Currency Trader Derek Moore Talks About His Trading Framework

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Currency Trader Derek Moore

Click here to get four more interviews for $1, or learn more. Hello everybody and welcome back to Thanks for joining me for another episode this week. We’re going to be speaking with Derek Moore and he’s a currency trader. We’re going to talk to him about how he finds good trades throughout the day and maybe some things that he looks at that we can throw up on some charts ourselves and maybe find some good trading opportunities. So, Derek, thanks very much for joining me on the phone today.

Derek: Tim no problem. I’m glad to be here. I’m excited to talk a little bit about trading, probably one of my favorite, if not favorite topic, so I’m excited about this. All right, good. Well, I had the opportunity to meet Derek at the recent Las Vegas Traders Expo. He traded live in front of an audience so I’m always appreciative of that. I might as well ask you because I didn’t ask you at the time, were you a little nervous doing live trades in front of a group?

Derek: I’ll tell you the truth and it’s a great experience because one of the things that it absolutely does is it kept me disciplined. In other words, I knew that everyone was going to see if I made a bad trade and by a bad trade I don’t mean losing money, I just mean not following a trading plan. So in some regards, if you can never get 300 of your friends to watch you trade, it would probably do a lot better to be honest with you. Yeah. It really brings to the forefront pretty quickly to explain what you’re looking at while you’re trading, which I know isn’t easy and to let alone to put your screen up in front of the 300 people is definitely tough. So thanks for doing that. But I also think it must say something about your confidence in your own abilities to trade too?

Derek: Well, the thing is Tim and it’s a good question because why would go up there and trade live, why would I show people what I was doing or expose myself to that. I think a lot of the pre-work that I’ve done is when I actually set up my trading strategy, whether you call it a strategy or you call it a plan. So really it was just about getting up on stage and just going through the steps the things that I’m looking at and then trying to execute on the plan. What would be difficult if say I didn’t already have a documented, written trading plan and go up there and try and create it in front of the crowd, I think that would have been a lot more difficult. Yeah. Well, let’s talk about that. It’s a great place to start. What’s on your trading plan? What kind of things have you put on there as discipline, rules that sort of thing.

Derek: Yeah. I always say there are five things that I needed to workout for myself before I could really start to trade and it’s what am I going trade, what time frame, how am I going enter, how am I going to exit, and how am I going to measure success? So, when we talk about the time frame, I do trade intraday, I also trade off daily charts, I trade off weekly charts, and those are things where I don’t have to be in front of the screen, I might set up alerts, but it comes down to how often did I want to see the signals and obviously if you’re trading off five minute candles you’re going to get quite a number of signals, but that’s definitely very important. But what am I going trade, and for a lot of time I felt like I couldn’t trade stocks as well as I could trade let’s say currencies or futures and I spent some time going over it and what I found Tim is that it wasn’t that my formulas, my strategies didn’t work as well, it was just I had too much choice. There are five hundred stocks, a thousand stocks out there, so I felt like narrowing my field and deciding I’m going trade from this basket and as a trend trader, talking about entries and exits, I knew that if I could get in and if it trended that’s where I could potentially make some money there and of course measuring success it’s not about the dollars, it’s not about the percentages, to me it’s about process. So how often am I winning, my winning percentage and when I do win, how big are the wins compared to the losses and I create that sort of ratio that I think we’ve talked about. Yeah. I hear you on saying it’s not about the money, and yet I hear a lot of traders say that and they’re all successful, but really at the end of the day it is about the money where you’re doing this to make a living. So how do you kind of separate that to make sure that because what I’m basically getting into is that when you do make it strictly about the money, there is something happens there psychologically, so it seems like the best way to kind of separate it out, they know that the money is the end game, but they make their goal something different.

