How  To  Trade  Divergence(The  Ice  Cream  Trader)

By Rob Booker

http://robbooker.com

Book Website and bonus materials at:http://tfl365.com

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ONE OF THE REASONS SO MANY TRADERS FAIL IS THAT THEY TAKE STATEMENTS LIKE “CUT YOUR LOSSES AND LET YOUR PROFITS RUN,” AND

THEY BLINDLY FOLLOW IT. NOTHING - NOT EVEN A FAMOUS TRADING MANTRA - WILL EVER RESCUE YOU IF YOU HAVE POOR TRADE PLANNING

SKILLS IN THE FIRST PLACE.

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THIS IS A TRADING EBOOK PUBLISHED BY TFL PRESS

Copyright © 2013 Rob Booker

All rights reserved. Published in the United States by TFL Press.

http://tflpress.com

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Table  Of  Contents

NOTE  TO  READER:

The hardcore trading stuff starts on page 15.

Contents

How I Drove Myself Crazy - 4The Ice Cream Man - 7 The Factory - 10Luigi and the Ice Cream Routine - 15Divergence, by Luigi - 20The Path to a Million Dollars -55How to Recover from Losses - 58

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 1  

How  I  Drove  Myself  CrazyI take another loss. So I switch directions. Surely if I change directions I’ll get it right. But then it reverses and goes the other way. What other way? The same damn way I thought it would go in the first place.

My friend Glenn says they should make computers out of rubber. That way, we can throw them out the window.

Glenn’s right. I want to chuck my computer out the frigging apartment building. I want to see it explode into a thousand million shards of wrong-direction-chart-plotting garbage.

But of course I don’t do that. I am going to get this right. I am going to sit here and trade this currency pair. If today is like the other recent days, I will keep trading until I get one thing right. Just one thing right. That’s all I want. If I can get one direction correct on these charts, with any amount of profit, then I can end the day in peace. I can walk away. But not until I at least get one small nod of approval by this demon, this EUR/USD currency pair.

Or else I can always do what Glenn recommends. My name is Frank. My brother, Harry, introduced me to trading. He lives in Japan now and his life is a mess, probably from trading (definitely from trading) but once he told me about it I got the bug, I guess, and I can’t seem to stop myself. I can’t say that I am addicted. But I can’t say that I’m not. I am in that middle ground where I’ve decided I will not stop trading until I learn how to do it.

I don’t have a job right now. I am living on savings for a bit – I’m young and I can do that for the next few months. Because my brother suggested it, I started trading forex. I now hate my brother. Because I live in San Francisco in the Pacific Time Zone of the United States of America, I am up for what seems like 24 hours a day. The European Session, as they call it, is the most active session of the currency market. It starts at midnight in my local time zone.

I get sleep here and there. For what seems like the rest of the day, I look at the charts. I look at the charts on my phone. I have an iPad and I loaded two different charting platforms on that. I do most of my trading from a laptop and that is never far away, either. How did I get like this? If I had a dog, it would be dead. Really. I would never take it out. My fish died three months ago. I couldn’t even bother to get up to feed them. I am wasting my life away on this goddamned currency market.

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In the evenings I volunteer at the Catholic Charities on Beverly Street, talking with seniors and playing games. It’s not much but I live alone, and they live alone, and I’m young, and they’re old. I think I keep waiting for something important to happen in my life and by going to the senior center – almost every evening – I am trying to speed up the process. On Thursdays I deliver food to the shut-ins. Fridays I am a kitchen assistant, which means I mostly wash dishes because I don’t know how to cook. On Mondays and Tuesdays I call out the Bingo numbers. That’s what I am doing tonight.

Even as I am calling out the numbers I’m thinking about the Euro. I left the house with an open buy trade on EUR/JPY, and I was actually just a little bit positive on that trade. I declined to set a profit target – because this could be the big move I have been waiting for, and I want to catch it. To keep myself from watching my phone during the Bingo game, I hum a song in my head, count to 100 over and over again, and tap my foot to the beat of the Frank Sinatra songs playing on the stereo in the Bingo hall. But I want so desperately to see what’s going on with my trade.

At the end of the game I stop to see Lawrence. We have a regular chat on Monday nights. I can see that he has something for me. His hand trembles (which it always does) as he grips

tightly to a small business card-shaped piece of paper between his thumb and forefinger. He smiles wide. He is excited to see me.

“Lawrence, do you have something for me?”“I sure do, Frankie. I sure do.”“I’m excited to see what it is,” I tell him, and I reach out.But he snaps back his hand, much more quickly than I thought he’d be able to do.“Not yet, Frankie,” he tells me, scolding me before I know I’ve done something wrong.”“Okay,

Lawrence, okay. No problem. How are the ladies tonight?” He grins. “Oh well, you know, for a ninety year old man they get pretty excited. I’m the

youngest man here tonight besides you, and I’ve got what the ladies are looking for.” I never ask him exactly what it is that he has – that the ladies are looking for – and I’m quite sure I don’t want to know. I let it go.

“I see you have a card there. Is that a business card?”“Something like that, yes, Frankie.” He pauses. “Tell me, you still involved in all that currency

trading? You still doing that?” Yes, I tell him. But we don't have to talk about that.“Well, of course it’s all going to hell, you know that. The dollar. It’s going to hell. First Obama

is gonna take away our guns and then he’s gonna set about to destroy this nation’s economy.” Lawrence talks like this often. I am not sure he has any guns, but if he did – I doubt anyone would want to try to take it away from him.

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“Yes, yes, the dollar is probably going down,” I say, but that’s just to agree with him. I don’t actually care what happens with the dollar. Tonight I want the Japanese Yen to fall about 100 pips and that will make back everything I lost earlier this morning. I could breathe easier. I haven’t had a winning day in two weeks. I’m going to blow through my savings if I’m not careful. Sitting here with a man over the age of ninety makes me realize that if I’m not smarter about my money, I’m going to end up old and poor and alone. Those are three things I don’t ever want to be. Well, I wouldn’t mind getting old. But poor and alone? No, thank you. I lean in a bit. Maybe the business card has something to do with some special advice – some way for me to definitely not end up poor and alone.

“Frankie, I am going to give you this card here,” he says, “and it’s a special card.”His hand trembles mightily. He can hardly hold it out for me. His expression is telling me that

he wants the card to be special, he wants to do something for me because I have visited him regularly for the last 12 months. The card is probably worthless. But he wants to do something for me and this is all that he has.

I gently take it but keep eye contact with him. “Thank you, Lawrence. Whose card is this? Do you want me to contact this person?”

“You’re going to want to contact that person, yes. If you’re really interested in trading, and you really want to make some money, then you need to talk to this fellow.”

I don’t think Lawrence knows anything about trading – he was a janitor at George Washington High School in the Richmond District for 42 years. But I carefully fold the card into my jeans pocket in a way that shows him that I care about it. I haven’t even looked at it yet.

“You see that man,” Lawrence says, “and he’s going to change your life. You really want to make money, don’t you?”

“Yes, Lawrence, I do.”“Then this is the man you need to see.”He says this with such conviction that I know he’s telling me the truth as he knows it - he really

believes what he is saying. Maybe I do need to see this man. Maybe Lawrence isn't just hoping this guy will help me. Maybe he really will help me. I decide to pay this man a visit tonight.

But when I get out into the parking lot of the Catholic Charity, and look at the card, my heart falls into my stomach.

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   2    

The  Ice  Cream  Man

“An ice cream man?” I crumple the paper in my hand. Crazy Lawrence, the man who thinks Obama is going to come get his guns, gave me the name of an ice cream man who, and I’m not laughing about it, is going to help me with my trading. I walk home dejected. The only thing that can cheer me up now is if the EUR/JPY has gone up. It hasn’t. Two weeks straight of losing, losing, losing. And really, I haven’t had a single positive week of trading in – well, I can’t even remember how long. Maybe I am just fooling myself.

Before bed I decide that I’m just unnecessarily depressed. I need to pick myself up off the floor and do something about how I feel. I know I was wrong about the EUR/JPY. There is only one thing to do when I know I am wrong – and I heard this in a webinar on FXStreet.com, or on TFL-TV, or some other place I can’t remember now – I gotta go the other direction. The market

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told me I was wrong about the EUR/JPY going up. The market was therefore telling me the EUR/JPY wanted to go down. So I take a sell trade, with a lot size just a little bit larger than usual, and drift off to sleep, still wearing my jeans.

Morning light filters into my Sunset District flat a bit earlier than it does for anyone else in my neighborhood. My house faces east, and it’s taller than the others around it, so I get more natural light in the morning than I do in the evening. Which I like. The first thing I do is rub my eyes and then grab my phone. I overslept, I know that already because I’m usually up before sunrise. It’s already past 7am. I missed the London Session. I missed most of the New York Session. And it hits me: I have an open trade!My thumb rests on the charting app – I pause. Do I want to look? No. I don’t want to see it. I can feel it. I know these things, even without looking. My luck hasn’t turned. I already know this trade is a stinker. I sold the EUR/JPY, right? I scratch my head. Maybe I bought it! Of course not. You can pretty much know which way the market moved overnight by looking at my profit and loss statement – the market always went in the opposite direction of my trades. I can’t put it off forever. I take a shower. The water is cold but I don’t mind. Maybe the water heater is broken. I pour a bowl of cereal. It tastes stale, like cardboard. I look into the bowl. No, it’s actually cardboard. Maybe it got chopped up in there at the factory. I brew a cup of hazelnut coffee. It tastes like strawberries for some reason. I imagine (in my delirious state) that if I wait a little bit longer, the trade that I know is negative can have some time to turn positive. Maybe if I stop looking at it, then I won’t close it, and if I don’t close it, then it will turn in the right direction. I won’t have to keep changing directions that way! But no. It’s not going to work that way. So I take a peek. Maybe if I only look out of the corner of my eye it will be less painful.

