel that way.  The problem is, when that potential exists it has the affect of affecting the way that we see market information in detrimental ways.

Mark Douglas is absolutely right.  Many traders, including myself when I first started, are afraid to take losses.  I always wanted to be right.  Every time I would take a loss I would feel the exact emotions above of disappointment, dissatisfaction, and betrayal.  I couldn’t believe that the market could cause me such pain.  After all, I was expecting my trades to be winners.  I had back tested the chart patterns and technical indicators, seen the great trades and charts on the forums, so I thought that I was going to be a winner.

There were some problems with my chart and price pattern analysis that I only discovered at a later point.

William Eckhardt from the book New Market Wizards was asked why he doesn’t use chart patterns in his systems.  The answer he gave was:

The human mind was made to create patterns.  It will see patterns in random data.  A turn-of-the-century statistics book put it this way:  ’Too fine an eye for pattern will find it anywhere.’  In other words, you’re going to see more on the chart than is truly there.  Also, we don’t look at data neutrally – that is, when the human eye scans a chart, it doesn’t give all data points equal weight.  Instead, it will tend to focus on certain outstanding cases, and we tend to form our opinions on the basis of these special cases.  It’s human nature to pick out the stunning successes of a method and to overlook the day-in, day-out losses that grind you down to the bone.

Eventually I didn’t just look at the time the chart patterns worked.  I started spending more of my time on when the chart patterns failed – and failed miserably.  That is where the order flow light bulbs turn on and the market epiphanies come.

Distorting Market Information

Mark Douglas then proceeds to talk about how traders have pain avoidance mechanisms that affect their perception.  The trader who is in a trade that is moving against them, they will a tendency to focus on the information that they believe validates their trade and avoid the information that tells them the market is trending against them.

The way this manifests itself in trading is for example if you are in a long trade and the market has just taken out a low point and posted a huge down day.  Instead of the trader focusing on the fact that their pain tolerance point was just hit and they should get out of the market, the trader can focus on the small upward retracements that occur in the market.  The trader can just look at and focus on the small green bars, instead of the large red bars.  That is for a chartists.

An order flow trader can focus on the small pieces of bullish news that he or she believe support the trade instead of the big bearish news that caused the market to sell off hard.

Which is why becoming an order flow trader, especially global macro and news traders, involves understanding and assigning importance to the information that is going to move the market.  Knowledge of market sensitivity is crucial.

People can latch on to all sorts of different market information.  The chartists can latch on to their head and shoulders pattern.  The technical indicator trader can latch on to their divergence signal.  The price pattern trader can latch on to their engulfing pattern at a major support/resistance level.  The astrological trader can latch on to the planets aligning in a certain pattern.  The order flow trader can latch on to a stop loss and option barrier location.

What is important is that the thing that you latch on to generates order flow and moves the market.

Mark Douglas offers some more words of wisdom:

Regardless of the reason for getting into a trade, if other traders don’t buy into that reason, or if other traders don’t have another reason to want to buy at a price that is worse than yours.  You bought the stock at $10, someone is going to want to buy it at $11, buy it at $12, at $13, and not only be able to buy it at 11, 12, 13 and 14, there are going to have to take out all the offers, all the traders who think it is high at 11, 12 and 13.  And so, if these people aren’t coming into the market to do that, then whatever reason you thought you had might not be so good.  That is why it is critical to pre define your risk before you get into a trade.  Professional traders do not think of it any other way because they know it takes other people.  My reason might be great, but if someone else isn’t buying into it what different does it make?  It doesn’t matter because it is not a winning trade.

This is a very important quote.  Professional traders know it takes other people to move the market.  They know it takes order flow.

Therefore it stands to reason that your analysis method, your reasons for entering a trade should be as closely linked to what the other traders are thinking about, and more importantly, what their future actions will be.

Why is it important to know what the market is currently thinking?  Because if you know what the market is currently thinking, then you can project out future scenarios for what could happen.  You can know what shocks to the market can cause order flow to be generated.

I do not go into trading with the expectation that my next trade or next series of trades are a random outcome.  I go into trading believing that I will take small losses, but I never believe that my trades have a random outcome, for there are always order flow and liquidity reasons.  Most of the time they are identifiable.  Some of the before the trade and hence I place a trade.  Other times in the middle of a trade, hence the management of trade occurs.  Other times after the trade, where it is either a profit or a loss.  If it is a profit then you can re affirm whether your analysis caused the market to move.  If it is a loss, then you can examine what went wrong.  Only on a small number of occasions do I attribute it to some fluke event.

