Barry Burns

Cheat Sheet / Updated 04-26-2022

The practicality of trend trading is that you're waiting for the market to "show its hand" by establishing a clear direction and then jumping onboard for the ride. This handy Cheat Sheet provides an overview of how to follow the big-money market players to the glorious land of profitability. Get tips on why trend trading works so well, how to determine a trend that will continue after you enter the market, and how to manage your risk once you're in a trade.

Article / Updated 07-06-2021

If you have reasons to believe that a market is going to go down, you can make money by short selling that market. Short selling (also known as going short or shorting the market) means that you’re selling the market first and then attempting to buy it later at a lower price. It’s exactly the same principle of “buy low, sell high,” just in the reverse order — you sell high and then buy low. Credit: Figure by Barry Burns You may be wondering, how can you sell a stock before you buy it? It’s actually not as difficult as it seems. To sell a stock that you don’t own, for example, you must first borrow it. Your broker facilitates this process and may let you borrow a stock owned by another trader or, less frequently, owned by the broker himself. When you’re ready to exit your short position, you cover the position by buying back the stock you had shorted. In other words, selling before you buy really means you’re borrowing the stock before you short sell it. This discussion is meant to be a simple introduction, not an exhaustive education to fully prepare you for shorting the market. Before shorting the market, talk to your broker about the risks and rules of short selling and educate yourself on all the details. Also be aware that the rules for shorting stocks may be different for shorting futures, spot forex, or other markets. Talk to your broker for details. What makes short trading so exciting Selling first and then buying later (hopefully at a lower price) has several advantages, including the following: Markets tend to go down faster than they go up. This is because fear is a stronger emotion than greed. When people feel fear, they tend to exit their long positions quickly and massively. Markets can go into a free fall, and therefore it’s generally possible to make money faster by short selling than by buying, at least for brief periods of time. By being flexible enough to short sell, you open up your ability to make money in various market conditions. When you’re comfortable going short, you provide yourself more opportunities to make money. Shorting options can provide a hedge against your long positions. Options are contracts that give the owner the right, but not the obligation, to buy or sell a stock at a given price before a certain time. They’re much less expensive than buying the stock itself and, therefore, can act as a type of insurance policy against a stock position. Taking a short position on a stock with an option would actually involve buying a put option. That can seem a bit confusing because you have short exposure to the stock as the value of the put option increases as the stock price moves lower. The benefit is that you pay a small premium, which can be thought of as a deposit that allows you to sell the stock at a higher price if the stock moves down. Hedging is like buying insurance. It’s taking a trade that helps to offset losses you may take on a primary position. The challenges of shorting the market Like most things in the market, and in life, there are two sides to a coin. If you decide to incorporate short selling into your personal trading, it’s important to be fully educated about all the implications. Short selling also has several disadvantages you should seriously consider: It may feel unnatural, and you may struggle to wrap your head around the concept. It may be psychologically challenging and feel uncomfortable to you. Going short is more expensive than going long. When you short a stock, you’re borrowing the stock and have to pay a fee, though nominal, for doing so. Theoretically, short selling has unlimited risk. If the market goes against you (by going up), there’s no ceiling to how high the price can go. It may feel unpatriotic to take a position against a business and/or the economy succeeding. Not all stocks are available for shorting, and some of those that are available aren’t always available. This reduces the universe of stocks available for you to trade. Short selling must be done in a margin account. It’s up to you to decide whether you’re comfortable trading with borrowed money. If you’re short a stock when the company pays dividends, you’ll owe the dividend and it will be withdrawn from your account. Remember, when you short a stock, you don’t own it. You’re borrowing it from your broker who still owns it, so he will want the dividend if you’re holding the short position when the company issues dividends. If a company spins off part of its operations, creating two companies, you could find yourself with a short position in both companies. That could be a problem if you’re not bearish on both companies.