-$3,700. That’s not less painful. It’s three thousand, seven hundred dollars of pain. What the hell happened overnight, I wonder? I curse under my breath even though no one is around. I have an entire conversation in my head, at the speed of five hundred thoughts per second, but then blurt out the end of the conversation out loud, as if someone has been here with my all along. “I have to do something different.” I live just a block away from Golden Gate Park. I put on my tennis shoes and leave the house. I don’t even bother to lock it. The sidewalk has been painted purple, or some kind of

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chalky blue color – all across the front of my house. It’s colder than usual for this time of day. It occurs to me that I might be dreaming all of this. Maybe I didn’t have a loss. I pinch myself. Nothing. I guess, for now anyway, I’m awake. I wish I were dreaming, because then it would still be night, I could still get up early and close my trade. I think back to last night. Lawrence promised me that this guy would be helpful. What do I have to lose?

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3

The  Ice  Cream  Factory

I had lost three thousand seven hundred dollars so far on my long EUR/JPY position. I had no idea how much worse it would get. Why not just go to this Ice Cream Guy and see what he had to say? I looked at the card again. No address. So I stopped inside a Chinese restaurant that smelled like cooked pig - even at seven in the morning - and went to the back where I knew they had a pay phone. Next to the pay phone was a phone book from, well, forever ago. But that's what I wanted. Any ice cream man or friend of Lawrence would be listed in an old directory. And sure enough it was there in the White Pages: 19th and Mission, San Francisco, California. On the way out of the restaurant, the owner, Marty, who I'd known ever since I moved to San Francisco, shoved a bowl of noddles onto the counter. "You eat before you go, Frankie," he told me. I looked at the noodles. "Before I go where," asked, "Where do you think I am going?" "I can see it in your eyes, Frankie," he told me, "You are going somewhere important today." Marty and his wife always took good care of me, so I ate the noodles quickly. Somewhere important indeed. The old television above the counter played business television - not the usual Chinese soap opera. A beautiful blonde reporter was practically yelling into her microphone out in front of the New York Stock Exchange. "It's worries about the European Debt Crisis that's dragging down the market today, Becky," she blared, "and that's probably going to last all through the day today." Oh great, I thought. The Europeans and their Debt Crisis. Couldn't they get their shit together? I wondered how bad my EUR/JPY position was now. It had to be down at least four thousand dollars. Maybe more. That was almost half my money. It was getting worse. I needed to see the Ice Cream Guy. I thanked Marty and left a five dollar bill.

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I took the N Judah to Market Street and walked from there. It was not a short walk but I needed the exercise. In just ten blocks I passed thirteen hole-in-the-wall Mexican restaurants, four liquor stores, and what seemed like a hundred newspaper stands - all of which proclaimed the start of a terrible debt crisis in Europe. What the hell? How badly did the universe want to show me that I had taken a trade in the exact wrong direction? What made this worse is that I had taken the trade in the right direction to start with. If I'd kept that open, I'd be making five thousand dollars right now. I imagined what I could buy with five thousand dollars. Another two months of living expenses. An iPad. A trip down the coast to clear my head. A plane ticket to visit my brother in Japan. Well, scratch that last one. Harry was a mess and if I had just made five thousand dollars, he'd probably ask me for it. I was so caught up in this line of thinking that I passed right by the address the first time. The other reason I walked past it is that it was boarded up.

CLOSED BY ORDER OF BOARD OF HEALTH Below those words a bunch of language explained the date and time of the closing. September 15, 2007. I scratched at my eyeballs. What? That was more than five years ago. What the hell? I knocked on the boards. I felt stupid but I knocked on the boards anyway. "Luigi!" I called out. I pounded on the boards again. He had to be in there. Why would Lawrence ... And then it hit me. Geez. Lawrence had given me the business card for a guy who went out of business five years ago, and who probably hadn't had anything interesting to say to anyone about business or ice cream (for that matter) in twenty years. Glancing up, I saw an old sign that clearly marked this location as LUIGI'S SAN FRANCISCO ICE CREAM FACTORY in bold rusted metal letters. At once time, all shined up, they actually would have looked classy. The building took up half a block on the street side, and probably took up an entire block around back - this was a large location. He probably, at one time, had made a lot of ice cream here. I knocked on the boards again. "Luigi!" A voice called from behind me. "Luigi!? He dead!" A man with a shopping cart was chuckling, rolling by. Clearly homeless, but apparently knowledgeable on the whereabouts of the local Ice Cream Guy. "Dead?" I asked. "You sure?" "Sure, think, boss. I went to the g*damn funeral." I sighed. That was pretty conclusive. "Thanks," I told him. "I'm Frank."

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I held out my hand. He looked surprised. He either wished I was handing him money or he hadn't been touched in a long time. He took my hand and I shook it strong. I looked him in the eye. He smiled back. He hadn't been touched in a long time. I could tell he hadn't showered in a while, either. "I'm Bob," he said. "They call me Bob round here cause I just Bob in and out!" He laughed as he said this, and bobbed and weaved like a boxer. "What do you do, Mr. Frankie?" He asked. "I'm a little bit in between things, right now, Bob, to tell you the truth." "Me too, Frankie boss, me too," he said, nodding a very kind nod. "I'm also doing a little bit of trading," I added for no purpose. I hated saying that, because it just sounds wrong to do a little bit of it, but I wasn't a pro, and I didn't even feel like an amateur anymore. "Ohhh, I can see why you wanted to see Luigi, then, Frankie, I can see," he said. "Luigi, he was some kind of money-thinker, some kind of money maker, yes, he was." He was nodding. "Made a lotta dollars he did, all that financial stuff. Yes yes." I sighed again. Felt somewhat one hundred percent stupid, now, because I'd come all this way and the man was dead, and he did in fact have some lessons to teach me. "Thanks, Bob. I appreciate you letting me know about Luigi." "Sure, thing, boss," he said, and I started to walk away. I got about half a block away when a voice called out: "Hey, Frankie boss!" I turned around. "You want get in here?" he called out, pounding on the wooden boards. A chill went up my spine. "Frankie, boss, you wanna get in here?" He yelled again, and he pounded so loudly on the boards I could hear them vibrating in my head.

Around back he led me. Cautious at first, but then with a spring in his step, and then we reached a door that had clearly been bolted shut so tightly you'd think they were holding stacks of gold bars inside. Bob hopped up and down a bit in front of the door, like he was getting ready for a boxing match again. Nervous energy radiated off him. We don't have to do this, I told him. He nodded but didn't stop hopping. He knew, and at the same time I knew that he wanted to go in (assuming that was even possible). For a moment he looked up at the sky, and mumbled a few words, and then dropped his right hand off the shopping cart, as if he were leaving it for good, and then pushed back his

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shoulders, lost the bounce in his step, and planted both feet squarely on the ground in front of the door. "It probably locked," he told me, and then with one gentle touch - as if to just check the temperature of the door - the door swung open. Just the way it would if the place had recently been burglarized. He didn't skip a beat and stepped inside. Cold. Dusty. Bob tells me that no one has been inside this factory in more than five years. Once Luigi died, they tried to keep it open, but no one could run it like Luigi, and mistakes were made. "Maybe I made some of those mistakes," Bob said, and I realized that he had worked here. That why he knew. "You wanna see the back office," he said. We walked between huge machines, rusty already and now worthless. Giant machines for turning milk and mixing ingredients. Huge boxes - maybe some still full of who knows what - still lined the room. Some abandoned factories are filled with trash and rats. This was just a dusty, moldy, silent and otherwise clean, gigantic room. The further back we went, the quieter it got. Natural light spilled out of second-story windows that lined the perimeter of the room. Our feet clicked on the bare cement floor. Bob didn't say anything. He was leading me to a back office of some kind. He hadn't been back in here in years, I could tell. The way he had left his shopping cart on the outside, like he didn't even know what it was. The way he held himself walking through that door, like he belonged here, like this was his job. He was a different Bob inside the factory. Led me to the very back, and up a spiral metal open staircase. I followed Bob who looked eager, like he might see the boss when he got up there. We arrived at a door, with frosted glass like the door of a 1950s private detective, and it just said OFFICE, and there was light coming from the inside, and Bob looked hopeful. I felt badly for him. He knocked on the door. I bit my lip. Why was he knocking? Rustling. Papers rustling. I gasped silently, not wanting Bob to know I was suddenly freaking out. Ten seconds ticked off and seemed like a week. I forgot about my EUR/JPY trade and Bob and my brother and just thought of Lawrence and that I wanted to punch him for sending me to a haunted ice cream factory. A car honks. A brother yells to another brother something about picking up milk for mom. A bicycle bell rings. Bob places his hand up against the glass one more time to knock, but before he can touch his hand to the glass: "Is that-a-you, Bobby?"

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I practically faint. On the other side of the door, the dead Ice Cream Man is asking if Bobby wants to come in.

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4  

Luigi  And  The  Ice  Cream  Routine

I should have run. I wanted to run but my feet couldn't move. Bob moved to touch the door knob. Don't touch that, I wanted to say but my lips didn't move. I really didn't want any trading advice from a dead guy. I really didn't want any trading advice now, at all. Really, was this happening? Surely I was dreaming. Crazy Bob, Luigi the Ice Cream Trader, jeez, I had to be dreaming. For sure. And then he opened the door.

