Lane Mendelsohn: How to Overcome the Common Trading Blunders

Written by Lane Mendelsohn

Lane Mendelsohn

Lane Mendelsohn is Developer of VantagePoint software

While other families talked sports, politics or what’s happening in the community around the dinner table, we talked trading. My father, Louis Mendelsohn, pioneered the application of personal computers and trading software to the financial markets and has been at the forefront of the industry for almost four decades. I can’t remember a time in my life when I haven’t been completely immersed in trading and the markets.

I’ve literally talked to thousands of traders from my years working at Market Technologies, my father’s company. While their stories are different, there are so many similarities, especially when it comes to the reasons that prevent them from being consistently profitable in the markets.

The following are ten of the most common mistakes I’ve heard over the years and the advice I give to traders to get them back on track.

  1. Stop Emotional Trading

I’ve talked to trading legends and investing newbies and they all grapple with the emotional roller coaster that is trading.

Why is it so difficult to control your emotions? It may lie in our genetic make-up. When you feel emotions while trading, there is a physical, chemical reaction that is happening inside of you. You have evolved to avoid pain and discomfort and developed a flight instinct. This is why most traders embrace flight. Flight from the market (at the worst time), flight from systems (because of the discomfort of drawdown), flight from success. This is all normal.

However, learning to take the emotion out of your trading is integral for long term success.

  1. Approach the Markets from a Global Perspective

Many traders don’t know how to incorporate a multi-market or ‘intermarket’ approach into their trading. They only look at a single stock or asset class and fail to account for the big macro picture. For stock traders, this often means only looking at the equity in isolation and if they do consider other markets, it’s the equity indexes or other stocks in the same sector.

But my father, Louis Mendelsohn, the founder of VantagePoint Intermarket Analysis Software, recognized as early as the 1980s that there are dynamic interconnections between related global markets. Still, traders too often take the historically narrow, single market focus of analyzing each individual market by itself, instead of incorporating it into a broader, global, multi-market or ‘intermarket’ analytic framework.

  1. Use Leading Technical Indicators

So many traders tell me that they operate only in hindsight. They study a chart on Wednesday night, look at a moving average and see that a particular market they’re interested in is trending up or down? Upon further inspection, they find that the trend actually started on Tuesday morning or earlier and that they’re already a couple of days late in getting into the position.

Technical Analysis is simply a reaction to past price action, and by using traditional lagging indicators such as Moving Averages, there’s often missed opportunity. I have found that using a predictive trading software like VantagePoint that uses leading technical indicators helps traders get in to trends earlier, and therefore they have more confidence to stay in winning trades longer.

  1. Move on to the Next Trade.

I can’t tell you how many times I’ve spoken with a trader who wants to tell me about a gold futures trade (or AAPL stock or a FX pair or whatever) from five years ago that was once a winner that turned into a loser. They can’t seem to get past it.

Traders need to remember that losses are part of the game of trading. Every trader will have some losses. In fact, many successful traders have many more losing trades than winning trades. But they still make money because their winning trades are considerably larger than their losing ones. You must think of your losses as part of the expense of doing business as a trader.

Just like any business, trading involves having such expenses as your technical analysis software like VantagePoint, you data feed, your commission to your broker, etc. Losses are just another expense. Always try to keep them to a minimum but realize you will have this expense in your trading.

  1. Remain Objective at all Times

Most traders don’t want to acknowledge that a trade could turn against them. They enter the market assuming they’ll be successful, refusing to look in the rearview mirror. It’s also common for emerging traders to use a calculator to predict how much they’ll make and how they’ll spend the unrealized profits!

I have found that entering the market with a neutral attitude is a good approach. You need to believe anything can happen in the market at any time. This is what being objective is all about. A profitable trader needs to be thinking constantly that the market can do whatever it wants whenever it wants at any time. Many traders get into trouble by thinking the market can’t or won’t do certain things.