Some more words of wisdom from Mark Douglas:

The pattern shows up first. Then what we have to do is put up our money.  Meaning, how much am I willing to risk to find out if it will work. Most traders because they evaluate, because they judge and because they analyze and build a case for the pattern being right, they actually talk themselves out of believing that the risk even exists. 

[source: http://orderflowforex.com]

Paul Tudor Jones's Perfect Failure

PERFECT FAILURE

COMMENCEMENT ADDRESS TO GRADUATING CLASS OF

THE BUCKLEY SCHOOL

June 10, 2009

            When I was asked to give the commencement address to a graduating class of 9^th graders, I jumped at the chance.  You see, I have four teenagers of my own and I feel like this is the point in my life when I am supposed to tell them something profound.  So thank you Buckley community for giving me this opportunity.  I tried this speech out on them last night and am happy to report that none of them fell asleep until I was three quarters done. 

When composing this message I searched my memory for my same experience back in 1969 when I was sitting right where you are.  I realized that I could hardly remember one single speaker from my junior high or high school days. Now that could be my age. I’m old enough now that some days I can’t remember how old I am. But it could also have been a sign of the times.   Remember, I was part of the student rebellion, and we did not listen to anything that someone over 30 said because they were just too clueless. Or so we thought.

          Anyway, as I sat there considering this speech further, I suddenly had a flashback of the one speaker who I actually did remember from youthful days.  He was a Shakespearean actor who came to our school to extol the virtues of Shakespeare. He started out by telling us that Shakespeare was not about poetry or romance or love, but instead, was all about battle, and fighting and death and war.  Then he pulled out a huge sword which he began waving over the top of his head as he described various bloody conflicts that were all part and parcel of Shakespeare’s plays.  Now being a 15-year old testosterone laden student at an all boys school, I thought this was pretty cool.  I remember thinking, “Yea, this guy gets it.  Forget about the deep meaning and messages in the words, let’s talk about who’s getting the blade.” 

          As you can see, I have a similar sword which I am going to stop waving over my head now, because A) I think you are permanently scarred, and B) the headmaster looks like he is about to tackle me and C) some of you, I can tell, are way too excited about this sword, and you’re scaring me a little.

          I’m here with you young men today because your parents wanted me to speak to you about service—that is, serving others and giving back to the broader community for the blessings that you have received in your life.  But that is a speech for a later time in your life.  Don’t get me wrong, serving others is really, really important.  It truly is the secret to happiness in life. I swear to God.  Money won’t do it.  Fame won’t do it.  Nor will sex, drugs, homeruns or high achievement.  But now I am getting preachy. 

          Today, I want to talk to you about the dirtiest word that any of you 9^th graders know.  It’s a word that is so terrible that your parents won’t talk about it; your teachers won’t talk about it; and you certainly don’t ever want to dwell on it.  But this is a preparatory school, and you need to be prepared to deal with this phenomenon because you will experience it.  That is a guarantee.  Every single one of you will experience it not once but multiple times, and every adult in this room has had to deal with this in its many forms and manifestations.  It’s the “F” word.

 FAILURE.  Failure that is so mortifying and so devastating that it makes you try to become invisible.  It makes you want to hide your face, your soul, your being from everyone else because of the shame.  Trust me, boys—if you haven’t already tasted that, you will.  I am sure most of you here already have.  AND IT IS HARD.  I know this firsthand, but I also know that failure was a key element to my life’s journey.

          My first real failure was in 1966 in the 6^th grade.  I played on our basketball team, and I was the smallest and youngest kid on the team.  It was the last game of the season and I was the only player on the squad that had not scored a point all season.  So in the second half the coach directed all the kids to throw me the ball when I went in, and for me to shoot so that I would score.  The problem was that Coach Clark said it loud enough that every person in the stands could hear it as well as every member of the opposing team.  Going into the fourth quarter, our team was well ahead, Coach Clark inserted me and thus, began the worst eight minutes of my life up until that point.  Every time I got the ball, the entire other team would rush towards me, and on top of that, that afternoon I was the greatest brick layer the world had ever seen.  The game ended.  I had missed five shots, and the other team erupted in jubilation that I had not scored.    I ran out of the gym as fast as I could only to bump into two of the opposing team’s players who proceeded to laugh and tease and ridicule me.  I cried and hid in the bathroom.   Well, that passed, and I kept trying team sports, but I was just too small to really compete. So in the 10^th grade, I took up boxing where suddenly everyone was my size and weight.  I nearly won the Memphis Golden Gloves my senior year in high school and did win the collegiate championship when I was 19.  Standing in the middle of that ring and getting that trophy, I still remember looking around for those two little kids who had run me into that bathroom back in the 6^th grade, because I was going to knock their blocks off.   That’s one problem with failure.  It can stay with you for a very long time.