The office was a mess, like it hadn't been used in ten years, with yellowed papers tossed about - bills, invoices, shipping labels, memos, old phone books, and dust everywhere, huge piles of it puffing into the air and catching the sunlight that came from the windows. The blinds were up. Sitting in the office was a 50-something man, solid bald dome for a head, and huge chubby hands that looked more like meat hooks than human parts. His mustache was so big, so full, that it seemed as if a small animal had parked itself on his upper lip. He was pecking at a keyboard, sitting in front of a giant old CRT monitor - no color, just amber against a black background - flashing thousands of numbers across the screen. He wheezed like a smoker and grunted a lot, even in the few seconds that I got a first look at him. He didn't seem distracted by our presence. "Crazy, Bob, what's happening out there today?" he said with a grunt. Bob acted like nothing was wrong at all. "Mr. B, it's good to see you man, everything is tip-top for sure!" He beamed. Clearly he was excited to see his old boss, dead or alive. "How are the machines runnin today? We gonna have enough vanilla extract? How we doin on eggs, ya know, we gonna have enough of those? And -" he was talking faster than a teenage girl on a school bus, barking out order after order, but hadn't yet looked away from the monitor. Bob nodded. "It's all good, Mr. B, we doing all right out there, we doing all right. How about you, Mr. B, how are you?" "Just fine, Bob, just fine, just trying to get everything moving today, feel like I need a vacation, feel like I haven't been myself lately, you know?" He then turned and looked up, and saw me, and said, "Who's this? This the guy who's gonna mop the floors downstairs?"

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Bob looked at me and I looked at Bob. "Sure, Mr. B., this is -" "Frank Banes, sir," and I offered my hand for a shake. He looked at my hand, then looked down at his own hand - checking his palm and his wrist, as if he hadn't seen it for a long time, and then looked at me as if to say, I'm not sure I remember what I am supposed to do here. So I let it go. "I'm actually here because Lawrence sent me. Your friend Lawrence at the rest home." "I don't know any Lawrence at any rest home." "Oh, well," I said, "I meant Lawrence. Not from the rest home." "Yeah, I know Lawrence. Whatta you here for?" "I wanted to talk about trading." And then his face broke into a giant smile. "Well, hello, there Frankie, I've been expecting you!" He stood up to give me a hug.

After a bear hug from the dead man, he told me that Lawrence had let him know this morning that I'd stop by for a visit. Lawrence had explained that I had a few bad trades and wanted to get myself sorted out. He pulled out two rusty Steelcase chairs that squeaked across the floor like they had chair arthritis. "Sit down, and I'm gonna as you some questions." "Mr. B, you want me to go check on things downstairs?" Bob asked. I looked at Bob. There wasn't anything downstairs. Well, Bob was crazy, I figured. But Mr. B just looked at Bob, and gave him a knowing look, as if to say, I know there's nothing down there, Bob, and it's ok. Bob nodded and sat down next to me. "So, Frankie," he began, "tell me - what do you trade?" "Currencies." "Profitable?" "Well." I sighed. "No." "Why?" "I get in a trade, it starts losing, I get out. I go in the opposite direction, it starts to go against me, but I stay in. Then it starts moving in the direction I had on the first trade." "And this happens over and over." "Yes." "What's your routine?" "My routine?" "Yeah, you heard me, your ROUTINE. What's your trading routine?"

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"Well, I guess," I say, wanting to answer his question but not having anything to say, "I suppose - well…" "You don't have a routine." "I don't know if I do." "What time do you do your trade planning?" "In the morning." "What time? Is it the same time you do your trading?" I nod. Man, I can see where this is going already - he is going to wail on me for not having a plan when I sit down to trade. And it stings! He's right. I sit down in front of the computer and I just start, well, I start doing analysis and trading - right then, right there. "Frankie, I can see your wheels turning up there, so we know you are thinking about this already. So I am going to tell you straight, right now, there are three things you need to know and there are three things you need to do to have a trading routine, and I guarantee that hardly anyone ever thinks about any of this. This is the big difference between the ones that make money and the ones that don't. You ready?" I said I was ready. Every part of me is ready, right now, and I inch forward to the edge of my rusty, dusty Steelcase chair. And then he begins:

THE ICE CREAM ROUTINE

You cannot plan your trades and trade your plan at the same time. That is impossible. How can you plan to build a bridge and build a bridge at the same time? That's never going to work. How are you going to make a recipe for cinnamon-crunch double chocolate cookie dough triple fudge ice cream at the same time you're mixing in the eggs and the milk and the sugar? You gotta have a recipe, you gotta collect the ingredients, you gotta then prepare them and get them ready in the order they're supposed to be there. First thing is, you get a recipe. You figure out what your best flavor is. What's your best flavor, the one people come to you for, the one thing you know how to make that everyone likes? With trading, it's the one trick you know, it might not happen very often, but right off the top of your head you know it. You know when X crosses Y, or whatever, that you pounce on that trade and you take it. Those are the ones you know. That's your recipe. You know what goes into that trade. Maybe it's an economic report plus a moving average, maybe it's a trend line, maybe something else. You know what ingredients go into this and you know what you need. So you write that down. On one page, or less than one page. I have it written right here on a yellow sticky note on my computer: I'm an RSI Divergence trader. That's what it says. I make divergence trades, I know the recipe, I know what I look for, I know what I like. That's it. Once

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you make that decision, it's done forever. You hear me? Done. Forever. No changing. That's it. I have been a divergence trader for 34 years, that's it. I know what I like, I know what I do well. One trick, Frankie, that's all you need. One trick will make you a million dollar currency trader. Next thing, you gotta plan to use the recipe. You say you trade in the morning. So you gotta plan to use your recipe - you gotta make your plan at night, before you go to bed. Same thing around here at the factory - we make a plan for the next day, so everyone knows what we're gonna make, and we write it up on the chalk board in huge letters for the next day. So people come in, they do their jobs, they know what to do. They're not wandering around wondering what we're working on next. Back to you - a trader. You plan at night and this is what you do: let's say you are a divergence trader like me. You look at the charts, you run through ten, twenty currencies and you look, and you say, "Which of these currencies is ready to set up divergence, or is divergent right now." Those are your flavors for tomorrow, see? Those are the ones that are ready. Maybe you do this: You look at the longer term charts for some divergence, and then you say, ok, I got three currencies that are ready with divergence for tomorrow, now I'm going to bed. And that's it. You write down those three currencies and you go to bed. You don't trade them, you wait on them. You wait for the day to come. You wait for your trading day to start. You come in fresh for those trades. When the New Yorkers sit down at their desks on Wall Street the next morning, to trade the Yen, you're going to be sitting down at your desk too, and you're going to trade it with them. You might be wondering, what if my trade has already fired off? I knew you were going to ask that. You don't worry about that. You go to bed. Maybe in the morning your trade is done, your idea is gone. That's why you look at the longer term charts the night before. That's why you do your planning from, say, the daily, or the four-hour charts, and then in the morning you still have an idea worth taking. Here's the trick, Frankie, and it's a special one: You plan at night, and you let your mind rest with that plan for 8 hours. That plan gets sealed into your brain and by the time you wake up the next day you're comfortable with it, you're fresh and ready for it. When you wake up in the morning and you know what you need to do, it's exciting to go to work as a trader. When you wake up in the morning and it's all potential, all unrealized gains out there waiting for you, that's why you are going to jump out of bed in the morning. A trader with a losing position waiting for him - he stays in bed. He hides under the covers. A trader with the whole market ahead of him, and unlimited potential for profit - he jumps out of bed like he's wearing springs on his feet. Last, you trade that plan. You delete everything off your screen except for what you said you were going to do. That's it, nothing else. You remove everything else from your field of vision. We don't make hot dogs and ice cream here. We don't make roasted chicken and ice cream, or sell frozen vegetables and ice cream - we do one thing. We make ice cream products here. And we don't mix the flavors. We start out making chocolate in the morning, we have a

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batch of chocolate in the afternoon. Done. You do the same. In the morning you have those three or maybe even two currencies up and ready, and then guess what you do? You wait. You don't do anything until the time is right. You wait until all the ingredients are together in the right proportions, and then you begin to stir. You wait for your entry - the one you know from your yellow sticky note on your computer - and then you stir, you take the trade, you make the trade, you make the ice cream, you get the idea. That's it. He stopped. He would have been out of breath if he'd been alive. But he was dead so he just looked at me, his eyes locked onto mine, reading me before I even spoke.

"But what about risk to reward?" "It's part of your recipe. I expect you to know that already." "But what system am I going to trade?" "You figure that out. I can teach you divergence. I have made more money than I know what to do with trading divergence. It's one trick that will last you your entire life. Then that's your recipe." "How do I know when to stop for the day?" "We make one batch - one hundred gallons - of chocolate ice cream every day. So we know when we are done." I nod. It makes perfect sense. "I'm done when I've made a designated profit for the day." "Right. And - or - " "When the batch comes out wrong and I've lost." Just saying that made me think: How often could these guys afford to make a bad batch of ice cream and still stay in business? Not many. It made me think. "You can't lose very often, can you?" "I can lose, but it has to be small. Let's say we're making chocolate ice cream. You want to get the recipe right, and you want to plan as perfectly as possible, but then you get there in the morning and the milk that was delivered has a slightly more sour taste - just a tiny bit more sour than usual. That's a loss. You correct it by adding a little bit more sugar to this batch. And so on." "Small corrections along the way." "Right. Small losses. You never hold onto a big loss. If the milk is sour, you don't ignore it. You compensate for it. Or you throw it out if it's bad milk, from the beginning." From the corner of my eye I saw Bob raise his eyebrows. There must be a story about sour milk, I guess. "So," he says, "You want to learn divergence?"

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5

Divergence,  By  Luigi

Frank’s Notes: What follows is the best recollection that I have of what Luigi told me. As close to word for word as possible. I've put some charts in to better explain what he talks about, plus some of my own notes.

