With the Labor Day long weekend coming up I thought I’d do something a little different. My wife and I are getting on a plane Monday – heading off for our annual 3 months of Autumn swells in Biarritz, France. But the Emini trading doesn’t stop.

Here are my 8 tips for travelling and trading while on the road.

Travelling and Trading #1: Close out any open positions

Airports, airplanes, security, customs, foreign languages, driving on the other side of the road, etc. are all stressful enough. Why make it any harder on yourself?

I stop trading a few days before I travel and close out any open positions. I don’t want to be checking or worrying about the market while I’m travelling.

I want to reach that “zen-like-state” where I don’t care if the flight is delayed, if my luggage doesn’t arrive, if I’m seated beside the chatty grandmother or competition bodybuilder (yes, it’s happened to me – and I was sandwiched between 2 of them).

Travelling and Trading #2: You only need 1 screen to trade

I think I’m a little different from the average trader when it comes to trading screens – I only need one. To be honest, sometimes I think traders use multiple screens as a badge of honor or a way to feel important. Is that sacrilege? Have I just crossed a line?

I try and keep things simple – minimize the number of trading decisions, minimize the number of variables to monitor, minimize the “noise” and outside influences.

I focus exclusively on and trade one market, I only use 3 non-correlated indicators and most of the time I have just one workspace open – my 500, 1,500 and 4,500 tick chart setup.

I have travelled with 2 laptops in the past but it’s really not necessary. If you do choose to do that, take the battery out of one and run it just on mains power. That will cut down on travelling weight – although your fellow travellers do look upon you with some suspicion when passing through security.

I am in absolute awe of my 17 inch Apple MacBook Pro – flawless. So I’ll be travelling with that this year. If you’ve ever wanted to get off the Microsoft treadmill but were a TradeStation die hard (like me) then read this article on Trading Software for Mac.

Travelling and Trading #3: Check the WiFi before you leave

A solid, fast Internet connection is a must. These days WiFi is becoming ubiquitous – which means fewer plugs and cables to carry with you. But the speed and reliability of your WiFi connection can still be an issue.

Before we book any accommodation while travelling we always check the speed and type of Internet connection. For example, 3G mobile or (God forbid) satellite Internet connections will not cut it. Some of the apartment landlords are a little bemused with the questions – but don’t be put off. A poor Internet connection will ruin your stay.

In my experience, the French Internet infrastructure is excellent. A friend of mine who’s in-the-know, told me that Biarritz in France, where we stay, was one of the first places in Europe to get high-speed Internet. And frankly, I was blown away at how good it is.

Spain is patchy and lots of landlords try to pass off 3G mobile Internet as high speed. I’d love to spend more time surfing in Indonesia – but you can barely get better than dial-up there, so that one will just have to wait.

Travelling and Trading #4: Don’t forget adapters and application disks

I used to fuss about which electrical power adapters and cables I needed when travelling. Not any more. WiFi has eliminated cables and now I travel with 2 universal power adapters.

The beauty of the universal adapter is you can connect any plug to any outlet. Choose a well designed, small adapter with surge protection and you should be able to manage most countries.

Again, in the past I’ve travelled with a dozen or so application disks – just in case disaster struck. With most software downloadable from the Internet these days (like TradeStation), this is less of an issue. However, I still travel with my operating system backup disks and some spare CD-ROMs. Last year I had to do a full system backup and re-install on my wife’s computer – and it was surprisingly easy.

Travelling and Trading #5: Buy, rent or ship locally

Travelling with surfboards is a real pain in the neck. It’s worse than golf clubs, bikes or skis. The worst bit is getting on that rental car courtesy bus – your fellow travellers feel compelled to strike up a conversation and ask you “is it really worth it”.

Well, this year I’m buying (and then re-selling) locally. Biarritz has a couple of awesome surf shops and they stock a full catalogue of the best Australian and US shapers. And we’re staying long enough to make it worth my while.

Not a surfer? The same principles apply. If you can’t work or trade without a printer – buy locally. Printers are getting so cheap they’re almost a disposable item! You might think about the same thing with a second screen – it all depends on how long you’re staying.

Then there’s the weekend ski trip that happens to be on the way to/from your destination. If you’re like me and you can’t bear to ski/board without your own boots and gear then think about boxing them up and shipping them ahead to your hotel. It just takes a little forethought and planning.

Travelling and Trading #6: It’s all about the shoes

Ok, so the secret to stress-free travelling is to travel light. But what is the secret to travelling light? Answer: shoes – travel with the minimum number of shoes. And the shoes you take have to be ultra-comfortable, lightweight and versatile.