To be objective, you cannot put your demands and expectations on the market. This doesn’t mean that you can’t have an opinion about the market. It only means that your opinion can just as easily be wrong as it is right. And you need to be completely ready and comfortable for it to be wrong. You need to release yourself from having to be right. The more objective you are, the less you will distort the information you receive.

  1. Trade from both the long and short sides of the market

A common conversation I have with traders is trying to get them to be comfortable with initiating short trades. I tell them that if you fail to learn how to utilize short trading strategies, then you have cut yourself out of a number of profitable trades. Many people think that shorting is un-American or too risky. However, by not learning know how to go short, you’re putting up a roadblock to one of the potential trading avenues you have to earn profits, particularly during a declining market. The market is a two-way street, and the person who doesn’t short is missing a part of the game.

One of the great things about the VantagePoint predictive trading software is that it finds trading opportunities for both the long and the short sides of every asset class. It has a powerful Intelliscan® feature that looks for trending opportunities based on intermarket analysis.

  1. Always Use a Stop Loss

I’ve heard people say they don’t want to use stop orders because they think that the market will hit their stop orders and then immediately start moving in their direction after they’re stopped out. And you know what? This will happen sometimes.

For people who attempt to use mental stops (where they’ll just get themselves out of the market instead of putting the stop order in the market), the problem comes when the market does go through their mental stop orders, then reverses and starts moving back in their direction. Usually, these people are at a loss as to what to do next. And the unfortunate thing is that it usually costs them a lot of money, as they do not act in their best interests. They let losing trades turn into huge losing trades.

Using a stop loss is key to preserving your capital over the long haul.

  1. Employ Proper Risk Management

Personal psychology influences our thinking and decisions about money. A trader should never risk money they can’t afford to lose. Certainly, no one wants to trade with the goal of losing money but one must be ready and prepared for such an outcome.

I tell traders that a good way to prevent this is to reshape the way they think about risk. Traders often make one or two mistakes when it comes to determining risk; they either define the reward first, which is a mistake born out of greed, or they put a stop loss on the setup that is much too close to the entry to give the trade a chance at working out.

When learning to think in probabilities and to view the market in terms of risk to reward, it is necessary to calculate the risk on a trade setup first, then you can calculate the reward as a multiple of the amount you have at risk. By concentrating on the risk first, instead of the reward, you are making yourself more aware of the risk involved on each trade setup, instead of becoming fixated on how big of a reward you might make, as many traders do. This will also turn you into a “risk manager”, rather than a “trader”, the best traders in the world know that consistent trading profits come as a result of managing risk effectively, so consider yourself a manager of risk from now on.

  1. Preparation is Key

In trading, Winston Churchill’s famous quote, “Fail to plan, plan to fail” rings especially true. When you enter the market arena, you had better be prepared. However, few traders perform the necessary due diligence before moving headlong into the markets.

You can’t just walk into the market with a handful of money and expect to take money away from the professionals. If that’s the case, you’re gambling, not trading. Many who trade successfully rely on a trading plan. Just like how a business plan outlines the establishment and development of a proposed business in detail, a trading plan outlines, in detail, a structure for trading.

I personally know some of the most successful traders in the business like Larry Williams, Jake Bernstein and others and guess what, they are diligent about their preparation and planning.

  1. Don’t Trade in Hindsight

The trading world has evolved considerably since I was a little boy talking markets around my family’s dinner table. There’s literal rocket science available to the retail trader, including VantagePoint software’s Neural Networks. These Neural Networks study data and “learn” subtle relationships within and between related domestic and global markets. They can then recognize hidden repeating patterns in global market data and use this information to make highly accurate predictive market forecasts that you can apply to your trading.

I tell traders that instead of using old outdated technology, they need to use 21st century tools to compete in today’s complex global markets,

 

About Lane Mendelsohn:

Lane Mendelsohn has been involved in the financial industry since the mid-1980s, when he joined Market Technologies, founded in 1979 by his father, Louis Mendelsohn, a widely recognized pioneer in the trading software industry.

