trader who hasthe  potential  to  execute  will  affect  the  net  order  ﬂow.  Whether  thosetraders are using a larger or smaller time frame than you is not important.What is important is whether the potential they offer will be for or againstthe  net  order  ﬂow  currently  operating  in  the  market.  In  other  words,  ifthey  come  in  with  their  potential,  will  that  potential  increase  the  imbal-ance or reduce it?
By observing price patterns in several time frames, you can begin tosee which direction the market is more likely to go. By using more thanone  time  frame  to  evaluate  a  trade’s  potential,  you  will  avoid  more  low-probability trades. When several time frames are all saying about the samething and prices are advancing in that direction, as clock time passes, thattrade’s potential is increasing. If several time frames appear to offer con-ﬂicting price pattern relationships, that trade most likely has a lower po-tential. As a trader looking for high-probability trades, develop the skill ofcomparing multiple time frames to your trade hypothesis. When you havea good idea that traders in the next few higher time frames are interestedin the same side as you are, you need to let them have the clock time theyneed to execute.
Also,  be  prepared  for  your  time  frame  to  give  a  liquidation  signalwhen  the  higher  time  frames  are  getting  their  initiation  signal.  A  key  toholding  your  winners  and  using  multiple  time  frames  is  learning  that  a
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shorter time frame needs to offer a countertrend signal to encourage thetrader from the opposite side to initiate. That opposite-side order from theshorter-time-frame  trader  is  what  the  higher-time-frame  trader  needs toexecute his initiation order. For example, if you are on the 15-minute timeframe from the buy side, and the hourly trader is nearing a buy signal, thehourly trader would like to see a sell signal on the 15-minute time frame inorder to encourage a new 15-minute time frame short to open that he canbuy from. Without knowing that the shorter time frame will be in conﬂictwith the larger time frame at the exact moment the larger time frame is setto  come  in  on  the  advancing  side  of  the  net  order  ﬂow,  you  might  betempted to book a small gain in your time frame. Learn to let the largertime frames push your trade.
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RULE #13
Know YourProﬁt Objective
If  you  don’t  know  where  you  are  going,  you  willprobably end up someplace else.
—Yogi Berra
No  trader  will  ever  reach  his  full  potential  without  some  disci-
plined  method  of  getting  out  of  winners  when  it  is  time.  The winning  trade  that  continues  to  develop  potential  is  a  differentissue. Proﬁt objectives are necessary because you must have points inthe market where you make choices. Sooner or later it is time to liqui-date  every  trade  and  exit  the  market—the  trade  is  over.  When  thetime/price  relationship  reaches  that  point,  you  liquidate  and  wait  forthe next one.
The  best  time  to  make  that  choice  is  before you  place  your  trade.Having  a  proﬁt  objective  before  you  initiate  provides  good  beneﬁts for  your  developing  trade  methodology  and  your  discipline.  Proﬁt objectives  help  you  stay  focused  on  getting  paid  the  most  from  yourwinners.
Having a proﬁt objective ﬁrmly in mind is crucial to lasting successfor  two  basic  reasons.  First,  it  helps  you  maintain  the  proper  risk-to-reward  ratio  on  your  open  positions.  As  we  discuss  in  detail  later,  themagic numbers are 42% winning trades and a 2:1 money won/lost ratio. Atthis level of performance you have a winning approach, but if you don’thold your winners you can’t overcome your losers. Knowing how muchmoney you are looking to take on any speciﬁc trade helps you keep yourfocus  on  this  ratio.  Just  knowing  these  ratios  and  attempting  to  deﬁne
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your upside objective will keep you out of lower-probability trades. Plac-ing your exit orders at or beyond price levels that will maintain this mini-mum  winning  ratio  does  not  insure  that  those  numbers  will  trade,  ofcourse, but having a resting order designed to take a proﬁt allows you tobeneﬁt  from  winning  ratios  and  helps  you  stay  disciplined  to  take  win-ners—to  help  your  approach’s  inherent  probabilities  work  for  you  moreoften than not.
Second,  having  a  proﬁt  objective  helps  you  ﬁght  the  temptation  toclose a winner too early, cutting your proﬁt short. As long as your trade isworking,  you  have  a  better  ability  to  sit  tight;  you  are  developing  themuch-needed discipline to leave a good thing alone. No matter how youwant to slice it, no market will go straight up or straight down away fromor toward your proﬁt objective. It will take some amount of time for thetrade  to  develop  in  order  to  eventually  reach  your  objective.  If  you  letevery little switchback or price hiccup scare you out of your winners, youcan’t pay for your losers. Having an objective ﬁrmly in place will give youthe perspective that is required to sit through and wait out temporary ad-verse price moves. Every market inhales and exhales.