Derek: Yeah. Tim to me it’s all about repeatable process. So the problem with looking at raw dollars is that a repeatable strategy, repeatable plan overtime. And that’s why I’d say when I focus on the process I believe the results will come. And so it is in the end about you want to be profitable, you want to have bigger wins and losses, but it’s about designing something that you can implement and you know that overtime it’s going to be right. We we’re just in Las Vegas for the Traders Expo as you mentioned and I think about blackjack players or poker players and this has been well documented, this isn’t something that I’ve created, but they all have repeatable strategies. And if you think about a blackjack player, they might hit on blackjack if anyone hasn’t played that, you got to get 21 if you get over, you lose. But if you had an 18 and you’re going to hit on that hoping to get a three or less, you may win on that one hand, but over time that’s going to lose consistently. And so when I talk about focusing on process, focusing on not necessarily the dollars, it’s about setting up strategy that you believe is repeatable, that over time will yield you good results and, therefore, you believe the profits will come. That’s interesting, all right. So what you’re saying is if you just said, “I want to make a thousand dollars a day or even a hundred dollars a day,” repeating that is hard to do because there’s nothing behind it that says what you have to continue to do over and over again. I think I’m finally understanding why separating out the money is important because there’s no strategy behind saying, “I’m going to make a hundred bucks a day,” but there is by saying, “I’m going to enter only at this time and exit at this time,” that you can repeat over and over again.

Derek: I think goal is something that’s an interesting topic and I’ve heard traders say that, “I want to make X amount a day or I want to average X amount a day.” I think averaging probably makes more sense than trying to force and get something per day. The thing for me though Tim is that I’m a trend trader mostly, I’m a most breakout trader, and the live trading challenge was a great example in that in the hour and it was towards the end of the day before a holiday week, but I didn’t get off any trades, and so a lot of my results are dependent upon the market giving me those opportunities. So to try and say I need to make this per day, think about a daily trader, somebody who trades off daily charts and I do that, I might take a couple trades and have break even, little games, little losses, but later in the year I might get into a larger trend to be able to ride that for several months and so that’s one of the reasons why I think it’s a little bit dangerous to put goals in your trading plan because if the market doesn’t give you that, it’s nothing you did wrong, it’s just you didn’t have the opportunity, you were in position for success, but it didn’t work out. So I think that’s important. All right. Knowing that that money is secondary, do you have a number in mind though on an annual basis or a monthly basis that you want to average and try to achieve?

Derek: I still don’t and I’ll sort of explain a little bit about that. When you look at let’s say December of ’07 or January of ’08 to March of this year, what you had was a very, very steep down trend. That was an opportunity to make some profits on a downside by riding that trend. If you go back to 1994 and 1995, I think more in ’94, the market was pretty much flat line throughout the year, and so it’s really that ’94 was not a good year for trend traders because there wasn’t a trend, this past year has. And so when I say that as far as goals, the goals are to stay disciplined. It’s not necessarily the end. It’s about thinking about the steps that you need to do to get there and so for me it’s about making sure you take the signals and that’s one of the things, it’s important sometimes traders don’t take signals and they don’t capture the moves that they could have made. But take the signals to try and remember that your strategies are based upon little losses, letting winners run, and in the end what I believe is that overtime year over year when the market does what I needed to do, I’ll be able to participate. All right. Let’s get right into some of those signals. Talk about your garden variety chart that you like to pull up with the currency pair, first of all, I’m assuming you trade spot market?

Derek: Yeah, I do. I trade the FX market, the forex market at the spot. I also trade futures and I trade stocks. I know we did the currencies during the live event and I like currencies, but I do trade all the markets and when we talk about what it is that I’m looking for, the first thing is and what I would get, I believe that trading plans can be very simple and maybe we can get into this later, a lot of times the simplest of plans work, it’s the discipline and not adhering to the plan that’s the problem. But when I look at the chart, a couple things, I look for the trend. What’s this current trend? Is it going up, higher highs and higher lows, is it going down or sideways? So when I pull up a chart, some of the best breakouts or breakdowns, because remember trends can be up or down, is when you have a period of consolidation. Think about a rectangle going across the screen and then what I look for is I like to use a 20-bar breakout strategy. All that means is, and this goes back to Donchian channels where 20 price bars, on a daily chart 20 days, on a one hour chart 20 hours, and when price is making new highs, although all of us were taught to buy low and sell high, I always like to buy high and sell higher. So I look at that. I look for where something like a MACD, the moving average convergence divergence, is crossing from below to above the centerline. I also look at moving averages. So a few of those things they’re all trend-based, they’re all momentum-based and I’m looking for breakouts. All right. So you mentioned something that I want to just go back to the Donchian channels is, I think it’s D-O-N-C-H-I-A-N is that correct?