          The next time the dragon of failure reared his ugly head was in 1978.  I was working in New Orleans for one of the greatest cotton traders of all time, Eli Tullis.  Now, New Orleans is an unbelievable city.  It has the Strawberry Festival, the Jazz Festival, the Sugar Bowl, Mardi Gras, and just about every other excuse for a party that you can ever imagine. Heck, in that town, waking up was an excuse to party.   I was still pretty fresh out of college, and my mentality, unfortunately, was still firmly set on fraternity row.  It was a Friday morning in June, and I had been out literally all night with a bunch of my friends. My job was to man the phone all day during trading hours and call cotton prices quotes from New York into Mr. Tullis’ office.  Around noon, things got quiet on the New York floor, and I got overly drowsy.  The next thing I remember was a ruler prying my chin off my chest, and Mr. Tullis calling to me, “Paul. Paul.”  My eyes fluttered opened and as I came to my senses, he said to me, “Son, you are fired.”  I’d never been so shocked or hurt in my life.  I literally thought I was going to die for I had just been sacked by an iconic figure in my business.

          My shame turned into anger. I was not angry at Mr. Tullis for he was right.  I was angry at myself.  But I knew I was not a failure, and I swore that I was going to prove to myself that I could be a success.  I called a friend and secured a job on the floor of the New York Cotton Exchange and moved to the City.  Today, I will put my work ethic up against anybody’s on Wall Street.  Failure will give you a tattoo that will stay with you your whole life, and sometimes it’s a really good thing.  One other side note, to this day, I’ve never told my parents that I got fired.  I told them I just wanted to try something different.  Shame can be a lifetime companion for which you better prepare yourself.

          Now, there are two types of failure you will experience in life.  The first type is what I just described and comes from things you can control. That is the worst kind.  But there is another form of failure that will be equally devastating to you, and that is the kind beyond your control. This happened to me in 1982.  I had met a very lovely young Harvard student from Connecticut, dated her for two years then asked her to marry me right after she graduated from college.  We set a date; we sent out the invitations; and all was fantastic until one month before the wedding when her father called me.  He said, “Paul, my daughter sat me down this afternoon, and she doesn’t know how to tell you this, but she is really unhappy and thinks it’s time for you two to take a break.”  At first I thought he was joking because he was a very funny guy. Then he said, “No, she is serious about this.”  I thought to myself, “Oh, my God, I am being dumped at the altar.”  I’m from Tennessee. Getting dumped at the altar was the supreme social embarrassment of that time. It was a big deal. When all my family and friends found out, they were ready to re-start the Civil War on the spot. I had to remind them that the last Civil War didn’t go so well for our side, and I didn’t like our chances in a rematch. The reality was that I was a 26-year old knucklehead, and since all my friends were getting married, I kind of felt it was time for me to do the same thing.  And that was the worst reason in the world to get married.  I actually think she understood that and to a certain extent spared me what would have been a very tough marriage.  Instead, I’ve had an incredible marriage for twenty years to a wonderful wife, and we have four kids that I love more than anything on Earth.  Some things happen to you that at the time will make you feel like the world is coming to an end, but in actuality, there is a very good reason for it. You just can’t see it and don’t know it.  When one door closes, another will open, but standing in that hallway can be hell. You just have to persevere.  Quite often that dragon of failure is really chasing you off the wrong road and on to the right one.

