A followup to the 3 R's

After my last post, E-Mini Player asked a question about the stats I'm currently keeping. The answer turned out to be sort of long, so I'll just answer it as a blog post. Remember though, the actual stats and results are meaningless to others. We all have our own plans. The best trading plan out there is the one you created for yourself. The point though is that I do keep stats that I think are relevant to my plan and success in executing it. Call me conservative, but there are just some things I need to prove to myself and not just assume, or hope works.

I am currently keeping manual statistics on:
1) MACD confirmation. 8-17-9 MACD is the only "below the chart" indicator I use. I use the same setting MACD on both my 42 and 133 tick charts. For LONGS I have 4 possible readings; and 4 for shorts. Thus far I have recorded a little over 1,800 readings. The result so far: 1) I know what the most common reading for winning trades is, 2) I know that ultimately MACD has not proven to be that important. Thus I am not going to pass on a trade just because I don't get the ideal MACD reading.

2) What side of the zero line is MACD on (on my 42 tick chart) at the time of a winning setup? Just short of 900 readngs so far. The result: nothing definitive for either longs or shorts. After reading #1 and 2 you may wonder why I even use MACD then. Well, it does have tendencies to show "most likely" readings for winners. And, it teaches me to LOOK and see what's happening
under the price chart (a weak point for me).

3) The amount of drawdown (YM points) experienced past an "ideal" stop point (which can be figured). This stat tells me how much of a default stop-loss I should use to start with and what is likely needed to keep me from getting stopped out needlessly. A little over 600 readings so far.

4) Won-Loss record of setups (and "close enough" setups) whether I took the trade or not. The purpose is to help me make that KEY mental paradigm shift from "avoiding loss" to "seeking gain". This is actually a fairly new stat for me. The result gets updated on a whiteboard everyday next to my desk. I want it staring me down.

5) Based on the timeframes I watch, and the type of setups I look for, was today a EXCELLENT, GOOD, OK, or TOUGH day for the type of trades I look for? I review the day and give each day one of those 4 ratings and write a few sentences explaining why. Why? I want to know if certain news days, trading calendar days, or just days of the week, have any tendency to NOT fit my plan. I don't want to create a needless bias toward any day though. I just want to know how the expectations of my plan play out over every type of trading day. This is a fairly new stat I'm keeping too.

Completed stats: (I'll list one)
1) 34/89 crossover study. The biggest stat I've ever logged (and is now completed) is: "Does the first pullback after a 34/89 crossover (both ema's on my trading timeframe 42 tick chart) result in a positive move? It doesn't have to be a setup that meets the rules, just the move that occurs on the first pullback after that ema crossover. And of course "positive move" is a discretionary thing. So nothing scientific here. No real filtering of the crossovers either. That means it includes all the meaningless crossovers you get when the market just goes sideways in a fairly tight band. 3,279 readings for this one.

Make the letter "R" work for you

Sometime ago Linda Bradford Raschke wrote a great article about the "3 R's of trading" she uses. A link is at the end here. So I'll let LBR do most of the yakking here today. I guess the letter R is a popular one here because it is the first letter of many common Regimens. (Oh, there it is again) Here's how I use the letter R.

RECORDS....Call them statistics. I keep track of currently 5 things each day that are designed to beat into my head PROOF that certain beliefs I have are in fact valid beliefs. You can't just read about something in a book and automatically make it a belief of yours. Sometimes you have to see it play out, time after time after time, in real-life. It is like building up a belief system one brick at a time. I've kept many different stats over the years. Some have been "completed" so I no longer need to keep tracking them as I have all the proof I need. And when it seems worthwhile I will begin tracking others.

ROUTINE....Everyday (weekends too) I have a set daily schedule I follow. It includes such things as what time I will get out of bed. What I will drink while finishing my prep work (hot tea). What I will do in my prep work. What I will do over lunch. What I will do precisely at 4:00. Routine builds habit. Habit builds success.

REPITITION....I have three forms of trading homework I do. 1) Study my trading plan notes, 2) Do my S/R levels for the next day, and 3) study the screenshots I create each day as well as the ones I have archived. Some I have to do every day. But all three I do on the weekend. What am I doing this weekend? Answer: 1,2 & 3. What will I be doing next weekend? Answer 1,2 & 3. What will I be doing the 3rd weekend in May, 2011? Answer: 1,2 and 3.

