Rebel Traders 029 : When Is a Signal not a Signal

What makes a signal a signal and what signals you should be looking for to get in or out of a trade? That’s the critical question the Rebel Trader’s tackle in this weeks podcast as they dive in to 2018 feet first...

A question the Rebel Traders get asked all the time is what is a “Good” signal to get in to a trade and what signals should people be looking for to get out of a trade profitably. Well, Sean and Phil jump in to 2018 with a look at what makes a signal, what is a good signal, what signals you can ignore and crack some myths over the head with a big mallet.

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Sean Donahoe: What makes a signal a signal? And what signals should you be looking out for to get in or out of a trade? Are you ready to rock? Let's do it.
Automated: Rebel Traders takes you inside the world of two underground master traders, who take an entertaining and contrarian look at the markets, to cut through the noise of Wall Street, and help you to navigate the trading minefield. Together, Sean Donahoe and Phil Newton are on a mission to give you the unfair advantage of a rebel trader. And now, here are your hosts, Sean Donahoe and Mr. Phil Newton.
Sean Donahoe: Hey, hey, hey. This is Sean Donahoe, and I hope you all have a fantastic new year, that the hangovers have cleared. I am joined today by the guy in the corner waving the flags, doing semaphore over here. Mr. Phil Newton. How are you doing, sir?
Phil Newton: I'm doing very good. The hangover is now overhung.
Sean Donahoe: Good.
Phil Newton: Is that a thing?
Sean Donahoe: It's overhung, overrun, or oversold.
Phil Newton: Overrun, yes. It was a little too much whiskey.
Sean Donahoe: There you go. I wish I could say the same. Unfortunately, as you might be able to tell by my voice, I actually have a second dose of that bloody pneumonia and bronchitis, so unfortunately, there was no whiskey for me over new year. This is the first time I think since I was born that there was no whiskey involved.
Phil Newton: So you liked it so much, you've gone back for seconds.
Sean Donahoe: Abso-bloody-lutely. Apparently-
Phil Newton: Not quite.
Sean Donahoe: That's that my wife was saying yesterday. She said, "You like this, don't you?" It's been a month now, Jesus. I think this is the illest I've been in a long time.
Phil Newton: Do we want to continue this conversation.
Sean Donahoe: Well, indeed. Let's skip ahead, shall we? In today's show, we are gonna be talking about what makes a signal a signal, and what signals you should actually be ignoring or looking for in your trading, and how to get in and out of a trade based on certain signals.
Phil Newton: We've also got the usual quick-fire round where your trading questions are answered. Again, every week I say it, but it still is my favorite section of the show. of the week, going over the hype, all the shenanigans of industry, and somewhere amongst all of this nonsense that we call our Rebel Trading Show, and we're gonna find the trade.
Sean Donahoe: Absolutely.
Phil Newton: And what a trade it's gonna be.
Sean Donahoe: Indeed. All this nonsense, I like it. What we're gonna do guys is, and this is answering a question we get asked a lot, is what makes a good signal to get in a trade, or what signals should be people looking out for to get out of a trade profitably? There's a very fine-
Phil Newton: You know what? I just heard in the distance a giant clang, and that was the penny dropping while you were saying before with the semaphore and the signals.
Sean Donahoe: Okay, it only takes a few minutes for him to warm up guys, ladies and gentleman. You know, we have to keep the choke on the engine ticking along get the crank handle, and eventually he picks up speed.
Phil Newton: I've got no excuses because certainly not early on in the morning. It's early afternoon, and I've had plenty of time to kind of get the engine running and get caffeinated.
Sean Donahoe: Yeah, he sat over there wondering, "What the hell is this guy on about? Semaphore. Oh shit, okay." So anyway, yes. What we're gonna be doing today is we're gonna be looking at different forms of signals, but trading signals, no wag, wag flaving? Flag waving, and we are gonna be looking-
Phil Newton: Fun with flags.
Sean Donahoe: Fun with flags with your, yeah, Big Bang theory. I guess that makes me Sheldon and you Leonard, I don't know. But anyway-
Phil Newton: As long as I'm not aiming in the fun with flags.
Sean Donahoe: I was gonna go there, but I decided I'd be nice. Absolutely, but we're going to crack some myths over the head with a big mallet and dive right in. I guess one of the things we should really start with, especially for the newer traders, is draw some lines in the sand, because a lot of people, and we banged on this drum a lot, but a lot of people use indicators as signal generators, and we need to really define what a signal is versus an indicator. Phil, I'm gonna let you take that one away real quick.
Phil Newton: Thanks, push me under the bus straight away I like it. To be Fair to the reality with indicators and the confusion with signals is that, you know, well the clue's in the name, one's a signal and one's an indicator. What an indicator is a way of measuring and assessing and evaluating what price is doing as far as I'm concerned. It doesn't necessarily generate a signal, although you can use it to contribute towards signal generation, which I think is where most of the confusion lays.
For example, we like to use Bollinger Bands to help us evaluate price. Now notice the wording there, I'm not saying it's a generated signal, I'm saying to help me evaluate price. Just because price is doing something in relationship to say Bollinger Band, and again, we could be talking about any indicator. Whether it's MACD, whether it's a trend line, whether it's moving average or moving crossover, or RSI, or CCI or ... You get the point, insert the name of your preferred indicator. When a certain condition is met with that tool or indicator that's where people then call it a signal.
That's where I believe the confusion lays, because it's just where a mathematical evaluation of what price is, again an average price, a longer term average crossing, a shorter term moving average, you know, that would be often considered as a signal. One of the most common ones is where, you know, the hundred period crosses, the whole ... I can't remember now, it's been so long since I looked at them now, but the golden cross it, the two-
Sean Donahoe: The 200 year 50, 250.
Phil Newton: Is crossed by the 50 period move map. So the shorter term moving average cross by the talking heads love banging the drum of it's a golden cross signal or a death cross signal. And it's a load of nonsense and the reality is, it's just that the shorter term average has crossed a longer-term average, and that's it. It's just another way to help you evaluate what price is doing, it doesn't necessarily generate signal, although too many people confuse what an indicator is highlighting with a signal. So let's just pause there and make sure that, you know, we're all on the same page.
Sean Donahoe: Absolutely. And it's a great point because a lot of the traditional indicators are designed just to represent a mathematical formula against price action. And that's it. It raises an awareness. Now you can create, and we do this all the time where we combine different things, which are, say for example, a Bollinger Band plus some price action. That can give us a signal-
Phil Newton: Looking for a sequence of events.
Sean Donahoe: Yeah, but part of that will be indicating.
Phil Newton: Yeah you're absolutely right.
Sean Donahoe: Absolutely. Now you can then code that as an indicator, but that becomes then a signal generating indicator. But you've got to understand it's more than one thing going on. It's the combination of things that we're looking for, but even then it's still needs visual confirmation and everything else. But even if you're raising awareness, if you're combining, and this is one thing that we do a lot, is we combine price action with indication because we are technical traders, we're not talking about fundamentals here, we're talking purely technical trading, but when we started combining those two, then we start creating a signal.
Phil Newton: It becomes more powerful, yeah. We start to layer them. So I think again, you just already touched on another kind of points here, we use the indicators. I just want to underscore it. We use indicator to kind of take a big list of stuff to the smallest thoughts for the day. So it kind of creates a shortlist. So we're using them as part of the process to raise our awareness of possible opportunities.
Sean Donahoe: Yeah, and we talk about that. If you guys haven't seen the Webinar that we put together with some of our on demand training. If you go to rebel-
Phil Newton: Yeah we go through step by step with how we do all of this.
Sean Donahoe: Yeah go to tradecanyon.com/on demand we actually break down this exact process that we're skimming around here where we find, filter, and sort stocks. Literally we use a series of simple techniques.
Phil Newton: Surprisingly we practice what we preach.
Sean Donahoe: Exactly it's what we do every day.
Phil Newton: What a surprise.
Sean Donahoe: But it allows us to cut through all the noise down to find maybe you know, anywhere from one to eight opportunities for the data look at and we choose the strongest one from that.
Phil Newton: It's significantly more manageable as well, isn't it?
Rather than look at every stock every day, you know we just want to look two or three things up a day. So anyway, the point is the indicator raises our awareness of the opportunity, that's what I want to kind of highlights, rather thank skip past. Again, it's just trying to draw that distinction between signals indicators. Our awareness is raised because of an indicator meeting certain condition, that doesn't necessarily mean I'm going to trade it. It just means okay, well back conditions been met, this mathematical formula has now been quantified and the condition that I'd like to see has now been brought to my attention. Okay, now what? Now I'm going to take a look at it, see if other things are in place that are layering on the conditions and it's those, that process, that algorithm, for once a better a description, the full completion of everything that I'd like to see generates the signal.
Sean Donahoe: Yes, and it is a combination of things. It's the perfect storm, so to speak, of items that are happening or when they come together. Ooh that is a point of interest. Do I placed that trade based on what I see? Then you do your own evaluation on top of that. You've got a signal once these all these check boxes are complete. Now here's the thing, there are many indicators. There are many chart patterns. There are many candle patterns that can be used. You don't have to know them all. You don't have to have like this giant arsenal of jigsaw pieces, so to speak, that then fit perfectly in the market and I have to know the name of each piece, the configuration of each bump.
Phil Newton: A lot of them will conflict and contradict each other as well.
Sean Donahoe: This is a very important point.
Phil Newton: But then, which ones do you use is going to be determined by what you're trying to achieve. I suppose if we try and draw a real world example, you dig a little deeper into that subject, is the kind of like a mechanic using the right tool for the job. You know, if you're looking to change a tire, you're going to use the right tools to change the tire. You don't necessarily need to strip down the engine to change the tire. And that's what people try and do. You know, they try and know everything about car maintenance, or just how to build car, whereas the reality is they just need to know how to change the tire.
Sean Donahoe: That's a very good point. It's a very good point. How many times have we dealt with that with students who they dive in, want to know absolutely everything. And I was the exact same way when I first got into this. Because I wanted to know everything. I mean, there was, you know, not long ago I would say, I went on a Indiana Jones trip down every tumble, every hole, because I wanted to expand awareness and eventually came out of the, came out of that, with a snake wrapped around my neck, a stone bull chasing me and say, you know what, that was a waste of bloody time. And it happens. I have the bug every now and then.
Phil Newton: No, but I suppose it was only a waste of time because you realize what I was what I've always said all along, which is, okay, if you want to know it, you know, that's fine, explore it, but you don't need it.
Sean Donahoe: Well, that's exactly it. And I have these, okay, you know, I have these bouts of wanting to learn more, I want to know more. I always want to kind of expand the horizon.
Phil Newton: You think of it over time.
Sean Donahoe: But I always come back and Phil says, Yup, still here.
Phil Newton: Told ya.
To be fair I did the same thing. But what you'll, what everyone will learn is that over a period of time, you'll pick it up as you go along. I wouldn't necessarily go out my way, unless you've got a real, "You know what? I think I'd like to get my nose stuck into Elliot Wave, or Dowry, or old Gambit," or whatever theory you want to look at. You know unless you've got a really strongly drawn attraction. Me, I was drawn to patterns, price patterns , you know, the shape the price unfolds, that we can attach a names. And these days, I don't have one way or the other what it called, because what I realized is, that while I know all the names of these patterns and I can trade all these patterns. The name of it is never actually known until after the events anyway. So we can only look back and say, yes, that was definitely xyz pattern.
But in real-time, and this is what the textbooks don't teach you, in real time at the hard right edge of the chart. You've got to kind of figuring out, okay, well if this patent is in development and so far it looks like this pattern, and we can be talking about a pattern, or an indicator, or, you know, a particular theory. Insert the indicator portion there. You know in real time, that can change, it can evolve. I like feel quite frequently say, it's an evolving, mutating, pattern and we're only going to know what it's called after the event, and after it's come to completion. Because that's when we can look back and say "This has happened." So in real time that's where it matters, to be fair, that's where it doesn't matter in real time. Yes you might have an indication. Yes, certain events might have happened, but then you need to layer on all these other conditions.
So it stops you from jumping the gun, stops you from treating that one condition like a signal. I think that's the tale of caution.
Sean Donahoe: Yeah very much so. When, I mean, the event I was talking about here with Phil saying I told you was Elliot Wave theory. I got fascinated with Elliot Wave theory and I'm like "Well, just on the surface of it sounds absolutely fascinating. You know, it's touted as the key to the universe and everything else," So then, came out of it, It's like what a load of bollocks
Phil Newton: And apply it with consistency in real time.
Sean Donahoe: Yeah, Exactly.
Phil Newton: That. My objective is, everyone's in agreement, but whatever you do, you've got to apply it with the consistency in real time, and that in real-time, bloody insert expletive beep. That's the tough part.
Sean Donahoe: Indeed,
Phil Newton: That's the really difficult part of doing it in real time.
Sean Donahoe: And the problem like you said, was that, you know, again, you don't know it until after the fact. It's like, oh yeah, that's what that was.
Phil Newton: So I mean, the way that we do is we trialed trying to deal with what we successfully deal with. What is the known fact at this point? That's how we've constructed.
Sean Donahoe: Yes.
Phil Newton: That's the thing that's not going to change. The interpretation of it is not any different whether you're talking to me, John, Paul, Peter, Rita, Sue, Bob, you know, if it doesn't matter who you're talking to, that fact is a known fact.
Sean Donahoe: Exactly.
Phil Newton: That's what we try and do with our stuff. And when we've gotten known fact, that's when we move on, the next condition that we're looking for. So an indicator for example, that gives us a known fact, that's not going to change, so that that indication, that condition is set in stone, so then we move on to the next condition that needs to be met. Again on all these conditions when they're layered on, it's now we've got enough information so you know what it's probably, you know, history is repeating itself. We've got several known facts, history probably will repeat itself in wording we're not. No one can say for certain, but it's highly probable that 65% of the time, we are going to be right. Because that's what we have been doing for many years.
Sean Donahoe: Well exactly.
Phil Newton: You know, that's what layering on these indications, these conditions, and it's in their entirety that they create the signal. You know, and you were saying Sean, you know, it's, you don't need to know everything for that pattern, you just need to know enough to get the net part of it.
Sean Donahoe: Yeah. This is, what-
Phil Newton: What is it we say about the know all Nevils?
Sean Donahoe: Yeah don't be that guy down at the pub.
Phil Newton: You don't need to be that guy down in the pub. You know, I suppose another way that we've talked about it in the past is then, you know, when your taxi driver starts, and again, nothing against taxi driving, but when the taxi driver, that's his main vocation, or their main vocation, and when they start giving you financial advice, you know, but that's when you want to be thinking, well perhaps I don't need to know that.
Sean Donahoe: Indeed. Yeah.
Phil Newton: That's the thing I don't need to know or do the opposite.
Sean Donahoe: I actually-
Phil Newton: Don't be the guy-
Sean Donahoe: I was going to say-
Phil Newton: Go for it.
Sean Donahoe: I heard a great example, a friend of mine called John Reese was saying, it's just aces "Isn't it amazing. Don't you feel that all these sudden experts in like cryptocurrency," I'm not bashing on cryptocurrency, but it was highly relative, "Don't you think all these,"-