Derek: Yeah, that’s right. You’re exactly right. OK. Just in case our users want to Google that after they listen to this, but what essentially is a Donchian channel and how are you using that?

Derek: Yeah. And it’s Richard Donchian and he was a technical analyst over at Shearson. I don’t know if it was Shearson Lehman at that time, but he’s credited in a lot of articles around trend following and trend trading. He is one of the first people to use let’s say, trend following strategies. It’s plotted and if you have it available on the indicators, an upper and a lower line, so the upper line is going to measure what the current 20-period highest, OK, the lower line is going to be the 20-period low. So what you have is these rectangles that follow price. The greater the ranges the wider the lines will be, the more narrow or the more compact that you see it the less space they’ll be in between the lines. And so during up trends what you should see is not only price making a new high, but you should continue to see those higher highs and the lows also come up. And as a trader, I’m looking for when price breaks out to a new high, that’s a nice opportunity because look I mean I know that a lot of people are always saying, “Well it can’t go much lower,” or, “Why not buy at a lower value?” But I like to see things that are breaking out because I’ll never going to buy the absolute low, what I’m trying to do is get the majority of that trend and understand I’m never going to sell at the top either. So find breakouts, setting stops accordingly and trying to take advantage of trends when they happen. Yeah. Actually, I was watching you on your chart on those Donchian channels and they don’t break out in a sense that they just burst above the line, it’s almost like they barely come across it and right then is the signal, right? It’s not like a moving average where this thing can go crazy above it. It didn’t look like placed that way.

Derek: Yeah. I mean the way you’re actually right Tim and when you look at a chart a lot times and it’s slower, the faster moving it is on the lesser time frames. But let’s talk about a daily price chart, if you look at 20 price bars when it makes a new high, and you’re right it may thrust above there, but it’s simply the belief that if you’re clearing those old resistance areas, if you’re breaking out a little bit that’s the buy and with technical analysis, and we’re trading based upon technicals, a lot of times your entries it’s all about having an area to exit or an area that tells me that I’m wrong. And so part of the problem with buying when price is making a new low is that I’ve got nothing to tell me that I’m wrong and do I use a percent, if it goes down another point. But when you’re buying breakouts like that, that old resistance line which would the be top of the channel, now becomes support and I have a nice area to tell me look if I’m wrong it was a good idea, let me get out, let me take a small loss. All right. So your ideal trade would be one where it’s breaking above a Donchian channel, the MACD is crossing above the centerline, am I describing that properly?

Derek: Yeah, that’s right. I mean all these indicators and I don’t try and get too bogged down in the indicators Tim, but whether using a MACD, whether using stochastics or RSI, it’s about using them in a trend trading fashion, and what I mean by that is I want to see the momentum in the indicators and for some of them, although MACD is across of the centerline, for some of the indicators I actually need to change the settings so that rather than the old overbought oversold, I want to buy things that are breaking out and I want to buy things that are showing overbought because there’s no reason to say it can’t stay overbought. But I look at the chart, right, I see the price is breaking out, I see that my indicators are either crossing the midpoint, the centerline if they’re momentum based. I see price being above a moving average, I see all those things and that tells me that it’s time to get in, it’s time to…so that I can see that the market is making those higher highs and higher lows, and then if I’m wrong it’s not that far of a distance to get out. All right. So describe that ideal trade then, what are your settings on your MACD, what is it doing and then what are their moving averages you’re using and what are they doing?

Derek: Yes. So we think about the MACD I don’t change the, they call it the out of the box settings, it’s still the 12,26,9. And what that means MACD, moving average convergence divergence, you see two lines. There’s the MACD line and the signal line, in other words you got a fast and the slow line. The faster of the two are the MACD line, which is going to be on top of that slower line, that’s going to be the difference between the 12 and the 26-period exponential moving average. So the signal line is a 9-period average of that MACD line, again fast and slow lines. Since it’s exponentially based, what that means is unlike a simple moving average, your exponential moving averages have greater weight to more recent closes. So price starts to breakout, that’s going to move or be more sensitive than let’s say your simple moving average. What I like to do is I like see that MACD line, the faster line cross above when it’s plotted on the chart, the signal line which is also referred to as the zero point on the indicator. So when you have something that’s been below and then it’s trending up and going through that centerline, a lot of times that’s indicative of the start of a new trend. The nice thing is with that is if it comes back down below that centerline that helps me understand that I’m wrong and I can get out. So as far as moving averages and you’ll hear me say this a lot Tim, sometimes it’s not about programming the perfect moving average or if 50 works, 49 should work right, the 49 periods that I’m referring to, but it’s more about discipline, but it’s all about trend based, it’s about breaking out and I think whatever you’re using I mean I think it’s worth discussing, is complexity important or can you can you get by with simple things? What is it for you, which moving averages are you using?

