of yourouter behavior, which includes execution entry, stop placement, movingstops, setting limits, adding to positions, taking off positions, ﬁnal liquida-tion,  when  stops/limits  were  ﬁlled,  dates  and  times  of  all  these  actions,and the net gain or loss to your account.
Inner data is far more valuable and difﬁcult to document, but the in-ner  data  is  the  real  meat  and  potatoes  of  getting  better  at  trading.  Re-member, no matter how you want to slice it, you must be on the properside of the net order ﬂow reasonably close to your entry point in order toat the very least have an open-trade proﬁt working for you. If anything is
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getting in the way of your seeing the most probable point where the netorder ﬂow is likely to change, your probabilities of success on that tradeare lower.
One thing you must do in the record-keeping process is to documentexactly what you are thinking and feeling when you execute. Keep a writ-ten journal of your thoughts and emotions. The sole purpose of this docu-mentation  is  to  expose  to  your  conscious  mind  the  true  nature  of  whatyou are using from your inner world when you execute, move orders, takeyourself out of trades, or refrain from taking trades. All of your thoughts,perceptions,  feelings,  desires,  motivations,  and  so  on  boil  around  insideyour internal trade-making software and ﬁnally create an urge to action—the reason why you pull the trigger at that precise spot.
The  sum  total  of  your  inner  world  is  what  creates  your  account  bal-ance for the simple reason that you see the market the way you see it. Yoursystematic trading approach is an attempt to create a sense of order to un-derstand the apparent chaos of price action. It is designed to help you ﬁndthe best possible point for a change in the net order ﬂow, based on somehypothesis of probabilities that you hope are usually present under certaintime frames. What your system really does for you is give you enough con-ﬁdence to execute. It gives you that conﬁdence because the systematic ap-proach is based on a set of assumptions that you can agree with ahead oftime. All you need to do is follow the system—but market conditions andyour personal state of mind may not be exactly right for that system today.When you make the choice to trade or not trade for some reason, youcreate only one of three results: made money, lost money, or stood aside.No matter the results in your trading account, there was movement in themarket anyway. If you see that movement as a potential proﬁt you missed,a potential loss you avoided, a trade you shouldn’t have done, or a tradethat was done right, you are no longer trading the system. You are tradingyour  point  of  view on  the  results  of  using  or  not  using  the  system.  Themarket itself had no knowledge of your participation or absence, and yourresults had nothing to do with the net order ﬂow.
This  inner  data  is  invaluable  to  know  about  yourself  because  it  willexpose your thinking process for what it is at the time. After critically ex-amining your thoughts and emotions, comparing them to the ﬁnancial re-sults in your account, and then ﬁnally to subsequent price action, you willsee  how  fear,  greed,  or  hope was  involved  in  your  execution  instead  ofclarity of observation or discipline. Once that is clear to you, the choiceto change both your thinking and your behavior is yours. If you know thatwhen certain things are going through your mind you are about to eithermake  a  losing  trade  or  get  out  of  a  winner  too  soon,  you  can  make  thechoice  to  stay  out  or  hold  on  a  bit  longer.  Your  conﬁdence  is  better  be-cause you control your behavior better.
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Record keeping on both levels will give you that extra data to learnwhere you are strong and where you are weak in your trading approach.After  critically  examining  your  own  documented  behavior  you  can  seewhere you excel in trading, and you can then duplicate that winning be-havior.  You  will  also  see  where  your  behavior  is  weak,  and  you  can  putcontrols (rules) in place to minimize their effect on your execution. In theend, it is only your behavior that creates your results. You need to knowwhat behavior works and what behavior doesn’t, and in most cases thatdata is in your head when you trade. Get that data out on the table andstudy it.