Phil Newton: It just happens to be continually topical.
Sean Donahoe: Yes you talk about taxi drivers per say. Don't don't you feel that when you're getting all these crypto advice from all these so-called experts who suddenly emerged, that you feel like it's getting life advice from the from the girl at the checkout counter at your local supermarket? And I'm paraphrasing, so like, yeah, so every valid point.
Phil Newton: That's hilarious.
Sean Donahoe: Made me laugh my ass off. But so, but at the end of the day, I mean when you start layering on, you start checking all these boxes to start developing signals that allow you to get-
Phil Newton: A production line.
Sean Donahoe: A production line, that's a great example. A production line I think that portrays-
Phil Newton: Yeah, when you've got one stage of completion, one condition, then you can pass it off to the next condition for approval. And then when that's done you can pass it off to the next stage-
Sean Donahoe: Yeah
Phil Newton: The condition for approval. And it gets the seal or stamp the staff supervisor puts the stamp on it and then it gets spat out the end with all the conditions have been met, you've got a completed product, if you like. And then you can put the trade up. It's a conveyor belt. It's a production line, and what we're looking to do with that conveyor belt is, with the conditions that we have. We're looking for, you know, the rejects, if you're like, you know, we're constantly, instead of looking for a trade, we're looking to try and exclude, okay, that's a reject, that's a reject. It doesn't meet the condition. It's to reject, you know, it's only when we get that pristine copy of what we're looking for. Then it gets the stamp, the seal of approval, the supervisor tufts his hat, and we click send on the order.
Sean Donahoe: Now here's the interesting thing you don't, and this is something that a lot of traders get trapped in, they're like, and using the production line analogy, they're like the dodgy factory in some emerging country, third world country. It's like, oh well, you know, we cut that corner. We really don't care about the quality of that part of the product.
Phil Newton: Quality control goes out the window.
Sean Donahoe: Quality control is taking the day off, feet up on the desk, and I've given them, and then what comes out the other end is messed up signal. Here's the thing, a lot of people look at traditional signals, and I'm going to talk about some candle patterns here and a chart pattern. The problem is, and this is something a lot of people don't, we're going to put out a little kind of a report about this. It's candle patterns that you could ignore and chart patterns that you could ignore. The reason being is a lot of the more advanced hedge funds, and certainly a lot of the high-frequency trading, and algorithmic funds actually rely on lightning fast trades against traditional funds, and retail traders who are using what we're going to put in quotes, traditional patterns and signals that they use to get into a trade. Because they're automatically taking the other side of that to nullify, but take advantage of all the money coming in on those, yeah.
Phil Newton: Yeah, just the one that score that. All the institutions, they're looking for the quality. They've got large numbers to play around with it, if you like. You know, if you think in the textbooks, all the best practices and advice that the author is telling you about is generating these signals that the retail trader, or you and I and Joe Blogs on the street is using. You place your order, where the textbook tells you, and the institutional traders know this, you know, and all they're looking for liquidity. And you know, through the textbook tells you where there's likely to be a large block of liquidity. So, of course the prices will get run to that the point and, you know the context of maybe a consolidation. It might be after the events interpreted as, oh it was a false breakouts. Well how do you know it was a false breakout at the time, you don't know.
Sean Donahoe: No.
Phil Newton: But this is the, I mean there's things that you can do to help prevent it. But this is what most retail traders experiences are. I mean if you get into a trade and then you get stopped out quite quickly in the traditional sense, which we can avoid, we explain that in our on demand presentation, how you can avoid that, but it's not constant cycle of the textbook say do this or when the retail trader goes and does that, and it doesn't play out as they expect. Again, it's nothing personal, it's just the institutional traders are looking for liquidity, you know, so they to run price may take one or two attempts to actually break out or do the thing that we thought originally, and it just doesn't like it in the textbook, because it's a perfect example of what the author is trying to describe. But the reality is again, this clue that we talked about earlier, in real time, it's vastly different.
Sean Donahoe: Absolutely.
Phil Newton: How can we avoid that?
You know, most of the time it, you know, it involves just ignoring most of the traditional patterns. It's great to know them to raise an awareness, but I wouldn't take these individual patterns. Again, we skipped over to candlestick patterns. I mean there's some very common, very reliable patterns that are often talked about, that people swear by, from analytic patterns. But at the same time I know people that use them the exact opposite way to conventional, and traditional wisdom or how the textbook says, so you know, who're you supposed to believe, you know, I'd rather be the person who's making money using them non traditionally, than what the textbook and what the author was trying to talk about. I mean, I think again, I'm getting kind of flustered and frustrated because-
Sean Donahoe: Well, I completely-
Phil Newton: I don't, I just don't believe in the traditional way of doing things, I mean yes you can use these tools, but I think you need to make your own opinion about that.
Sean Donahoe: Well, the ironic thing is that we come at it from two different angles over the years, the many years we've been trading, and the funny thing is that both Phil and I have the same opinion because we've avoided a lot of the traditional, because we've been stung consistently with the traditional. If I could even say, couldn't bring myself to say it, but I've mean, whether we're talking about three black crows, or a morning doji stars, or three outside up, or one upside down or-
Phil Newton: The hammers, the dojis, the shooting stars, the facing lions, the dark cloud covers, we can name drop all of them, as well.
Sean Donahoe: The three elements on an umbrella, you know, it doesn't matter.
Phil Newton: Yeah, yeah, the three dancing fairies, but that's a different story. That's for a different podcast.
Sean Donahoe: There you go.
Phil Newton: But it raises a point, for every, for example, three white soldiers, I know a guy, I know this guy.
Sean Donahoe: He's got this guy. He knows a guy.
Phil Newton: I've got a guy. The textbook tells us that 80% of the time, that's probably going to reverse according to various studies that have been done. And it's widely accepted that particular candlestick formation will result in a reversal of price movements either temporarily, or you know, more longer term. And again I know a very successful trader who uses that pattern and it's opposite the three crows as a continuation pattern, as opposed to a reversal pattern. As strange as that may be, he uses it the exact opposite way to conventional wisdom. Go figure it out.
Sean Donahoe: Well indeed. Now again, but it's taking tradition and flipping it on its head. There are technical reasons behind that, but also physical reasons where you can see the opportunities.
Phil Newton: Yeah, I think just don't do the opposite though. I think, make your own observations. Okay, Use these patterns in the textbook because to be fair, a lot of them were written a 100 years ago, or 50, 60, 70 years ago. And, while the patterns might not have changed, the way you might use them might have, and likely has done. So you need to kind of just update and evolve with the market. Again, I'm not saying that the patterns don't work, I'm just saying, put them into context. Make observations, layer them on top of what you're already doing. You know, so we might use, we commonly use Bollinger Band on price issues, so on prices at the upper or lower Bollinger Band, that's where we're interested. You know, statistically speaking, at the upper statistic of movement. So maybe we add one of these candlestick patterns at that extreme of movement, and make an observation. This is how you start to develop a signal strategy, that we were talking about. So it then becomes quite interesting. So don't just take it, well I'm expecting three white soldiers at Bollinger Band prices stream, therefore price will reverse.
Or what if that generates you a perfect continuation signal. And that would be the observation I would make. I would go back and do the research, do the study and get my nose in the historical chance to look for evidence. To suggest whether my premise holds true. Will it reverse or will it continue and then based on those observations I can start to formulate an expectation of, well, every time I see that, in addition, happen, then I can note what happens next and then that's going to help me generate, well when it happens in the future, the fact that the known events that we would talk about, I can then start to maybe think about those patterns as a possibility to generate a signal. So noting what happens next. Do you want to put money on what might happen next in the future based on what you've observed historically. And this is how you can start to develop, a strategy, you know, daisy chain several tactics and conditions together that you like, and you know if you like the outcome it gives you then that's your signal.
Sean Donahoe: Now see, that's exactly it. Now how about getting out of a trade. This is an interesting thing. We kind of defined what a trade is. Some signals that you need to be very aware of to develop, to combine, to kind of get all your check boxes, your production factory, meeting all the conditions, but getting out of the trade's a different area. Because a lot of people will state get into a trade but then get out of a trade at the right time. So one of the things that we do, we don't actually worry about this because of the way the specific way we trade as Rebel Traders, the way the strategy that we use every day or one of the main strategies of the core strategy that we teach our, you know, our students. You don't need to worry about signals to get out of the trade because we hit those targets were out in simple as that. It's actually automatic.
But a lot of people struggle to get out of a trade profitably because they're looking for a signal to get out, but they never quite there with that signal. The same problem with getting into a trade is making sure that refining everything to get, you know, get in, but getting out is the same kind of mental process. I mean we, whether we're talking about reversal points or momentum stops, do you still believe in the trade, then what do you think about that?
Phil Newton: Yeah, I mean I think a lot of people, a lot of newer retailer traders put all their focus on the signal, if you like. And let's just assume that they've got past and they've realized, hey, that the signal is a series of events, and not just one thing. So, you know, other people, the easy thing is to wait for the opposing conditions to be met, which for most people, that's good enough. It depends on your strategy as a whole, but that could be one way of doing it.
Sean Donahoe: Yeah.
Phil Newton: And so, what if it didn't generate the signal because it's got to meet the opposing, and it didn't. So for example, if I'm staying with my Bollinger Band, prices have to go to the other side of the Bollinger Band before it generates the opposing signal.
Sean Donahoe: What if it doesn't get of it hangs around in the middle and you're moving average forever.
Phil Newton: Yeah. What if our viewpoint it doesn't unfold. So you know, we've got to take those things into consideration, now the way that I deal with it. Again, I've traded many, many, many ways over the years and had lots of different exit strategies. The thing that I found flummoxing for myself was that uncertainty, that will it get to where I think it's going. So I think the first thing to have in mind is be happy, be confident with your viewpoints, you know, and this is one of the things that we, you know, that we use in our processes and what's the overall direction the market is going. It's bullish in the last 12 months, okay, it's probably going to continue. The only reason why we might or might not make money is if we find our entry correctly. So the viewpoint is bullish, so I need to be comfortable with that. So have that viewpoint, and then possibly process will be after we've generated, or green light to place the trade. It's okay, well where do I think it's going?
You know, if it's going up, how far is it going? You know will it get to the other side of the Bollinger Band, say for our example. Will it get there? Or what if it doesn't get there? What if it only gets 80% of the way there. So part of the research, and the study that I've done for my own trading, is well, if it doesn't get there, then I want to have a get out, a zone of time. I'm not going spread apart. So will eventually get to target again from the lower Bollinger Band the upper Bollinger Band, what if it doesn't get there? It might only get part of the way there. So I don't want to be frustrated. So let's just say that from the lower Bollinger Bands to the upper Bollinger Band it gets 30% of the way there, and it's not dithering, meandering sideways. Personally I don't care that it does that at that point, I want to ignore the noise of the market.
I don't want to watch every price fluctuation and movement and the ebbing and flowing. For me personally, it will make money or won't make money. So price needs to get to my expectation. So one of the first things that I've done is not have a huge expectation for the trade. I've got a high expectation of a low dollar move, a realistic expectation that prices will move $2, $3, $4, $5, or you know five, six a few percentage points. So unrealistic expectations are often why people don't meet their targets. Being rude, that they're shooting for the stars. So that expectation needs to be realistic. So again, from the lower to the upper, what it doesn't get to the upper Bollinger Band. If it gets 30%, 50%, 60% of the way there, I'm probably not going to be worried about it, because it's not in my zone. So I've got an expectation that price will get the target. And I'm going to wait for that to happen, and I'm not worried about the in between part of all the movements.
So when I do get interested is when prices are 80% of the way through all of that first target. And again, I'm just keeping it simple, You know, if we're treating from the lower Bollinger Band to the upper Bollinger Band, then if we're 80% of the way there, then I'll be certainly considering taking profit, and that is as clinical as I want to be. You know, if we're 80% of the way there, that the first target, do I want to wait an extra small movements, it probably is not worth waiting for. So when we're there, then, and then it starts to then pause. I'm just going to take profit and very quickly when we're in the zone of the targets of the profit being narrow it, take it, close it.
Sean Donahoe: That's it. Money off the table. Chips in the bucket.
Phil Newton: Exactly, exactly. Yeah. You're not going to go, you're not gonna get poor taking profits, you know, you need to be very clinical with that profit taking. So I kind of tooling around the issue. How do we, how do we get back to the target the first place, so you need to be very clear on where you think will move, or what you think will happen, your expectation, and it needs to be a realistic expectation. And then for me personally, I'm not looking at trade between now and when that target is reached. I'm personally I only want to manage profit.
Now, I'm happy with that. I'll let you trade to expire worthless. I'm not to get some cash back. If the stock doesn't do what I think it's going to do, I'm fine with that. But I'm only gonna manage profit and I'm only going to manage profit when it's in that target zone. That's how I like to deal with it, and that's as clinical so I want to be, and everything else prior to that target being reached is noise as far as I'm concerned. So that's how I deal with it. Again there's probably better ways of doing it, but for me, that releases me from the emotional attachments to the trade. Will it go up? Is it going to do that? Prices pausing, oh, there's a bit of a spike on that candle. I don't need to look at it because that's the decision I made a long time ago. That's how I deal with my targets, and the exiting of the trade. I'm only going to exit for a profit.
Sean Donahoe: Well exactly, and at the end of the day, if you're looking at any particular trade, it can give you a signal that, hey, I'm done, but then continue moving in the favorable direction. If we're talking about a directional play is you've got to look at it at the whole is like, okay, if this stock traditionally moves in like five percent or ten percent thrusts or pull backs, then you know, bull market, that's what you look for.
Phil Newton: You'll see that in the last twelve months.
Sean Donahoe: And that's why I'm so that's, you know, kind of helps you define your expectations. Even if you've got a counter signal that doesn't pan out, you know, you could see, okay, well, you know what, I'll take some money off the table. Like Phil was saying, you're never, you know, if you're managing your losses and managing your profits and you're aware and you're clinical or strategic, unemotional, involved with your particular trade, then boom money off the table it's in the pockets, profits, good move on, what's the next trade. There's plenty of opportunities.