Proﬁt objectives are tools for effective trade management when hold-ing your winners. They help you focus on ﬁnding good risk/reward ratiosto  begin  with,  but  more  important,  they  help  you  hold  your  winners  forthe largest potential gain. As long as you take the point of view that proﬁtobjectives are part of your tools, you will have more winners to start withthat you can hold longer.
I have found a few helpful tools that allow me to remain conﬁdent inmy proﬁt objectives. First, look for a minimum three-to-one reward-to-riskratio. This is not your actual price objective; this is the money you intendto risk compared to the market potential you hope to ﬁnd. For example, ifyou believe that a market is developing a short-selling opportunity, wherewill you place your protective initial buy-stop order, and how far can themarket go in your favor before the buyers step in and support it? If youare going to risk 50 points on a day trade, does the market have the poten-tial to trade at least 150 lower on the day? If the answer is no, then youmight  want  to  pass  on  that  particular  short  sale.  You  are  looking  for  ahigh-quality  relationship  between  your  risk  limit  and  your  upside  poten-tial. If the market has never had a 150-point day in its entire history, thenpassing up that trade is a no-brainer; most likely the market doesn’t havethat  much  potential  for  the  day.  Your  goal  with  a  risk/reward  ratio  is  tostart  from  the  premise  that  the  ratio  tells  you  how  far  the  market  mustmove if you take that position. Comparing your required proﬁt objectiveto what you already know from your previous market study tells you bet-ter  whether  you  really  do  have  a  potential  trade  with  a  higher  or  lowerprobability based on the parameters you have selected to trade with. You
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need to compare that risk with what you have to get if you take the posi-tion. In other words, if you can risk 50 points and the market can’t pay youat least 150 (based on your study), knowing your required objective pre-vents you from placing a low-probability trade.
Having  a  proﬁt  objective  also  creates  conﬁdence  to  add  to  winningpositions.  Many  trades  will  have  much  more  proﬁt  potential  than  origi-nally hoped for as they develop. When that potential becomes apparent,having an objective will help you ask good “if–then” questions to improveyour net rate of return. When you see clearly that your original objective isonly a small stopping point rather than the end of the trade, having a pre-determined mind-set to add to the winning position is a great way to re-main disciplined to work the winning trade until it is all over.
In my personal trading, I have two or three objectives for each positionwhen I initiate for my ﬁrst entry. The ﬁrst objective is the area where I feelthe market will have a pause, and a larger time frame trader must make adecision.  For  example,  if  I  have  bought  an  hourly  low,  my  ﬁrst  objectivewould be the high of the day or previous day; that is most likely where thedaily or weekly trader will take notice and either cap that rally with sellingpressure or add to the net order ﬂow on the buy side. No matter which hap-pens, the ﬁrst objective is not just price; it is time and price. I want to seethe higher-time-frame trader push my trade with his order ﬂow.
My  second  objective  is  the  usual  three-to-one  reward/risk  ratio.  If  Ihave  correctly  anticipated  the  net  order  ﬂow,  and  the  trader  in  the  nexthigher time frame is joining the party, when the market gets to the price Iam looking for I must decide if the trade has developed more potential inthe same direction; that is a factor of time. If the rally has happened veryquickly,  and  the  market  traded  the  second  objective  price  and  thenbacked off a bit, most likely that is stop-loss buying as the losing shortscover and the larger time frame also liquidates. In this case, the rally maynot have that much farther to go and I would either take the proﬁt or atleast roll a break-even protective stop. But if the rally took lots of time,there was good continued buying and selling from both sides as the objec-tive was reached, and the price stayed at or around the objective for sev-eral hours, then it is possible that even larger time frames are coming intoplay. The entry of traders in the next larger time frame may mean that thepotential for a further advance is still building. If the market continues tostay at or around the objective price while volume and open interest alsoincrease, the market most likely has further to go. I would add to the posi-tion by some amount because the potential to reach the next objective hasincreased.