Divergence happens when you see something go farther than you thought it would, and you detect a lack of enthusiasm about that move. The best way to explain it is to imagine running up hill. At the top of the hill, you're higher than you've been, but by gosh you are not very happy about it. You went further, farther, but you didn't have the same enthusiasm for the run near the top of the hill as you did at the bottom (unless you are some kind of psycho). The market moves in the same way. Stocks go up, but they don't necessary have the same enthusiasm. A stock makes new highs, maybe new all-time highs, but guess what? There isn't the same enthusiasm about the move. Maybe volume spikes up real high but then dissipates at the peak. Or maybe it just doesn't move as fast as it makes that new high. Or maybe it makes one giant leap upward on one daily bar - but every other day around it is pretty regular. Or maybe it makes that new high the day before a holiday starts - so we know that not very many traders were behind the move. Or maybe for a currency pair it makes that high during a session that isn't ordinarily an active session - making you wonder: where the hell did this move come from? You get the picture? There are times when a move upward (or downward) just doesn't make sense. The situation seems out of balance, and you know something is wrong. Time of day, lack of volume, too much volume for a certain day or time of day, or a huge amount of volume in a zone where there has otherwise been almost no volatility. Something is out of place. That's what I look for in stocks. I call it intuitive divergence. It's when you know something shouldn't be moving like this given the setting, the circumstances. I do this all the time, and we'll talk about it more later. I can tell you want to see an example. Ok, let me describe a situation to you.

OSCILLATOR DIVERGENCE

Classic divergence is always oscillator divergence. If you hear the word “divergence” in a trading room, you know what they are talking about. Always. And usually they’re talking about

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divergence using just one kind of indicator. I’m going to open up a new world of divergence to you, and we’re going to consider some things that you won’t find anywhere else. The core divergence concept is simple:

Price goes one way, an oscillator goes the other way. That's it. Simple.

The problem is that classic divergence is rife with false signals. That's why it only gets one page in most books - if it gets one page at all. One really easy way to lose a lot of money is to trade classic oscillator divergence exactly the way those one-page descriptions tell you to. I've spent my life looking at divergence from every angle. We're going to take a look at classic divergence, and then we're going to super-charge it. First, an example.

Figure 5.13: Classic, bearish, oscillator divergence using the Momentum Indicator (10).

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In Figure 5.13, you can see that Amgen ($AMGN) is rising - that's easy to see. maybe they’ve announced a new medication to help men remember to take our the trash and to put down the toilet seat. Who knows. Anyway, I drew a trendline over the top of the candles to show that. But at the same time, over the same exact stretch of candles, the oscillator - in this case, the Momentum Indicator - is falling. That's classic bearish divergence.

Figure 5.14: Classic, bullish, oscillator divergence using the Stochastic (9,3,3).

In Figure 5.14, Amgen ($AMGN) is falling - making fresh lows. But the oscillator, in this case the Stochastic, is making higher lows. The market appears to be losing enthusiasm for the bearish trend. This is an example of classic bullish divergence. It is supposedly an early warning sign that price will begin to move upward soon. Several assumptions are made when trading classic divergence like this. First, that the trend is ready to end and it's safe to take a trade against it. Second, that the oscillator knows more about the price than the actual candles know about the price - and that's a huge assumption to

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make. Third, we're assuming that this trade will eventually return enough profit to justify worrying about all of this in the first place. I don't want to say that these assumptions are ridiculous. But it's a tall order. Here's why:

• Classic oscillator divergence (COD) trades against the trend (primarily), and that's usually a very dangerous thing to do.

• COD uses indicators with their standard settings, so we're looking at the same thing that thousands, even millions, of other traders are looking at.

• COD generally assumes that we are going to trade from the same time frame chart where we found the divergence, which, as we'll see in a moment, is a terrible way to take one of these trades.

Let's go back to Figure 5.13. The price is rising and the oscillator is falling. Well, great - where are we going to enter the trade? I have never seen one book or description of an entry for a divergence trade that made any sense to me. It seems that everyone is so excited about the divergence that they don't think about what to do next. And when you start thinking about what to do next - that's when you run into problems. What I want to do next is help you to systematize your trading of oscillator divergence, help you to identify it using a variety of indicators, show you as many examples of trades as I can, and explain how you enter a divergence trade from the short-term charts. While you look through these examples, decide which long-term chart formation you prefer (which indicators you want to use to find divergence), and then get ready to live with it for a long time. This is going to be your bread-and-butter trade, that you are going to look for over and over again for the rest of your trading life. And it's going to make you a lot of money. Quickly, here are some terms you'll want to know as you read through the rest of the book:

Indicator: A program that runs on your chart, plotting lines that go up and down. We'll usually put the indicator on the lower section of your charts, underneath the price. Some indicators, however, go on the chart right next to the candles.

Trendline:

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A sloping line drawn on the chart over or under price or an indicator. We're going to use a lot of these!

Candles/Bars/Price: I'll use these three terms interchangeably. They refer to the price on the charts. Some people like candlestick charts, made famous by my friend Steve Nison. Some people prefer regular old bars - I don't use these but I still refer to "price bars" on occasion because it's just a term to mix things up and not say the same thing all the time. And last of all, sometimes I'll just refer to "price" - and when I do that, I am talking about the candles on a chart.

OSCILLATOR DIVERGENCE, PART 1: THE MACD

The MACD is probably the all-time most famous indicator used to plot divergence. Strictly speaking, it's not an oscillator. Most people would call the MACD an "indicator of momentum." But for the purposes of this book we're going to consider momentum and oscillation the same thing. For the critics out there, I know that oscillation and momentum are not the same thing; but this book is about making money, not about making fine distinctions in terminology. The MACD (shown in Figure 5.16) contains three main elements: a Histogram - the bars/columns that rise up and fall down along a center “zero” line, and then two lines that move around above and below and in between the Histogram. These lines are called the MACD Line and the Signal Line. The MACD Line is the faster of the two. Here’s a diagram to make sure you know the elements of the MACD:

Figure 5.15: The elements of the MACD.

The point of this book is not to explain the inner workings of each indicator or the mathematical formula behind each one. However, it’s worth noting just a few things:

• The Histogram is a nice measurement of momentum in the market. Tall Histogram bars are indicative of a lot of momentum, or strength, in the market. These tall bars can stretch above

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the zero line (the MACD’s mid-section between up and down Histogram bars), or below the zero line. Histogram bars above the zero line denote a bullish market. Histogram bars below the zero line suggest the market is in a bearish phase.

• The two MACD Lines will move far above the Histogram in upward trending markets. The two MACD Lines will fall far below the Histogram bars in downward trending markets.

• Sometimes, when the market is just ranging, and going sideways, the MACD Lines weave in between the Histogram bars.

Now that you know the MACD, let’s look at some examples of divergence - and how to trade it. Standard MACD divergence looks like this:

Figure 5.15: A look at MACD bearish divergence using the standard MACD settings.

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Usually, the first question a trader asks me is: how do I know when to start drawing divergence? How do I know that “it’s time?” That’s a perfect question. If you look at Figure 5.15, you’ll quickly realize that the S&P was making higher highs on price and lower highs on the MACD lines for quite some time. How do you know when to start drawing the lines? How do you know when it’s okay to start taking trades? This is a problem - and it’s inherent in all traditional divergence guides. If you don’t know when to start drawing the lines, and you don’t know when to finish drawing them (how do you know when the divergence setup is “complete”?) then you aren’t going to know when you can start trading. That’s question number one. But that’s not the only problem with traditional divergence. Another problem is that you can find divergence practically everywhere on a chart, using the standard MACD settings. You can find divergence all over the place - you’ll easily find several examples on almost any chart that you open, on any time frame. The last problem with traditional divergence guides is that there is no agreed-upon standard for using the Histogram or the MACD Lines as the measure of whether a financial instrument is divergence. There are times when the Histogram bars show divergence - but if you use the MACD Lines as the measuring tool, then you won’t see divergence. In fact, this is true on Figure 5.15 - the MACD Lines are making lower highs at the same time that the Histogram bars are barely showing any change. It comes down to this: with too many ways to identify divergence, it becomes practically meaningless. And with the potential to see divergence everywhere, it loses its value as a high-probability trade setup. Especially considering the fact that divergence is trading against the most recent trend on a chart, we need to be careful. We don’t want to take tons of bad counter-trend trades in rapid succession because we thought we saw a good setup. Instead, we want to be clear about the definition of divergence, and we want to be absolutely confident in the trades that we take. To solve these problems, we need to do three things:

• We need to add a “filter” so that we know when the divergence setup is valid, and complete, and ready to trade

• We need to adjust the MACD indicator so that it doesn’t fire off a divergence warning so often (we only want to see the very highest quality setups)

• We need to be very, very patient about the way we enter the trade, so we avoid getting in too early against the trend

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To accomplish all three requirements, we’re going to add the Relative Strength Index (RSI, set to 21) to our charts, and we’re going change the settings on the MACD, and then we’re going to build a checklist to make sure that we only enter the highest-probability trades. How to set up your charts for MACD Divergence

MACD Settings: 30, 65, 23

Relative Strength Index: 21

We’re going to slow down the MACD - and as a matter of fact, we’re also going to slow down the RSI. Usually the RSI is set to 9, or 13 (and sometimes 14) on a chart. But we’re moving the setting to 21. That’s going to help us a lot. You’ll see me do this to indicators all the time - slow them down, change the settings, to show something different than the mass of trader-lemmings (blind followers to a trend) is looking at. Here’s an example of divergence we can believe in - and trade.