Phil Newton: You raise and interesting. I just think you touch on an interesting point with targets. I mean I talk about keeping it simple and mechanical using the Bollinger Band, but if you want to kind of get beyond that. So a mechanical way of evaluating targets. I frequently trade from the lower Bollinger Band, the upper Bollinger Band, or from the upper to the lower. Quite commonly will coincide if you look left across chart with traditional interpretation of sub ordinaries. But another way, I think you touched on a really interesting point. If the stock, first thing we do is in the last 12 months is this stock going up, or down, or sideways. Okay, it's going up, and you raise an interesting point if you want to kind of get beyond the mechanical and start pushing towards more accurate discretionary interpretation of targets, well it looks like it's moving up in $3 to $5 movements. So every push it, every push up in that last 12 months might be $3 to $5, again a quick eyeball. I'm saying you can only take 5, 10, 15 seconds to do this, it won't take long, it's not involved.
It looks like it moves in $3 to $5 movements or $3 to $5 up pause retracement, $3 to $5 up. Maybe you can use that as your targeting, because you've got historical precedent for the target. Then that starts to give you maybe more accurate zone to aim for and that might not be on the upper Bollinger Band. Because they do expand and contract, but it might just give you that more accurate, hey, if this moves up $3 to $5, then I'll be happy because in the last 12 months that's what it's been doing. So maybe that, maybe that gives you the target. Again, you've got the historical precedence and then you can say, okay, when it gets to that zone take a profit.
Sean Donahoe: Absolutely.
Phil Newton: And be clinical you've got to be clinical. You can't hold out and say "Well, let's just see if it moves more," well, you've just evaluated that only moves in $3 to $5 thrusts, you know, with the trend before it starts to pause. Sure it might do more, but the reality is, historically it hasn't.
Sean Donahoe: So take your money off the table, save it for another trade. And because if you imagine that you're 80% of a move, while the probability of now of it making another thrust up to a 100 is dramatically reduced because it's already done that 80%. So from a mathematical probability standpoint, it's dramatically reduced.
Phil Newton: Yeah, why hold out the small , you've got a guaranteed profit, 80% of your expectation, right this second versus an unknown probability of ruining the extra, you know, squeezing the extra 20% out.
Sean Donahoe: Now one thing I should say, and this is as we wrap up this segment, is there's really only two signals that we really care about, and we talk about this again, I'm not trying to do the self promotion here although, you know it's-
Phil Newton: It's just covered more detail-
Sean Donahoe: It's covered in more detail in our on demand training.
Phil Newton: We're skirting around it very loosely, at a very high level with my air fingers raised.
Sean Donahoe: Oh dear me. But he's up there waving his flags again guys. But yeah, I mean there's two, there's no actual name for the signals that we use.
So I'm just going to call them the Rebel Trader extreme signals, and that's basically at the extremes of the Bollinger Band, two standard deviations are 20 period moving average standard settings on every platform and then you're looking for a large spike at the top of, the Bollinger Bands. You're looking for a large spike at the top and then at the bottom of the Bollinger Bands a large of spike on the casual, at the bottom where the lower, the top. I'm trying to describe this, I'm trying to describe to the visually using the medium of air here. But if that, if the, at the bottom, the top candles almost negligible, the lower wick on the candle is significantly larger than the body, then that's a good signal. Same, You know the counter to that at the top.
Phil Newton: Yeah that previous move might have exhausted that, what it's saying. Note the wording, it's not a guarantee. No one can give you a guarantee. And if you're looking for that then this is the wrong business for you. But it tells us that, hey, we're as statistical extreme and that price is likely exhausted. You know, the previous move, downsize statistically extreme, as possibly exhausted, and that can help us generate the, If I'm, you know, assuming that one or two of the things that indigenous are that, then I'm probably going to trade this.
Sean Donahoe: So there's been a U-turn in existing direction, and that's what we're looking at, that for us is, okay, now we'll do some more examination.
Phil Newton: Yeah. And within the context of the last 12 months, it might be in an up trend. So if we're in an up trend, lower Bollinger Band with that sign of exhaustion that we've just talked about, then we'll find the dip in an up trend.
Sean Donahoe: Yeah.
Phil Newton: That's how we do it.
Sean Donahoe: And there's an extra element of looking left, but again, we'll cover that more in the under mantra. We won't do that here.
Phil Newton: That's a bit more visual.
Sean Donahoe: Yeah.
Phil Newton: And there's this, these things combined together. Give us a check box, check box, check box, put the trade on. But we'll talk about that again in that expanded 20. Go into it a lot more detail. So with that being said, there you go ladies and gentlemen, signals whether to ignore them, whether to be aware of them, what layers up, what layers down, and when to take profits. So with that being said, let's move on.
Automated: And now it's time for the Rebel Trader tip of the week. Brought to you by tradecanyon.com Ready to take your trading game to the next level? Discover where smarter traders come to get coached by the best, and learning to trade just got way easier. Trade Canyon, smarter traders, live here.
Sean Donahoe: So this week's Rebel Trader, tip of the week, do not be trapped by convention. You see conventional traders, traditional traders are all prime targets for the market. You need to have a bold adapting strategy that allows you to bypass a lot of the BS, cut through the noise, and focus on what's important. Now you've probably got a lot of that ethos, so to speak, from the main part of the show, but if you think about this in general terms, when everyone is trained to do the same, they've picked whatever books they've got, with the right candle patterns and charting patterns and you know, it's like the ABC's, one, two, threes, The Sesame Street of treating education that we all go through. I mean, funnily enough, I am British, but I learned my ABC's from Sesame Street. Funnily enough, it took them forever to get me to say zed instead of zee back in the UK because that's the way I learned.
But again, lots of people pick up the books. They picked up all these knowns, so to speak, and that's what they're trained in, but the problem is you never break out of that cycle because that becomes the foundation, your touchstone for everything you do and the problem is that everyone on the other side of that is ready to take your money because of that.
Phil Newton: And often, you know, looking at one thing in isolation, as we touched on before, one of the conditions, let's call them, doesn't make a signal or a strategy. And that's what most people are looking at.
Sean Donahoe: Absolutely.
Phil Newton: Looking at, say, a moving average crossover or looking at a MACD, you know, crossing the zero line, or they're looking at CCI hook, or inserts, your indicator condition here, whatever that is, and they're looking at one thing and calling it a signal, or strat. And that's what, that's what most people will do, and that's the conventional wisdom that is touted in the majority of textbooks. Is how you interpret this tool, therefore this is the only thing you need.
Sean Donahoe: Now. You have a very good thing that you talk to a student recently and I really actually wanted to highlight, that is, and we've said on the show many times, is validate everything. Just because it's tradition or convention doesn't mean it's right. Now, one thing that you talked about was, talking to a student about, was making the observations in your journal or trade book. Do you want to expand upon that a little bit more.
Phil Newton: Yeah, and to be fair we've talked about this many, many, many times before as well. Yeah, I mean, just validate everything. I get, we touched on it earlier, and this is what I meant earlier as well. Is when you've got a condition that you like. Again, we use the example when certain conditions are met, make a note of it, validate, you know, just because the moving average, the golden cross has happened, or you know, whatever indication that you're looking at. Just because that's happened, it doesn't necessarily mean that, you know, the conventional expectation will occur. So validate it and prove it to yourself, gain some conference. You know, I was trading breakouts for the better part of 12 years, but I added my own little twist to it, which became very commonplace. Because you know, that conventional wisdom views the breakout example was that, you know, when you've identified a consolidation, you place a buy order above and the sell order below, and the textbooks told you to do that. And basically after that it was usually your head between your legs, and you close your eyes and you wait for something to happen.
But that's what the textbooks, or maybe not in exactly those words.
Sean Donahoe: I was going to say that's not exactly textbook, but that's a great analogy.
Phil Newton: Yeah but that's what the textbook said, you know, buy order above sell order below, Whichever one triggers firstly, the other one becomes your stop-loss or that's the conventional wisdom. But the reality is, mate, you should wait for the move to happen. And typically what I used to trade the first pullback after the breakup, you know, adding that pullback was the, kind of like, the secret sauce for me at the time, and still is to this day. And you know, adding a pullback to most chart patterns because I'm pattern trader for the best part of my trading career. And you know, adding that condition onto conventional wisdom meant that I wasn't sucking into those all false breakouts, where the institutional traders are looking for liquidity that we mentioned earlier as well. But, you know, it's just that observation just added the dynamic turn the conventional wisdom into, actually it's turned it from a mediocre, mostly losing type of strategy, into actually, this is working quite well.
Sean Donahoe: Yeah. This is a confirmation now. It adds a layer of certainty, which most people have been burned out of.
Phil Newton: And this is where I started to have that realization of the conveyor belt, but it's take the conventional thing and make your own observations. You know, most people like to use Bollinger Bands. Okay, well what happens around the price? You make your own observations. Don't take the authors word for it, it might be that you spot something different, because you see the market differently. So that process is what I've done over years. You know, I mean basically, again, I wouldn't worry about the unnecessary specifics, like the name of the candle pattern or chart pattern, or formation, I wouldn't worry about what it's called these days. It just doesn't matter to me anymore. I mean, sure, I know them, and over a period of time, you'll pick them up, as we touched on earlier, but the reality is just making an observation validate everything. Write down in your journal, write down in your here log.
I want as far as we've spoken about before as well, noting my emotional state of mind so that I can, you know, if I was particularly excited or overconfident with a trade. I noted that those were some of my worst performing trades and what it meant was that I got too excited and skipped a step in this process. So I put, kind of, circuit breakers in place to, kind of, account for that. You know, eventually twenty years later, you know, you develop a strategy that we're trading to this day. You know, it's all these things baked into it.
Anyway and you know, the ultimately, the conventional wisdom, the conventional idea of what to do. It just doesn't matter, as we said, you know, don't worry about name of the pattern, it just doesn't matter. And I think my final thought on this is, I mean, look at it this way, if everyone, and what I mean by that is retail traders, if they're all doing the same thing from these textbooks, and what conventional wisdom dictate you do, and we know that 95% of them have struggled to become better than a break even freighter. Why would you ever want to do conventional wisdom dictates you do? Because that's the same thing that everyone else is doing then not making it work? Well, so be the rebel. Do the opposite, break convention, or confirm convention. You know it might be that you see something, you know, it's not just the isolated events we're talking about. You can use the conventional wisdom with a certain, around a certain sequence of events, but you've to make your own validations and observations. And face them, be the rebel. It's make it work for you.
Sean Donahoe: Absolutely. It's what we do here every day, it's the name of the podcast for a reason. It is break convention, be a rebel, and don't follow the crowd, because if the crowd's walking off a cliff, you're better off with the high ground and just watch them all dive. So with that being said-
Phil Newton: Why would you want to be the same as everyone else?
Sean Donahoe: Exactly, exactly. So with that being said, let's rock on to the quick fire round.
Automated: If you've got questions, they've got answers. Sean and Phil dive into the virtual mail bag for this weeks Rebel Trader quick fire round.
Sean Donahoe: Okay, so rummaging in the new year's mail bag, the first question of 2018 is, I'm going to fire this one at you. "I keep finding trades by never seem to get out of them profitably. I either hold on too long or get out too early. What can I do?" Now we kind of touched on this in the main thrust of the show, but let's take this and take a step back. What is the most common wisdom shall we say.
Phil Newton: Shooting for the stars there. I think that most people have a larger than what is perhaps realistic as a target.
Sean Donahoe: Trying to do the Babe Ruth thing and point to the outfield, is what you're saying.
Phil Newton: Yeah, swing for the fence. You know, everyone wants to swing the fence. Everyone wants the 10 bagger. If you can drop the ego elements to your trading, you're going to be significantly better. Why do you think it's going to, why do you think the stock will double in the next thirty days, it might happen, it's possible, but the reality is it probably won't. So, you know, let it go before we break into song let's think of another thing.
Sean Donahoe: The Frozen theme came into my head immediately, but there you go.
Phil Newton: You know, where I'm going. Having a little, having a dash of crazy personality also with trading.
Sean Donahoe: Apparently.
Phil Newton: Yeah well, it worked for me.
Yeah, but Having an unrealistic expectation for your targets. I think that having mechanical way to interpret where a target should be. It can be a simple, and if you struggle with targets, I mean maybe you want to reevaluate, and maybe think about mechanical way of doing it. We've touched on a few mechanical ways. One of them is maybe include Bollinger Bands. If your you're setting the trade up around the lower edge of the Bollinger Band, maybe you aim for the midpoint, or the upper edge of the Bollinger Band. It's just a nice mechanical way to set a target.
I think the other thing people fall into the trap of, is that you want a risk reward ratio with some bullshit ratio. So if you have, again, this usually applies to people with stock losses, or to be fair, another way might be if you risking $3 per share on the auction, you might want to look for three to one second for $9 a share as an exit. Where, can I swear Sean? Where the fuck did that come from? You know It's just a bullshit, but you get the idea. You know why? Why don't you want a three to one risk reward ratio because the textbook told, you know, the reality is you're going to be more profitable if you invert that.
You're going to be your probability of profit. The probability we trade in is going to be better if you have a higher expectation of a lower dollar movement. I mean, I'm not saying that you can't aim for a 100% return on capital, 200% return on capital, or in this case three, five, 10 times, but on every trade. Really, you expect to make three, five, seven, 10 to one on your risk, on every trade?
Sean Donahoe: Yeah.
Phil Newton: It's realistic. I mean yeah It might do to-
Sean Donahoe: Go to Vegas with that attitude and see well it goes.
Phil Newton: Yeah I mean, you're not going to survive very long. I mean sure, I've had plenty of, you know, you know, multi hundreds percent return on capital with the option trades .
I average about one a week. I don't expect it. It just happens, you know, I can do it because the frequency trades on, because I advocate one trade every day with our own methodology, and looking for a consistent way to apply my finding, filtering, and sourcing process, and then having a mechanical targeting method. Again, just to keep it nice and simple without getting discretionary, if you're expecting price to go from the lower end of the Bollinger, to the upper end of the Bollinger, that's going to expand the contract relative to historical price volatility anyway. So if you know the first target might be a little bit closer based on the lower volatility price movements, it's going to be a little bit further away based on the higher fluctuations in pricing.
So you've got the automatically adjusting profit target. And just if, if you're struggling with that, if you don't know how to find a target discretionary, it's going to give you a realistic expectation, you know, and if you still don't think it's going to get into the mid point from the lower end midpoints of the Bollinger Band, the midpoint just gives you a target one and target two to aim for it, and then you can evaluate it. When price gets them reevaluate. Do I think it's been a go to the next, on the next benchmark? The next line in the sun.