In the Introduction I brieﬂy discussed one change I made to my trad-ing  approach  after  I  started  to  keep  good  records  and  review  them.  Ilearned to stay out of the market when I personally needed to and to trustmy analysis. Making that one change put me on the right side of the net or-der ﬂow better, which allowed me to hold my winners for the best poten-tial. Yet when I reviewed the records after that point, I discovered that mytotal  trade  results  where  not  materially  different;  I  had  about  the  samenumber of winners and losers and made about the same number of tradesin a quarter. Most of my net gain was from only a handful of the trades—the ones I was holding. I plotted this data using a standard bell curve andplotted my previous results on top of that. I discovered that from a pureprobability standpoint, nothing had changed. So why was my account bal-ance higher?
My account balance was higher because I held my winning trades andmade fewer total trades before the winning trades. Prior to the new rule Ienforced on my behavior, the overtrading yielded small gains and losses,and that kept my balance orbiting around a basic area of pre-winner loss.By not having those losses to overcome, when I would hold the winner forthe pull, instead of overcoming a loss prior I was adding a proﬁt prior. It issimilar  to  positive  cash  ﬂow  as  opposed  to  negative—like  getting  paid,paying all your bills, and having nothing left, versus paying all your bills,getting paid, and having no obligations. My account balance went higher,slightly  lower,  higher,  slightly  lower,  instead  of  going  lower,  slightlyhigher, lower, slightly higher, yet the actual trading was about the same. Ireally didn’t do anything different in my analysis or trade selection; I justgot positioned better by knowing where I was weak and knowing where Iwas strong. My record keeping showed me that, and if I hadn’t kept thoserecords  I  may  have  not  learned  that  as  quickly  or  had  the  data  to  makethat small change.
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RULE #11
Add toYour Winners
He that would have fruit must climb the tree.
—Thomas Fuller
No one can successfully speculate to their full potential until they
have the capacity to consistently add to winning positions. I makethis statement for three reasons. First of all, the pure probabilitiesof any systemized trading approach will always be subject to a ratio ofwinning  trades  to  losing  trades.  If,  for  whatever  reason,  the  winningtrades  are  not  maximized  to  their  full  potential  then  your  net  resultsover time will usually never be more than average across the entire sam-ple set.
I  would  encourage  you  to  do  a  little  homework  on  various  systemsand their net results over time. You will discover that almost all systems(no matter how they were developed or the theory behind them) suffer aperiod of drawdown that reduces their overall net results. If the user of agiven system has used it for any reasonable amount of time prior to thedrawdown point, no matter the previous success earned, the results areusually no better than a small gain or loss. If the user of that system hasonly used it a short time prior to a drawdown, then the results are usuallynegative to the account equity. This, of course, does not take into accountthe actual trader executing and how well he follows the system to beginwith. Many winning systemized approaches are negated by the behaviorof the trader using it.
Second, market quality is never discussed in system methodology. Allback-testing is based on the “if–then” assumption that conditions in any
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market  will  be  basically  identical  in  time  forward  as  they  were  in  timepast.  In  other  words,  the  system  is  supposed  to  create  results,  from  thepoint it is actually used in a real trading market, similar to those it gener-ated  as  it  hypothetically  performed  in  markets  that  had  already  beentraded. But the underlying conditions of that back-tested market cannotbe  duplicated  forward,  and  the  system  methodology  cannot  account  forunderlying  conditions  as  they  may  change.  Therefore,  the  establishedprobabilities learned from the system’s methods may not be duplicated ifunderlying conditions are creating price action that the system has neverbeen  exposed  to  before.  The  system’s  win/loss  ratio  might  be  higher  orlower and the money taken from winners may not be enough to overcomethe money lost on the losers.
Part  of  the  reason  that  systems  have  drawdowns  to  begin  with  isbecause the system is being overlaid onto a market that has a differentunderlying condition than the one that the system methodology was de-veloped under. The perfect example is a trend-following approach beingoverlaid onto a market that has stopped trending due to a change in theunderlying fundamentals and/or the perception of traders. The win/lossratio will most likely drop and the losing trades will most likely be largerthan  the  winning  trades.  Adding  to  the  winners  in  this  case  becomesmore critical if you intend to keep using that system while you wait forthe resumption of trend.