This is where you start to see my obsessive, compulsive streak. I am obsessed with finding the ultimate pair of shoes (and luggage, more about that below). I’m fortunate that I don’t need to attend business meetings or wear suits. So I have a little more flexibility in my choices.

And the winner is … Ecco. You might have heard of them – Fred Couples (former World number 1 golfer) wore a pair of Ecco golf street sneakers at the 2010 Masters. They’re a small but growing Danish shoe manufacturer that specialise in ultra-comfortable and somewhat quirky looking shoes. Anything from loafers to hiking boots.

I have sandals and travelling shoes from Ecco. The Ecco Ultra Terrain are amazing – lightweight, mesh construction that makes them breathable and they’re slip on/off for getting through security quicker. Remember that George Clooney scene in Up In The Air? “Asians. They pack light, travel efficiently and they have a thing for slip on shoes”.

Travelling and Trading #7: Travel light and keep a packing list

More of my obsessive, compulsive streak. I am also obsessed with finding the ultimate luggage – strong, lightweight, no bigger than you need.

Samsonite is an obvious choice. They’ve got a great world-wide warranty policy and are on the cutting edge of lightweight, strong materials. I’ve had my Samsonite shown in the picture for 8 years and it’s been around the world almost that number of times.

But I’m most excited about my latest laptop briefcase. It’s a Patagonia Lightwire Brief. My 17 inch MacBook Pro laptop fits perfectly, plenty of easy-to-access pockets, nicely designed shoulder strap and made from very strong ballistic fabric. But it’s most important feature? It’s ultra-lightweight. I’m just itching to test it out.

By the way – the picture shows all the luggage I’m taking for 7 months on the road. The trick to keeping things to a minimum is to have a packing list. When you unpack from your last trip keep a list of everything you used and nothing more. You always take more than you absolutely need – the packing list will keep you on the straight and narrow.

Travelling and Trading #8: Ease back into trading slowly

Time zones can play tricks on your mind. I find that once I arrive in a new location, the trading day initially has a very different feel.

The Emini open is happening at a different time of day than I’m used to. In Europe it’s late afternoon; in Hawaii it’s very early morning. Your mental state, not just your physical body, needs time to adjust.

It’s easy to rush in and confuse the feeling of a different mental state with the feeling of excitement you get when a trade is setting up. If I were a patient man I’d say wait a few days before dipping your toes in the water and taking a trade. But that’s not what I do.

The best advice I have is to halve your profit target and stop loss. Normally I’m gunning for 4 points and risking 4. When travelling, I start by playing for just 2. Because I’m much more likely to make a mistake in these first few days, I also limit my risk. I’m not sure it’s possible to trade with just a 1 point stop, but about 2 points is right for me.

I also limit the amount of time I spend watching the market – it’s easy to convince yourself of a setup when your body is running on adrenaline.

If you plan to combine travelling and trading I hope you found these tips helpful.

Just posted another feature article to the Emini-Watch.com website:

The 7 Deadly Sins Trade Log.

The beginning of a new year is always a good time to re-assess your performance and re-set goals for the next 12 months.

The article includes:

• Description of the 7 Deadly Sins (my recurring trading errors)
• Video instructions for using this simple trade log, and
• Excel spreadsheet download (free)

So if you're interested in seeing how I log my trades, follow this link to the:

The 7 Deadly Sins Trade Log.

Good luck with your Emini trading.

Learning to become a successful trader is hard work – very hard work. Let’s be honest, it takes years. And most never make it. The title of this opinion piece is not meant to suggest that everyone should learn to trade – but, that if you’re on this path, if you’ve decided you want to become a trader, here are 5 good reasons to persist.

1. Forget ‘Buy & Hold’

We have just experienced 20+ year bull markets in equity and bond prices. These bull markets started in 1982 at about the same time inflation peaked. For industrial equities (Dow Jones and S&P500 indices) the peak was 2007; for high tech equities (NASDAQ index) the peak was 2000. The peak in bond prices was arguably this year.

Dow Jones Index 1956 – 2009 (monthly)

The first macro factor contributing to this run up in prices has been the reduction in inflation. US CPI peaked in 1980 at over 14%; the Federal Funds Rate peaked in 1981 at over 19%. As inflation has come down, so have interest rates. As interest rates come down, bond prices go up. And then there’s the equity analysts: lower interest rates means lower discount rates in their discounted cash flow valuation models leading to higher valuations and higher PE Ratios.

The second macro factor in these bull markets has been the additional leverage available. In 1979 I was in an English boarding school. I remember my roommate squirreling away his weekly pocket money in a bank savings account. When I asked him why he wasn’t spending it on sweets and going to the movies on the weekend (ah, those were the days) he said he wanted to be sure that his bank manager saw him as a good risk when he left university and wanted a home loan from the bank.