You know, I think that look at it in stages would be a better way of doing it, you know, rather than just picking, what for most people is an arbitrary figure. Most people default to surprise me what the textbooks say is, oh you want a three to one risk-reward ration. Why? Why would you want that? You're just giving yourself an unrealistic expectation. Especially when you step into the options world. You know, because your capital that you use a significantly lower than if you were trading stock or futures, or options, sorry CFVs or spread betting. You know, options is lower capital intensity. So if you start looking for three to one or five to one or 10 to one risk to reward ratios, it suddenly becomes unrealistic expectation. Again, I'm not saying it can't happen, but that's usually the main reason why people don't see profitability. Their shooting for the stars. Other reasons we've touched on them, they've not got a, they're confusing signals with indicating all indications. They've not got a complete process.
They're just taking one indication in isolation on calling it a signal. You know that's something that we talked about on the main section of the show as well.
Sean Donahoe: Absolutely. I think that pretty much nails it, right between the eyes.
Phil Newton: I think, to be fair, if you're struggling, I think it, gives us a call, you know, we can have a chat to point you in the right direction. And you know, we usually we can fix those things, you know, if you're, you know, negative to around break even, you know, you're so close to seeing success, and usually a few tweaks and adjustments that might be specific to your situation that we can talk about. So I think if you're still struggling rather than me just talk vague generalization, give us a call, you know, and we can certainly put you on the right.
Sean Donahoe: Abso-bloody-lutely. Okay, what else is in the mailbag then my friend?
Phil Newton: So int he mailbag, so I've got, not me personally, the question is "I've got around $50,000 in the market, but I feel that 10% of my portfolio is too big." I'm assuming that we'll talk about position sizing. So what is the ideal trade size for portfolio, but is maybe $1,000 stronger?
Sean Donahoe: Okay. So now this is going to depend a lot on what your strategy is for trading, obviously, but the fact that you're asking this if it's a bit too big. It's probably because it's too big. If you're asking yourself that very question, you're right there. It's if you feel it's too big, it's too big. If you're not sleeping at night, if you're stressing about every bloody trade, it's too big.
Phil Newton: Position size is too big, the root cause of most evil I've got strong views on that.
Sean Donahoe: Yeah, and so do I. 10% is very aggressive and you have to have a very high risk tolerance for that, because that means if you have five positions-
Phil Newton: You've also got to have a success rate.
Sean Donahoe: Yeah absolutely.
Phil Newton: Like really high, because you're risking a big chunk of your portfolio.
Sean Donahoe: And this is what I was going to say, yeah you've got
Phil Newton: You've got to consider your bullseye, ought to be close too.
Sean Donahoe: Yeah, you've got to consider your bottom line. Is five trades that you've got half your entire portfolio locked up in five trades. And I've seen this talked about in textbooks is diversify with five different position, that's not diversification.
Phil Newton: That's just five different positions
Sean Donahoe: To have five positions yeah.
Phil Newton: You know if they're all 10% each, that's a big exposure on a small number of stock. Personally, I'd be happy to risk 50% of my account in open positions.
Sean Donahoe: Yes.
Phil Newton: I want to do an over a large number of occurrences.
Sean Donahoe: Absolutely.
Phil Newton: I don't want five positions, because in that case all your eggs in one basket and you want to spread that out. You know I read right off.
Sean Donahoe: Yeah, I, for me, I would say 1% is what we tend to talk about. If you're brand new-
Phil Newton: As small as possible.
Sean Donahoe: Half a percent is for a lot of our new, you know newest students, and everything else, until you get to the point where you're happy. But the more you've got out there, and spread across multiple positions, then again, the law of averages for your strategy is going to have more meat to sink its teeth into. And overall, you're going to see a lot more activity, a lot more movement in your portfolio where you, like Phil was saying, it's fine to have half your portfolio exposed in the markets at any one time. It was one of the things that we talk about anywhere from 30% to 50%, but if you're thinking about that for just let's keep simple numbers, 1% of your portfolio, or your available market capital, in the, you know, in a position. But that still gives you 30 to 50 positions that you'll have, that you can diversify across multiple industries, and sectors, and everything else. But again-
Phil Newton: I just want to allay the fair that because someone's going to go 30 positions, to be fair, let's think about this. If you do one a day, which is manageable for everyone, regardless of your personal commitments, and day to day chores, and work and whatever else on your life, you can find 20 minutes in your day to put to trade on. The find, filter, and sort trader. That's one a day, you do one every day and about 20 trading days in a month you've got 20 positions. If you can find one or two every day, you know 30 positions is not that much, when you break it down to one a day. It's actually not that much when you think about it in those terms.
Sean Donahoe: And if they automatically close, they're hitting targets, and they're closing every day or every company.
Phil Newton: Think about it like a farmer, yeah, think about it like a farmer, you've got to plant, a farmer does not plant one seed, and hope that it makes a crop. A farmer will plant lots of seeds knowing that some of those are going to die, some of those are going to wither, some of them they may sprout, but they're not going to be good enough to make it to market. Some of them will go to market, and some of them have significantly high quality where maybe they give them, they sell them to some of their premium, some of their best customers. They save the best produce for, you know what I'm saying here Sean. You're farming, you're planting a crop, so we need to plant a seed every single day.
Sean Donahoe: Absolutely.
Phil Newton: How do you do that? You trade as small as you can, and you trade lots of occurrences. It sounds like a lot when you mentioned the whole figure up front, but just one or two a day. It's manageable for everyone, regardless of your timeline or commitments and experience. Easy to. Bite sized trading.
Sean Donahoe: Absolutely. At the end of the day, trade small, trade comfortably sleep at night. Don't stress about the stuff, because it started. If you find that your position sizes making you stress or your little worried about the positions you have, I see this a lot, funnily enough with the crypto traders right now, who putting like everything in one coin, and then they're not sleeping and then stressing about "Oh my God, it went down again."
Phil Newton: Literally people, remortgaging the house.
Sean Donahoe: That scares the hell out of me.
Phil Newton: Alright there's going to be some great success stories when they come out with it, but not if you don't have a heart for person.
Sean Donahoe: Yeah.
Phil Newton: Literally, they are literally betting the farm, and that's what we don't want to do. We want smaller characters. We want a little bit of exposure to of things in lots of eyes. Thinking about each trade. The more positions you can have, think about if you had a shop on the high street, you know, and if you just got one products, again I like to use the shoe shop, for some reason, and maybe I've got secret fetish, I don't know. But that nevertheless.
Sean Donahoe: I was going to ask.
Phil Newton: If you want a shop on the high street and you just had one pair of size nines or whatever it is, men's shoes, you just put that one pair of size nines, in you know, whatever color, black. You know, just waiting for that one person, that wants a black pair of size nines in that design, come in, and buy the product. And then once you've sold them, you go into the stock room and you get another black pair size nine and put them on the shelves for sale. You're selling them one at time. You would not be in business for very long how you were running the shoe shop. You're going to put them bit of a variety, a few different styles, a few different colors. Maybe you do focus on a small number, but we've got lots of variety in the size of shoes. So that you can then account for what the different customers coming in, wanting maybe a size seven, maybe a size 11, maybe a size nine, maybe a ladies' version, you know, you see where I'm going with this and you've got variety. You've got a large number of occurrences. And that's what's going to keep you in business.
We're doing the financial trading equivalence of having a well stocked show room.
Sean Donahoe: Absolutely. No, I liked that, it's a good analogy, because at the end of the day, and this is something we bang the drum about, but is this is a business. This is not a hobby. This is not a gambling extravaganza. This is a business.
Phil Newton: If you'd like to get your balls in the rough, take up golf.
Sean Donahoe: As he says. So anyway, moving swiftly on, why is it that everyone is suddenly a crypto currency expert. Surely No one can be an expert in this new sector.
Phil Newton: Now, I've got a serious answer and I've got a not so serious answer to this one. The serious one is an expert is someone who knows more than you, or in the room, I think the legal version, the person who knows the most on a subject, who happens to be in the room that moment. They would be considered an expert. But everyone, yeah, every man, boy, child, you know, wants to be an expert on cryptocurrencies. I personally, I think it's a lot of bollocks. You know, you can't be, there's a few people that I would consider exceptionally knowledgeable on the subject digital currency. But the people who are touting themselves as experts at talking about it at, from one Angle, which is one that we typically bash on all time, which is how to trade trip-to-currencies.
Sean Donahoe: That is the new phrase.
Phil Newton: Trip-to-currencies.
Sean Donahoe: Yeah going to bust into a theme tune in a moment. But at the end of the day, I mean, here's the thing I say, I was saying this yesterday-
Phil Newton: But that's it, it's just from one angle, just from one angle. There's a few people, just to finish off, but there's a few people who are genuinely experts who know lots of different angles. Not just about one coin, or one element of it. Talking about the whole spectrum of the technology as a whole. And not just the currency angle. That's someone who I would consider and expert. Who's not saying "It's the best thing since sliced bread," who's maybe warning, erring on the side of caution, and maybe pointing out other opportunities in the science space and the technology around it as a, yeah, you know, they're gonna beat the more knowledgeable person. But I think the person who's out constantly advertising and suggesting as the quickest way to make a fast buck, walk away from them, as fast as you can.
Sean Donahoe: Actually, Run away, run away. It was funny. I was just, again, some of the people I know and everything else, just like, oh I turn 5,000 into 40,000 in the last year in cryptocurrency. I'm going to hold a webinar about it so you can join my new program. And I'm like, well, if you haven't made significant amounts of money and you've been in the crypto space in the last year where we've had 15,000 or 1500% growth in like Bitcoin, and you haven't done a significant return on your investment from that, then you know, okay look, everyone's an expert in a bull market. But I mean, I was thinking somebody yesterday-
Phil Newton: As we've seen many times recently.
Sean Donahoe: Oh yes indeed. But I will say, yeah, these crypto currency experts, yesterday where Facebook marketing experts, before that there were e-commerce experts, They were, you know, Internet marketing experts-
Phil Newton: And before we moved the full time Forex push-button solution. Come on.
Sean Donahoe: Exactly, it's just ridiculous.
Phil Newton: Let's be fair. Let's point out the obvious. Yeah sure, we've got something to sell, we're very good at what we do, but that's the difference, we practice what we preach. And we don't let everyone who wants to be involved in what we're doing, just buy it because there's a buy button there, we want to make sure that what we do is right. Because we appreciate, we used the shoe example, but not a one size fits all policy. Yeah, sure, we've got some that we know works, but, what if it's not right for you? We don't want to give you something that you're not gonna use and you're not going to find beneficial. We want to make sure that what we do goes to the right person at the right time, for them. And sure, we know we can help a lot of people, but hey, we want to make sure it's right. You know, so that's what we do, that we make you aware of what we're doing, and you know, if you want to, you know, kind of follow along with our strategy, we make it really available. Again, you can go back to the on demand training. You get the full outline of what we do. You can replicate what we do, how many of these so-called experts actual tell you how they do what they do.
Sean Donahoe: Exactly, exactly.
Phil Newton: Now where it comes in, if you want our time, give us a call and we can arrange, you know, to say if, you'll suitable to work us. With like any business if you want our time, you pay for it. Sorry, we don't make any apologies for that. But in the meantime, while you decide if it's right for you get to listen to our lovely voices, talk about, well the idiots in this space.
Sean Donahoe: At the end of the day that you go. So that being said, let's transition and move the heck on.
Automated: Don't forget, if you have a question you want to ask Sean, and Phil, just go to tadecanyon.com/rtquestions and your question may be featured on a future show.
Uh oh, what's that smell? It's time to call out the Wall Street Shenanigans, mainstream confusion and outright hi-jinks and hokum of so-called experts. Yup it's time for bullshit of the week.
Sean Donahoe: Okay, so I don't know if you've seen this over here.
Phil Newton: That nearly turned into a bullshit segment.
Sean Donahoe: It almost did.
Phil Newton: Now we have the official bullshit.
Sean Donahoe: But I've got the official one now and I'm going to have. This is more of a laugh then bullshit, but California just opened up its recreational pot laws. So now everyone can go out and go get stoned. But I had to laugh at the opportunistic nature of Jack in the Box. It's a fast food chain over here in the US and very predominant in California, but what they're doing is they're opening up, the Munchie Meals for stoners. So they're rolling out this special line of midnight munchies opportunity. Absolutely. But of course the box of Greasy stoner stacks is priced at $4.20. So 420. So for that is a kind code slang over here for a pot. So yeah. So again, I don't know if that's never heard of that when I was in the UK.
Phil Newton: So it's an ironic pricing.
Sean Donahoe: Ironic pricing. So I had to laugh at that. And good on, I mean good on Jack in the Box with taking advantage of that. I think that's absolutely hilarious.
Phil Newton: Hey, hey, let's hold our hands up, it's perfectly legal, nothing wrong with it.
Sean Donahoe: Abso-bloody-lutely but oh my good grief. But yeah, I've mean in the entire industry over here, California is full of stoners anyway. I know I was in California for the longest time, and it's not surprising that one of the other states to legalize it for recreational use along with-
Phil Newton: I'd like to say they're at the cutting edge, but the probably at the rolling edge aren't they?
Sean Donahoe: Pretty much, but there you go. Anyway, so a very short, very sweet bullshit of the week, but I had to laugh at that one when I heard that. So with that being said, ladies and gentlemen, that is the end of the show and that's it for this week. We put a lot of ground here in a lot of very important topics.
Phil Newton: Lots of interesting things, yeah, lots of interesting, multifaceted show this week. I've really enjoyed it.
Sean Donahoe: You did good, and please remember guys, that this show is not free. It will cost you a five star review. Just go to tradecanyon.com/rebeltraders and then select where you subscribe and listen to us. Leave us a review because it always helps us get this message out to other traders just like yourself. And it also shows us that you appreciate what we're doing here in the show.
Phil Newton: If also like to connect with us on Facebook or the Twitter machine, you can get all on the same link tradecanyon.com/rebeltraders. And, yeah, if you'd like to message us on Facebook or connect with that way, we can you know, we can certainly accommodate you. Sean, what have we got coming up next week?
Sean Donahoe: Well, next week we're going to be taking a little bit of a detour down to the Princess Bride territory with miracles not included. I know.
Phil Newton: Will Miracle Max be in attendance?
Sean Donahoe: Abso-bloody-lutely, and Inigo Montoya you killed my trade, prepare to die. So we're going to have a little bit of fun with this and we'll be back next week with unrealistic expectations and many other areas here where miracles are not included, so with that being saved.
Phil Newton: I love it.
Sean Donahoe: Take care and we'll see you soon.
Automated: For more cutting edge trading advice and ta free trader to workshop to help you build a personalized trading plan and make smarter trading decisions go to trade tradecanyon.com now.
Automated: Futures, options on futures, stock, and stock options trading involves a substantial degree of risk and may not be suitable for all investors. Past performance is not necessarily indicative of future results. Trade Canyon Incorporated provides only training and educational information. If you actually understood and listened to this, then that means you are awesome. Congratulations and well done. Notice this product may contain nuts.