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Figure 5.17 The EUR/USD currency pair with divergence using the slower MACD and RSI.

In the chart above, we’ve eliminated the MACD lines completely. It just makes it easier to see the histogram, which is the only thing we want to see, anyway. We don’t need those two dumb lines - they just make the whole business more confusing (sorry, if you are an aficionado of lots of lines and things flying all over your charts). First, take a look at price. It’s rising. That’s obvious - you can see the arrow rising on top of the candles. Second, take a look at the MACD Histogram. It’s falling. I love a falling histogram. You will learn to love it too. I don’t know why I just said that. Maybe it’s just that I’m getting excited about this divergence even though it happened in the past. I just get excited looking at it. It’s important to have two “humps” on the MACD Histogram. Two humps. Two mountains rising up above the zero line. That’s important. For bearish divergence, which is an early warning sign that price is set to fall, we need to “humps” on the Histogram, with the first one higher than the second one. Third, look at the RSI, shown at the bottom of the chart. Do you see that there are two peaks on the RSI that go above the 70 (overbought) mark? We need that. That’s our filter. That’s

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an important filter, too, because it tells us that this currency pair has gone wild, so wild that we’ve pushed a slower indicator (remember we slowed down the RSI) into overbought territory. And it did it twice during the formation of this trade. We only need the RSI (set to 21) to go overbought, or above 70, once during the formation of the divergence. But in this case it did it twice. That’s extra special. I especially like that. When I saw this setup, I wanted to sell the EUR/USD. I knew what I wanted to do. As a side note, during this same time, there was a program on financial television that advocated buying the EUR/USD - at this exact time when the divergence was forming. For a few moments I considered that I might be wrong about the setup. Then I ignored that thought and got ready to sell the crap out of the EUR/USD. That’s the setup. The rising price. The falling MACD Histogram. The overbought RSI. These are the elements of a believable, tradable divergence. We’ve not arrived at the trade entry just yet, but we’ll get there.

Trade entries for MACD Divergence

Method #1: RSI moves beyond the 50 mark

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Figure 5.18 Method #1 for selling the EUR/USD on this bearish divergence.

Here’s how we sell - and it’s the first of a couple of different ways to do it. You’ll see a circle around the RSI in Figure 5.18. This is where the RSI falls below the 50 mark. What does this tell us? It says, “Look everyone! This financial instrument, that was flying high, is now dropping! Sell it!” And that’s what we do - when you see the line cross the 50 mark, you sell it. You don’t have to wait for a candle to close (if you want to, you can, but it’s unnecessary). Then you set a stop and a profit target, and you walk away. We’ll talk more about where to put those stops and profit targets later. But for now, concentrate on getting the entry right.

Method #2: Entries on a shorter time frame chart

If you like precise entries, then this is the method for you. It’s my preference as well. It requires a greater commitment of time and effort but it’s worth it.

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The very moment that you notice that the divergence exists on the longer time frame chart - the 1 hour, in this case - you drop to a time frame chart at least 4 times smaller than the one you’re on. If you found divergence on the monthly chart, you’ll drop to the weekly chart. If you found divergence on the weekly chart, you’ll drop to the daily chart. If you found divergence on the daily chart, you’ll drop to the 4 hour chart. If you found the divergence on the 1 hour chart, you’ll drop down to the 15 minute chart. If you found divergence on the 15 minute chart, you’ll drop to the 1 or 5 minute chart. If you found divergence on the 5 minute chart, you’ll drop to the 1 minute chart. If you found divergence on the 1 minute chart, may God have mercy on your soul.

Figure 5.19 An earlier entry on the EUR/USD using the 15-minute chart.

In Figure 5.19. you’ll see a place - on a 15 minute chart - where we find a much more precise entry. And I’d argue that it is a better entry. One the 1-hour chart that we showed previously, the entry for the trade came around 1.3600. The entry on this 15 minute chart comes at 1.3660 - that’s 60 pips higher. That is a way, way, way better entry. We still can get our profit target from

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the longer time frame chart, so we now have an earlier entry, a tighter stop-loss, and a more distant profit target. They say “cut your losses and let your profits run,” and one way to do that is to set up a trade that allows you do that. From the very start, we’ve given ourselves a bigger profit target and a smaller stop-loss. I like that. One of the reasons so many traders fail is that they take statements like “cut your losses and let your profits run,” and they blindly follow it. On the 1-hour chart, for example, a trader could get in at 1.3600 on the sell trade - and then say, “I am definitely going to let my profits run.” But because he got in late on the trade, how far can he really let it run? Do you see that? If you don’t set the trade up correctly in the first place, then your blind allegiance to a trading mantra isn’t going to give you a better profit target. Nothing can rescue poor trade planning.

ONE OF THE REASONS SO MANY TRADERS FAIL IS THAT THEY TAKE STATEMENTS LIKE “CUT YOUR LOSSES AND LET YOUR PROFITS RUN,” AND THEY BLINDLY FOLLOW IT. NOTHING - NOT EVEN A FAMOUS TRADING MANTRA - WILL EVER RESCUE YOU IF YOU HAVE POOR TRADE PLANNING SKILLS IN THE FIRST PLACE.

Here’s another example of an early, better entry on divergence. Let’s look at an index this time.

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Figure 5.20: Some great bearish divergence on the $SPY 1-hour chart.

In the $SPY chart above, we see the ETF making higher highs on price, but at the same time it’s making lower highs on the MACD (remember we’re just showing the MACD Histogram to make this even easier to see. Successful trading can be more about what you decide to eliminate from the charts, even more than it is about what you add to the charts). What makes this a valid divergence setup is the fact that the RSI, set to 21, made one peak above the 70 (overbought) mark during the divergence setup. In this case, that move above 70 happens right at the very start of the setup, and that’s just fine. We don’t care when it happens as long as it’s between the two peaks made by price and the MACD Histogram. To enter the trade, we’re going to move to a lower time frame chart - and here it is, the 15-minute $SPY chart:

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Figure 5.21: An early sell trade on the $SPY, thanks to the 15-minute chart.

In Figure 5.20, we get our early entry. We sell when the RSI (set to 21 again) falls below the 50 line. That’s an indication that traders no longer want to buy this high-flying index. Maybe they want to take some profit. Maybe they heard something negative about the index on television. Maybe they have upset stomachs. Maybe the moon cycles are off, or their latest phone call with the psychic friends network didn’t go so well. Who knows! We don’t care as long as we get that move below the 50 mark. And then we sell at about $152 even. At this time, you’re probably wondering about profit targets and stop-losses. And that’s a perfectly natural thing to wonder about. Let me give you a bunch of short answers, and then later on in the book I am going to teach you some really important principles of support and resistance (and that will be the longer answer).

Stop-losses and profit targets for MACD Divergence

3 Ideas for Stop-Losses

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1. Place a stop loss above the recent high on the chart - at $153 in this example. For a buy trade, you would place a stop-loss below a recent low. We are going to look at a lot of examples of this later on in the book.

2. Stop out of the trade if the RSI moves above the 60 mark. This can be a highly effective method. If this were a buy trade (and not a sell trade), we could stop out of the RSI moved below the 40 mark.

3. Stop out of the trade when your account has lost 1% of its value, regardless of where price has moved on the chart. This technique is for you if you like to take big trades but you want to cut them off fast if they go against you. Be warned, however, that if you choose this method you are going to stop out of a lot of trades because you might reach a 1% loss in your account before the trade has a chance to move in your favor.

7 Ideas for Profit Targets

1. Place a profit target at an area of support or resistance on the chart, from 100-200 candles ago. This means you go back on the chart, at least 100 candles, and you look at the last place where price stalled or had trouble breaking through. We are going to look at tons of examples of this later in the book.

2. Take profit on the trade when the RSI reaches the 70 mark (for buy trades) and when it reaches the 30 mark (for sell trades).

3. Take profit on the trade when you see divergence in the opposite direction on an even shorter time frame chart. Using Figure 5.20 as an example, you would go down to a 5-minute chart and look for bullish divergence - and when you saw it, you would exit the trade. This can keep you in winning trades for a very long time. But it takes time and effort and most traders are too lazy to do this.

4. Set a profit target at a level two times greater than your stop-loss. In the example from Figure 5.20, if you had a $1 stop loss (set at $153), you would set a $2 profit target at $150. This is an ineffective and lazy way to trade, because it’s completely arbitrary. Most traders do this and most traders never maximize their profit on a trade.

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5. Take profit on the trade after waiting a defined period of time. To do this, you look back over the last 15-30 profitable divergence trades that you’ve had. If you haven’t taken that many divergence trades, look back on your charts to the last 15-30 trades. Look at the divergence trades that were profitable. On average, how long did those trades stay in profit? Some might have stayed in profit for 40 candles. Or 100. Or 200. Take an average of all of them - and then stay in the trade for that average number of candles. This can be an amazingly effective way to stay in your winning trades. Think about it: trends last for a certain amount of time, and each financial instrument has an average length of time for a trend. Most traders jump out of winning trades way, way, way too early. It is far easier to stay in a winning trade if you have done just a little bit of research to see how long winning trades usually last. If you really want to get sophisticated (and smart) about the way you do this, look at the last 50 profitably divergence trades - and then answer this one question: What length-of-time-profit-target (say, 25 candles, or 30, or 40) makes 75% of the 50 most recent trades profitable? That’s a big question, and it might take you a while to understand it. We’re just trying to see if there is a length of time that is “magic,” or seems to work on most of the winning trades.

6. Use Fibonacci Retracements, Gann Squares, Elliott Waves, or some other advanced technique that you love to time the exit. I don’t use these tools often - but you might love one of them, and if you love it, use it. Well, as long as it makes you money.