Article / Updated 07-06-2021

Investing is defined as holding a position for more than a year. Here is a quick overview of the pros and cons of this long-term strategy. Remember investing isn’t actually trading (trading is defined as a short-term activity). Advantages of investing The investing time frame is the most popular. Because it’s less active, the term trading is not used for investing. Following are some of the advantages of investing, particularly compared to trading: Investing is the least “active” approach to participating in the markets. It can be good for those who have an interest in the markets but don’t have enough interest in it to make it a part of their daily or weekly schedule. Some people have extreme difficulty doing short-term trading. Some, in fact, believe it’s impossible to determine short-term moves with consistent accuracy. For such people, investing may be a good choice. Holding a position for more than a year potentially allows you to tap into the long-term capital gains tax, which is generally a lower tax rate than short-term capital gains tax. This is not meant to be tax advice. Please consult a competent and qualified tax professional for details about taxes as they apply to the time you’re reading this and to your individual situation. Disadvantages of investing Investing also has some disadvantages that should be considered and weighed against the advantages. Ultimately, it’s up to you to decide whether the advantages outweigh the disadvantages for you and your lifestyle. Remember also that you don’t need to be an investor to the exclusion of being a trader. Here are some of the disadvantages of investing over against trading: Of the three-time horizons, investing can be the slowest way to make money, assuming that you could be an excellent swing trader or day trader. Because investing reuses the same capital very infrequently, the annual returns are generally not as good as a successful professional trader. Earning an average 10 percent return annually may be considered acceptable for an investor. However, someday traders have made 10 percent returns in a week! That’s certainly not meant to be an income claim, nor is that normal, but, yes, it does happen. Investors notoriously have a very difficult time outperforming the market — making investment decisions that result in a better return than if you simply invested that same money into an equity index fund, such as the S&P 500, and didn’t touch it. Even many professional fund managers aren’t able to do that for their clients after costs.

Step by Step / Updated 03-27-2016

The most obvious indicator for measuring momentum for many traders is the aptly named momentum indicator. It simply measures the amount that a market’s price has changed (often referred to as rate of change) over a given period of time, which you designate (14 bars is a common time period). Another way to express the momentum indicator is that it measures the current bar’s closing price to a specific number of previous closing prices (such as the closing prices of the last 14 bars) and gives a reading as to how fast price is moving in a direction. Because momentum measures the speed (or strength) of a market’s movement, the price bars on a chart can continue to move up (indicating an uptrend), while the momentum indicator can move down if the speed (momentum) decreases. This shows that although the trend is still up, it’s weakening and may soon be coming to an end. Following are three common ways of using the momentum indicator to confirm a strong trend for entry and also to determine when a trend is weakening to exit a trade:

Article / Updated 03-26-2016

Trend trading is a common and long-standing approach to trading for good reason: It works! Following are some reasons why, so you don't have to blindly accept the premise — and also because understanding why can give you the confident mind-set required for successful trading. The "whales" control the market. The markets are priced-based on an auction model of bids and asks and buyers and sellers, so logically the big fish in the sea (the market participants with the big money — pension plans, mutual funds, banks, hedge funds, insurance companies, and other institutions) create the big moves in the market. This isn't implying that they're doing anything illegal; it's simply a matter that large amounts of money invested in the markets cause them to move. If one market participant has a lot of money, it may be able to move the market by itself. As a group, the big-money players have even more market-moving power. Trend trading (also known as trend following) is one of the easiest and most reliable ways to make money in the markets because you're following the leaders (sometimes called "the smart money"). Trend trading is one of the simplest approaches to trading. The world of trading has become increasingly complex, causing many traders to suffer from information overload. From an endless number of trading systems, indicators, automated computer trading programs, and trading theories (with more being created every day), new traders often feel the need to study everything available. As a result, they become overwhelmed and confused. Trend trading is a simple approach to the markets that doesn't require a lot of fancy technology or an intimate knowledge of mathematics, geometry, or market theory. Therefore, trend trading is one of the simplest approaches to trading. Trend trading has stood the test of time. Documentation of trend trading dates back to the 19th and 20th centuries, and it continues to be popular to this day. One of the most famous trading experiments ever conducted, gathering a group of students with no trading experience in an attempt to turn them into successful traders (the "Turtle Traders"), was used with a trend following approach.