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[00:00:10] Show Introduction

[00:02:10] Sean: Okay, so, what we’re gonna do is answer a question we get asked a lot. What makes a good signal, to get in a trade, or what signal people are looking out for to get out of a trade profitably? We’re gonna be looking at different forms of signals. For the newer traders, we’re going to draw some lines in the sand. A lot of people use indicators as signal generators, and we need to really draw the line. So, Phil, I’m gonna let you take that one away.

[00:04:08] Phil: The reality is with indicators and the confusion of signals, an indicator is a way of measuring and assessing what price is doing. It doesn’t necessarily contribute toward a signal. For example, we like to use bollinger bands to help us evaluate price, not to generate signal. Just because price is doing something in relationship to bollinger bands, and again, we could be talking about any indicator, whether it’s trendline or moving average or moving up or crossover or RSI or CCI or your preferred indicator. When a certain condition is met with that tool or indicator, that’s where people then call it a signal, and that’s where I believe the confusion lays. It’s just where a mathematical evaluation of a longer-term average across a shorter term, that would be often considered as a signal. It’s been so long since I’ve looked at them but the Golden Cross is the 200 year average is crossed by the 250 year average. The talking heads love banging the drum of it’s a golden cross signal or a death cross signal. It’s a load of nonsense. It’s just that the shorter term average is across the longer term average. That’s it. It’s a way to evaluate what price is doing. It doesn’t necessarily generate a signal, although, too many people confuse what an indicator is highlighting with a signal.