Third, adding to winners is the best method of letting proﬁts run forthe  simple  reason  that  the  net  order  ﬂow  in  the  direction  of  your  trademay continue for quite some time past your initial best estimate. When wediscuss using multiple time frames (Rule #12) and buying and selling 50%retracements (Rule #25), you will have more tools for adding to your win-ners because often the depth of the net order ﬂow can develop over time,and it may not be apparent until you have been in the trade for a while.Sometimes the quality of the market changes in your favor to a deeper andmore deﬁnable way after you have executed to take your initial position.Being  alert  and  ready  for  this  eventuality  is  the  psychology  behind  Rule#11, “Add to your winners.”
Adding to your winners does not necessarily refer to a particular pricepoint.  It  is  often  a  price/time  relationship.  For  example,  suppose  youhave established a particular market position for a period of time and itcurrently has an open-trade proﬁt, but the market itself has started to con-solidate  between  two  very  well-deﬁned  price  areas.  Having  done  yourhomework, you already know that this particular market is subject to con-solidation  when  waiting  for  a  particular  set  of  fundamentals  to  develop.You already know that conditions are bullish and you are waiting for thatconsolidation  to  break  out  to  the  upside,  but  that  would  mean  a  new
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monthly high for that market. The fundamentals are due at the end of themonth, and prior to that point the volume has been dropping daily, but themarket is remaining well bid during this time.
If the market breaks out to the upside, you want to add to your openlongs because a new monthly high will attract a lot of attention from peoplewho may be waiting for some sort of conﬁrmation before committing them-selves to a long position. As the time approaches for the new set of closelywatched fundamentals to be released, you notice that the market ﬁrms nearthe top of the range and volume is increasing a bit. Now the news is releasedand the market breaks out to the upside and never looks back. That wouldindicate that a potentially new net order ﬂow is coming in, and even thoughprices are now at your ﬁrst objective on your ﬁrst long, the better thing to dois hold that trade and add to it because now the long position has more po-tential than you ﬁrst anticipated—and you are already there with a lead.
Of  course,  if  the  opposite  had  happened,  you  would  also  know  thatthe potential in the long position is dropping and you might want to liqui-date; but that is another issue. In the case of an upside breakout at a sig-niﬁcant  price/time  relationship,  you  have  a  new  clue  that  something  ischanging, and that very well could mean more potential in the directionyou had originally participated in. You need to press your advantage andnot only hold that winner but consider adding to the open trade for a max-imum gain. A system cannot account for that potential; only you can.
On a close and reverse strategy the same thinking applies. If you areaggressive  in  one  direction  and  something  changes—not  only  liquidatingyour open trade but reversing completely and holding a new trade in theother  direction,  if  that  price  action  is  more  aggressive  and  maybe  evenbreaks back through your original price from the ﬁrst trade’s entry—youare in a position where you could very well have tapped into a very largenew net order ﬂow and you are apparently on the right side. You need toconsider adding to the second working trade. Some old trading rules actu-ally are based on this thinking, one of which is “Buy/sell a reversal backthrough the opening range.” In today’s 24-hour marketplace this rule is ob-solete in many markets, but the psychology is the same: Add to your win-ner when the net order ﬂow is very clear to be expanding in your direction.The key here is not to say you will  always add to your winners butthat you will always be ready to add to your winners when the net orderﬂow is clearly apparent to you and you already have a lead on the market.In other words, when you are seeing it clearly and you are being paid, askthe market to pay you more since it apparently wants to.
A key to making this rule work consistently for you is to develop themind-set that market conditions are dynamic. They are constantly changing.When they change in your favor you need to exploit that, especially when
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you are already in the market holding a winner. Adding to a winner is reallynot a factor of increasing your risk. Your risk is always identical all the time:“What if I am on the wrong side of the net order ﬂow?” The fact that marketconditions can and will change is not the issue. The issue is getting paid themost when they change and losing the least when they change.
