Thursday, February 11, 2010


I’m going to add a few feature to the blog. Once in a while, I will be profiling a professional trader who I believe is someone you can learn something from. I feel that by doing this, you’ll be able to learn a whole lot more and expand your horizons to see all of the possibilities that exist in the trading universe. Each trader is specialized in a certain style of trading and has mastered it. I am profiling these traders so they can tell the rest of us how they became so successful in their own way. After all, no one stops learning, including me, and as long as you take away one big idea from these profiles, then I have done my job in furthering your education and development.

Today I want to profile Vadym Graifer of I wanted to discuss some of his works, trading methods, and market views. Let me give you an idea what I found about him as a trader, writer, and teacher. Turns out his trading style is very similar to mine (and he’s also a trading coach!). He was kind enough to provide me with an article on “Stops: Why Don’t We Keep Them?”, located be low the profile.

Trader. Vad has been trading for a living since 1996. He is exclusively an equities trader, mostly on an intraday basis. His trading approach is built on the method he constructed upon tape reading principles he carefully restored and applied to today’s markets. His simple but powerful setups can be seen everywhere in the market once you get a handle on them. His approach is very visual, consistent, and disciplined. When I asked him to describe it in one sentence, he said: “Distinguishing the Smart Money action from that of the Crowd by the footprints they leave on the chart.” Vad is one of few who published his verified trading records (

Author. Vad’s first book, Techniques of Tape Reading, describes his trading method. The first part of the book is devoted to a trader’s development and psychology. The second is about trading systems, with the principles of tape reading explained and categorized, and setups broken down by elements. The third part contains over thirty examples with all the ifs and buts. If you’ve enjoyed my articles on the application of tape reading, then you should read this book.

His second book is The Master Profit Plan ( This book is taking you by hand and guides you through the whole process of turning yourself into trader, making the process understandable and logical. It’s built in a form of choices you need make, explanations of how to make them and showing your next step depending on those choices. It takes you from the very beginning to practical trading, not leaving a stone unturned.

Teacher. Vad has extensive experience as a speaker and is known as being a very clear, concise and logical presenter, keeping his audience at ease, comfortable, laughing and learning a lot. He spoke at many Traders Expo seminars in US, Financial Forums in Canada, and private seminars in both countries and beyond, including annual Cara Trading Advisors Conferences in the Bahamas.

I had a chance to have a peek into Vad’s new project. It’s planned to be finished before the year end and is one of the most fascinating writings on trading I’ve seen in a long while. Not to give away whole thing, but it’s an application of Taoism to trading, based on serious research of this ancient philosophy and turned into incredibly practical trading advice. From the piece I’ve read so far – you will want to read it when it’s published.

Talking to Vad, I sensed what I want to see in people I partner with – integrity and professionalism. Read his writings, I am sure you will too.


STOPS: why don't we keep them?

With everything said and written on the subject of stops, it should be given that everyone is conditioned to keep them religiously even before they start trading. No matter what source a newer trader turns to, utter importance of stops will be underlined and emphasized up to the degree that keeping them is heralded as the ultimate key to success. We all heard adages like “Take care of your losses, profits will take care of themselves”.

Do all the stern warnings work? Not really.

Time and again traders blow their stops, widen them in a course of a trade, hold losing position in a false hope it will make them whole. If this destructive behavior continues despite all the warnings, there must be deeply rooted reasons for this. As with most trading flaws, failure to keep stops roots in fundamental misconceptions about the very nature of the market and trading. Such misconceptions cause incorrect psychological makeup which, in turn, results in behavioral patterns harmful for a trader’s performance. In order to re-condition oneself it is necessary to work out fundamental, even philosophical if you will, understanding of the market as an environment in which a trader operates.

Let us list and analyze the misconceptions that cause failure to keep stops.

Right action must result in profit.

This misconception stems from misunderstanding of the very nature of the market as an uncertain environment. Newer trader sees a market as a conglomerate of firm links between reasons and outcomes. In such a conglomerate, every reason results in single possible outcome. The simplest case of such link would be “good news – up, bad news – down”. We know it’s not true – price reacts to news in a wide variety of ways.

Similarly, an inexperienced trader applying the setup he knows “should work” expects every trade to be a winner, providing all the components of the setup are right. Have you ever heard complaints like “Everything was exactly like in that book, yet the trade failed”? That is direct result of this misunderstanding. Everything may be right, yet the trade fails – just because markets work in probabilities and not in certainties.

If a system produces certain percentage of wins over time, it’s just statistics – and, as it is always the case with statistics, it cannot predict an outcome of a particular trade. No matter how good the setup is, any given trade can fail. That’s why it’s imperative for a trader to distinguish between two kinds of losses.

The first kind is a loss caused by a trader’s mistake – failure to follow all the rules of system applied, or impulsive entry without any reason at all. Such losses must be taken as a lesson. The second kind is the case where every piece of puzzle was in place, yet the trade failed – such losses must be written off as a part of trading game, as a tribute to uncertainty of the markets.

Of course, if you identify a component of your trading system that regularly causes trade failure, you can and should tweak your system in order to minimize failures. However, during the trade a stop must be taken as soon as signal of failure appears. The line of thinking “The setup was so good, it must work eventually” is a disaster waiting to happen.