[00:06:05] Sean: Absolutely. It’s a great point, because a lot of the traditional signals are designed just to represent a mathematical formula as price action, and that’s it. It raises an awareness. You can create, and we do this all the time, where you combine different things. For example, a bollinger band plus a price action can give us a signal.

[00:06:30] Phil: Looking for a sequence of events, but part of that will be the indicator.

[00:06:40] Sean: Absolutely. Now you can coat that as a signal, but that becomes a signal-generating indicator. But you’ve got to understand. It’s more than one thing going on. It’s the combination of things we’re looking for, but even then, it still needs visual confirmation. We do this a lot - we combine price action with indication, because we are technical traders.

[00:06:50] Phil: It becomes more powerful. We start to layer them on. We use the indicator to take a big list of stocks to a small list of stocks. We’re using them as part of a process to raise awareness of a possible opportunity.

[00:07:49] Sean: We talk about that in our webinar. Go to https://tradecanyon.com/ondemand. We actually break down this exact process to find, filter, and sort stocks. It allows us to cut through all the noise to find anywhere from 1 to 8 opportunities.

[00:08:35] Phil: Our awareness is raised because of an indicator meeting certain conditions. That doesn’t necessarily mean I’m gonna trade it. It just means that condition has been met, this mathematical formula has been quantified, the condition I’d like to see has been brought to my attention. Now what? Now I’m gonna take a look at it and see if other conditions have been met - the layering on of conditions. It’s that process, that algorithm, the full completion of everything I’d like to see that generates the signal.

[00:09:07] Sean: And it is a combination of things. It’s the perfect storm, so to speak. Items that are happening and when they come together they become a point of interest. Do I place that trade based on what I see? Then you kind of do your own evaluation on top of that, you’ve got a signal once all these checked boxes are complete. Now here’s the thing. There are many indicators and chart patterns that can be used. You don’t have to know them all. You don’t have to have a giant arsenal of jigsaw pieces.

[00:09:49] Phil: A lot of them will conflict and contradict each other as well. But then, which ones you use will be determined by what you’re trying to achieve. If you’re looking to change a tire, you’re gonna use the right tools to change a tire. You don’t need to strip down the engine to change the tire. And that’s what people try to do. They try to know everything about maintenance, or just how to build a car, when they just need to know how to change a tire.

[00:10:26] Sean: How many times have we dealt with that with students who want to know everything? I was the same way when I got into this. It was not long ago I went on an Indiana Jones trip down every tunnel, every hole, because I wanted to expand awareness. I eventually came out of that with a snake wrapped around my neck with a stone bull chasing me saying, you know what? That was a waste of time.

[00:11:00] Phil: I suppose it was only a waste of time because you realized what I’ve always said all along, which is if you want to know it, that’s fine. But you don’t need it.

[00:11:13] Sean: I have the bouts of I want to learn more or know more, and I always try to kind of expand the horizons, but as Phil says, yep, still here!

[00:11:26] Phil: To be fair, I did the same thing. What everyone will learn is that over a period of time, you’ll pick it up as you go along. I wouldn’t necessarily go out of my way, unless you’ve got a specific theory you want to look at. Unless you’ve got a really strongly drawn attraction. For me, I was drawn to patterns, price patterns, the shape that price unfolds. These days, it doesn’t matter what it does because I realize that while I know all these patterns and trade them, the name is never actually known. We can look back, but in real time, if a pattern is in development, and we could be talking about a pattern or an indicator, or a ridiculous theory. In real time, that can change, it can evolve. In real time, it doesn’t matter. Yes you might have an indication, and you need to layer on all these others conditions to stop you from jumping the gun, to keep you from treating that one condition like a signal.

[00:13:10] Sean: Yeah, and that can happen. The event I was talking about was Elliott Wave Theory. On the surface, I was absolutely fascinated, but it was touted as the key to the universe and I came out of it like what a load of bollocks!

[00:13:28] Phil: Everyone’s in agreement that whatever you do, you’ve got to apply it with consistency in real time. And that, in real time, that’s the really difficult part.

[00:13:50] Sean: So a lot of these you don’t know it until after it’s happened. You’re like, oh yeah, that’s what that was.

[00:13:56] Phil: The way that we do it is we try to deal with the known fact. That’s the thing that’s not going to change, regardless of who you’re talking to. That fact is a known fact. That’s what we try to do. When we’ve got that known fact, that’s when we move on to the next condition we’re looking for. Then when we have known facts, no one can say for certain what will happen, but at 65%, it’s highly probable. You don’t need to know everything, you just need to know enough. What is it we say about know-it-all Nevilles? Don’t be that guy. When a taxi driver starts giving you advice, you might start thinking, maybe I don’t need to know that.

[00:15:42] Sean: I heard a great example from a friend of mine called John Reese. He said, don’t you feel that when you’re getting this crypto advice from all these so-called experts, that it feels like getting life advice from the local checkout girl at your local supermarket? I’m paraphrasing but that’s a very valid point. At the end of the day, when you start layering on, you start checking all these boxes, you start getting signals that allow you to get a production line.

[00:16:40] Phil: When you’ve got one condition, then you can pass it off to the next condition for approval, and when that’s done you can pass it off to the next for the seal of approval from the manager who puts a stamp on it. It gets spat out at the end when all the conditions have been met. You can put the trade on. It’s a conveyor belt. What we’re looking to do with that is we’re looking for the rejects. Instead of constantly looking for a trade, we’re looking for rejects. It doesn’t meet the condition, it’s a reject. It’s only when we get that seal of approval that we click send on the order.

[00:17:30] Sean: Now, here’s the interesting thing, and this is something a lot of traders get stuck in trying to be a production line. They’re like the dodgy factory in some other country. Like, oh well, we cut that corner, we really don’t care about the quality of that part of the product, quality control is taking a day off, feet up on the desk, and what comes out the other end is a messed up signal. A lot of people look at traditional signals, and I’m going to look at some candle patterns here, and chart patterns. The problem is, it’s candle patterns that you can ignore and chart patterns you can ignore. The reason being is a lot of the more advanced hedge funds and the high frequency trading and algorithmic trades actually rely on lightning fast trades against traditional ones made by people who are using “traditional patterns and signals” to get into a trade. They’re automatically taking the other side of that to nullify but take advantage of all the money coming in on those.