          By now you are thinking, how much longer is this loser going to keep on talking.  My kids are all teenagers, and whenever I’m telling them something I think is important, they often wonder the same thing.  But the main point I want you to take away today is that some of your greatest successes are going to be the children of failure.  This touches upon the original reason  I was invited here today.  In 1986, I adopted a class of Bedford Stuyvesant 6^th graders and promised them if they graduated from high school, I would pay for their college. For those of you who don’t know, Bed-Stuy is one of New York City’s toughest neighborhoods. Even the rats are scared to go there at night.  Statistically about 8% of the class I adopted would graduate from high school, so my intervention was designed to get them all into college.  For the next six years, I did everything I could for them.  I spent about $5,000 annually per student taking them on ski trips, taking them to Africa, taking them to my home in Virginia on the weekends, having report card night, hiring a counselor to help coordinate afternoon activities and doing my heartfelt best to get them ready for college.  Six years later, a researcher from Harvard contacted me and asked if he could study my kids as part of an overall assessment of what then was called the “I Have a Dream” Program.  I said sure.    He came back to me a few months later and shared some really disturbing statistics. 86 kids that I had poured my heart and soul into for six years were statistically no different than kids from a nearby school that did not have the services our afterschool program provided.  There was no difference in graduation rates, dropout rates, academic scores, teenage pregnancies, and the list went on.  The only thing that we managed to do was get three times as many of our kids into college because we were offering scholarships whereas the other schools were not. But in terms of preparing these kids for college, we completely and totally failed. Boy, did this open my eyes.  That was the first real-time example for me of how intellectual capital will always trump financial capital.  In other words, I had the money to help these kids, but it was useless because I didn’t have the brains to help them. I had tried to succeed with sheer force of will and energy and financial resources.  I learned that this was not enough. What I needed were better defined goals, better metrics, and most importantly, more efficient technologies that would enable me to achieve those goals.  What that whole experience taught me was that starting with kids at age 12 was 12 years too late. An afterschool program was actually putting a band-aid on a much deeper structural issue, and that was that our public education system was failing us.  So in 2000, along with the greatest educator I knew, a young man named Norman Atkins, we started the Excellence Charter School in Bedford Stuyvesant for boys. We set the explicit goal of hiring the best teachers with the greatest set of skills to be the top performing school in the city. Now that was an ambitious goal but last year in 2008, Excellence ranked #1 out of 543 public schools in New York City for reading and math proficiency for any third and fourth grade cohort, and our school was 98% African American boys.  We never would have done that had I not failed almost 15 years earlier.

          So here is the point: you are going to meet the dragon of failure in your life.  You may not get into the school you want or you may get kicked out of the school you are in. You may get your heart broken by the girl of your dreams or God forbid, get into an accident beyond your control.  But the point is that everything happens for a reason.  At the time it may not be clear.  And certainly the pain and the shame are going to be overwhelming and devastating.  But just as sure as the sun comes up, there will come a time on the  next day or the next week or the next year, when you will grab that sword and point it at that dragon and tell him, “Be gone, dragon. Tarry with me and I will cut your head off. For I must find the destination God and life hold in store for me!”  Young men of Buckley, good luck on your journey…..

Mind over Market- Grkfx review [Part 3]

Mind Over Market Part 3 of 7

Mark Douglas talks about the patterns in collective human behavior.  And when a set of criteria is present in the market, there is a higher probability of one thing happening over another.

That people, that other people will come into the market to bid it higher, or offer it lower form here.

Now if you are a quant or looking to be a quant, then I suppose you would look for mathematical equations.  But I don’t using too much math in trading, so I stick with order flow, global macro, news, sentiment, etc.

There are absolutely patterns in the market.  The difference is that one trader may want to look for mathematical equations, or break down the data points into mathematical equations, and thus formulate a entry and exit criteria.

While the other flow trader is far more likely to find order flow and liquidity patterns.  They use these to formulate a liquidity model and mental model of the market.  They use it to get into the heads of the market participants and figure out what they are thinking.  They find order flow, liquidity, news, global macro, sentiment, stops, option barrier, sensitivity patterns within the market.  Then they break them down into an entry criteria and exit criteria.

And that is the difference.  One person chooses to find and look for mathematical equations, while another chooses to look for order flow and liquidity patterns.

I prefer the order flow, liquidity, global macro, news, sentiment, etc patterns.  I prefer them because I believe they are closest to what truly generates order flow.  When I see a 500 pip move occur, I do not assume that a mathematical equation can describe that.  I just look for order flow triggers, global macro triggers, stops, etc.  I feel that is closest to what makes the market move.  Another person may disagree and believe that the mathematical equations cause people to enter the market to bid it higher, or offer it lower.

Mark Douglas then states that the problem is that the patterns repeat themselves on a random basis.  He again talks about the mathematical criteria.