7. Set a profit target at a tiny, tiny, tiny number. Set the profit target so small that you are almost guaranteed a win - and then exit half your position at that level. This can boost your confidence. Why is that important? It teaches you to take profit (another problem for most traders, who often watch their winning trades turn into losers).

More trade entries for MACD Divergence

Method #2, continued: The shorter-time frame chart entry

We didn’t get to look at a buy trade in the last set of examples, so let’s do that now.

I like to trade the currencies because I can trade from the very short term charts and have lots of quick trades every morning. It’s my routine. One of my favorite currency pairs is the GBP/AUD because, well, I guess it’s just what I am in the process of loving right now. Here’s some bullish divergence on the pair from the 5 minute chart, and an entry on the buy trade from the 1 minute chart.

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Figure 5.22: Bullish divergence on the 5-minute chart.

The chart above shows the currency pair making lower lows on price. It’s a downward trend! And at the same time, the MACD Histogram is making higher lows. That’s bullish divergence. We expect a bounce upward - even if it is only a small one - from this currency pair. We want to buy it. I do this almost every morning during the early New York session of the currency market (at approximately 7:30 Eastern US Time). I jump out of bed in the morning, race into the shower, scrub my body quickly with soap, and the whole darn time I am thinking: “I can’t wait to find some short-term divergence! It’s going to be a great day!” I really do that. I am a full-on currency nerd. Oh, yes, right, we were going to look at a chart and get a trade entry. We’ll do that in a moment. Sorry for the delay. Please enjoy the music while your party is reached (now hum some music or just sing a little song in your head). It’s important to remember that before we drop down to the short term chart, that we see the two “humps” on the MACD Histogram. These are “inverse humps,” of course, which are humps that form underneath the MACD’s zero line. You could also call these valleys, but I prefer the word “hump,” for reasons that I am not going to admit to right now. We need two humps. Two distinct humps. Remember that.

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Also, we need to make sure the RSI (set to 21) falls at least once below the 30 (oversold)m mark. This can happen anywhere between the two humps. Sometimes it happens at the first hump and sometimes this happens on the second hump. Either is fine. Now we can move onward to the 1-minute chart - a very short-term chart - and make a trade!

Figure 5.23: The entry, and one way to take profit, from the 1-minute chart.

The 1-minute chart above gives us everything we need: an entry, and a profit target. It could also give us a stop-loss, and we’ll talk about that in a moment. At position #1 on the chart, we see the low that was made from the 5 minute chart, where the second hump was clearly shown on the chart, and we knew we could drop down to the 1-minute chart. The identification of humps is actually quite easy and fun, and once you get the hang of it, you will be looking for humps everywhere. Really. On my way to my house in Arizona, I started taking pictures of humps. I’m telling you, you’re going to start seeing these things everywhere.

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Figure 5.24: Humps are everywhere. Mountains are the humps of the earth’s divergence. Really.

Now, let’s continue. At position #2 on the chart, we have a buy trade entry signal. Why? Because the RSI moves above the 50 mark. That’s our short-term entry. The easy-peezy-lemon-breezy profit target on this chart comes at position #3. That’s when the RSI goes above 70 - to overbought. You might even want to wait until the RSI goes above 70 two times, just to give the trade a little bit of extra room to give you a little bit of extra profit. I love extra profit. I love profit almost as much as I love humps. Almost. For the record, from the time of entry at #1 to the exit at position #3, this trade makes about 40 pips (trading 1 standard lot in forex, that’s $400) in 90 minutes. This is what I do in the morning. I close the door to my office, I turn off all the lights, and me and the humps get down to business. What I am saying here is that there is no better profession in the world than trading divergence for a living. There is no way you are ever going to convince me that there is anything better. You have no customers. You have no customer service. You do not need a 1-800 number. You do not need a warehouse. You do not need an office. You do not need employees. You just need one small computer and a routine. Do you think you might love divergence as much as I do? Then keep reading, because it gets better.

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VOLUME DIVERGENCE ON THE INDEXES

It's near Thanksgiving time in America. People are shopping for turkeys and giblets and all the fixings. Hopefully some ice cream too. I wake up and I notice something odd: in a sideways market, following a pretty nice downward trend, and right near the holiday, there's a huge spike on volume for the Russell 2000. I love the Russell 2000. If the Russell 2000 was my ex wife I'd still be - well, let's not get into that. Let's just say I love it. I trade this sucker every week in one way or the other. Back to our boy the Russell, and the sideways market, and all of the sudden there is a spike in volume. The spike is way bigger than usual, at least when you look at the last, say, 50 bars. So picture in your mind a Russell 2000 chart, sideways market, let's say a 4-hour chart, big volume, near a holiday. Something doesn't fit. Something is odd here.

Figure 5.1

Frank's notes: The IWB is an ETF that mimics the movements of the Russell 2000 index. It's a popular way to trade the broad market, and it's favored by short-term and long-term traders

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alike. If you're an options guy (or gal), keep reading because there's something neat in here for you.

You know what is going to happen next? There is no way that the market can sustain that kind of volume around a holiday, unless there has been some kind of terrorist event, some kind of massive market shock, like a bank failure or flash crash. No way. This event, this spike in volume at a time when it would not be ordinarily expected - this is an early warning sign that a turn is coming. It's not coming immediately. This is intuitive divergence. A wake up call. It's not reason enough to trade yet. You don't want to jump in the market now. You want it to settle down. Why? Because the volume spike is over, but the market can drift lower. The Russell can now move even lower than it has already in the preceding downward trend. That's what we want. We want real divergence now, we want to see the Russell fall from here, continue the downtrend, we want to see it fall another three, four, or five points if we can get it. And guess what else we want to see? We want to see volume dissipate during this move. We want to see volume go away. Whatever panic caused the move - hell, we don't care. Maybe everyone finds out that Apple computer is going to announce the manufacture of a toilet - the iPot - or something like that. We don't care. We just care that usually we don't see this kind of volume during this time of the year (or day, if you are a short-term trader). And that's exactly what happened, Frankie: the Russell dropped lower, and volume drained away as the traders scattered away. The big volume scared off the little guys, who wanted to be home baking pies and stuffing ducks into pigs into turkeys or whatever for the holiday.

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Figure 5.2

Frank's notes: Look at the way the IWB falls in price but volume drops back off. That's what we're looking for. Of course this could go on forever, right? But it doesn't. Hear what Luigi has to say.

So you're thinking: this sucker is going to tank, it's going to fall another 20 points, the market is in a free-fall, and the world is over, let's all put our money into cash. But no, no, no, no - the market told you what it wants to do. It wants to go up, and how do you know? The enthusiasm dried up! No one wanted to follow up that huge spike in volume - everyone ran away. And while they were away, sure, price could fall a bit more (it always does, and that's why we don't just take a trade immediately). But we know what we want to do. We know the trade we want to take. We want to buy this. If I were an options trader, I'd start buying calls - just outright calls, no funny business and no spreads and calendars and butterflies and iron condors. None of that gibberish. Just a flat out bet that if I buy a month's worth of time - just a month, mind you, so this is not an expensive option - I am going to see price rise by three to five percent. That's a great options trade. A 30-day expiration, a strike price five percent away from the current price, and I'm done.

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I don't trade options, so I wait a bit longer for a precise entry. What I want to see is a jump upward - I want to see price bottom out here, and show me any kind of sign that wow, pop! boom! bam! everyone noticed the bargain! Here's what that looked like on my trade:

Figure 5.3

Frank's notes: Look at the big gap up. Someone wanted some IWB at a discount price.

Boom! We get that pop upward and we take the trade. After the first candle jumps upward - on that gap - we immediately take the trade. We place a stop-loss order below the lowest price IWB reached in this latest divergence move - so, below 74.00, and we're getting in at 76.50. So we have a two dollar and fifty cent stop on the trade. And we're looking for this to move at least 5%. On a $75 ETF, that's a move of, say, about $3.75. Our profit target is larger than our stop, which is good, and we have everything we need to take the trade. But wait: you might be wondering about the gap. The gap! Isn't the market supposed to fill that gap? Here's what I say: To hell with filling the gaps on volume divergence trades. Screw 'em, I say. Those gaps are signs that the market doesn't want to be down there. Traders are running away from the 74.00

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level for whatever reason. Maybe a bank is defending that level. Maybe there's a huge option bet near that level and if that level is hit then a bank is going to owe a customer a hell of a lot of money. Or maybe - and this is the simplest explanation, which makes it the one I like the best - maybe the market just likes a great discount. Traders love a discount. Traders love to buy stocks and buy indexes, and they love a bargain price. No wonder everyone backed off after the big volume spike! They knew they wanted to get long, not short. So we buy it. And guess what? It moves up real nicely.

Figure 5.4

Frank's notes: Well, there you have it - a move of at least seven bucks on a seventy-five dollar ETF. That's a ten percent gain, over the course of a month. That's a great return. If you're an options trader, that's an even bigger gain for you.

But that's just one example. Let’s look at some more, because there are ways to time this even better, get better entries, and really hit home runs here. You want to make big money, kid? You want to turn ten thousand dollars into a million? Into two million? It’s formulaic. It’s a repeatable pattern. You play this over and over and over again.

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VOLUME DIVERGENCE, PART 2

Look at the chart. Out of the blue, there’s a POP! A blast of volume that comes out of nowhere. What’s the big deal here? Where’s the giant movement? There isn’t any! There is no accompanying burst of movement in the market to go along with this pop in volume. Something is amiss. The market wants to tell you something. Again, it’s our early warning sign.

Figure 5.5

Frank’s Notes: The IWB gets a burst of volume in late August, when no one is usually around to do any trading. What would cause such an oddball increase in shares traded? Who knows, says Luigi, and more important: we don’t care. We just know that a trade is coming.