Derek: Yes. I use a 50-period, especially when I’m on daily or when I’m on even weekly charts. When I come down to intraday trading, I might dial it back to 20 periods or so. One of the things that I think is interesting though when you talk about intraday trading is that if you have, let’s say that the market closes at a certain level and it doesn’t matter what you’re trading, but your price bar is closed at a certain level, and then the next day you have a gap open down or a gap open up. Well, the problem with those indicators and this is one of the things that I think is important is you have to figure out what the disposition is for that day, and what I mean by that is when you have these gaps, you have to see what the price bars are doing. Is it consolidating? Is it continuing a trend? Because this is where I take the autopilot off a little bit and if price gaps down your MACD is going to show a short or your moving average might show a short, but the problem is it’s taking those prior price bars from the previous day into account and so at the beginning of the day when all you have is a couple of price bars, I think it’s really important to sometimes not necessarily take the signal to look at the disposition, draw your support lines, draw your resistance lines and then you can see what’s going on for the day. All right. That’s excellent advice. I haven’t consider that of course it accounts for the previous day’s bars too and you’ve had that long overnight gap, although, in forex it’s less so, but it definitely with stocks, but I also note when you were trading live you had two moving averages, I think there’s a 50 and what was the other one that you and on there as well?

Derek: Yeah. I think I’m trying to remember back to I believe I had the 50 on there. Because there was a crossover at one point that you were talking about.

Derek: Right, so that’s actually that gets into the stochastics I think. I was using that a little bit more. And Tim you would ask me what my settings were there and stochastic as many of your listeners probably know is just a typical overbought/oversold indicator. Above 80 is considered overbought perceived is more likely to decline, and below 20 perceived is oversold more likely to rise. The problem with traditional stochastics is that when you do have breakouts and when you have price making new highs. A lot times stochastic will get, “rich,” or will get into the overbought territory. The problem is a trend trader selling there, so selling automatically when it gets in the upper half of the study or selling when it goes above 80. I think Apple is a great example, if you look at Apple on daily chart it went to overbought probably around 97 or a hundred in the most recent price. Well, Apple, at least as of today, it’s sitting right around 200. So what I’ve done is I changed the stochastics settings, one, I use a slow stochastic, so that’s going to be 14.3.3, 14 periods, a three and then the smoothing of three. And then I change instead of an 80/20 line Tim, I use a 40-line. And so what I’m looking for from a momentum or a trend trading-based standpoint, I want to see stochastics rising, I want to see the faster line to continue to be above the slower line, and I want to see it cross above 40 and I’m OK if it goes even into the upper regions because as prices making higher highs, it might stay overbought for a while. So I like to change that. Traditionally, it’s an overbought/oversold, you can use that during range or down periods, but as a breakout in a trend trader it’s not as useful to me, what’s useful is momentum. All right. That’s good stuff there. So you’re looking for the three to cross over the 14, the fast across over the slow stochastic, and then once it goes over 40 meaning you still have time to get in on this trend rather than just say over 80 I’m selling.

Derek: That’s exactly right and a lot of times Tim I look for and I think we saw this in the live trading challenge, you noticed on my charts that that happens in stochastics and I think you even asked me, “Hey, how come you didn’t take the trade?” Well, what happened was I didn’t get that breakout number above my price channel and so the conditions were there, the setup was there, but because price wasn’t breaking out yet, I didn’t take that trade, but it’s definitely something that I incorporate into my trading. All right. And then how often do these trades come along where it’s breaking out of the channel, the MACD is crossing over, the stochastic is crossing over. It’s over 40 maybe it’s bouncing up a 50-day moving average or a 50-period moving average, I mean that’s a lot of stuff to line up and yet you’re pretty likely to have a good trade in those cases, so how often that’s going to happen?