And that is the difference.

I do not look for mathematical criteria.  I do not expect such mathematical algorithms and formulas to move the market or generate a lot of order flow.  I look for order flow and liquidity reasons for the market to move.  And as such, I do not subscribe to the belief that the patterns repeat themselves on a random basis.  I believe that you can even achieve consistency in a small series of trades if you pick and choose them carefully.  There is very little randomness to a series of consecutive order flow winning trades.

The host then explains that mathematical models cannot predict human beings.  They seem to be contradicting their own arguments.

The way I see it: If mathematical models cannot predict human beings, then why use them?

The way I see it, if they do not predict human beings, then throw them out, and go figure out what tools, techniques, mindset, and strategies actually can predict human beings.  Then you know what will cause people to enter the market to move it.

Douglas:We are obliged to other traders to come in to buy something at a worse price than what we thought was low to make us winners.  (for a long trade) Host:  Most of us out there are dependent on someone else to move the market for us.  We are trying to identify that pattern.

And that is what order flow trading is about.  When you place a trade, even when the big players place trades, they require some other traders to come in to enter the market and move it further in your desired direction if you want the trade to be a winner.  Small traders, even big traders are dependent on someone else to move the market for them.  Now the big players have the ability to move the market to hit some stops, but they still need stops to get triggered to make a profit.

This is where the video gets interesting.  Douglas says the trades are a random event.  They state that they have reduced the market down to the terms that it takes someone else to make you a winner.

The part about requiring that someone else make you a winner is true.

Douglas:  When you put on a trade do you think about who might come into the market to make you a winner? Host:  No, of course not.
Douglas:  If it turns out to be a winning trade do you know who that trader was or who those traders were that made you a winner?
Host:  No
Douglas:  Is there any way to know?
Host:  No

Then they joke around about how you can’t figure out who the other traders were that were providing liquidity to you to make you a winner.

Then they state that when a pattern presents itself, they don’t have any idea who will move the market for them.

Difference Between Order Flow Mindset and Mediocre Mindset

This is where the glaring differences between order flow traders and the other traders show themselves.  Some traders would just joke around about how you cannot figure out who was providing liquidity to you to make you a winner.

The order flow traders does not treat it like a joke.  They prefer to know, as many times as possible.  Now technically they cannot truly know in the sense that they are not 100% sure who was on the other side of the transaction.  But they can certainly break down the market into various participants, such as breakout traders, macro traders, chartists, retracement buyers, etc.

The order flow traders never wants to place a trade unless they have a strong idea who will move the market for them.  Every single time I place a trade I always want to know what will cause prices to move.  I want to know what scenario or trigger I am betting on.  Otherwise I do not place a trade.  There is no reason to place a trade unless you have some expectation or edge of knowing what stands a higher probability of happening.

Mediocre traders believe that there is no point in analyzing who may or may not come into the market to move it.  They consider it a fruitless exercise.

Order flow traders on the other hand believe it is one of the most critical aspects of any trading edge.

Douglas:  The trading errors come from believing that when the pattern is present that it is going to give me a winning trade on this one.  This trade is going to be a winner. Host:  You can’t think that way.
Douglas:  That is how the typical trader thinks.  The typical trader thinks I am not going to put this trade unless I think it is going to be a winner.  It skews our expectations.

The typical traders does think that every trade is going to be a winner.  The reason why that skews traders expectations is because the typical trader does not have a good enough reason rooted in order flow and liquidity for their trade to be a winner.  The typical trader believes their moving averages, stochastics, and chart patterns are going to move the market.  Thus the typical trader thinking.  The typical trader thinks they have an edge, when in reality they do not.

As an order flow trader, I always think every trade is going to be a winner.  Otherwise I would not place them.  Do I have 100% winners?  Of course not.  When I take a loss and I mad or angry?  Of course not.

But I still always expect every trade to be a winner.  You may assume that if I take a loss that my expectations were unfulfilled and that can cause disastrous consequences.

Here is the difference between the typical trader and the order flow trader.  The order flow trader can believe that many trades can be a winners because they actually have a system rooted in order flow and liquidity that has an edge.  The typical trader cannot believe that every trade will be a winner because they do not have such a system.

The order flow trader wants to place really good trades each and every time.  That is what they strive for.  They always want to either have higher win rates or better reward risk, or a combination of both over the typical trader.

