We discover what makes great traders tick! My ‘10 Trading Questions With…’ guest this week is Michael Gouvalaris, Author of The Trading Playbook and The Technical Investor blog, Independent Trader and Investment Advisor.

1. What is it about trading that gets you up and motivated in the morning?

I enjoy trading because it doesn’t matter whether yesterday was a great day or a bad day; each day is a new day full of opportunities.

I also enjoy the challenge very much; it is one of the few remaining opportunities where any individual can command his or her own destiny.

2. How did you first get involved with the financial markets?

My initial exposure to the markets came during a homework assignment for an Economics class I was taking at the time. I began studying price charts of all the different markets in an attempt to learn how they worked. I was instantly hooked and it all just really took off from there.

3. What was the turning point that really propelled you towards trading success?

The turning point for me was when I gave up looking for perfection, or the holy grail of trading. I started thinking in terms of probabilities instead of certainties. I got rid of all of the indicators on my screen and paid careful attention to price, which is the most important thing when it comes down to it.

4. What are your personal trading goals?

My trading goals are simply to abide by my rules in taking the higher probability setups at a favourable risk to reward ratio. I try not to put a specific dollar amount or percentage on it, because I find that I end up overtrading and generally doing more harm than good.

5. What trading mistake have you learned the most from?

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Never double down on a losing position. I started trading using options and I developed a strategy that was working well for a while. It was very early in my trading career and I really had no idea what I was doing. I got dangerously overconfident and continued to add as the trade continued to move against me, until I eventually allocated my entire trading account to this one day trade turned “swing” trade.

I remember clearly that I had one opportunity to get out of the trade close to breakeven. But my rationale was that this trade had caused me enough trouble, so I wanted to get something out of it. So there were numerous mistakes involved in this one!

Of course, it was almost as if the market knew right where my breakeven point was just to torment me, because it proceeded to go against me for a week straight. I eventually cried uncle and gave up, giving back all that year’s trading gains and about 30% of my principal on top of it.

It was a horrible feeling that I wouldn’t wish on anyone. Although it became a turning point for me, as I vowed that if I was to continue trading, I would have to take it seriously and create a detailed plan to ensure I never put myself in that same position ever again.

6. What are the main trading strategies and markets that you trade?

When I day trade, I look to the ES or E-Mini S+P 500 futures contracts. I use the tendencies of each day type that is discussed in the book, to look for high probability setups. One of the lowest hanging fruit for day traders is the gap fill setup, so depending on the day type, this is often a trading setup I look to exploit to my advantage.

For Swing Trading I generally use ETF’s, sometimes leveraged ETF’s, and a few higher beta growth stocks. I have two setups I look for and they also are discussed in the book.

One is a “shakeout” trade, where the market takes out an important swing low or high and then reverses. This is often a capitulation move and is generally a good spot to get in to ride the trend.

Another setup is I look for supply and demand patterns that I can use to gain a low risk entry point. For instance, I had pointed out on my blog that Facebook stock had experienced three separate $9 declines before finding support and making a new all-time high. Those were exploitable patterns one could use to gain a low risk entry, with a solid reward potential. These patterns are everywhere it just takes some time to understand what to look for.

7. What 1-3 trading books should every trader read?

Reminiscence of a Stock Operator is an easy choice, a lot of wisdom that stands the test of time. Trading in the Zone is another classic that I really enjoyed. And Market Wizards by Jack Schwager is another must read.

I’ll do one better and add in a couple of movies. Rogue Trader, based upon a true story, great movie with a lot of lessons to be learned. Rounders, another excellent movie that is about poker but the concepts are applicable to trading.

[Editor’s Note: Don’t forget to check out Michael’s own book: ‘The Trading Playbook‘ – A.R.]

8. If you had 1 minute with someone who wants to learn how to trade in stocks, what would you say?

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Start small and work your way up, if you start too big then your emotions will likely get in the way and it increases the odds you’ll make a rookie mistake that you may not be able to emotionally or financially recover from.

Keep things simple, less is more. In other words, you don’t need 10 different indicators on your screen to get a trading signal. Pick one, maybe two and work with that. Focus more on the things that you can control, such as risk management, as opposed to finding the perfect system or setup (because it doesn’t exist).

And be very mindful of not becoming overconfident or overly fearful. Either of these extremes will cause you to make potentially big mistakes. Avoiding the big mistakes is just as important as winning because you won’t stay in the game long enough if you make many big mistakes.

9. What separates the average from the very best traders?

I believe the best traders are the ones that can accept the fact that there are no certainties, asses the probabilities, and take those higher probability setups with good risk management. Great traders can lay their ego and emotions aside and scratch a trade when it doesn’t work for them. Great traders can easily forget the past and instead look forward to the next setup.

10. How do you ensure your trading will continue to be successful in the future?

The easy answer is risk management. As long as one continues to focus on higher probability setups using favourable risk to reward management, success will surely follow. Of course this is easier said than done, but I firmly believe that is quite achievable for anyone that is dedicated enough.

Bonus Question: If you were not a trader, what would you do?

Well I am also an Investment Advisor; I develop portfolios for clients depending on their goals, risk tolerance and time horizon. However, this may be too related to trading. In that case I think I would have become a software programmer. There is a lot of opportunity and growth potential in that field.

Michael Gouvalaris’ Bio:

Michael Gouvalaris is the author of The Trading Playbook: Two Rule Based Plans for Day Trading and Swing Trading. He is the author of the Technical Investor blog (formerly Mikes Trading Journal) which began in 2009 and has provided timely and accurate technical analysis of the markets and garnered the attention of many in the financial media. Michael is an Investment Advisor Representative for James D. Maxon Financial Advisors, LLC, based in Woburn, Massachusetts. Helping clients meet and exceed their financial goals through careful planning and risk management. His meticulous research of financial market data helps clients to maintain focus on their goals and avoid the many behavioral pitfalls that the individual investor tends to get caught up in.

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