Derek: Yeah. I mean it all comes down to the length of the chart that I’m using, so if I’m using a five-minute or a 15-minute price bars meaning each of those bars represent a 15-minute increment of time. I’m going to see more signals. Now, if I go to monthly charts, I might see five signals in seven years, right? And that’s why I think it’s important for me and I think important for a lot of traders. I used to try and struggle Tim with what’s the best time frame to use and what I came to the conclusion was use the time frame that matches my trading personality and people’s trading personalities, so that’s important. So how many setups happen? I think the another question is really not only how many setups happen, but then how many of those wind up being good trades and I think that goes back to the ratios a little bit. So when I see that the setup, I can get in the trade, they’re not all going to work, and the fact as trend trader I probably am only correct somewhere around 35 to 40% at that time. So it might be I get in and I take it small as a get in, and I take a very, very small game, but the problem is and look at Apple. Apple is such a widely held stock, a widely known stock. There were three or four little losses, little game type trades and it was that last one, the one that the people are still in, that was the big winner. So you’ve got to have and for me you’ve got to be taking the signals, you’ve got to be looking at things and a lot of the automation these days Tim I mean at the Las Vegas Trade Expo there was so much technology, so many platforms and firms and allow them off for automation and it’s not you have to take every trade or you can automate your trading, you can do that if you want, but I think it’s really important to set up a system where you get signals. So maybe it’s an email alert, maybe it’s a text message alert, but it’s really, really important to do that. And you’ve got some pretty specific guidelines here that you use across all these markets. I mean this would seem to be relatively easy to totally automate and say when all these things happen and line up, automatically execute the trade with this much size, have you thought about doing that?

Derek: I have and I think it really depends on the time frame that I’m trading on. So let’s say with currencies, let’s address that one first. They trade five and a half days, so Sunday afternoon on the West Coast through Friday evening or Friday afternoon. No one’s going to be able to be in front of the computer 24/7, Monday through Friday, right? So there might be some automation that’s possible there, but what I would say is when I trade of daily charts, it’s not a matter of being in front of the computer it’s a matter of being able to receive the alerts that I’ve set up, so I think that’s just as important. But one of the things too is I don’t like to trade around news. So what I found was that when I do automate my strategies, if there was news rather than get into something and then have the market gyrate a little bit, I’d rather turn off the automation or to simply stay out of trades if I’m not in an automated mode, let the news settle and then let price develop and trend and get in on that. So I think that’s one of the dangers with automation. And with the currency markets as well, we’ve got the issue of spread and so unlike let’s say a futures contract or a stock where I pay a commission, in forex you’ve got the bid and the ask, and it’s called pips. So I’ll give you an example, there’s I think the contract that I was trying to trade it was .9560 into .9565, that’s a five-pip spread, OK? What that means is if I’m trading a standard contract where one pip equals $10, I’m down $50 on the trade just by entering and so I think that’s one the important things to remember, too, with the currency market, although it trades 24/7 there are certain markets, the New York and the London open, the Europe open that are more active. There rest of the time gets a little bit thinner, the spreads wind up widening a little bit, so it’s something to be careful of. And then will you switch over to equities or futures when things are pretty mild in the forex markets?

Derek: Yeah. I mean that’s a nice thing. Being a technician and being a technical trader, I hate to say that I can go into any market and trade it, but I can go into any market and trade it because in the end Tim I’m just trading price bars, I’m trading charts. So whether it’s orange juice or the mini Dow or the Euro-US dollar or Apple computer, I’m trading price bars. And so someone who trades off fundamentals and needs to know a lot of things about the company, their universe is very, very small because you just can’t put in the time like that. Technicals allow us to do that. So if something is not moving or if a trend isn’t happening even on longer term basis if a trend is not happening maybe orange juice isn’t trending, maybe the Dow is flat, but the Euro-US dollar is in a trend and I’m all about needing those trends to make some money. Yeah. And with everything that’s available these days in terms of choices, it’s certainly not hard to find something that’s moving if you’re willing to trade any market. How are you screening for these trends in other markets like individual stocks, do you have some sort of software or you flip into your charts?