OK, take it away Linda. http://www.lbrgroup.com/images/SFO_July04.pdf

Update - Sunday 08/30/2009

Just thought I'd post an update in case any of you were wondering what I've been up to. Summer school went well, pulled off three A's and a B+ and GPA's currently at 3.7 (not too bad with full-time work I guess). I'll be taking a full class load (4 classes) in the upcoming quarter as well, which starts in a couple of weeks. The IT consulting is going OK too. I signed up with ThinkOrSwim and can access their web-based trading/charting platform at work, so I try to check in on the market when I can. Some people take breaks to smoke; I take breaks for charting :D

I'm still looking to join a prop firm, so please email me if you have any contacts. I graduate in March next year, and coincidentally that's when my consulting engagement officially ends, so it would be the ideal time to join a proprietary trading firm. I could do pretty well with member rates and firm capital :-)

As far as this Blog goes, I'm very glad that Chuck and Ziad are posting here and I hope they'll continue posting because both are fantastic traders! I'm posting more on Twitter these days since what I have to say doesn't really require a full blog post. So if you'd like to stay up to date or check the marked-up charts I post, follow me on Twitter: http://www.twitter.com/eminiplayer

That's about it from my side. Enjoy the rest of your weekend!

Here's my marked up 5-min ES chart from Friday:

Relax, Breathe, Have Fun!

That's what it says on an index card that lays by my computer each day (it has a yellow smiley face on it too). I started out the day with a bias to the upside based on Intel's news and the gap up. That foolish "big picture" bias cost me a good opp. It messed with my mind. "So when is it going to reverse and go up?", was the theme in my head. (Having a bias on a small timeframe is fine, and required). And then I saw a post in a chatroom I hang out in. It was referring to a trade someone had just taken. "...like taking candy from a baby", he said. You could see the smoke come out of my ears. My anger rose. It's a good thing there isn't anything made of glass on my desk.

Relax, Breathe, Have fun. I had to settle down and finally realize the trend was DOWN. I have to realize I won't see everything I want to see in the charts. The market can be screwy at times. It's job is to confound the most people so it can generate big volume by catching people "on the wrong" side of the market. I had to get my head back in the game.

Relax, Breathe, Have fun.
Breathe in deep, hold it 20 seconds, let it out in 5 seconds. Rinse and repeat.

I can imagine some "gap guru" reading this and telling me about how "obvious" this whole morning was. Even "like taking candy from a baby" he may say. HaHa.

Finally, the smoke stopped coming out of my ears. A couple setups became clearer. The clouds parted and the sun came out. And I fretted for what? Don't I know all the "rules" of this game...all the psychological traps and releases? Yup. But we are all works in progress. I am unfortunately human. $%&#@!

Focus.
acquire the skill of Instant Amnesia.
Trust that the market "always comes around" to give you the setups you want, ....everyday. It really does. Just have some patience.

Relax, Breathe, Have fun! It works.

Putting yesterday's ideas into action

Chart #1: The overnite and pre-market price action was all over the place, creating a big "going nowhere" box (not shown). The 8:30 Durable Goods news was "good" but the market went down to test the DOUBLE BOTTOM from 8-24 and bounced up. That was a somewhat high probability bounce, but I didn't play it because the bigger New Home Sales news was due out in a few minutes. I don't want to risk getting caught in a news volatility jerk until/unless it has picked a direction.

Chart #2: Shortly after that the 10:00 New Home Sales number hit and it created a VOLUME SPIKE right into the gap fill. I am a price created S/R (support/resistance) player. That's what all the horizontal lines are. The blue ones are gap fill levels. The big volume spike created price resistance at its high. Shortly after that the momentum carried price over the gap fill (and over that price volume resistance) and pulled back to retest the gap from the top. It wasn't a perfect test but the risk was pretty minimal. That's an entry long. A second opportunity long is the retest of 9529 from the top at 10:09 (once the first S/R level held (the gap) I expected the next higher to hold as long as price had a clean break over it and could then re-test it). A 3rd potential long was at 10:15 as it tested the S/R band of
9546-9549. It tested the upper band to the tick and rose some more. It topped out later on a negative $TICK dvg just short of the 9576 S/R level, that is also the VAH (market profile value area high) for yesterday.