Failure to perceive the market as an uncertain environment can result in another misconception:

Losses can be eliminated.

In a paradoxical way, this erroneous notion leads to more losses. A trader tweaks his system endlessly trying to get rid of losses completely. In such constant adjusting and re-adjusting, the system evolves into something totally different, losing its original logic, or even stops producing entry signals at all. As a result, a trader either abandons his system, which was not a bad one to begin with, or in a worst case, simply refuses to take losses. After all, he made his system so perfect by eliminating all the reasons for failures, it just MUST work! Meanwhile, had he stayed with original approach, maybe with some minor tweaks, it would continue producing steady results.

My trade is who I am.

This is one of those hidden subconscious misconceptions that cause us to refuse to take our stop. A trader perceives the result of his trade as a reflection of his personality, his abilities. A trade failure makes him feel as though he is a failure. Winning makes him feel “right”, while losing makes him feel “wrong”. Nobody likes to be a failure, to be wrong. That’s why, in order to avoid being wrong, we refuse to take our stop. You can be right and still lose on this particular trade. You can be wrong and win, too.

It’s important to differ between good and bad trade, and we will be back to this later, in the Random reinforcement part. At this point it’s important to separate your self-perception from the result of your trade. Taking a stop loss, you are stopping your loss – nothing foolish about that. The major trigger for the right approach here is a realization that by accepting the market as an uncertain environment, we already have accepted the possibility of losses. If we haven’t expected the market to work in our favor every time, there is no reason to feel foolish when it doesn’t.

A loss is just a paper loss until it’s taken.

This is a big mistake in thinking. If a loss gets out of hand, it’s very real. It paralyzes you, it clouds your judgment, and it makes you miss plenty of other opportunities. Instead of taking a pre-determined loss and moving on to another trade, you sit and watch your losing one, twitching in pain and feeling remorse. Your chance to take a small stop is long gone. You are agonizing now over big one that is going to deplete your account too much and inflict serious emotional wounds. You hardly notice many other opportunities. The market has moved on, other sectors and stocks are in play, and you still nurture your losing trade, hating it and not being able to finally drop it. At some point you will ask yourself “Why was this trade so important to me? What made me hold onto it?” And this takes us to the next common error:

Putting too much importance into single trade.

A newer trader tends to see each trade as overly important, as if it’s going to make or break him. The market is an endless stream of opportunities. The next trade is right around the corner. No single trade is so important that it would be worth abandoning all other opportunities. Perceive your trading as a process, not as separate events. With the correct approach trading becomes natural, like breathing. Each entry is inhale, each exit is exhale. Breathe in and breathe out. Don’t choke yourself trying to hold onto each given breath.

Random reinforcement.

This is an important concept to understand. The market is not always rewarding right decisions and punishing bad ones. The practical implication is that a trader runs a risk to stop applying proper techniques if he sees wrong ones being rewarded sometimes. Take a stop, observe a stock reversing and going into profit zone – and you get tempted to skip your stop next time. If you try it and it works, there is significant chance that you continue doing just that – the bad habit gets reinforced. You may win several times by breaking your rules. What happens eventually is that one trade that does not reverse destroys your account. It’s important to define what good and bad trades are. Unlike many think, a good trade is not always a winning trade; a bad trade is not always a losing trade.

- A good trade is a trade where you kept all your rules that you know to be working in a long run. A good trade can be a winning one when the market acts accordingly to what your system indicates. It can be a losing trade when the market acts against it, but it’s still a good trade.

- A bad trade is a trade made against your better judgment, against your rules. It can be a losing trade when a market acts as it “should”. It can be a winning trade when the market rewards your bad judgment, and it can be a very dangerous trap as a bad habit gets reinforced.

The last thing to say in conclusion is that a certain psychological barrier for a trader to overcome to start applying his stops with no hesitation. When this barrier is taken, things suddenly become so clear and automatic that a trader can’t even believe it was ever a problem for him. When this barrier is overcome, you feel that stops became natural part of your trading, that you take them with no slightest hesitation and forget about them instantly, moving on to search for your next trade, that taking stops do not trigger any negative emotions. This is wonderful feeling of total self-control. Not only will it do plenty of good to your trading performance, it’s a very rewarding feeling in itself.


Bobb999 said...

Hey John, your Friday afternoon BWLD trade you tweeted was a surprise, especially after reading your post on the importance of tight stops...How come you let BWLD reverse so far on you, well below your buy price (of 43.55), and the B.O. point (43.27), to exit finally at 43.02 for a -1.0% loss??
A guess: Bullish volume was so strong when you bought that you maybe thought there was enough underlying buyer interest to make it quickly bounce to the upside again-?
-btw I appreciated the post on stops. I can't say I've yet mastered sticking to stop rules as I should.I've decided to enforce stop rules from now on, by entering actual stop-sell or stop-buy orders immediately after entering a position. It may be the only way, at least as a training measure, to protect me from my worst enemy: my own undisciplined self!

C.R.E.A.M. said...

Great new feature John. Learning here everyday. Thanks

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