As a child, Lane began to accompany his father to financial conferences throughout the country where his father was an invited speaker, as well as to business meetings with leaders in the financial industry. Through these experiences Lane became familiar with the financial industry and trading software field, and developed personal, and later professional, relationships with many top technical analysts, stock and futures brokers, trading software developers, and money managers in the United States and overseas.

In the following years, beginning as a teenager and throughout his twenties and into his thirties, Lane contributed significantly to the company’s growing success as an Inc. 500 company. He became involved in virtually every aspect of the company’s operations including software sales, marketing, product research and development, trader education, website development, staff recruiting and training, and general management.

Focus, determination, persistence and a passion for the financial markets have allowed Lane to approach his increasing responsibilities at Market Technologies with unbridled enthusiasm each day. As Lane continues to demonstrate excellence in his performance as a C-suite executive at Market Technologies, it is expected that one day he will take over the helm when his father, now 67 years old, decides to retire as Chief Executive Officer.

In addition to his professional activities, Lane remains committed to giving back to his local community, by donating time and financial resources to various charitable organizations each year. In 2009 he was recognized by the Tampa Bay Business Journal as an honoree for the Up & Comers Award in the “30 Under 30” category. This award recognizes rising professionals committed to excellence and high standards of integrity in their professional careers and in their community involvement.

Lane is not all business, though; or at least not entirely so.  He enjoys relaxing at his Wesley Chapel ranch with his wife Mandi and two young daughters where they breed and raise farm animals as a hobby. Although he does this to relax, he is never one to pass up a good buy or a profitable sell on livestock. Sometimes, you can take the man out of business, but you can’t take business out of this man.

Golden Cross + Death Cross = Golden Death

We hear it on CNBC regularly… a certain stock has shown a “golden cross” pattern. This could be the beginning of a big bull trend. Another stock has shown a “death cross” pattern, and now is definitely the time to get out. These vaguely-defined strategies are how many people perceive technical analysis.

Often, the strategy is applied  in the same way, with the same variables, to a variety of different markets. The individuals using it expect to learn something of value. Is the fast MA 50, 25, or 100? Is the slow MA 100, 150, or 200? Do you sell buy as soon as the cross occurs, or do you wait for a pullback? Everyone has their own interpretation, and anyone who knows the Chimps knows we don’t leave room for interpretation.

I propose an experiment. Let’s give the Golden Cross and the Death Cross free rein to define themselves on their own terms. We’ll give them full leniency, and let them perform as well as they possibly can. No stop loss, and history from 1949 on the S&P 500. We’ll let the fast and slow moving averages optimize themselves. Go go gadget Genesis…

optimized golden cross and death cross applied to And the results are in! I’ve highlighted a period between 2009 and 2012 during which a series of crossovers occurred. Barely visible are the buy and sell triggers, for example, you can see a small red triangle between June and July 2010 right after a crossover during which the system closed its long position and opened a short.

The optimal values for fast and slow MAs on the S&P 500 from 1949 to present are 56 fast and 198 slow. Actually, not too far off from one I’ve often heard, 50 fast and 200 slow. But before you go programming this into your own charting program, let’s take a closer look at performance…
optimized golden cross death cross performance

Thinking twice about applying this strategy to your own trading? You’d better be. You’ll find yourself making money on just 1 out of 5 trades. With such a poor track record, you’d be a trader of amazing resolve if you were able to make that 4th or 5th trade believing it’s likely to be a winner. The numbers speak for themselves. This is clearly not a strategy anyone should be considering.

But the question remains, is there any way to salvage a wreck like this? The Chimps think so. Even the most standard and rudimentary (dare we say, fundamental?) of technical methods like Moving Averages must be applied correctly. Next week, we’ll show you how to we modify Moving Averages to come up with insanely better results.