Should the market continue to advance after the position is added to,then the next objective level comes into play. That is usually a price areawhere  the  larger  time  frames  take  a  stand  from  the  other  direction.  For
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example, in this case, an hourly low was the right area to get long a mar-ket that has now made an advance that the daily or weekly trader is alsointerested  in  from  the  long  side.  As  we  approach  the  monthly  openingrange  (for  example),  the  monthly  trader  will  now  take  notice.  Since  themarket  had  been  lower  up  until  that  point,  the  monthly  trader  is  mostlikely  either  looking  at  placing  shorts  out,  anticipating  a  failure  of  themonth’s opening range, or looking to go long if he is certain that the rallywill continue. The net order ﬂow will most likely start within a price/timerelationship that includes everybody. Once the price reaches the monthlyopening range, that price action will be a high on everybody’s price chart.So  now  we  watch  for  the  hourly  price  charts  to  show  some  selling,then the daily charts to show some selling, and ﬁnally the monthly charts.If the process takes 24 to 48 hours of clock time, and the market itself islower  for  all  those  time  frames,  then  most  likely  the  traders  in  both  thelarger and the shorter time frames are all liquidating. The trade from thelong side is running out of potential. The objective was reached and thetrade is over.
However, if the price action continued to show strength—for exam-ple, the hourly price chart corrected lower and then prices returned to thehigh end of the range, the daily price chart closed near the high and justunder the monthly opening range, it is a Friday afternoon and the proﬁt-taking  sell-off  to  close  the  week  never  happened,  and  so  on—then  thetrade may be continuing to build potential. If the market advances furtherthrough the opening range, in this example, it would be a good time to addagain  to  the  position  because  traders  in  the  larger  time  frame  are  nowadding net order ﬂow from the long side as well.
Having  a  series  of  proﬁt  objectives  in  place  before  you  initiate  thetrade  helps  you  to  remain  focused  on  the  process  of  holding  a  winningtrade. Markets are dynamic and conditions are always changing. Proﬁt ob-jectives help you maintain your edge for the simple reason that they keepyour attention on the things that really matter: Changes in the net orderﬂow as traders come in or leave the market. The important point of havinga  series  of  proﬁt  objectives  is  that  you  look  for  something  changing  atprice/time  points  where  it  would  make  sense  for  something  either  tochange or stay the same. As your objectives are reached, price action willprovide important clues for you to review in order to have a degree of cer-tainty about liquidating, holding, or adding to the winning position. But inall  cases,  price  objectives  are  important  areas  to  have  predetermined  inyour mind. These are the places that you will do something or at least con-sider doing something. Whether the market ever trades to your price ob-jectives or beyond them is really not important. It is important for a traderto remain proactive in his trade management.
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Price objectives are stopping points that help you maintain focus onyour trade. Having the price objective in mind before you place the tradewill help you choose better-quality risk/reward ratios to start with. Havinga series of objectives that are price- and time-sensitive and involve addi-tional behavior from multiple time frames will help you get the most fromyour winners.
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RULE #14
Don’tSecond-GuessYour Winners
In great affairs we ought to apply ourselves less tocreating chances than to proﬁting from those thatoffer.
—François la Rochefoucauld, 
Forbes Thoughts on Opportunity
W ithout a doubt, the most proﬁtable market potential you can iden-
tify is a change in trend. When a market has stopped moving inone direction and is about to begin a move in the other direction,that potential might take time to fully develop but it is your lowest-risk,highest-probability  opportunity.  You  are  literally  sitting  on  top  of  a  goldmine. Getting in position early takes effort, but once you have establisheda base position, you need to let the trade work.
This is different from simply holding a winner. This is more an issue ofmaintaining proper focus, continuing to do the analysis needed to identifyfundamental  and  technical  potential,  maintaining  constant  vigilance  onnet order ﬂow as it changes, and sustaining a strong belief in yourself andyour ability. Your trade hypothesis is developing and the time needed for atrue  change  in  trend  to  manifest  might  be  quite  long.  The  last  thing  youwant  to  do  is  reevaluate  what  is  happening  and  exit  the  trade  early  or,worse yet, reverse your position.
Personally, I can show you trade records where I have been at theprécis point in both time and price to be long or short from the changein  trend,  sometimes  from  a  yearly  or  multiyear  high  or  low.  Did  I  getpaid? Yes, but not what I could have. I second-guessed my hypothesis.
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Looking  back,  I  can  see  that  it  was  mostly  because  I  lacked  the  focusand  discipline  to  just  leave  well  enough  alone.  What  stands  out  in  mymind most is the high in the orange juice market for 1991. I was shortfrom $2.06/Lb. I covered at around $1.95/Lb. Yes, I made a nice gain onthe  trade,  but  within  a  year  that  market  was  over  50  cents  a  poundlower.