Derek: Yeah. It’s both really Tim. I mean some days and I always say once week at least I’m flipping through on the daily charts, I’m looking through that, but sometimes I just take some of the components whether it’s all of the indicators or even just a moving average and I say, “Here are the symbols I create a watch list,” and then I say, “Send me an email when this happens on any of this basket of stocks,” so that way and there’s two types of automation, there’s one where the system automatically places trades for you, the other automation as I call it is the automation that let you go out into the golf course and know that if the Euro-Yen has started to trend, I’ll get an email about it. So I think that’s a big, big advantage nowadays with technology. You’ve defined your symbol list and now I just set it up so that I can get an alert on it, and then I can decide, I can go look at the chart, but what a great advantage nowadays. Yeah. I think Interbank FX are one of the forex brokers who was rolling out their iPhone app so they could trade from your iPhone now, so really, you truly can trade from everywhere not that that’s necessarily a great thing for everybody, but the choices are there if you want them.

Derek: It is and I think it does help with discipline somewhat too. There’s a couple of things about discipline and I think it’s important to touch on Tim and that’s what a lot of traders focus on is really the exit, but I think that the entry is important as well. I think sometimes it might surprise you to hear me say this, but one of the things that really hurt my trading early on was not taking signals. It’s almost like you got to be in the market and how many times did I look at maybe a chart and I say, “Well, this is a good entry here,” and I didn’t take it and then it continued to trend. So I think through what I’ll call the selective automation of getting alerts, it helps me stay disciplined. You’ve got to take the trade. Once you defined a strategy, once I have my strategy and I’m confident that if the market trends I’ll be able to capture it. What does that mean? It means that when I get my signals, I’ve got to take the trade. I take the trade and then I have what I call the dual exit system. There’s a stop that I create using average true range. Now, average true range is going to be 14 is the default, so 14 periods and that average true range is really, you think about the stock, how much room is it breathing in, how much room does it need to breathe? So that creates a volatility based stop and the way that I do that Tim is I’ll take the average true range number, multiply it by two and a half, and this isn’t anything I created right, just something that I like to use, and then I have my initial line descend. So if I buy stock at 50 I know what it’s average true range is, I take two and a half times that, I subtract it and I have my line descend. The second exit would be, for example, if I had a price channel breakout or a MACD go above centerline, is if it reversed and went back below that centerline. The nice thing about having the dual exit is that if you’re using indicators, I have no idea what the price is going to be if it crosses back to bearish levels. So this way, I’m protected on one side, I know my exit, and then on the second thing, I can let a trend run and only upon pull back get me out. So it’s really dual system there. And I like that, let me ask you a clarification question on the average true range, the ATR. You said you multiplied by two and a half and then subtract it, what do you mean by subtracting it? Subtract it from?

Derek: Yeah. Let’s use a real example or let’s say Apple at about $90 was a buy, so if I look at Apple and it’s $90, I look at its average true range. Let’s say it was I don’t know it was a point at the time. So being a point, I take two and a half times that and why two and a half, it’s just I want to give it a little bit more breathing room than it’s current range, so I get 2.5. So if I enter at $90, I’ll subtract it by 2.5. I know my initial stop based upon volatility is going to be 87.50, OK? So that’s my first line descent, if the price closes below that I get out. The reason why that’s important too is remember I said those five questions, well how much am I going to trade? The old information was always well and if you take a certain percentage of your account and you go in and you apply that across all the markets that you trade or all the stocks that you trade and maybe use a fix stop loss. The problem with that if you’re buying Google versus some stocks that doesn’t have any range, why would you buy the same amount of Google and certainly why would you have the same exit on Google that you do on another stock? You probably get stopped at too quickly. So in that trade I calculate my position size based upon what I want to risk on my account and on the second part of that with average true range is that a lot of traders struggle with volatility and where to place their stops and absence of a defined support line or somewhere else, this at least let’s me take into account the volatility and I think that’s important. All right that’s again, you got all these very strict rules that you’ve set up for yourself about exits and entries and that sort of thing, one thing we haven’t covered as we finished up here is you’ve talked about what gives you a signal, kind of talk about then how you drill down and find your ideal entry price.