When  conditions  are  not  changing  and  a  trade  is  working,  at  somepoint you want to add to that winner to maximize your proﬁts. You wouldliquidate that trade at your objective anyway, regardless of whether youhad one contract working or a hundred. After you add to that winner, ifsomething changes against you, either you would take your position off orbe stopped out—again, regardless of whether you had one contract on ora hundred. However you decide that the rule set for adding to a winner isgoing  to  work  for  you,  the  strategy  is  less  important  than  always  beingready to use it. If conditions change for the better in your favor, the issueof  adding  to  a  winner  should  never  be  in  question.  Press  the  advantagethat you already have.
Think of this rule as proactive. You are taking control of your ultimatetrading success by choosing to place yourself in the best possible proﬁt.You are choosing to take what is there to get. Remember, this rule will notwork well for you if you add to winners hoping the market will continuein your favor. You need to be certain you have identiﬁed the remaining po-tential in the trade. Proactively choosing to say, “As long as conditions re-main as they are, I will take more out,” needs to be effectively balancedagainst “If conditions change, I am out.” There can be no other inﬂuenceon your adding to a position. You add when your level of certainty is high-est in your original trade hypothesis. As long as your hypothesis remainsthe correct one, you stay in that trade until your objective is reached orsomething changes.
Sometimes adding to a winner is a factor of conditions remaining thesame until you reach the objective. Sometimes adding to that winner is afactor of conditions unexpectedly improving in your direction. But in anycase, when you are on the correct side of the net order ﬂow, once that issolidly conﬁrmed to you, no matter how you choose to deﬁne it or whattools you use to conﬁrm it, adding to that winner is your best option tomaximize your proﬁtability and negate the opposing probabilities inherentin any systemized trading approach. Your systemized approach will haveweak spots and a drawdown can happen at any time. Remaining vigilantand prepared to add to a winner will help increase your chance of lastingsuccess. Part of your trading plan should include a regular assessment ofhow well you are applying this rule.
One consideration that will help you identify when it is time to add toan open-trade winner is a rise in volume on days the market is moving inthe intended direction. If that is accompanied by a rise in open interest, so
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much the better, but you need to see turnover at times when the market isadvancing in your direction. Remember when we brieﬂy discussed the is-sue  of  zero-sum  transactions?  The  only  trader  who  must execute  is  theone holding the losing position; he has to get out at some point because hecannot lose money forever. When that losing position is liquidated, at leastone contract is not there anymore, so open interest will drop. If this losingtrader reenters the market and then experiences another loss, volume willbe higher but the net open interest should still reﬂect his leaving the mar-ket. In other words, the same trader did one lot for a net loss on the day,but he did it four times. Therefore, volume is higher but open interest isaround the same for the day because he is not holding overnight.
Turnover on days when price action is net in the direction of your hy-pothesis usually means the same groups of losers are coming back and thesame groups of winners are taking their money. This situation gets betterif new winners and new losers are squaring off; a rise in open interest willresult. In this case, because the price action is still net in one direction, itis evident that the sum total of the orders from that side remains higherthan  the  other  side,  no  matter  who  is  winning  or  losing  net  on  the  day.The market will continue in that direction until everybody quits, which isshown by a drop in open interest. That usually signals you are near a turn.Watching for turnover is a great clue that it is time to add to your open-trade winner. If that is accompanied by a rise in open interest, you knowthe market has a lot of fuel left in it, so you can continue to add.Maybe you could add every day for weeks and take it all . . .