Lessons learned: 1) Don't get bummed by "missing" trades. Prior to the 10:00 news there were some OK short opps that I just sat on my hands for. Instant amnesia helped. Hey, the day is NOT over at 9:45 am!! I had to FOCUS to catch the ones I did. And when they setup I just had to BELIEVE they would work and get in. You can't win if you don't play. And if they didn't work out, well, that's what stops are for.

BTW, as I'm typing this I just saw another good short opp at the 9546-9549 band that just worked good (10:57 entry). It is currently +25 YM points and only had 1 point of drawdown before dropping. DANG! I'm sure many traders were able to get in at lower levels than me (obviously...that's why there are price bars lower), but this is the method that makes sense to me and that I've spent a few years working on. You have to have a plan that makes sense to YOU, based on your perception of how the market moves. Once you figure that out, ignore other plans. .....Update: that short I
missed because I was typing this eventually made 26 points before having a pullback, and bottomed out at +36 points. And just 1 freakin' point of pain to get in that trade. I may have to re-adjust my posting schedule.

Survey Question

This morning the market shot up like a rocket on news (and perhaps the expectation of good news), then fell back to earth equally impressively. It was worth almost 200 pts. on the Dow. Some traders made a lot, some made a little, some lost. "Big opportunity" was all compressed in a brief 50 minute window of time. What does it take to profit in these opportunities? A solid trading plan obviously. But plans are the easy part. I am asking about something else...the intangibles (Websters dictionary: "that cannot be easily defined, formulated, or grasped").

Here are some possibilities:
1) Focus. The ability to maintain constant focus and make micro decisions instantaneously. No such "I'm going to check my email", ....or "I need a snack", or ...."the market is dead, I'm bored", ....or "it was right in front of me but I didn't see it". If you can't focus you will make some trades, but no doubt miss many others. Is that good enough?

2) Instant amnesia. You just closed a stinker of a trade and are slapping yourself on the head "what the heck is wrong with me?. I'll think twice before I enter a trade again." ...Or you close a big winner, "I'm on fire and can do no wrong. The market gods have annointed me". ....Or you just missed a setup that fit your rules and it ran for 40 pts (YM) without you on-board. You're bummed and "need to go take a walk to clear my head". If you can't get back into the "now" moment you are risking self-poison.

3) Self-trust. You have a plan which you've beaten into your head. You know what to do and when to do it. It tests out to great results over time. You are a machine. ....At least that's what you TELL yourself. In real-time you just froze like a deer in the headlights as the
self-doubts ran through your mind. Three minutes later your "trade" is up 30 points YM. BELIEVE and ACHIEVE...doubt and die. I've said it before.

4) Indifference to what happens. I have a theory that many of the most successful traders simply don't care what happens. They have a winning plan of course, and they execute it well. But when the order is placed they are truly unemotional. Their stats show they will win in the end so they don't care about this trade, or the next one. They just execute the trade and wait to record the results. They are truly fearless because they just don't care how this trade ends.

Any others? What do you think? All of them? Mix and match? What does it take to maximize your potential to profit over time?

What's the risk?

It's often less than you think. Today, so far, is a scalpers market. Small movement means small risk. The market is always moving if your timeframe is small enough to see it. Tick charts have always made more sense to me than "minute" charts or other timed charts. I always aim to trade with the bigger trend in effect at that time. Today it is "up" and the intraday advance-decline (A-D) is greater than +1,000. So I am looking for an opportunity on the long side here. The main premise of this trade is the play off the S/R level shown. I spend a lot of time determining and drawing out these levels. My whole plan is based on trades at these levels. They are the "wall" I use as a backstop to protect my backside. Again. about everything I post here is an extension of the homework I do everyday. I collect and study screenshots in order to implant in my brain what setups look like. The only person I am teaching here is me. Others are welcome to read along if they want.