Article / Updated 03-26-2016

All types of trading are risky, including trend trading. No matter what type of trading you do, not employing risk-management techniques in your trading is fiscally irresponsible. Here are few techniques to get you started managing risk: Manage leverage responsibly. Leverage is a two-edged sword. It can help you make money faster, but it can also cause you to lose money faster. Consult with your broker regarding the amount of leverage made available to you to help you decide whether you should use leverage. Be conservative in your decision. Don't risk more money than you can afford to lose without disrupting your overall financial life plan. Practice diversification. Trading various uncorrelated markets concurrently can help dilute the risk of having all your money committed to one financial vehicle. Consider hedging your positions with options and/or futures. These highly leveraged tools can help offset the risk of your primary position with a relatively small amount of money. It's similar to buying insurance. Utilize effective money-management techniques. Use protective stops to help limit the amount of loss you'll accept on every trade. Note: You shouldn't use protective stops only for each trade but also to limit the amount of money you're willing to lose in a given day, week, month, quarter, and year.

Article / Updated 03-26-2016

As good as trend trading is, trend shouldn't not be the only factor in considering whether or not to take a trade. Other factors must be added to it to provide enough variables to create a probability scenario that puts the odds on your side. Trading in the direction of the trend (the dominant direction of the market) is a great place to start. Determining the direction of the market at any given time is easy. The more important question for a trader is, "Will the market continue in that direction after I enter the market?" Knowing the strength of the trend will help you determine the probability of the market continuing to move in the direction of the trend after you enter your trade. Use an indicator that measures momentum to determine whether the trend is strong or weak before you take a position in the market. Determining the time to enter your trend trade is critical. If you get in too early, the market may experience a steep correction against your position before the trend continues. If you enter too late, the trend may be coming to an end. Use a cycle indicator and wave counts to determine the ideal time to enter the trend.

Article / Updated 03-26-2016

More markets are available for trading today than ever in the history of the world. The markets aren’t just available, but public access to them is easier than ever before. With the advent of computers, high-speed Internet access and online electronic trading, you can sit home and trade stocks, commodities, bonds, currencies, futures, and options all around the world from the comfort of your home. Day trading for those who work during the day As high-speed Internet and access to the market became more readily available, day trading became very popular. It still attracts a lot of people who like the possibility of making quick money, not having to wait a year to possibly get a 6 percent return. Unfortunately, most would-be day traders have to work a day job while they attempt to learn day trading. One answer to this problem is the spot forex market, which trades the fluctuations of the world’s currencies. This market trades 24 hours around the clock. Now, no matter your continent or work hours, you can enjoy day trading currencies in some market somewhere in the world. Finding a bull market In the olden days, people complained about the market being bad and felt financially enslaved to whatever the market was doing. “The market” they referred to was the stock market, often measured by the Dow 30 or the S&P 500. Today, there’s no one “market” to which your financial future is bound. You have access to all types of markets that can move very different from the U.S. stock market. You have access to international markets, emerging markets, frontier funds, gold, oil, real estate, bonds, currencies, and more, all available to you in a few seconds with a simple keystroke. Letting technology find the best trades for you Computers not only give you quick access to placing orders in markets around the world, but they can also help you find the best trades in those markets. Scanning software programs have become increasingly sophisticated and inexpensive. Retail traders have access to incredibly powerful software that can scan tens of thousands of markets based on hundreds of possible criteria you define. In a matter of minutes, you can have a list of markets that meet the criteria you set for fundamental and/or technical analysis. Today, the financial world is your oyster!