The divergence here is what I would call volume divergence, but it’s advanced. We don’t know if this is going to cause a reversal (a counter-trend move) or if it is going to cause a continuation. Either way, we want to make money. The divergence - the strange event that seems out of place - is that the volume doesn’t match the price, or the time. What does that mean?

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It means that once again, this financial instrument is bursting with shares traded but it’s not going anywhere. I mean, what the hell is up with that? Why would that happen? Hell, we don’t know, and we don’t give a damn. We just know that it’s divergent because we should see some kind of pop in the price if we’re going to see that many shares trading hands. And in late August, when all the Wall Street guys have taken their hot model wives to the Hamptons to eat bon bons and sit on the beach while the nanny watches the kids? We know something is wrong here. We know this means that something is coming. Most traders will tell you to use volume right away. To put a trade on right now - the spike in volume means something, it always means something right away. That’s the impatient, dumb way of trading it. That’s idiotic. Let’s allow the market to show us what to do. Let’s draw a battleground and mark the lines of defense, and let’s wait to see the market pop. We know that something happened underneath the surface to cause a sudden increase in volume. We also know that a big move in one direction will follow. But we don’t know which direction. So we draw the boundaries. Here’s what that looks like, in Figure 5.6.

Figure 5.6

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Frank’s Notes: This is probably the most important thing that Luigi taught me - that volume divergence isn’t about guessing which way the price is going to move. It’s not about saying “Price is down but volume is up, so that means X.” That’s traditional, old-school, out of date, stale, and useless analysis. The market doesn’t work like that anymore. Read what Luigi has to say.

Frankie, I’ll tell you - what I’m about to say goes against a lot of the TV-talk about trading, a lot of the books, a lot of stuff you’ll see on the shelves of amateur traders. And here it is: We really have no idea which way this is going to move now. We don’t know. So we draw those boundaries. We put a trendline above price, and below price. You can see the lines I’ve drawn aren’t even touching the candles. That’s ok. We’re looking for a burst of activity - a gap - beyond these boundaries. The spike in volume was the rumbling we could hear in the distance. A pop in price above or below those boundaries tells us what kind of beast is coming at us - a bull or a bear. Here’s what the pop looks like:

Figure 5.7

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Frank’s Notes: IWB pops up above the top trendline. Guess which direction this is going?

The big volume spike told us a move was coming. The gap up in price tells us which direction it’s going. This is a chance to make serious money. At the close of the candle that gaps upward, we can buy. Do we wait for a better price? No. Do we wait for the gap to fill? No. Do we care if there is news coming out tomorrow? No. Do we turn on the television to see what lies Wall Street has for us? No. No, no, no, no. We are our own decision-makers, we are the captains of our own ships, and the makers of our own destinies. It takes confidence to pull the trigger on this trade, but it’s a high probability set up. It’s going to go up. It just is. And hell, if it doesn’t - if it falls back below the bullish candle that gaps upward, we’ll get out. Fine. We buy IWB at $79.40. Target? At least 5%.

Figure 5.8

Frank’s Notes: The chart speaks for itself.

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Now is a good time to simplify the concept.

VOLUME DIVERGENCE EXISTS WHEN A SPIKE IN VOLUME OCCURS AFTER A RELATIVELY QUIET PERIOD IN THE MARKET, AND IS NOT ACCOMPANIED BY A SPIKE IN PRICE IN ANY DIRECTION. IT FORESHADOWS A SUBSTANTIAL MOVE.

When you trade volume divergence from a 4-hour chart, look for profit targets of 3-10%. Be ready to stay in the trade for a week or maybe longer. When you trade volume divergence from a 1-hour chart, look for profit targets of 2-5% (preferably 2%). Your trades will be open for as little as a day, and as long as a week.

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VOLUME DIVERGENCE, EXAMPLES

$GLD, 1-Hour Chart

Figure 5.9: Gold breaks down after a volume spike.

At the bottom of the chart you see the burst in volume. But price doesn’t do anything. It makes the world-famous Chinese Finger Trap Formation, where price spikes up and down and creates a fat body in the middle. This indecision is what we want to see. If we saw a massive bullish or bearish candle to accompany the jump in volume, we would ignore this formation completely. The indecision tells us that something is going to happen. We draw a boundary above and below price (in Figure 5.9 you only see the boundary below price) and if it gaps beyond either boundary, we’ll trade $GLD in the direction of the break. In this case, $GLD breaks downward, below our bottom boundary - and the rush is on to sell it. I don’t love that the candle that gaps downward is bullish - that shows that there were a fair number of buyers after the drop. But I’m not risking my life savings on this trade.

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Sell $GLD $164.50. Stop $166 (where price was before the drop). Target: $161 (about a 2% gain). That’s the lowest acceptable profit target. It should only take a week or two at most to reach this target. It might go 2%, it might go 10%. We don’t know, but we’re a part of the trade. If you want to go for more than the easy 2%, then simply move your stop loss to protect some of your gains once price hits $162, or $161. Lock in a little bit of profit and then let it ride. Walk away from the computer, don’t look at the screen - let it do its work over the next few days. You might be very happy with what you see.

$DIA, 1-Hour Chart

Figure 5.10: Big volume and a big candle. This isn’t anything special.

In Figure 5.10, you’ll see an example of big volume - an outsized spike in the number of shares trading hands. You don’t need to measure this. You can see it with your eyes. If you can’t notice a massive increase in volume with the naked eye, then walk away, it’s not what we’re looking for.

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Above the boom-boom of volume, you see a big bullish candle. It closes near the highs. Think about that for a moment. It closes near the highs. The enthusiasm was still strong at the end of the formation of this candle. That’s not indecision! That’s clear market sentiment. It’s not volume divergence. Go ahead and buy the next candle for 1%-2%. It’s a good trade. Why don’t we call this volume divergence? Because price and volume are congruent, in agreement. Lots of shares trade hands and there is agreement about which direction we’re going. That’s just power behind a big move upward. It’s standard volume-based trading and it can work nicely. We just don’t care about it. Like I said, go ahead and take these trades for a respectable, quick gain. Just don’t expect the same great win percentage from these trades.

$DIA, 1-Hour Chart, Example #2

Figure 5.11: Focus your attention on the candle circled at left. That’s indecision. We love that when it is accompanied by a boost in volume.

Remember, what we’re looking for is indecision. We want the market to be undecided about what it wants to do while at the same time desperately trying to do something. The battle is on.

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Something is going on underneath the surface. The rumblings of bulls, charging the bears, making an attempt to breach the walls, crack through the defenses. Once we see the boost in volume accompanied by that indecisive candle, we know we want to start thinking about a trade. Immediately we draw a boundary over the candles that fall. We want to see a breach of that boundary. We want to see the bulls charge through it, and that’s our signal that the indecisiveness has given way to direction, decision, movement. There are two places to buy on this chart. The first comes when a bullish candle (accompanied by big volume, I might add) charges upward through the boundary. That’s a great place to buy. It’s a fantastic, early entry on the trade. The second entry comes when price gaps upward. This is the high-probability entry - it’s the confirmation that the indecision is over for sure. Buy $DIA at $125.50 and then again at $127.00. Stop-loss $124. Profit target at least $130. We want to see a movement of at least 2% on this 1-hour chart.

$DLTR, 1-Hour Chart

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Figure 5.12: A big push in volume, with a small little series of candles. Indecision.

In this example, Dollar Tree ($DLTR) forms a little, regular, vanilla, plain-Jane candle that doesn’t mean anything to anyone, but at the same time experiences a big bump in volume. That’s the divergence. That’s the disconnect, the screwy-weird thing that whispers to us there is a big move coming, and you need to be ready for this. To get ready for it, we draw a line over the candles and we wait for price action to show us the way. And this time, we get a bullish engulfing candle that swallows its predecessor - a clear sign that the market wants to move upward, and in a substantial way. We buy. Buy $DLTR at $38.20. Stop-loss $37.70. Target: $39.50-$40 at the least. It might not seem like a big deal to make 2%-5% on a stock like this, but keep in mind that we reach that profit target in a matter of hours - not days or weeks. When you start adding up 2-% per trade, at a time, you’re talking about a really, really good year of trading. LAST THOUGHTS ABOUT VOLUME DIVERGENCE

It’s easy to set up a scan for volume divergence. Just have your trading platform look for spikes in volume - a jump in volume of 50% or more over the preview 20-50 periods on your chart. You could set standard Bollinger Bands on volume, for instance, with the standard settings of 20, 2. Then look for volume to jump to the upper bands. After you identify the burst in volume, check the price at exactly the same time - does this price bar (or candle) show a significant movement, such as:

A gap,A bullish candle 100% larger than the preceeding 3-10 candlesA bearish candle 100% larger than the preceedding 3-10 candles

If so, then you can ignore the move (or trade in the direction of that movement - but beware of the lower win percentage on these trades). If none of those conditions are apparent, and if price has stayed within the range of the last 5-10 candles - then you know you have volume divergence, and you should start setting up the trade.