That edge in knowing what particular scenario, order flow trigger, or market participant you are betting on is what will enable you to place better trades.  You will know when to cut losses better and you will know when you are able to go for the jugular.  Thus, enabling you to reach the higher points in the trading profit ladder.

[source: http://orderflowforex.com] 

Mind over Market- Grkfx review [Part 2]

Mind Over Market Part 2 of 7

Douglas then talks about how to accept the randomness principle, which is to accept the fact that any trade event can be a random unique outcome, but that can produce a consistent result over the long run.  He then talks about how traders who fail to acknowledge this principle will find that trading can be very frustrating.

I disagree slightly with this mindset.  I do not believe that a trade, or series of trades are random.  I believe there are very good order flow and liquidity reasons for the market to be making such movements.  That doesn’t mean that order flow traders should expect 100% winrates or even close to that – they shouldn’t.  But what I am saying is that believing in the randomness principle is more of a path to mediocrity.  George Soros did not embrace the randomness principle when he broke the Bank of England and made $1 billion in a day.  He discovered the order flow generators and triggers for a big move and went for the jugular.  He knew there was nothing random about the markets movements in the weeks before Black Wednesday and the weeks following.  He knew there were good order flow and liquidity reasons.

Instead of believing in the randomness principle, I believe in the taking losses principle.  Everyone will need to take trading small losses, and should preferably keep them small.  As an order flow trader I always still acknowledge that.  But acknowledging that you will have losing trades is very different from believing that the trade of a series of trades are random.  When I take a loss, very rarely is it due to the markets noise or a random event.  It is usually due to some wildly unexpected event, wrong interpretation of the order flow situation, or my own greed and fear.  Very rarely is an order flow traders loss due to the “randomness” of the markets.

Mark Douglas then proceeds to explain a bit about technical methods:

Technical methods define and identify patterns and collective human behavior.  The patterns definitely exist, they repeat themselves over and over again.  The problem is that the outcomes do not always correspond with the patterns on a trade by trade basis.

Now applying my order flow mindset to the above quote, I would say to find order flow and liquidity patterns that identify the market participants behavior.  Find the order flow generators and scenarios that consistently generate order flow, preferably a massive amount of order flow.  Some small tweaking of the parameters and triggers can be needed on a day by day basis.  The patterns exist.  The repeat themselves over and over again.  And yes, there are patterns that have an extremely high correlation between the outcome and the pattern on a trade by trade basis.

The host of the show then interjects and says:

If the last trade was a winner, this trade, even if the charts are the same, even if the same exact signal, the same looking chart, there is no guarantee this trade, that this trade will be the exact same as the past one.

And this is the path that many traders fall into.  Obviously the same trading signal will not be exactly the same.  You can’t have the market posting the exact up and down gyrations each and every single time.  The market will not make the same movements to the exact pip value and tenth of a pip value.  That is obviously not possible.

However, the trap the host of the show falls into is that he states that “even if the charts are the same, there is no guarantee this trade will be the exact same as the past one.”  Presumably he is referring to a previous winning trade.  And that is the trap.  He states that “even if the charts look the same”, thus implying that the system’s signals are based on chart patterns.

Of course the next trade can be a loser even if the charts look exactly the same!

How is that so?  Well the charts do not measure what is going on outside of them.  The charts cannot measure what is happening off the charts.  The charts alone cannot tell you where all the stops are, the cannot tell you where all the option barriers are.  The charts alone cannot tell you what billions of dollar of order flow expectations are riding on.  The charts alone cannot tell you how the market is positioned.  The charts alone cannot tell you what the global macro outlook is.  The charts alone cannot tell you what the market sentiment is.  The charts alone cannot tell you what news was released and how important it is.

And as such, they cannot tell you the real reasons why the market moved and will move the in the future.  Which is why it is obvious that even if the charts are the same the next trade can be a loser even if the previous one is a winner.  Now obviously the host does not know about order flow trading, but it is still interesting to see how many people are still stuck in the technical mentality and chart pattern mentality.

Mark Douglas then talks about how there is a “random distribution between wins and losses over any sequence of trades that you might look at.”  He then talks about thinking in terms of probabilities.