During  the  time  the  market  was  under  selling  pressure,  I  kept looking  for  another  short  position  to  put  out  on  a  rally.  I  convinced myself that the initial break was too fast and that a re-test of the highswas  coming.  But  that  rally  never  happened.  Because  I  was  content  tobook a nice gain instead of just letting the trade work, I missed one ofthe truly great short positions of the last decade or so. My trade hypoth-esis was the correct one and my initial timing was good, but I second-guessed  myself.  True,  a  lot  of  that  was  inexperience,  but  that  is  thewhole purpose of developing trading rules that work: to place controlson your behavior until you can trade with enough discipline to let prof-its run.
Rule #14, “Don’t second guess your winners,” is ﬁrst cousin to Rule #11and  a  critical  part  of  letting  proﬁts  run.  Of  the  mistakes  many  tradersmake, the mistake of second-guessing themselves is the most costly. Notonly will they be out of the market when prices continue to advance favor-ably for their initial trade hypothesis, but often these same traders makethe most costly mistake of all by second guessing themselves: Trying to beon both sides of the market. If you want to watch your trading stake go upin smoke as fast as possible, I recommend you try to trade both sides of amarket that is developing a trend.
Because  the  temptation  of  unlimited  proﬁt  potential  is  so  strong,many traders attempt to trade from both the long side and the short sideof a market that has true potential in only one of those directions. This is acommon mistake to make after a market has made a hefty advance in onedirection, because we all know a correction is coming and it will be a bigone. For example, if you are long soybeans from the seasonal bottom atthe end of the year and on into the spring, and if the market has advanced80¢/BU up to planting, it is reasonable to expect a top may be in place ifthe acreage planted is higher than expected. It would not be uncommonfor sellers to come in and for holders of open longs to liquidate at leastsome  of  their  positions.  Under  those  trading  conditions,  a  30  to  40¢/BUdrop in price would not be uncommon, and that drop might take a weekor  longer  to  play  out.  If  you  are  holding  a  nice  open-trade  gain  on  openlongs, you might be tempted to liquidate and reverse with the intention ofreestablishing longs after the correction, taking a gain from the short sideas well.
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The problem is, in this case, you might be shorting a bull market. Re-member, it is the blood of the shorts that have been paying the bulls. Youhave  now  placed  yourself  on  the  side  of  the  market  that  has  alreadyproven to be the losing side. Yes, a 40¢/BU correction is a lot of money,and yes, that correction would work against an open-trade proﬁt. But therisk you are taking by second-guessing your original bullish hypothesis isthat  you  will  not  time  your  participation  well.  In  most  cases,  the  antici-pated correction will not happen exactly as expected, nor will it be pre-cisely  a  certain  amount,  if underlying  bullish  conditions  remain.  Ifconditions remain bullish for a change in trend, and that uptrend has an-other three months to go, you won’t know that for certain until later, butyour new short position is in serious jeopardy. If those bullish conditionsremain  after  a  bearish  fundamental  is  ignored  or  absorbed,  it  will  onlytake one rally to take away a good portion of your previously closed gainand you won’t have a position of any kind once you liquidate your losingshorts.  A  $1.50/BU  price  change  in  favor  of  the  bullish  hypothesis  goingforward  might  mean  little  or  no  gain  to  your  account  if  you  don’t  haveyour original base longs still working—you were short for a time againstthe trend and you were ﬂat for a time, waiting to reestablish your longsthat would have worked anyway.
All of this could have been avoided by holding to your original hypoth-esis  and  letting  your  positions  work  until  that  market  was  clearly  overfrom the long side. By second-guessing yourself, you took money out ofyou own pocket when your hypothesis was the correct one.
Now, I’m not suggesting that you will see a $1.50/BU up-move in soy-beans every year. Obviously, seasonal tendencies in the grain complex aredifferent  from  year  to  year;  I  am  not  postulating  that  bullish  or  bearishtrades will play out as anticipated under all market conditions. I am sim-ply using an illustration. My intention is to show you that no matter howyou come to a conclusion that a market has potential in one direction overanother, you serve your self-interest best by staying with that hypothesisand  not  vacillating.  You  need  to  consider  trading  only  from  that  side  inmost cases, and you need to ﬁnd a way to leave your initial position onlong enough for the potential you have found to develop fully. That couldtake time.