As we all know, times changed. The banks gradually got looser and looser with their lending standards – up until it blew up in their faces. And the end result was more and more debt for everyone – individuals, corporations, private equity firms, hedge funds – driving up equity and asset prices around the world.

But now inflation is virtually zero. If you factor in declining rents, CPI in the US is negative. The Federal Funds Rate is virtually zero, long term Government bond yields are between 3.5% and 4.5%. The decreasing inflation part of the run up in markets and valuations has reached the end of the road. And finally consumer and corporate debt levels are starting to come down for the first time since the Great Depression.

Updated thoughts on Why Buy and Hold Won’t Work here.

Conclusion: The two key contributing factors that drove the bull markets in equities and bond prices – decreasing inflation and increasing debt – have gone. Forget Buy & Hold.

2. Take personal responsibility

These 20+ year bull markets in equity and bond prices also had a dramatic impact on the Financial Services industry – it boomed and it boomed all around the world. Corporates raised debt with bond issuances and went public with equity raisings. Mutual Funds bought these securities and Joe Public bought the Mutual Funds.

Along the way, Governments saw an angle, a way out of a sticky problem they faced. In the long run, with ageing populations and declining population growth rates, they couldn’t afford the growing cost of funding state pensions. The Financial Services industry offered them a way out: “mandate employees to fund their own pensions and you’ll be off the hook.” The industry would sell even more Mutual Funds to Joe Public and the Government would throw in a tax break to sweeten the deal.

Now we have Joe Public’s savings plus his mandated pension contributions flowing into the Mutual Fund industry. And here is where you find their dirty little secret. A fund manager has two choices when charging for his service:

1. Charge 10% (or so) for performance above a benchmark, or
2. Charge 2% (or so) of the total assets being managed

Now, why make life difficult for yourself. Number 1 is hard work – very hard work. Number 2 is easy – buy what everyone else is buying (no need to stick your neck out) then buy a little more when the new monthly contributions flow in and pick up your 2% along the way. Plus Joe Public will like it, because 2% is cheaper than 10%, right?

So, the dirty little secret is that the fund manager has learnt it’s much easier for him to not stick his neck out by trying to out-perform his peers, but just keep taking the 2% of this river of investable funds flowing his way. The end result? He’s forgotten how to invest, how to time the market, how to sell at the top.

Conclusion: Your mutual fund manager (and broker) are looking after their best interests, not necessarily yours. Take personal responsibility for your finances.

3. Reduce time-in-the-market risk

Everyone know the story of Pavlov’s dogs? The classic “conditioning” experiment.

Day 1: Pavlov rings the bell, the dogs don’t know what the hell is going on. Pavlov feeds the dogs. Day 2: Pavlov rings the bell, the dogs stand around. Pavlov feeds the dogs. Day 3: Pavlov rings the bell, the dogs … you get the picture, by the end of the week Pavlov rings the bell and the dogs know they’re going to get fed.

Well, fund managers are just like Pavlov’s dogs. No, that’s not fair. “Investors” are just like Pavlov’s dogs. They have become conditioned by a 20+ year bull market. Their investing behavior is based on a bull market. Their heroes and mythology (“the Sage of Omaha”) are based on a bull market. Their mantras are based on a bull market.

Like this mantra: “It’s not timing the market but time-in-the-market that counts.” We’ve all heard that one. Probably what stopped your fund manger from taking profits in 2007.

My point is – if the game has changed, the rules you’re playing by have to change. If we’re not in the middle of a bull market any more – then your investing behavior has to change. All of a sudden being out of the market is not such a crazy idea. Taking small profits consistently makes more sense than holding for Peter Lynch’s “10-bagger” (a stock that goes up 10 times while you own it).

Conclusion: Whenever you’re invested in the market your capital is at risk. Reduce risk by spending more time in cash and being pro-active with your entries and exits.

4. Reduce currency risk

I’ve spent my whole life in a currency crisis. For that matter, I’ve spent my whole life in a declining Empire. You see, I’m British – well, half British, my father was American. And we British know what it’s like to have our currency and international standing gradually diminish.

When I was young, my father would occasionally reminisce about visiting London just after the war and tell his version of how he met my mother. “Back then” he’d say “one Pound was worth four Dollars.” While I was growing up the Pound was mostly worth two Dollars. Then in 1985 the Pound went as low as being worth only one Dollar!

I remember at University working with a couple of mates on a software programming contract for a US company. The opportunity of being paid in US Dollars came up – and we jumped at it! Wow, be paid in US Dollars – yeah, now we’d hit the big time.