How To Be A Mediocre Trader

Never let a winner turn into a loser. Great trading advice right? What if I told you that it's advice like this that's keeping you in mediocrity. Most traders don't question the general trading "wisdom" out there, but let's do something a little different this time and shed a little scrutiny on this issue.

If you stop to think about it, this little nugget of wisdom sounds a lot smarter than it actually is in a practical sense. Let's start with the obvious. What exactly is a winner? If you're trading the S&P e-minis, then the technical answer is that you're in a winner when you're up 0.25 points, the smallest increment the instrument can move. So does this mean that when you're up a tick, you should quickly move to break even so that it doesn't become a loser? Good luck ever getting a real profit with that strategy. So what is it then, is a winner a point? Is it a relative amount based on your original risk on the trade? Is it a multiple of this number? When should you say, I can't let this WINNER turn into a loser?

I can't give you an answer because, well, I really have no clue. Instead, I've chosen to think differently about the issue altogether. In my mind, it's futile to try to put a distinct label on what a winner is, and more than this, it can actually be quite unprofitable. To start with why it's futile, well, simply, each trade and context is totally different. What can be considered a good profit in one trade can be peanuts in another one that has much more potential. So why not consider a winner any trade that has reached a point where from the market's perspective you could say that if it returned to your entry point, that would imply that it's failing. For some trades that may mean 2 points, and for others that may mean 10 points. Yes, I said 10 and that's not a typo. In the past there've been some rare occasions where I had 7 or 8 point paper profits (on a 2 point original risk in similar volatility environment to last Spring) and I've let them reverse all the way back for a loss because I didn't think that the market had reached a point where a return to break-even would negate the reason for the trade. Is this crazy? Was I just being imprudent? It may seem so if you only look at one instance, but your view might change if you saw some other trades that were up relatively big (say 6 or 7 points), came back to break-even, but I didn't exit because the basis for the trade was still there, and then went on to eventually become 10, 12 or 14 point winners.

Now is it very hard emotionally when a large profit becomes a loss? Absolutely. But does that mean that we should avoid it at all costs? I beg to differ. You see, no one said that long-term profitable actions are comfortable. It's not comfortable for me when I'm holding a good profit and watch it retrace back to break-even into a potential loss. But if I still believe in the trade, I'm not going to exit just to protect profits, or just so I don't have the stigma of "letting a winner turn into a loser." If I have a good profit and all of the sudden I see something to make me question the market and my odds, then yes I'll often lock in the profit. But I'm not doing it just to obey some conventional trading wisdom that says never let a winner turn into a loser. I'm doing it because it's the correct course of action to take in my view. And if the correct course of action is to hold on despite the potential for what most traders would consider a "winner" to reverse and become a loser, then I'm going to sit with that discomfort and do it.

You see, it's a matter of principle. The problem with this old adage is that it makes traders trade with a fear of themselves. "How could I let a winner turn into a loser? I must be a loser if I do that." Traders that blindly follow such conventional wisdom fear their own negative criticism if they break it, even when it might have been the correct course of action to do so. They might notice that to have some really large winners, you can't always be scared of trades coming back to break-even and thus bailing just so a profit doesn't become a loss. You have to determine what's normal movement, and then allow whatever outcome to be in that context. Why is it so bad anyway to let a profit become a loss? It's only bad to not get out when your reason for the trade is gone, whether it's a profit or a loss. Don't let some dogma force you into being unforgivable with yourself when you see that to trade right in some circumstances, you may have to let a profit turn into a loss. Of course, you can alleviate the self-reprimand by only labeling something a winner once it has reached the threshold of no-return. But ultimately that's just semantics. Every profit feels like a winner and thus it becomes a matter of principle like I stated earlier; If it's correct process, then you shouldn't think it's wrong to break some old trading wisdom.

Of course what I'm talking about here extends much farther than just winners becoming losers. There are endless varieties of this type of crowd thinking that goes unchecked and thus leads to diminished profitability in the name of comfort and conformity. And before the comments start coming in that this advice is too general as some traders are scalpers and aren't looking for big winners anyways, yes I know. But even there it applies if they take it down to their timeframe and point of reference. If they're up 2 ticks and there's potential for 6, they shouldn't be in fear of letting this profit turn into a loss just because it would be considered wrong or it would feel uncomfortable. And in the end this is what it's all about. Are you willing to do what's uncomfortable in the short-term if it will yield long-term profitability? Let me tell you, it's not easy to do. I don't do it perfectly. I still struggle with it every day and sometimes I slip and do what feels comfortable instead of what I know is right. But the point is that I don't settle for the comfort zone. I keep pushing myself to move beyond it and take my trading to new levels.