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RULE #12
Use MultipleTime Frames
Think fast—act slow.—Greek proverb
Most  traders  have  had  the  frustrating  experience  of  having  a  nice
winning trade suddenly reverse into a smaller gain or, worse yet, aloss, execute for their liquidation, and then watch that trade run intheir favor to a new daily or weekly proﬁt level. Aside from placing theirstop  too  close  (or  panicking  out),  this  problem  is  a  result  of  not  under-standing multiple time frames and how groups of traders on different timeframes compete with one another for control of the market. If you look atyour  historical  price  charts,  you  will  observe  that  retracements,  falsebreakouts,  reversals,  failed  reversals,  washouts,  and  various  other  pricepatterns occur with regular frequency under all time frames. A short-time-frame price chart and a long-time-frame price chart will eventually havethe same or similar patterns develop; the only difference is actual time re-quired  to  create  that  price  pattern  or  see  that  potential  developing—“clock time,” if you will.
I  ﬁnd  it  is  more  helpful  to  think  of  price  charts  not  in  terms  of  atime frame per se but more as a number of bars. For example, a typicalpennant  formation  requires  around  40  to  60  bars  of  “open-high-low-close”  (OHLC)  price  bars  to  form  and  be  observed  as  a  potential  pen-nant.  On  a  ﬁve-minute  price  chart,  that  would  represent  about  200  to300 minutes of clock time—somewhere around 3.3 to 5.0 hours by theclock. If you have done your homework, you know that a pennant for-mation has a certain probability of a breakout at a certain time (about
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two-thirds  of  the  way  forward  from  the  mast  or  ﬂagpole)  and  that  theprice move is usually about the distance of the ﬂat side of the pennant,one way or the other.
In other words, on a ﬁve-minute price chart, if you suspect a pennantis  forming,  it  will  take  you  about  two  to  three  hours  to  deﬁne  it,  andsomewhere  around  the  four-hour  mark  a  breakout  higher  or  lower  is  ahigher  probability.  Additionally,  most  pennants  on  a  ﬁve-minute  pricechart have a ﬂat side of some amount that is a certain percent of the day’srange.  Armed  with  this  data  you  now  enter  that  trade,  and  if  all  goessmoothly, you might capture 80% or more of the breakout when it comes.But at that moment, a new level of order ﬂow comes in and that marketreally takes off. And identifying that new net order ﬂow is what makes allthe difference.
Using that hypothetical trade as an illustration, if you compare yourﬁve-minute price chart to an hourly time frame price chart, perhaps youwill then observe a different pattern that the last 40 to 60 bars have cre-ated. Upon closer examination you note that the pennant formation thatrequired 60 bars and 300 minutes by the clock is reﬂected on the hourlyprice chart as a double-top formation that required 6 bars and 300 min-utes by the clock. If your ﬁve-minute pennant formation had an upsidebreakout,  once  your  price  objective  was  reached,  that  most  likely  wasnear the top of the hourly double-top formation. Should the market nowattract enough buying to penetrate the hourly double-top, you would beout  of  the  trade  with  a  small  proﬁt  just  when  the  larger-time-frametrader is buying into the market and creating a bigger order imbalanceon  the  buy  side.  You  have  banked  a  small  proﬁt  when  you  could  havejust  as  easily  had  a  larger  one  by  simply  noting  that  the  smaller-time-frame bullish potential was contained within a larger-time-frame bullishpotential. Both time frames had a bullish potential that developed withinthe  same  300  minutes  by  the  clock,  even  though  each  price  chartcounted  it  differently  and  presented  that  data  to  the  observer  (you)  intwo different formats.
The concept of using multiple time frames has to do with understand-ing who is looking at what, and when those traders are most likely to addpressure to the order ﬂow by entering an order. An hourly-based trader isthinking  something  different,  and  therefore  executing  differently,  thansomeone on a longer or shorter time frame. When you have a lot of evi-dence on your side, in your time frame, that it is time to enter the marketfrom one particular side, how conﬁdent are you that more orders from adifferent  time  frame  will  also  be  coming  in  from  that  side?  You  can  de-velop  that  conﬁdence  by  seeing  objectively  what  other  time  frames  areseeing. When you then compare those viewpoints for congruency, if youhave  a  good  sense  that  more  than  one  time  frame  is  thinking  along  the
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same lines, you have more conﬁrmation that potential net order ﬂow maydevelop a little larger along that direction. To help you let your proﬁts run,you need to recognize and exploit what every time frame might eventuallybe doing.