You see, everyone in England knew it, deep down, kind of instinctively – no one wanted our money. Not the Americans, not the Germans (they had the Deutschmark – impenetrable fortress), certainly not the French. About the only people we had it up on were the Italians – the Lira, now that was just a joke, Monopoly money.

But it’s now 2009 and the world has changed. I don’t know what happened to America but something’s gone wrong. The entrepreneurial engine of the world has turned into ….. (fill in the blank). It seems quite possible that America will suffer the slow ignominious decline that Britain has suffered since the second world war. And the US Dollar is not as almighty as it used to be.

Conclusion: Holding your assets in US Dollars cannot be considered the safe bet it used to be. Use your trading skills to follow long term currency trends and be pro-active.

5. This is a ‘Golden Age’ for traders

To paraphrase Dickens: “It was the worst of times, but it was also the best of times.”

We are privileged to live in a ‘Golden Age’ for traders. Frankly, we’ve never had it so good. Here are just a few reasons, off the top of my head:

• Lightening fast online order transmission
• Tiny commissions (less than tick value for the Emini)
• Negligible slippage when entering/exiting
• Very reasonable margin requirements for futures
• High quality research & analysis, available for free
• Ability to trade almost any instrument (equities, FX, futures, options, etc.)
• Sophisticated software that makes even auto-trading possible
• Community of knowledgeable traders available via forums
• Literally thousands of books now available about trading
• Trade from home, office, boat, beach, pool-side, travelling abroad, etc.

Conclusion: Trading is not the dark art it used to be. The opportunities for traders have never been greater. All you need is a passion for trading and an Internet connection.

I received a very touching email from a subscriber, Michael (name changed):

"First, thank you very much for your website. I lost my whole account trading the Emini. I’m so upset. I don’t know how I should start again. Please, can you help me?"

Rather than send Michael a quick response, I thought I might spend some time writing a considered reply and publish it on Emini-Watch.com. So here goes.

Michael, I would suggest you do two things:

1. Ask yourself whether trading really is for you and be brutally honest in your answer
2. If trading is for you, then go back through every one of your trades and figure out what mistakes you are making

Trading Psychology and Types of Trader

In answering the first question, the following schematic might be helpful. In my experience there are 4 types of trader:

Trading Psychology and Types of Trader

Under-Capitalized Newbies: You’d be surprised how many emails I get from people who have just lost their job, scraped together $5,000 and want to make a living trading. Or attended a broker’s sales presentation showing how easy it is to trade and offering ridiculously low margins. Or just want to buy a high profit-factor trading system and auto-trade it to incredible riches.

These people have no idea what they’re getting themselves into – they are "cannon fodder" for the Professionals. Michael, if you fall into this category and don’t have the stamina to succeed as a trader, then walk away – there are easier ways to make a living, trust me.

Doctor, Dentist, CEO, Lawyer: These are generally smart people who are used to being successful. However, when they start trading, all of a sudden they find it’s harder than it looks. The skills that got them to where they are professionally (being smarter than most, being good with customers or colleagues, corporate ladder climbing) don’t mean a thing trading.

But they’ve got deep pockets and they can always recoup their trading losses with their day jobs. Michael, it doesn’t sound like you’re one of these but if you are, trade smaller and make sure your losses are much, much less than your regular income.

Thrill-Seeker: There are plenty of traders that enjoy the thrill. Some years they are up, some they are down. They trade capital they can afford to lose and probably have most of their money in Mutual Funds or High-Yield Bonds. For them the motivation is partly about being able to say they’re a "trader" at dinner parties, always having an opinion about which way the market is going.

Don’t get me wrong – I like these kinds of traders. They are great company, always reading the latest books, always experimenting with new ideas. They’ll survive in the long haul and preserve their capital. Michael, if you are one of these traders then put your head down, rebuild your stake, figure out what went wrong and start again slowly.

Professional Trader: In my opinion two things separate the Professional from the herd. Firstly, being able to override your instincts and take the "hard" trades – not trying to pick the top or bottom, waiting until you get a high probability setup, following your trading rules even when it feels wrong.

Secondly, being consistent – day after day, month after month – making small gains every day rather than big wins followed by big losses. Approaching trading like a business – methodical, logical, dedicated.

Trading Psychology and Figuring Out Your Mistakes

Michael, if you’re not ready to quit then my best advice is to go back through every one of your trades and figure out what mistakes you are making. Try and remember the circumstances of every trade – what was your trigger for entering, what were your indicators saying, what data biased your opinion in taking the trade, how were you feeling physically and emotionally.