Article / Updated 03-26-2016

The ten commandments of disciplined trading are based on common mistakes made by traders. You dramatically increase your odds of being successful if you follow these commandments. Thou shalt not chase a move. If you missed the best risk/reward entry, just let the trade go. Never chase the market. Thou shalt not trade in choppy markets. Trading isn’t a zero-sum game. You lose money on every trade on both the bid/ask slippage and commissions/fees. Without clear directional momentum on your side, you don’t have an “edge,” and without an edge, you won’t have a profit! Never trade when the 50 SMA is flat! Thou shalt not trade against the dominant energy (shorting higher highs or buying lower lows). These can look so good, but because momentum is against you, it’s like trying to push a Sumo wrestler uphill. Thou shalt not trade too many contracts/shares/lots for your account size. If you lose more money than you’re comfortable with, you’ll trade badly. Everyone, even the best traders, go through periods of days, weeks, and occasionally even entire months of losses. You need to keep your losses per trade and per day small enough that you can financially survive a major losing streak without having to refund your account and without causing you emotional stress. Thou shalt not trade for the “action.” Trading is a business, not an extreme sport! Like any good businessperson, your primary objective is to increase your bottom line. Thou shalt guard your capital. It’s your lifeblood. Without it, you can’t trade. Thou shalt never trade from a state of panic or anger to recover losses. When you have a losing trade, that money is gone, and the trade is done. Trying to get the money back by bending your rules will only result in more losses. Your rules are what make you money. They’re proven to give you the high-probability trades. Thou shalt not worry about “missing the boat.” Your goal isn’t to catch every big move in the market — in fact, you won’t. No one does. Your only objective is to trade your rules and take the money the market will give you each week according to those rules. Even though you often hear about “trading the market,” you can’t trade the market; you can only trade your rules. Thou shalt not place your stops too close. If you’re doing this, it’s an excellent indication that you’re not in the right frame of mind for trading, and you should stop trading. You can’t trade scared. You should place stops where the pattern you’re trading would be broken and no closer. You must give the market room to wiggle. It doesn’t move in a straight line. Allow for the bids/asks of individuals to move the market around messily within your trading setup. Thou shalt not take profits too soon. You want your winning trades larger than your losing trades. Be patient with the trends and let them ring up big money for you.

Article / Updated 03-26-2016

Newbie traders are often targets of hype promoted on the Internet and elsewhere, promising get-rich-quick approaches to trading. Beware of anyone promising overnight success. Trading is a real, legitimate profession and, like any other profession, requires a thorough education, a dedication to earnest study, development of skill, lots of experience, and a commitment to personal growth in the process. No e-book, magic indicator, or forex robot is going to make you rich. You have to do the work yourself and do it well. Becoming a risk-management expert Profitable traders tend to focus on risk management more than making profits. When you have a profitable trading methodology, the most important thing is to be hyper-diligent in managing your risk. You need to keep your losses small, and let your winners run. You achieve risk management through personal discipline, the use of protective stops, diversification, and hedging, among other things. Documenting your trading You can’t measure numbers you don’t have. Documenting your every trade isn’t the fun part of trading, but you must document your every trade to improve yourself as a trader. Businesses live and die by their numbers. Good businesspeople meticulously watch their income, expenses, profits, losses, balance sheets, and other financial reports so they know the strengths and weaknesses of every area of their business. Professional athletic clubs do the same. They have the statistics of every player, and they video tape every game of both their team and their opponents. They use this documentation in the never-ending pursuit of improvement. As a trader, you can improve your chances of success by documenting every trade, including the following information: The time and price of your entries and exits The reason for your trades The mistakes you made What you were thinking when you took each trade How you were feeling when you took each trade Reviewing your trades At the end of each day, week, and month, review your trades. Print out your charts and match them to your entries and exits. Look for patterns of your thoughts and feelings as you entered trades. You can use those patterns as indicators for future trades. Look for patterns of mistakes you habitually make. For example, do you Overtrade? Get out of trades too soon? Hesitate too long to enter your trades? Constantly trade against the trend? Knowingly break your trading rules based on gut feel? No one ever becomes a perfect trader, but if you can drastically reduce the habits of making the same mistakes over and over, you can move into the profitable trader category.