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..as far as trading methodology, I’ve found that most traders are either successfully following their own system, or unsuccessfully trying to follow someone else’s.

Following someone else’s exact method (including mine, if I had anything you could actually call an “exact method”) is certainly not going to bring you personal fulfillment. Also doubtful that it’ll bring you any money.

But ask yourself, if you did find someone with a magic recipe, and if using that magic recipe did bring you tons of money, what unhappy situation would that money get you out of?

Then ask, what is it about that situation that makes you unhappy?

Then ask, what series of (poor) choices did you make which resulted in your being in that situation?

Then ask, what is it about you which resulted in your making those (poor) choices?

Then start your real journey and forget trading.

Oscillators (stochastics, momentum, etc.) will give good signals if the parameters are set just right and as long as the chop continues. If you’re trying to trade these, however, be ready to ignore the overbought/oversold signals the moment the trading range is broken.

Remember, none of these indicators predicts the future! They only help you to see when probability is likely to be on your side, and your trading skill and money management do the rest. A stochastics reading of 90 means nothing if a stock has just broken out of a range.

Indicators serve as filters of general conditions you should be able to see on the chart. Look at overall price and volume action. If you can’t see one of Dave Landry’s Big Blue Arrows, don’t let all those other indicators become Rorschach blots and cause you to see something that’s not there.

Small losses. The magic of successful trading. Not being right all the time. That would make you clairvoyant, in which case one Powerball ticket would do the trick. Small losses. Small losses. Small losses. Then the occasional big gain. Sounds upside-down, but that’s how it works.

You may wonder where my picky rules come from. A little spiral notebook filled with wisdom transcribed from hundreds of index cards scribbled over the years while trading. What I did right, what I did wrong, what to do next time. You can never learn as much about your weaknesses from books as you can from yourself, if you just keep very accurate and honest records. Otherwise you just repeat the same emotionally-driven mistakes over and over until you give up in frustration.

Another painful lesson we all eventually learn is the one about trying to trade someone else’s tips or systems, no matter how well-intentioned. My playbook is currently limited to specific day trade and swing trade setups, and nothing else. Bouncing around from method to method in search of a guaranteed winner is a sign of inexperience, and a sign that one still has some losing, er, learning to do.

Denny: Alan, Bev is the woman I’ve always dreamed of. An angel in the bedroom, and a whore in the kitchen.

Alan: I think it’s the other way around.

Denny (smiling): Not last night…

from Boston Legal

The absolute worst thing one could do at this point is start modifying the rules once the trade is on, even if that resulted in a larger gain. Why? Because that’s based on emotion, it’s not repeatable, it results in a worse outcome most of the time… and in the unfortunate event that it results in a better outcome, it reinforces losing behavior (in this case, letting your emotions dictate your trading decisions).

I don’t use the VIX as a sole indicator. No one should. Anyone who remembers the times the VIX spiked above 40 knows that blindly trading one indicator can be treacherous, because when the signal is wrong, it’s waaay wrong, and you can give back all your gains in an instant. A version of the Black Swan phenomenon. Trade your system, but always have in the back of your mind the possibility of the rare event that hits like a tidal wave, and consider that unlikely possibility in your positioning. Nothing can make you want to jump out of a window like watching years of hard work go up in smoke in one day.

If the XOI (oil index) heads down and you’re long XOM, it’s time to pull your pants up (i.e. tighten your stops) and get ready to be escorted to the door. Don’t get focused on the stock and ignore the index and in this case, the underlying commodity. You do so at the peril of your trading account and your sanity.

My positions are in complete compliance with Da Rules. Rule #1 (or 3, I forget) is to always be aware of your time frame. I’m a firm believer that changing time frames after a trade is entered is one of the biggest pitfalls in trading, usually because it’s done out of the subconscious need to find a way to avoid being proven wrong.

I’ve used the example before that it’s perfectly alright to do a daytrade short sale on a stock that’s in a strong long-term uptrend; the two timeframes have nothing to do with each other. Trade within the appropriate time frame. Move with the groove. Work your mojo, grasshoppa.

I generally stay away from taking requests for charts. It would look too much like I thought I could take a random chart and divine something about the future from it. “This stock is definitely headed up.” Or down. Or whatever.

If I (or anyone) could do that, we’d have Bill Gates taking out our trash.

Crystal-ball predictions are the domain of someone who’s either trying to sell you something, who is desperately seeking to reinforce his own belief, or who is just plain full of crap.

What you can tell from charts, if you’ve spent some years and bled some hard-earned money trading, is when you see a low-risk entry in the direction of the prevailing trend, and how much of a loss you stand to take if you’re wrong.

That’s quite different than trying to guess the future, then betting your money on that guess. We’ve all been through that stage, and eventually, hopefully, come out of it prior to complete bankruptcy.

One of the great milestones in my trading history was my learning to think of each trade in terms of how much I was comfortable losing, versus how much I hoped to make.

If only I’d learned that back when I was trading options with a $2000 account, thinking the low price of the option justified my taking positions which, in hindsight, carried far too much risk.

But, as always, the market is there, waiting patiently to teach you these lessons, gently if you’re open to them, or like sticking your hand in a meat grinder if your ego thinks it knows better.

If you don’t know where you’re gonna get out, you can’t get in. You must be able to clearly state your maximum potential loss in order to take a trade. You must know how much you stand to lose if you’re wrong, and be comfortable losing that amount. If you aren’t, reduce your position size. Don’t get caught up in the dreamy “how much I’ll make if I’m right” and let that entice you to commit too much.

Does the fact that some loudmouth at the water cooler has made 50% on his money in the last two months and thinks trading is easy mean that he’s a better trader than you, who are diligently trading your plan? NO!

Where do all the work and skill actually pay off? In the long run. Keep following your methods. Keep modifying, evolving, improving. Ignore the lucky idiots. They come, they get lucky, they eventually blow up, and they go away, making room for the next batch.

So don’t try to anticipate and randomly jump out of the plane. Never anticipate. That’s one of my rules, although I’ve not published it at this point. Anyway, just make sure you’ve trailed your stops to exactly where you’re comfortable being taken out, and expect some action.

Free markets are one of the greatest miracles of modern life. They allow us to trade our skills and labor for currency, then to trade that currency for the things we need and want, even if those things are created by the cooperative efforts of thousands of different people all over the world who don’t know or necessarily even like each other.

Free markets work brilliantly, creating the most efficient pricing and the most efficient flow of the current supply to fill the current demand. The problems arise when someone meddles. This someone is usually a government.

Our government’s meddling… er, intervention began in earnest after the Great Depression, always with the best of intentions, and with some success along the way, but at the price of the greatest economic tragedy in our history- the unfunded entitlement programs which, without draconian reforms, are destined to crush our economy and our childrens’ future.