Derek: Yeah. And that’s one of the things, sometimes this can be an over thought area I believe. Who’s to say that if I get my signal that I need to wait for it to come back down, I’m pretty much comfortable knowing Tim that I don’t know I can’t make a prediction. Now, if you ask me, what do you think the Dow is going to be in six months? I would say I have no idea. All I do is I follow the price bars then I read and react. But when I see a signal, generally, let’s say it’s on a daily chart or even intraday, I take the signal, I put in my risk management and then I just let the trade go and one of the things that I know we talked about or I talked about during the live trading challenge and Tim you and I have talked about, I think even off air, is the discipline factor. Now, we could have or I could have the best trading strategy and even though I’ll tell you that there’s a lot of trading strategies that work and they don’t have to be overcomplicated it all comes down at some point to discipline. And for early on I know all of us have done that, I’ve made all the mistakes. I probably bought something, I didn’t take my exit, it continued to run against me and I just was hoping and wishing and somehow it gets to break even, right? And it never did. They never went back to break even, but discipline is part of it. And so a lot of the work that I needed to do early on was creating the strategy. The work that I do now is more discipline-based. I don’t have to spend a lot of time looking at the charts. I’ve already got everything defined. It’s a read and react, but now my time is spent making sure I’m disciplined and staying focused and I think that more than anything is going to be predicate whether or not I’m able to be successful in trades. It’s very tempting not to take trades. It’s very tempting to try and over think things, let the process work, let the system work and I think that the results that I get, I’m confident that if I let things work it’s going to work out for me. And that’s important to know, so if you’ve lost four trades in a row, five trades in row, and you hear this a lot to take the next signal just as if you would the first one because, of course, the moment you don’t is the one that works out and so the only way to do that is to force yourself to be consistent that way. Will there ever be a time and we’ll finish with this, where you say, “Look I’ve lost five in row, rather than take the next one it’s time to look at my system and maybe make some adjustments,” is there ever a time that that’s appropriate?

Derek: Yeah, Tim. I think I’m glad you asked that question because there’s a lot of debate about, OK, if I have so many loses in a row, I go back to Apple and if we had a chart up or if I was looking at it they will literally a couple, at least three or four different times that Apple was bought according the system right, and then was sold and had I skipped that last trade, well that was the one that trended, right? In December of ’07 on the S&P there were a couple false signals maybe, but had I not taken a short position, would I have captured that large move. So I think it’s important, but the thing is that when I go into trades I’ve already defined what my risk is. Generally, I don’t like to risk more than 1% and I know this might seem a little bit low, but I don’t like to risk more than 1% of my account. And what I do with that and what I mean by that is I’m not talking about how much money I put into the trade, I’m talking about the distance between my entry and my exit. So when I talked about the ATR-based exit, I know what the distance between on a per share basis, a per contract basis my entry and exit will be. And since I’m not taking large risk, it’s almost like there’s comfort knowing, I’ll take the trade if I get stopped at with a small loss that’s fine. And I think one of the things that does for all of us as traders is, if you’re ever really concerned about a position, if you can’t sleep about a position or you’re so frantic to take profits at the first sign of a profit let’s say, you’re probably trading with the position size that’s too big. And so more than anything else like I said it’s discipline, but making sure the trading risk is such so that if you take the signals and you take one after another and you’re confident that if the market does trend, you’ll capture the majority of the trend, it’s going to be much more relaxing, it’s going to be much more easier to follow the system. So it’s so difficult to come back from large losses and if anyone ever ask me for one bit of advice is don’t take large losses, have a system that you believe in, manage your risk, and if you’re trading with the right position size, you’re going to be much more relaxed. Well, this has been great Derek. Derek, thanks so much for your time. I really appreciate you sharing some of these things with us. You gave a lot of good specific info here that our traders and listeners can use right away. So I truly appreciate it. Thanks for your time.

Derek: Tim thanks so much for having me on, pleasure as always and thanks again for moderating that live trading challenge. I think that’s a rare insight that you gave traders and the audience so thanks again Tim. You got it thanks for the pitch; hopefully, we’ll see a lot more people in New York in February. Thanks again.

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