[00:18:55] Phil: All the institutional traders are looking for liquidity. They’ve got large numbers to play around with. If you think in a textbook that all the best practices and advice the author is telling you about are generating these signals that the retail trader (you and I and Joe Blow) are using, you place your order where the technical indicator tells you and the institutional trader knows this. All they’re looking for is liquidity, and the textbook tells you where there’s likely to be a large block of liquidity. Of course, prices will get run to that point. In the context of consolidation, after the event it might be interpreted as oh, it was a false breakout. But you didn’t know it was a false breakout at the time. There are things you can do to help prevent it, but this is what most retail traders experiences are. You get in a trade and then you get stopped out quite quickly. We explain in our on demand presentation how you can avoid that. But it’s that constant cycle of the textbooks say do this, and when the retail traders does that and it doesn’t play out as expected, it’s nothing personal. It’s just that the institutional traders are looking or liquidity. So they’re going to run price or take one or two attempts to do the thing we actually thought originally and it just doesn’t look like the textbook. In real time, it’s vastly different. How can we avoid that? Most of the time, it just involves avoiding traditional patterns. It’s great to know them to raise awareness, but I wouldn’t take these individual patterns. We skipped over candlestick patterns. There’s some very common, reliable patterns that are often talked about that people swear by, but at the same time I know people that use them in the exact opposite way of conventional and traditional wisdom. So, who are you supposed to believe? I’d rather believe the person who’s making money using them non-traditionally than what the textbook and what the author was trying to talk about. I’m getting kind of frustrated because I just don’t believe in the traditional way of doing things. Yes, you can use these tools, but I think you need to make your own opinion of it.

[00:21:25] Sean: I think the thing is that we come at it from two different angles. We’ve avoided a lot of the traditional because we’ve been stumped repeatedly. Whether we’re talking about three black crows or morning doji stars, the three elephants on an umbrella…

[00:22:08] Phil: We can name all of them. But yeah, it raises a point. I know a guy. The textbook tells us that 80% of the time, that’s probably going to reverse according to various studies that have been done. It’s widely accepted that it will result in a reversal of price movement. I know a very successful trader that uses that pattern and it’s opposite the three crows as a continuation pattern as opposed to a reversal pattern. As strange as that may be, he uses it the exact opposite way to conventional wisdom. Go figure it out!

[00:22:53] Sean: Well indeed. It’s taken traditional and flipping it on its head. There are some technical reasons for that.

[00:23:05] Phil: Sure. Don’t just do the opposite though. Make your own observations. A lot of them were written a hundred years ago. While the patterns might not have changed, the way you might use them likely has. You need to evolve with the markets. I’m not saying the patterns don’t work, I’m just saying to put them into context. Make observations. Layer them on top of what you’re already doing. We commonly use a bollinger band price. Statistically speaking, it’s at an extreme of movement. Maybe we add one of these candlestick patterns at that extreme of movement and make an observation. What if that generates a perfect continuation signal? I would go back and do the research and get my nose in the historical charts and look for evidence to suggest whether my premise holds true. Will it reverse or will it continue? And based on those observations, I can start to form an expectation. Every time I see that condition happen, then I can note what happens next. And that’s gonna help me generate. When it happens in the future, the facts, the known events, I can then start to think about those patterns as a possibility to generate a signal. This is how you can start to generate a strategy. Daisy chain several patterns together and if you like the outcome, that’s your signal.

[00:25:06] Sean: How about getting out of a trade? It’s a different area. One of the things we do is we don’t actually worry about this. We hit those targets, we’re out. It’s that simple. A lot of people struggle to get out of a trade profitably because they’re looking for a signal to get out but they’re never quite there. The same problem with getting into a trade, making sure they’re refining, but getting out is the same kind of mental process, whether we’re talking about reversal points or momentum stops. Do you still believe in the trade? What do you think about that?

[00:26:22] Phil: Yeah, I think a lot of retail traders put all their focus on the signal. And let’s just assume that they’ve got past and they realize the signal is a series of events, not just one thing. For a lot of people, the easier thing is to wait for the opposing conditions to be met. For most people, that’s good enough, but it depends on if your strategies are whole. What if it didn’t generate the signal because it didn’t meet the opposing.. For example, if I’m staying with my bollinger band, prices have got to go to the other side of the bollinger band before it generates the opposing signal. What if our viewpoint doesn’t unfold? Let’s take those things into consideration. The thing that I found flummoxing for myself was that uncertainty. Will it get to where I think it’s going? I think the first thing is to be confident in your viewpoints and then part of the process will be, after we’ve generated our green light is to figure out when we think it’s going. If it’s going up, how far up? Will it get to the other side? If it doesn’t get there, I want to have another get out zone. It might only get part of the way there. Let’s just say that in the lower and upper bollinger bands, it gets 30% of the way there and it starts to meander sideways. Personally, I don’t care that it does that at that point. I want to ignore the noise of the market. I don’t want to watch every price fluctuation ebbing and flowing. Me personally, it will either make money or it won’t make money. So price needs to get to get to my expectation. One of the first things that I’ve done is have a huge expectation for the trade. I have a high expectation of a low dollar move - a realistic expectation that price will move $3, $4, $5. Unrealistic expectations are often why people don’t see their expectations being reached. When I do get interested is when price gets 80% of the way toward that first target. We’re trading from the lower bollinger band to the upper bollinger band. If we’re 80% of the way there, I’ll be considering taking profit. If we’re 80% of the way there, do I want to wait for that extra small move? It probably is not worth waiting for. When we’re there, I’m just gonna take profit.

[00:30:25] Sean: That’s it. Money off the table. Chips in the pocket.

[00:30:30] Phil: You’re not gonna get poor taking profit. You need to be very clinical with that profit taking. But we’re kind of chewing around the issue. How do we get the target in the first place? You need to be very clear about where you think the stock will move. It needs to be a realistic expectation. I’m not looking at the trade between now and when that target’s reached. Personally, I only want to manage profit. I’ll let the trade expire worthless. I’m only gonna manage profits and only when it’s in that target zone. That’s as clinical as I want to be. Everything else prior to that is noise as far as I’m concerned. That’s how I do it. It releases me from the emotional attachment of the trade. I don’t need to watch it constantly. Will it go up? Price is pausing. Ooop, there’s a bit of a spike on that candle. I don’t need to look at it because that’s the decision I made a long time ago. I’m only gonna exit for a profit.

[00:31:44] Sean: At the end of the day, it can give you a signal that hey I’m done, but then continue moving in the favorable direction if we’re talking about a directional play. You’ve got to look at it as a whole. If this stock traditionally moves like 5% or 10% thrusts or pullbacks, them boom, that’s where you’re looking.

[00:32:08] Phil: You’ll see that in the last 12 months.

[00:32:12] Sean: And that sort of helps you define your expectation, even if you’ve got a countered signal. You can take some money off the table like Phil was saying. If you’re managing your losses and profits, and you’re staying aware with your unemotional strategy, they pull your money off the table and take your profits and move onto the next trade. There’s plenty of opportunities.

[00:32:40] Phil: You raise an interesting point with targets. I talk about achievements using the bollinger band. You wanna get beyond that - a mechanical way of evaluating a target. I frequently trade from the lower bollinger band to the upper bollinger band, or the upper to the lower. And quite commonly, that will coincide if you look left across the chart, with support and resistance. Another thing to do is to see which direction it’s heading. If it’s going up and you see it going in $3-5 movements, it might give you a more accurate zone to aim for. That might not be at the bollinger bands because they do expand and contract. You’ve got historical precedence, and when it gets to that zone, take profit. And be clinical. You can’t hold out and just see if it moves more.

[00:34:30] Sean: So take your money off the table and move onto another trade. If you imagine you’re 80% of a move, well the probability now of it making another thrust up to 100% is dramatically reduced because it’s already done that 80%.

[00:34:50] Phil: Why hold out? You’ve got a guaranteed 80% profit of your expectation right this second and an unknown probability of it squeezing the extra 20%.

[00:35:05] Sean: One thing I should say - there’s really only two signals we actually care about. I’m not trying to do self-promotion here, it’s just covered in more detail in our on demand segment. There’s no actual names for the signals that we use, so I’m just going to call them the Rebel Traders Extreme Signals. At the extremes of the bollinger bands, two standard deviations, 20 period movement average, standard settings on every platform, and then you’re looking for a large spike at the top of the bollinger bands, and then at the bottom of the bollinger bands, a large spike on the candle at the bottom. At the bottom, the top candle’s almost negligible. The lower wick on the candle is significantly larger than the body, then that’s a good signal counter to that at the top.

[00:36:22] Phil: That previous move down to that statistical extreme might have exhausted. And that can help us generate. Assuming that one of the conditions are met, I’m probably gonna trade this.

[00:36:50] Sean: It’s been a U-turn in existing direction, and that’s what we’re looking for. Now we’ll do some more examination...

[00:37:00] Phil: Within the context of the last 12 months, if we’re in an uptrend and we’re at the lower bollinger band with that sign of exhaustion, then we’re buying the dip in an uptrend.

[00:37:10] Sean: There’s an extra element of looking left, but we’ll cover that more in on demand trading. These things combined together check all the boxes. Put the trade on. But we’ll talk about that in our expanded training. With that being said, there you go, ladies and gentlemen. Whether to ignore them, whether to be aware of them, what layers up, what layers down, and when to take profits. Let’s move on.

[00:37:45] Rebel Trader Tip of the Week

[00:38:02] Sean: So, this week’s Rebel Trader Tip of the Week is do not be trapped by convention. You see, conventional traders, traditional traders, are all prime targets for the market. You need to have a bold adapting strategy that allows you to bypass a lot of the BS. Cut through the noise and focus on what’s important. You probably got a lot of that ethos from the main part of the show. When everyone is trained to do the same, they’ve picked up whatever books they’ve got, with the wright candle patterns and charting patterns, it’s the Sesame Street of trading education that we all go through. The problem is, you never break out of that cycle. It becomes the foundation for everything that you do and everyone on the other side is ready to take your money because of that.

[00:39:20] Phil: And often, you’re looking at one thing in isolation as we touched on before. One of these conditions doesn’t make a signal or a strategy. Most people are looking at a moving average crossover or a mack-d, or a CCI hook, or whatever your indicator condition is, and calling it a strategy. That’s what most people will do and that’s the conventional wisdom touted in the majority of textbooks.

[00:40:00] Sean: Now, you have a very good thing you taught to a student recently and it’s making your conditions or circumstances in your trade journal.