Your best trades occur when you have correctly positioned yourselfon  the  net  order  ﬂow  as  traders  in  each  successively  higher  time  framechoose  to  execute.  For  example,  if  you  are  looking  for  a  buy  point,  youwould like to see the 5-minute, 10-minute, and 15-minute price charts pro-vide  similar  clues,  all  at  around  the  same  price  area.  At  the  exact  sametime,  the  30-minute  and  hourly  price  charts  are  likely  neutral  or  slightlybearish after a move to the downside has already happened. The daily andweekly  price  charts  might  show  a  down  day  or  weekly  low  within  abroader weekly or monthly established range.
Now, suppose you execute from the buy side and within 30 minutes orso you have an open-trade proﬁt. Most likely you have correctly identiﬁedwhere the 30-minute-or-less trader is creating a buy-side order imbalancebecause  prices  are  higher.  That  can’t  happen  unless  sellers  are  over-whelmed  under  those  conditions  at  that  moment.  If  the  30-minute  andhourly  bars  now  trade  higher,  then  you  have  a  pretty  good  clue  thattraders in the next higher time frame are also beginning to show up on thebuy side. If the market now continues higher and closes, say, in the upperhalf  of  the  daily  range,  it  is  a  fairly  good  bet  that  the  daily-time-framebuyer  is  also  executing.  If  the  market  is  again  higher  for  the  next  day’strading by the close, the traders looking for a potential low for the weekmay be active from the buy side. Your original entry on the shorter timeframe  is  conﬁrmed by  the  longer-time-frame  traders  executing  from  thesame side. More traders are seeing the same thing, and the cumulative netorder ﬂow is working from that side. In this illustration, competing timeframes became congruent as the market drew in the full spectrum of par-ticipants  the  more  clock  time  passed.  As  time  goes  on,  the  market  willcontinue to advance even when the short-term time frame produces a sellsignal because the larger time frame is still attracting order ﬂow from thebuy side.
Now, bear in mind, I am not trying to oversimplify price action or get-ting  positioned.  I  know  that  swings  in  price  can  be  violent,  the  marketmight go sideways for a long time, and false signals frequently occur allthe time. Often trades that could have worked become losers for variousreasons. It takes time to get in a position, and it takes experience to knowwhen the move you are waiting for is developing.
The point I want you to absorb is that certain trades from one side de-velop  potential  over  time.  Sometimes  closing  out  your  position  with  agood gain because it was one of the biggest moves you had ever seen un-der your time frame is the worst thing you can do. If the larger-time-frame
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traders are drawn in from the same side, that particular market will have alot farther to go in your original direction. Of course, you can always getback in from the original side anytime you want, and maybe it is a goodrule for you personally to remain ﬂat overnight; but if you are followingthis rule properly you will always look for clues that the winning positionyou just found and participated in has a lot more potential developing inthe same direction.
It takes clock time for all those trading time frames to become active.If traders in multiple time frames are coming into the market, your proba-bility of success is much better. When this rule is combined with Rule #11,you have a powerful tool to help you let proﬁts run better. When a positionhas worked, consider that if it is still working a day or two later, you mightwant to look at that side again and also add to it.
Making this rule work for you requires you to think outside the box asit  concerns  your  personal  time  frame.  You  should  always  have  a  timeframe that you execute under, but that time frame does not contain all theinformation about potential net order ﬂow. The wise trader will considerwhat the traders with other time frames might be seeing, because at somepoint, when those other time frames are drawn in, their orders from thosedifferent time frames will either add to the net order ﬂow that is develop-ing in one direction or it will overwhelm the net order ﬂow from the otherside, stopping the imbalance and the price advance. Every