 

The Commitment of Traders Report (CoT)

The Commitment of Traders Report (CoT) is a weekly report issued by the Commodity Futures Trading Commission (CFTC). The report shows existing positions and change of position size for several groups of traders in a variety of futures markets. This data can be found at www.cftc.gov, and is also available for download through data streaming services like Genesis.

Who Does the Report Cover?

For many years, the report included statistics on three major groups, commercials, institutional traders, and small speculators. More recently, each of these groups has been broken down further into subgroups. However, for our purposes, we will focus on the aforementioned three major groups.

Why is CoT Important?

CoT is one of the best leading indicators of long-term trend. Used properly, it can help us decide if conditions are right for a trade. It doesn’t provide a trade “trigger”, that is, it will not tell you exactly when to buy. However, it can give you a “setup”, telling you whether or not the trend is congruent with a trade you’re considering. That is to say, CoT clues  you into the long-term trend, making the success of your trades more likely. But we don’t simply buy when commercials buy and sell when they sell. See our notes on application below as well as an applied example at the end of this article.

Is All CoT Data Necessary?

The Chimps do not consider all CoT data equally important. Commercial activity is by far the most reliable data within the report. Remember, these are generally large companies that have spent years dealing day-in and day-out with a few select commodities. Their ability to predict the cost of these commodities, and thus protect the profits of their own business, has been consistent over the course of decades.

There is a lower ability to successfully predict these price moves among institutional traders, and even more so among small speculators. We don’t disregard either of these groups completely, but we give much heavier weight to commercial activity. Institutional trader and commercial activity sometimes diverge, and commercials tend to be right in these situations. Small speculator activity is usually a contrary indicator, but this is not always the case. For these reasons, we don’t consider these two categories particularly reliable, thus we look at them less.

What Stocks Work with CoT?

Since the CoT reports on futures markets, there is a specific subset of stocks with which you can successfully use CoT. Commodities ETFs and ETNs are an obvious choice here, but only those with useful CoT reports. These include crude oil, gold, copper, sugar, coffee, corn, and wheat. Stocks closely tied to the price of these commodities can also be analyzed in this way. Goldcorp and Barrick for gold, Exxon and Gazprom for oil, Freeport-McMoRan and BHP for copper, ADM and Kraft for grains and sugar, and Starbucks for coffee. You get the picture!

There are also stocks that just aren’t suitable for CoT. For example, you can’t use financial futures in conjunction with financial ETFs and stocks. Our extensive backtesting show this approach to be highly ineffective.

Beware: Application of CoT is Counterintuitive

So, buy when commercials are buying and sell when they’re selling… right? WRONG! It may sound confusing, but it’s exactly the opposite. Unless you have the foresight and capital of a commercial, you will get crushed and lose everything if you do the same. For explanation of why, see our notes & cautions below.

Just remember this. For the small investor, buy at the end of commercial buying and sell at the end of commercial selling (with proper setup-trigger-followthrough, of course). Why? The end of commercial buying usually coincides with the start of a bull market. Likewise, the end of commercial selling usually coincides with the start of a bear market. Again, for an applied example of this, see the charts below.

Notes & Cautions

Commercials are Hedgers, Not Speculators

Commercials provide the most reliable data within the CoT, but it’s not always obvious what they’re doing just by glancing at the numbers. When commercials buy or sell, they are not opening a new position, they are hedging. Remember, commercials always have stockpiles of the commodities they trade.  Buying means they are protecting themselves against an anticipated rise in prices by locking in a lower price now. Selling means they are protecting themselves against a fall in prices by locking in a higher price now.

Commercials Act in the Long Term, Outliving the Little Fish

Unlike large and small traders, commercials buy into and sell out of gigantic positions over long periods of time. Whereas a trader might accumulate a position over the course of days or weeks, commercials average up or down over the course of months and years. This means that a commercial can remain a buyer in a 15 or 20% move down, while smaller traders would have been stopped out almost immediately. So you as an individual should by no means attempt to mimic the activity of commercials. Instead, use their activity to verify a market trend or time a change in the trend.