[00:40:30] Phil: We’ve talked about this many times before. Validate everything. When you’ve got a condition that you like, we use the candlestick example. When certain conditions are met, make a note of it. Validate. Just because the moving average or whatever indication you’re looking at has happened, doesn’t mean the conventional expectation will occur. So prove it to yourself first, gain some confidence in it. I was trading breakouts for the best part of 12 years, but I did my own little twist to it which became very popular. The conventional wisdom was, when you identified a consolidation, you place a buy order above and a sell order below, and the textbooks told you to do that. After that you place your head between your legs, close your eyes, and you wait. That’s what it said. Buy above, sell below. Whichever one triggers first becomes your stop loss. But the reality is, you should wait for the move to happen first. Typically what I do is trade the first breakout after the pullback. Adding that pullback was sort of like the secret sauce for me at the time. It meant that I wasn’t suckered into those false breakouts, where the institutional traders are looking for liquidity. It’s just that observation.

[00:42:30] Sean: It added that extra layer of certainty.

[00:42:40] Phil: And this is where I started to have that realization of the conveyor belt. Make your own observations. Don’t take the author’s word for it. It might be that you spot something different because you see the market differently. I wouldn’t worry about the unnecessary specifics like the name of the pattern, because it just doesn’t matter to me anymore. I also note my emotional state. I guess my point is, if everyone, all the retail traders, are all doing the same thing and we know that 95% of them struggle to become better than a break-even trader, why would you ever want to do what conventional wisdom tells you to do? So, be the Rebel. Do the opposite. Break convention, or confirm convention. It might not be the isolated event, but you’ve got to make your own observations.

[00:45:05] Sean: Absolutely. Be a rebel and don’t follow the crowd, because if the crowd’s walking off the cliff, you’re better off with the higher ground and just watching them all dive. So, with that being said, let’s rock onto the Quickfire Round.

[00:45:23] Quickfire Round

[00:45:35] Sean: Okay, so, rummaging in the new year’s mailbag, the first question of 2018 is I keep finding trades, but I never seem to get out of them profitably. I either hold on too long or get out too early. What can I do?

[00:46:00] Phil: They’re shooting for the stars here. I think most people have a larger than what is realistic view for their targets. Everyone wants to swing for the fence. Everyone wants the 10-bagger. If you can drop the ego elements to your trading, you’re going to be significantly better. Why do you think the stock will double in the next 30 days? It might happen. It’s possible, but the reality is it probably won’t. Let it go. If you struggle with targets, maybe you want to reevaluate and find a mechanical way of doing it. Maybe include bollinger bands, if you’re setting a trade up on the lower, maybe you aim for the midpoint or the upper edge of the bollinger. I think the other thing people fall into the trap of is they want a risk-reward ratio with some bullshit ratio. This usually applies to stop losses, or if you’re risking $3/share on the option and you’re looking for a 3:1, or $9/share on an exit. And I swear, Sean, where the fuck did that come from? Why? Why’d you want a 3:1 reward ratio? You’re going to be more profitable if you invert that. It’s going to be better if you have a higher expectation of a lower dollar move. I’m not saying you can’t make good ratios, but on every trade? You expect to make 3, 5, 10:1 on your risk? It’s unrealistic.

[00:48:20] Sean: Go to Vegas with that attitude.

[00:48:23] Phil: You’re not gonna survive very long. I mean sure, I’ve had plenty of multi-hundred percent return on capital, but I don’t expect it. It just happens. But I can do it because of the frequency of trades. I advocate one trade everyday with our methodology. It’s a consistent way to apply my finding, filtering, and sorting process. Most people default to what the textbooks say, which is you want a 3:1 reward ratio. Why would you want that? You’re just giving yourself an unrealistic expectation, especially when you step into the options world. The capital you use is significantly lower than if you were trading stocks or Forex. If you start looking for 3 or 4 or 5 or 10:1 risk to reward, it suddenly becomes an unrealistic expectation. For the reasons we’ve touched on them, they’re confusing indicators with signals.

[00:50:50] Sean: Absolutely. I think that nails it right between the eyes.

[00:50:54] Phil: I think if you’re struggling, give us a call. Usually we can fix those things. If you’re negative to around breakeven, you’re so close to seeing success. There's usually a few tweaks and adjustments specific to your situation that we can talk about.

[00:51:20] Sean: Absolutely. So, what else is in the mail, my friend?

[00:51:25] Phil: Okay, so I’ve got around $50,000 in the market. 10% of my portfolio is too big (I’m assuming we’re talking about position size). What is the ideal trade size for a portfolio that is $50,000 strong.

[00:51:50] Sean: Okay, this is going to depend on what your strategy is for trading, obviously. If you’re asking yourself if the trade is too big, it’s too big. If you’re not sleeping at night, if you’re stressing about every bloody trade, it’s too big.

[00:52:15] Phil: Position size - the root cause of most evil. I’ve got strong views on it.

[00:52:15] Sean: And so do I. 10% is very aggressive. You’ve got to have a very high risk tolerance for that. That means if you have 5 positions, you’ve got half of your entire portfolio locked up in 5 trades. And I’ve seen this talked about in textbooks. Diversify with five different positions. That’s not diversification, that’s just five different positions.

[00:53:00] Phil: And if they’re all 10%, that’s a big exposure. Personally I’d be happy to risk 50% of my account, but I want to do it over a large number of occurrences. I don’t want 5 positions because in that case, all your eggs are in one basket. You want to spread that out.

[00:53:25] Sean: For me, I would say 1% is what we tend to talk about. The more you’ve got out there, the more your strategy is going to have meat to sink its teeth into. Overall, you’re going to see a lot more activity, a lot more movement in your portfolio. It’s fine to have 30-50% of your portfolio exposed at any one time, but if you’re thinking about putting 1% of your capital into a position, that still gives you 30 to 50 positions that you can diversify across multiple industries and sectors.

[00:54:25] Phil: I just want to allay the fear there, because someone’s gonna go 30 positions? If you do one a day, which is manageable for everyone regardless of your personal commitments. You can find 20 minutes a day to put a trade on. There are about 20 trading days in a month, so you can find 20 positions. A farmer does not plant one seed and hope that it makes a crop. A farmer will plant lots of seeds knowing that some will die, some will wither, some may sprout but are not going to be good enough to go to market, some will go to market, and some will be of significantly high quality where maybe they save them for some of their best customers. You’re farming, so you need to plant a seed everyday.

[00:56:00] Sean: Absolutely. At the end of the day, trade small, trade comfortably. If you find your position sizes are making you stressed, and I see this a lot with the crypto traders right now who are putting everything in one coin and then they’re not sleeping.

[00:56:32] Phil: Or re-mortgaging the house… There’s gonna be some great success stories when they come out of it, but not if you don’t have a heart attack first. They are literally betting the farm. And that’s what we don’t want to do. We want a little bit of exposure. Think about each trade. Think about if you had a shop on the high street. If you just bought one product, one pair of shoes, size 9, and waited to sell them until you get another pair from the stockroom, you would not be in business for very long if that’s how you were running the shoe shop. You want to have lots of variety.

[00:58:00] Sean: Absolutely. It’s a good analogy, and at the end of the day, it’s a business, not a hobby. This is not a gambling extravaganza.

[00:58:16] Phil: If you’d like to get your balls in the rough, take up golf!

[00:58:20] Sean: As he says! So anyway, moving quickly on, why is it that suddenly everyone is suddenly a cryptocurrency expert? Surely, no one could be an expert in this new sector.

[00:58:32] Phil: I’ve got a serious answer and a not-so-serious answer for this one. A serious one is an expert is the person who knows the most on a subject and is in the room at that moment. They would be considered an expert. Every man boy child wants to be an expert on cryptocurrencies. Personally I think it’s a load of bollocks. There’s a few people I would consider exceptionally knowledgeable on the subject of digital currency. But the people who are touting themselves as experts are talking about it from one angle, which is the one that we tend to bash on all the time, which is how to trade ‘tryptocurrencies’.

[00:59:23] Sean: That is the new phrase. I’m gonna burst into theme tune at any moment. Anyone advertising making a fast buck, run away. I see people saying I turned $5,000 into $40,000 in the last year with cryptocurrency. I’m gonna hold a webinar about it so you can join my new program. But I’m like, if you haven’t made significant amounts of money and you’ve been in crypto for last year where we’ve had 1500% growth like Bitcoin, then…? Look, everyone’s an expert in a bull market. These crypto experts were Facebook marketing experts yesterday, before that they were ecommerce experts.

[01:01:10] Phil: Before that they were some Forex push-button experts. To be fair, while we’re on that bandwagon, we’re very good at what we do, and we don’t let everyone who wants to be involved in what we’re doing buy it just because there’s a buy button there. We want to make sure that what we do is right, because it’s not a one size fits all policy. We know what we do works, but what if it’s not right for you? We don’t want to give you something that’s gonna work for you. We want it to go to the right person at the right time. If you’d like our help, give us a call. Like any business, you’ll pay for our time. In the meantime, you get to listen to our lovely voices.

[00:02:40] Sean: At the end of the day, there you go. Let’s transition and move the heck on!

[01:02:48] Bulls**t of the Week

[01:03:12] Sean: Okay so, this is more of a laugh than a bullshit. California just opened up its recreational pot laws so now everyone can go out and get stoned. I had to laugh at the opportunistic nature of Jack in the Box. It’s a fast food chain over here in the US and very predominant in California. They’re opening up the munchie meals for stoners. It’s a new line of midnight munchies, a box of greasy stoner snacks priced at $4.20.

[01:04:10] Phil: Why $4.20?

[01:04:12] Sean: That is code/slang over here for pot. I never heard of that over in the UK. Ironic pricing. I had to laugh at that. Good on Jack in the Box for taking advantage of that. Well done.

[01:04:32] Phil: It’s perfectly legal. Nothing wrong with it.

[01:04:36] Sean: But yeah, the entire industry over here… California’s full of stoners. I was in California for the longest time. A very short, a very sweet Bullshit of the Week. With that being said, ladies and gentlemen, that is the end of the show. We’ve covered a lot of ground here.

[01:05:10] Phil: Lots of interesting things, a multi-faceted show this week. I’ve really enjoyed it.

[01:05:15] Sean: Good, good, good. Please remember, this show is not free. It will cost you a five star review. Just go to https://tradecanyon.com/rebeltraders/ and then select where you subscribe and listen to us. Leave us a review because it always helps us get this message out to other traders just like yourself and it also shows us you appreciate what we’re doing here in the show.

[01:05:38] Phil: If you’d also like, you can connect with us at Facebook or the Twitter machine at the same link, https://tradecanyon.com/rebeltraders/. What do we have coming up next week?

[01:05:53] Sean: Next week, we’re going to be taking a detour down to the Princess Bride territory with miracles that are not included.

[01:06:03] Phil: Will Miracle Max be in attendance?

[01:06:05] Sean: Abso-bloody-lutely. And Inigo Montoya. You killed my trade. Prepare to die. We’re gonna have a little bit of fun with this and we will be back next week with unrealistic expectations and many other areas here where miracles are not included. So, with that being said, take care. We’ll see you soon.

Resources & Links Mentioned in This Week's Show

3 Key Takeaways From This Show

  • Indicators do not give signals, they give indications and raise awareness. Combine indicators with price actions or other confirmations to create a signal.
  • Rebel Traders don't need signals to get out of trades as our strategies are primarily target based.
  • Many signals are undermined by hedge fund and algorithms that rely on lightning-fast trades against traditional funds and retail traders who want to trap them in their signals by taking the other side.

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