I keep a trading log and fill in it religiously after every trade. It obviously includes entry, exit, profit, contracts traded, etc. for every trade. But I also evaluate every trade against the 7 Deadly Sins that I make trading. Obviously the goal is to make fewer and fewer mistakes over time.

I keep my trading log in an Excel spreadsheet and it’s calculating a running total of my performance against my Deadly Sins. I’ve got to such a point that even as I’m entering a trade I can feel if it’s violating one of my rules.

So, here’s my list of 7 Deadly Sins:

1. Trying to pick top or bottom ("Billy, Don’t Be a Hero" starts playing in my head)
2. My gut tells me that we’re going to break out (Professionals love fading breakouts)
3. No confirmation from my Volume indicators (wait for everything to line up)
4. Hesitating on entry (typically when the trade is "hard" to take)
5. Canceling my stop (OMG, the biggest Sin of them all !)
6. Moving my profit target (got to let the winners run)
7. Letting a profitable trade turn into a loser (luckily, a rarity)

If you love trading then you’ll gladly go through this exercise. Evaluate your mistakes and understand what is working for you and what is not. Remember "Watch a man in times of adversity to discover what kind of man he is".

Michael, I hope this helps. Good luck with your Emini trading.

My thoughts on trading psychology and range days today. Got a great question from Nilesh about Tuesday’s explosive move. Here it is:

"I knew I should only trade from the long side. But in the last 2 hours I took 4 trades – all of them SHORT. Only the last trade cost me, however, it’s cost me more in confidence. Any suggestions?"

What is a range day? A range day is any day where the market just keeps going, either up or down. We all know what they feel like. You’re thinking "When will this runaway move stop? Where’s the top/bottom?" Trust me, we’re all thinking it – "When do I short this monster rally? When do I buy this over-sold market?"

So here are the stats on range days:

Emini Range Days (frequency of days with a particular range)

7% of Emini trading days have a range of greater than 2.5% of the previous day’s close. These are large range days, either up or down. So you get on average of 1 to 2 range days a month. Note the "fat tail" at 3% or greater – classic Nassim Taleb.

Emini Range Day Opens (frequency of days and how close the open is to the extreme)

Most of the time range days open near the low of the day if the market is going up, or near the high if the market is going down. The label on the chart is a little misleading as it looks like I’m only talking about up days. In fact the data includes both up and down days. Strictly speaking I should have said "there is a 59% chance that the open is within 20% of the extreme".

Emini Range Day Closes (frequency of days and how close the close is to the extreme)

Now here’s the good stuff. 71% of the time the market will close very near the extreme – near the high on an up day or near the low on a down day. There’s no reason to short an up range day. Again the stats above include up and down range bars.

There’s over a 25% chance that the market will close in the top 5% of the bars range on an up day! (and within 5% of the bottom on a down day). That’s what you should be thinking as the market screams away – "I need to buy a pullback and hold to the close".

Day After Emini Range Days (frequency of days and the size of tomorrow’s range compared to today)

Lastly, here’s what happens on the next day. There’s over a 40% chance that we’ll get another range day tomorrow. Now I should have split this data into up days and down days – I’m sure down range days are more likely to be followed by another down range day. But you get the picture.

Tom Cruise and Days of Thunder

So those are the stats. Now this might sound a little peculiar – when I’m in the middle of a runaway "range" day I visualize Tom Cruise and Robert Duvall in the movie "Days of Thunder". I hope you’ve all seen it – after all it did have Nicole Kidman in it.

Anyway, it’s about stock car racing and early in the movie Tom Cruise gets into a big crash and his confidence is shaken. Duvall takes him aside and tells him that when he sees an accident happening ahead of him, the cars will mostly likely slide down from the TOP of the banked track to the BOTTOM – and leave a clear path through the wrecks on the high side of the track.

The big race day comes, Cruise is losing to his arch enemy and in the middle of the race there’s a big crash ahead of him. There’s smoke all around and he can’t see what’s in front – but he remembers what Duvall said. "Go high. Pick a line that avoids the wrecks and you’ll get through".

So even though there’s smoke all around and he can’t see where’s he’s going, he knows that there is a high probability that the wrecked cars have slid down from the top of the track and the safest route through is to "go high".

That’s what I’m thinking as a range day develops – get long and hold on, because the highest probability outcome is that we’ll close at the highs. I’m blinded by the smoke but I know that if I "go high" I’ll be safe.

Good luck with your Emini trading. BTW the little contest I’m running is coming up real soon – stay tuned. And here’s the movie trailer for Days of Thunder.

Trading Psychology (Days of Thunder)