An Objective Approach

Here’s an example of an objective approach, using the CoT as confirmation of the long-term trend, then using the standard setup-trigger-followthrough approach on a shorter-term ETF trade.

In this example, commercials accumulate coffee for nearly two years as the price of coffee goes down. We watch the CoT report to time our own buy for the end of commercial buying.

First, we look at a quarterly chart of coffee futures:

coffee-futures-cot

This chart illustrates the start and end of commercial accumulation. Note, the end of commercial accumulation is usually the start of a bull market, which is how we time our ETF trade on the next chart.

Next, we look at a weekly chart of JO (the Coffee ETF):

jo-mac-w-cot

The red line on this chart is the end of commercial buying (same point as on the chart above). End of commercial buying generally signals the start of a bull market. As investors or traders, we do not have the luxury of massive funds to support dollar cost averaging. Consequently, we must apply timing, entering the trade when commercials stop buying.

As you can see, the process of using CoT data for investment-grade long positions is not totally mechanical. Some judgement is required, however, the large profits that are to be gained by following this procedure will offset the fact that, on occasion, several attempts to enter long positions will initially be stopped out.

The Inside Bar Method

inside-bar-example

The blue bar is an “inside bar”

The Inside Bar Method is one of the simplest and most effective of the 2Chimps timing triggers. An inside bar is a bar that falls completely within the trading range of the bar immediately preceding it.

More precisely, to qualify as an inside bar, a bar must:

  1. have a high lower than the bar directly before it
  2. have a low higher than the bar directly before it

The appearance of an inside bar is a setup. In order to buy or sell, we must still wait for the trigger.

Trigger

For the inside bar method, the trigger comes on the third bar or it doesn’t come at all.

A buy is triggered if the third bar close above high of the first bar. A sell is triggered if the third bar closes below the low of the first bar.  See below:

inside-bar-buy

inside-bar-sell

If neither of these conditions are met on the 3rd bar, then there is no trigger (see the series of trades below for examples of “no trigger” inside bars).

Follow-Through (1st profit target and risk)

Your first profit target is calculated at half the range of the first bar of the pattern. See below:

inside bar profit target

Risk is calculated as the full range of the first bar of the pattern. See below:

inside bar stop example

Example

Here’s an example of a series of trades using the inside bar method. Notice, most inside bars do not trigger a trade, but those that do generally hit their first profit target within a couple of bars.

inside bar series

A Brief Note on Our Strategies

At 2chimps.net, we do our best to familiarize you with our various strategies. If you have visited other trading websites, then you know that most of them will not reveal their methods to you.

If these trading methods are revealed to you, it’s done in a way that leaves the methods subject to interpretation. Many methods include the use of mythical or mystical trading concepts with no basis in reality. Our recommendations are reality-based, and frequently, we provide historical track records (as in the case of our seasonal trades).

When you are learning our methods, please remember that all of our trading methodologies consist of three phases. These are: the setup, the trigger, and the follow-through. Without follow through, you can still lose money even if your setup and trigger are 100% correct! Follow through includes a profit maximizing strategy as well as risk management, and both are crucial to the success of the trade.

Position size and exit strategies are very much dependent upon your individual financial situation. Therefore we do not make blanket statements about performance because we are not privy to your individual level of risk tolerance or your ability to trade various position sizes. However, our methods and procedures remain objective. With sensible and clearly defined profit maximizing strategies, they have the potential to be very profitable.

2Chimps Profit Maximizing Strategy

Without a profit maximizing strategy you won’t get the big moves. Over the years we have developed a profit maximizing strategy designed to provide three distinct profit targets for each trade or investment. Three Units Rule Because the strategy is divided into three targets, we always enter trades with “three units” in mind. Enter every […]
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