The psychology behind this rule is critical for your lasting success, be-cause  following  this  rule  helps  you  follow  all  the  other  rules  for  lettingproﬁts run. If you second-guess yourself and your trade hypothesis, mostlikely you will cut an open-trade proﬁt short, you will not add to your win-ners, and you will not have a proﬁt objective you are willing to wait for.When  you  second-guess  yourself  you  lose  the  beneﬁt  of  using  multipletime frames and of course, your records show that your personal results
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data  remains  inconclusive  for  true  learning  of  your  strengths  and  weak-nesses. At best, changing quickly from one hypothesis to another preventsyou from ﬁnding the truly proﬁtable trades that make all the difference;and at worst, it prevents you from getting paid the highest return for therisk you are assuming. One reason short-time-frame traders never achievethe lasting success that long-term traders more often have is because theshort-time-frame trader is not holding to a perspective that pays the most:identifying a change in trend and sticking with it.
To make this rule work, you as a trader need to be prepared to makeadditional  choices  for  the  long-term  health  of  your  trading  account.  Toearn the highest rate of return possible, you need to prepare ahead of timecertain  trading  behaviors  and  be  ready  to  apply  them.  When  a  trade  hy-pothesis is working and your initial base position is showing a proﬁt, beprepared to ask the question, “How far could this go?” If you are willing toconsider that your initial price objective may be only a small part of whatmight prove to be a huge move, you must be willing to consider enteringfrom the same side again very quickly if you liquidate. Perhaps adding tothe position as the market passes your objective is a better move. If youare  remaining  vigilant  in  your  personal  market  study  and  your  recordkeeping,  perhaps  you  see  that  something  is  changing  and  your  originaltrade hypothesis is more accurate than ever; in this case, holding at leastsome of your position is a better play.
This rule works for your best potential when you have the capacity tohold to your ﬁrst conclusion and are willing to stay with it for as long as ittakes. When you look at some past market moves, trends that lasted foryears in some cases, there are always traders who were there and on theright side at the turns—when the risk was lowest and the proﬁt potentialgreatest. Some were even there by accident. But as the trades developed,those very same traders chose to change their hypothesis for reasons oftheir own, either liquidating long before the full potential was realized oreven  entering  positions  from  the  other  side  and  suffering  losses.  By  re-maining in the frame of mind not only that you can be positioned at theturns but also that you can hold those positions, add to them, and wait forthe trend to fully develop without taking yourself out of the game early,you will be in position to hit the home run. But if you let the short-termﬂuctuations or pullbacks convince you that the trade is no longer going towork, or convince you that the trend has failed, you are not trading the netorder ﬂow or the market potential—you are merely trading your personalpoint of view. Your goal in making this rule work for you is to learn whatyou need to learn about your market ﬁrst and be willing to give the marketas much time as it needs for that trade to develop.
By combining the essential elements of “letting proﬁts run” into an ef-fective  trade  management  technique,  you  will  gain  the  conﬁdence  you
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need to sit tight on a winning trade and let traders in the other time framescome to the same conclusion and add order ﬂow in that direction; and youwill  create  the  discipline  required  to  hold  for  the  objective.  All  the  timethis is happening, you are watching for more clues that this is really thebeginning  of  a  bigger  development  in  the  same  direction.  When  you  seethat potential fully, you can then add to the winner and easily wait for thenext objective.
Over time, as you practice holding winners and letting proﬁts run, youwill learn that the markets are a very big place. There are times when thehugeness of the move won’t be seen at all by anyone at the start and only ahandful  of  traders  will  have  positions  on.  Once  that  trend  develops  andbecomes clear to everyone, that power from the net order ﬂow will pushthat trade farther than you might have initially expected. Remaining opento  that  possibility  right  from  the  start increases  your  probability  for  awindfall  gain.  If  a  change  in  trend  is  truly  developing,  those  clues  willshow, and you need to be open to the possibility that you were in the rightplace at the right time; now you need to run with it.
Traders who have the ability to let a proﬁt run are always the traderswith an open mind to the possibility that anything can develop. Once theyare on the right side they are looking for clues that this position might go avery long way. They tend to stay with that potential until the market hassaid either yes or no, but they rarely second-guess their initial hypothesisfor the simple reason that it apparently was the correct one. Rather, theyask the question, “How right could this be?” If their initial trade hypothesisis the correct one, and it turns out to be the correct one for years, they willmost likely have some trades on all the time. But they made that choicebefore  the  trade  was  entered.  Those  traders  took  the  point  of  view  thatanything can develop, and if it does, and they are on the right side, theyare sticking with it.
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PART IV
Trader Maxims
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RULE #15
Know theLimits ofYour Analysis
Every ship at the bottom of the ocean has a set ofcharts on it.
—Old nautical saying
W hen I ﬁrst started trading in May 1986, the ﬁrst book I read on the
markets was Chart Your Way to Stock Market Proﬁts, by David L.Markstein  (New  York:  Arco  Publishing,  1972).