And yes, order flow traders should think in terms of probabilities.  They want the probabilities in their favor.  You want sufficient win rate coupled with sufficient reward risk ratio in order to have a winning trading system.  But I never think in terms of a random distribution of wins and losses.  For I always know that I can tighten my trade parameters to nail a big winning trade, if I so choose to.  It involves more work, more research, and more patience, but I always know that with order flow and liquidity knowledge, you can find very good trades that do not fall into the trap of “random distribution.”  If the trade happens to be a loser, then I take the loss, figure out what went wrong, acknowledge and develop new order flow generators, scenarios, etc, and move on the next trade.  I almost never try to attribute the loss to “random distribution.”  That is just the way I view the markets.

Then the host asks the question to Mark Douglas about how does a trader who “has their charts lined up.”  There comes the fallacy.  The belief that if the charts line up then your trade has a certain success rate.

I don’t want the “charts to line up.”  Most of the time I don’t care what the charts look like.  I want the order flow to line up.  I want the news to line up.  I want the global macro situation to line up.  I want the market sentiment, sensitivity, and shattered expectations to line up.  Then I know a good trade has come.

Finally, Mark Douglas talks about the big difficulties with trading:

Now we have to get into the nuts and bolts of how the markets work.  One of the reasons why people have such a difficult time with this is because their initial exposure to the markets themselves is through electronics.  Through electronics there is a real disconnect between what your are actually participating in and what is causing you to want to participate in it in the first place.  Markets started as exchanges.  All prices are people generated events.  Everything happens because of what people believe.

The most important points are that prices are people generated events.  That is how it was 100 years ago, and still is today.  Notice how prices are not MACD generated events.  They are not stochastic generated events.  They are not chart pattern generated events.  They are not forex robot generated events.  They are people generated events.

Knowing that, it doesn’t take that much of a leap of faith to assume that price movement is a result of people generated events as well.  Prices move due to people generated events.  Order flow and transaction flow.

Even with the rise of some quants, and high frequency trading, etc, the markets are moved by people making decisions.  You are not going to see a 1,000 pip gradual move based on some algorithms battling it out.  The price movements are people generated events.

And since they are people generated events, it pays to know what these types of traders are thinking.  Especially the big traders, and big groups of traders that can move the market.  It pays to get into their heads to understand what they believe the market sentiment is, how they view the news, what their expectations are, what is their current positioning and how much more they can put on, what are their profit objectives, what are their pain tolerance points, what they are sensitive to, etc.

I highly doubt a 300 pip move is caused by a MACD divergence, for price movement are people generated events.

Mark Douglas talks about how prices actually move and how there are traders who actually trade at a level who can move prices, and it is their intention to move prices.

Mark Douglas says:

What actually has to happen for prices to move is this:  If the last price of something is $10, for the market to actually move to $12, all the offers at $11 have to be taken out.  In other words, people who are trying to sell at $11 they have to get their orders filled before they can get to $12.  For someone to actually bid it to eleven, or bid it to twelve they are doing the exact opposite in that moment of what it takes to be successful.  They are not buying low, they are buying high.  They are buying high relative to the last price, or buying higher relative to the last price.

Mark Douglas gives words of wisdom about having to understand how prices move.  Then they will understand how their technical method relates to this movement.

I would say once you understand how prices move, do not go to technical methods.  Instead go directly to order flow and liquidity methods that can actually explain why prices move.  Why would you want to go from understanding how prices move to loading up your charts with technical indicators and mathematical formulas that are just so far removed from what generates order flow?  Despite that logical reasoning, there are still many traders attempting to do trade using those technical methods.  Their choice.  I wish them well.

For the rest of you, skipping to the higher points on the trading profit ladder can be of earnest interest.

[source: http://orderflowforex.com] 

VSA resources

I'll keep you guys update with lot of VSA ebook, pdfs etc which I have, it's all basic but a pre-requisite requirement for anyone who want to master Volume Spread Analysis.

Download "Master the Market by Tom Williams" HERE

Download "VSA summary" HERE

Download "Rediscover the Lost Art of Chart Reading" HERE

Mind over Market- Grkfx review [Part 1]

I was reading http://orderflowforex.com a few months ago and I must say that I'm absolutely loving it. The blog author is a highly regarded member on forexfactory named Grkfx, he uses a right-now hot forex trading method called Order Flow Trading. I myself don't use such method but I could see its potential, I would love to learn more about it though, when I have more time and capital available but right now, it seems that both of above conditions have not met. In the blog, Grkfx has recently released a good series of article reviewing Mark Douglas's "Mind over Market", here is the article. Enjoy your reading.