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6  

The  Path  To  A  Million  Dollars

Luigi wanted to know how much money I wanted to make. I told him “a million dollars,” and he rolled his eyes as if that were not enough, or as if he knew I hadn’t really thought about the question long enough. Which was true. I came to find out later that knowing what I wanted was important, and being really specific about it, too. Here’s what he told me:

THE PATH

A million dollars doesn't mean anything to a Wall Street hedge fund. It doesn't mean anything to the guys down the road at Montgomery Securities. Thom Weisel, a friend of mine, he started that firm - Montgomery - and took Netscape public. He made a fortune, then he went off and started another investment bank, and then another, and couldn't stop himself. For that guy, a million dollars is a drop in the bucket. He's got that kind of money in spare change sitting between the cushions of his sofa. If that much money fell out of his back pocket he wouldn't even look for it. But a million dollars for you? That's money. That's security. You could travel on that. You could buy some time. I don't know what eats at you, but I know that you have a fire in your gut that says it's possible. And no matter what anyone else says, you see the men making that money on Wall Street, and you see the market moving, and you know that you can catch a move like that. And you don't need ten million dollars. You don't even care about that much money. You're in it to scoop up the remains that no one else wants, and you'll accept the discarded market movements of a few small stocks or a forgotten currency, and why? Why would you do that? Because you have to. You are compelled to trade, and you want to trade like you want nothing else. Once you catch this bug it's like a virus and once you catch it, you've got it for the rest of your life. So this is your life now. What you learn when you start out is that you are hunting for the big game. You want to nab the big score, you want to hit the home run. You read about Thom Weisel or Bruce Ackermam or Warren Buffet or another famous investor and wow, that's what you want. The one big trade.

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The one big trade is what brings you home. Let's say you build ten thousand dollars into twenty thousand, and it takes you two years to do it. Most traders would jump off a bridge. That's such a pitiful performance that they'd rather pick up garbage for a living. At least they feel like they're getting someplace. So they take that twenty thousand dollars and they say, well, now, I learned how to trade. I doubled my money in two years. Who else can do this? Hardly anyone! I've figured it out. This means that it's time for me to go on the hunt for the big game. Forget hunting for little bunny rabbits or pheasants. I want to shoot an elephant. At this point a trader - who is otherwise a massively successful investor, having beaten Wall Street and 99% of market participants in any given year - changes his game. He stops looking for the every day trades that got him here. Instead, he goes on the hunt for bigger profit targets, but needs wider stop losses to do it. You can see where this is going. It's the saddest story in the world to me: Trader doubles his money and then retires broke, having lost everything trying to make the big score. Maybe we can talk about this another time but for now, I want to tell you what the other path looks like. Why dive into a description of what doesn't work, polluting your brain with crazy ideas about The Big Trade? There is no worse story told to a trader than one about the time I made a trillion dollars on this one big bet, and the world was against me, and the odds were against me, and I fought through the position, and blah, blah, blah - those stories make us all think that we can do it too. But we can't. Wall Street is littered with the corpses of funds that took this path. We only hear about the huge wins: George Soros breaks the goddamn Bank of England. Or John Paulson bets so big against the housing market, almost losing it all, but then makes fifteen billion dollars on the trade. But the other stories are legion: hedge funds going out of business on losses of 50% or more. And you know how they lose that much money? In the same way - they make a big bet and they can't sustain it. They can't keep it. We love to read about the big bet but it's not the path. The path is simple. You grind it out, and you hardly ever - or never change your trade size. You get a repeatable pattern in place. You get into a groove with this divergence, and then you bang on it. Every day you show up and you become a Blue Collar Trader - you bang out a trade or two, you close up shop, you go home, put on a tee shirt, have a beer, sit in front of the television, and breathe out a big sigh. Then you get up the next day at the crack of dawn, before breakfast as my pappy would say, and you do it again. If there were a union it would be called Local 99, the Loyal Brotherhood of Blue Collar Traders, and they'd be known for their attention to detail, craftmanship, their ability to show up on time and get the job done right. That's what you aim for. You don't give a crud about the big trade, or some big idea, or a major trend that is supposedly "on the way," or the next great big giant idea sold to you by the

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networks, like you're some kind of lemming and you're ready to do what you're told. And how are you ever going to strike it rich by doing what you're told by a business television network? Since when was that the recipe for success? You just go to work, and you keep going to work, and it someone shows you a new or different system, you tell him to go politely stick his head in an oven. You ignore the new, the best, the greatest thing ever, and you do the same thing every day. You pretend that you have kids and they think you're an idiot for doing things the same way. You pretend that you are from a different era, when you were supposed to make money week in and week out, and punch the clock, get your check, and build a pension. Maybe this doesn't sound like the lifestyle of a trader, the thing that you were hoping for. But you are going to find that a Blue Collar Trader can live the most exciting life you've ever dreamed of. I have a feeling you already know that. I have a feeling that you already understand that when you follow this path, a whole world of opportunity opens up to you. You can live anywhere you want. You can see and do whatever you want. You can relax and know that you don't owe anyone any money for anything. Yes, most people don't get to this place. Most people don't know how to manage the tension between the freedom they want from trading and the Blue Collar work necessary to get them there - and keep them there. But I have a feeling you understand exactly what I am talking about. And that you're ready to do it.

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7  

Recovering  From  Losses

“I lost all morning. Everything I did turned to crap,” I said. I hate complaining but man, I really wanted to let it out. And this is what Luigi told me:

WHAT TO DO WHEN YOU LOSE A LOT OF MONEY

You don’t want to lose? Then get the hell out of the room, and go do something else. Let’s find you a job where you can win every time. Ok, let’s see, here are some:

1. Garbage collector: if you like shitty-smelling stuff, then this the job for you and you will always get what you want every day.

2. Horse-stable crap-picker-upper: Do you like crap? This is the job for you. Every day you go to work and you’ll get loads of crap.

Are you getting the idea? If you want to win every day, then you need to start loving crappy jobs. If you love ugly people, you are never going to have to sleep alone. If you love crappy-jobs, then you are always going to be able to find work. Are you getting the point, or do I have to keep going? What is going to save you is this: you never risk too much on a trade, and then you take your bad days, and then get right back into your routine. You show up for the next trading session and you do your job. Your routine is all that matters. If you were a football team, and you had a terrible game, you don’t go changing your entire strategy. You get back into your routine, so that you can do a better job of executing your best strategy. It is so tempting to change something - even everything - when you have losses. To change your strategy, your routine, your charts, your stocks or currencies. But you want to make very few changes to the game plan, and you want to start doing a better job of putting the game plan into action. Most of us have losses because we do something stupid. We make a mistake. So, you should write a rule about never making that mistake again. You should get someone in

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your life to hold you accountable to follow that rule. And then you should keep trading your system. More importantly: stay on your routine. You want to keep your routine sacred. Like it’s a religious rite. If you skip your routine, or you get off your routine, that’s far worse than changing your system. Here’s what I mean by routine (again):

YOUR ROUTINE IS THE TIME YOU GET UP, THE PROCESS THAT YOU FOLLOW TO GET READY FOR TRADING, AND THE STEPS THAT YOU TAKE BEFORE YOU ENTER A TRADE, AND THE GAME PLAN FOR MANAGING YOUR OPEN TRADE.

All failed attempts at trading are failures of routine. Failure at trading is the failure to have a routine. Or the failure to follow it. Nothing else. Period. Failure at trading is not about being stupid. Plenty of very stupid people have been great traders. I’d argue that the dumber you allow yourself to be, the less you will question your trade setups and you will make more money. Dumb people don’t try to figure out a market that doesn’t make sense. We walk away. Dumb people don’t like losing money, because they know they don’t have much. Simple, dumb people make a lot of money every day. It’s the know it alls and the smart people who get into trouble. Failure at trading has nothing to do with karma, fate, or God. God, if he was okay with letting me get rich, definitely wants you to be rich, and the universe has enough for everyone. If you are depending on fate for your success, then just don’t get out of bed tomorrow. Instead, lay there in bed and pray for cancer patients, and everything in your life is going to be great. Failure at trading has nothing to do with having a crappy trading system. I have seen people make money from the simplest, dumbest, easiest trading methods ever. I have watched people lose tens of millions of dollars, with a staff of the smartest PhDs and computers running the most amazing algorithms you can imagine. Failure at trading is not about emotions. I have seen the calmest people in the world lose millions of dollars in an hour. I have watched angry, emotional people make a hundred million dollars. Emotions are secondary. Emotions are part of life. Stop trying to not have emotions. What are you going to do, cut out your heart so you don’t feel anything anymore? Some people can stay calm during losses because they don’t care anymore. We don’t want you to stop caring! Some people who get angry at the market are upset because they don’t like losing money. Nothing wrong with that!

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Failure at trading is guaranteed when you have no routine, or fail to keep the one you have. With that in mind, I have a list for you. Here are things that you can do, to get your money back, after you have losses:

How to get your money back

1. Go running. Exhaust yourself. Wear yourself out. Often a losing trader is a lazy trader. Stop being lazy. Run, or swim, or lift weights, or get a baseball bat and go out in an open field and smash a car.

2. Get up 5 minutes earlier tomorrow, and make sure you follow your routine. Make a “grrr” sound, and get a little bit angry, and more determined to stay with your plan.

3. If you made a mistake - then write down a rule and add it to your list of rules, so that you keep yourself from making that mistake again. Build rules based on your mistakes.

4. Look over your checklist, or routine, and make sure you followed it today and that you are going to follow it tomorrow. By “make sure,” I mean: make a promise to yourself and keep it.

5. Take ten minutes right now and list your plan for trading the next session. What do you look for? What charts do you open? Imagine what you are doing to do when the trade goes against you. Practice (in your mind) doing the right thing at the right time. Practice (in your mind) staying in a winning trade all the way to the profit target.

6. Now get back to your routine, and go get your money back.

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WHEN YOU HAVE RESPECT FOR A ROUTINE, YOU DEVELOP THE CHARACTER NECESSARY TO DO THE RIGHT THING AT THE RIGHT TIME. STAYING ON A ROUTINE TEACHES YOU TO DO ONE THING BEFORE ANOTHER, AND TO FOLLOW A COURSE OF ACTION. THAT’S WHAT SUCCESSFUL TRADING IS.

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