Mark Douglas, an author of trading psychology books is shown in lengthy video interviews describing the many trading psychology and mindset problems many traders face and how to fix them.

I will post one of the videos every day and offer my analysis and nuggets of value once per day until all seven parts have been posted.

Mind Over Market Part 1 of 7

The video talks about how many traders believe that since they can find themselves in a winning trade, that they can have consistent results.  Having a winning trade and being a consistent winner are two completely different things.

They are absolutely right!

The key thing is to figure out why you are in winning trades and what causes them to happen.  If you are in a winning trade and are in such a trade due to a breakout, or explosion in volatility, then it is extremely important to figure out why the market moved.

Sometimes it can be as simple as the market tripping a nice concentration of stop losses changing the psychology of the market, even though there wasn’t any particular fundamental driver.  There just wasn’t any huge limit orders to soak up the stops, and no one was willing to stand in front of the freight train in big enough size to thwart the market move.

Other times it can be news based.  Other times the markets movements can be stop hunting based, or option barrier based.  Other times the market can be moving and being attuned to various global macro drivers.  Other times the market moves due to unfulfilled expectations and needs to reprice itself as the macro traders need to get out of their positions and establish fresh ones in the opposite direction.

If you can realize the true reasons – rooted in order flow and liquidity for the market making it’s movements, then you can go from just placing a few winning trades to being a consistently profitable trader.  A consistently profitable order flow trader.

Unfortunately most people do not find those reasons, and instead believe that the markets movements were due to some moving average crossover or divergence signal.

Mark Douglas said:

Winning requires absolutely no skill at all.

That is true, especially if you do not know why the market moved.

Those huge profits from a few lucky winning trades can cause people to think about how they can always continue to make those types of profits.  This has manifested itself many times throughout the decades.  Traders during the tech boom were riding the glorious trends.  Mouse clicks and some easy momentum led to glorious profits.  People were quitting their jobs to become traders.  They had a few nice winners and thought that it would lead to consistent profits.

Eventually it came to an end as the bubble burst and the traders did not know how to trade the other side of the market.  They only knew how to trade the bullish side, the easy bullish momentum.  That lack of flexibility led to the bursting of the bubble.  Which is why you need to learn to evolve in trading or suffer big trading losses.

It is happening again with the current gold bull market.  Mouse clicks and momentum.  People blindly buying gold.  they are buying the breakouts and buying the pullbacks and many of them are making a lot of money.

And you should milk the easy trends for all they are worth.  That is where a lot of trading profits can be generated from.  But also be aware of the bullish and bearish order flow generators and scenarios at all times.  You need to know when the trend is ending so you do not take massive losses when it reverses.  If you are really good you can make a killing in the other direction as well.

Mark Douglas gets asked: What makes consistency so challenging?

Mark Douglas responds:

At the most general level, it requires learning the types of skills that people just simply are not used to learning.  Mental skills.

I would take it a step further beyond mental skills.  I would say that it requires learning the types of skills about order flow, liquidity, and global macro, that most people are not used to learning.  They are not used to learning because there is just so much trading B.S. that has been accumulating on the internet, in forums, and various trading books over the years.  I go over some of the reasons in my article about why new traders fail.

Mark Douglas then proceeds to talk about how practicing trading during easy going times is effortless, but how when the going gets tough and there is pressure to perform and the markets are volatile, and you are attempting to recover from some losses, then that is when the traders mental skills are tested to the maximum.

Douglas then talks about how the mental errors traders fall for are a result of the belief that the technical methods are telling the trader what is going to happen next on a trade by trade basis.  He says that is not what technical methods were designed to do.

I agree with him.  Technical methods, and technical analysis methods were not designed to tell the trader what is going to happen next on a trade by trade basis.  This is the standard trading thinking of putting the probabilities in your favor, cutting your losses and letting your profits run.

But I would take it a step further and say the technical methods, aka technical analysis methods were not designed to do that because they cannot generate order flow and move the market.  Order flow based methods actually can tell you what can happen next on a trade by trade basis, for they deal with and analyze the very foundations of every marker – transaction flow and liquidity.  That doesn’t mean that they can escape statistical measurement – they can’t.  What order flow can do is offer drastically better and more accurate explains for why price has moved in the past and why it will move in the future.  It can actually tell you what is going to happen next on a trade by trade basis, instead of just hoping that a trading edge develops over the long run.

[source: http://orderflowforex.com]