You don't have to agree with all of this. In fact you can staunchly oppose it. So go ahead. Never let a winner turn into a loser. And never forgive yourself if you ever did so for good reason. Like the title of this post implies, it's your surest path to trading mediocrity.

Ziad

Weekend edition

Consider this an early Weekend edition. There are 3 "times-of-day" I monitor. One is obviously the open to 12:00. The second is lunchtime; typically 12:00 to 1:00 or so, maybe 1:15, and then the "3:00 session" which can result in a good move. The 3:00 session also includes 3:30.
There's always the possibility of a move starting in this time span as the bond market closes. CNBC blamed todays move on short covering. I don't care. I just look for the possibility of a move. If you look at yesterdays chart we had an almost identical setup as well, right at the same time. Today was also options expiration day. A lot of people will offer general advice such as "OPEX day will be a dud, it won't go anywhere", or "never touch a move after 3:00 on OPEX day". As any 16 year would say..."Whatever". Over the last couple years...years of watching charts about every day...I have come up with a few "Truths". Now, as a disclaimer, I'm a scalper mostly, so what I see on a chart may be of no interest to someone trading a longer TF (timeframe). But here's the "Truth" that applies here for me at least:
"EVERYDAY HAS OPPORTUNITIES! Don't assume you know what the day will be like coming into it. The economic news, world events, trading calendar, opinions of "experts" -- none of it matters. Good setups happen on FOMC day, days before a holiday, and others. NEVER go into a day with the piss-poor attitude that "nothing will happen". Just read the trend / PA as if you have no idea what the news was, or what day it is."
(Hopefully my langauge doesn't offend some. It is meant to be a motivator for me) The chart shows 1 minute bars, with an upper TL (trendline) that was broken right near the end. By the way, I stalked this all through a slow, boring afternoon, and then missed it. Why? I was a "dick for 3 ticks". I wanted a pullback to the 9477 triple top. And after I missed that I wanted a pullback to 9493 (a S/R level not drawn on this chart) that never materialized. That's the way it
goes sometimes.

"You are only as good as the chances you take"

I finished yesterdays post with a favorite quote of mine. Now I am posting another. I had to think hard about why I wanted to contribute to E-Mini's blog, and then what I would post. I decided to keep this as simple as possible and just make it an extension of the trading homework I do every day. (You DO have a regular study period, don't you?). As a friend of mine says, "70% of trading success comes from the 6 inches between your ears. The rest is just all in your head". Assuming you have a plan that gives you an edge in the market to make good probability trades, the rest is all in your head. It's NOT about your plan, winning trading plans are a dime-a-dozen....it's about the EXECUTION of your plan. And it's a lot harder than most people think. Execute or be executed. Believe and achieve...or doubt and die. We play the battles within our mind every day. Whether you have been trading 6 months or 26 years, we are all works in progress. I hate the term "expert". The reason I always put that word in quotation marks is because I am implying that anyone who calls themselves an "expert" in this business is an arrogant jerk. There are however people who have more experience than you and me. What's the point here? When you see a setup that fits your rules you have to take it. Most of us are discretionary traders, so we have to think about our entries and exits. But when we see them
we HAVE TO take them. I am not a teacher....or an "expert". I make mistakes all the time. Todays charts show the importance of believing in a plan and executing it. I don't know if any trade will work. Assuming you have a plan, then YOU ARE ONLY AS GOOD AS THE CHANCES YOU TAKE with it. (now what's the inverse of that?)

Introduction

E-Mini Player (obviously an ES trader) has invited me in as a guest contributor. To offer some diversity to the blog, I am a mini-Dow (YM) trader. You can read my profile to the right. I will be illustrating trade setups and descriptions as time permits (I have no idea how much at this point). The ES and the YM trade pretty much in lock-step most of the time. The difference just being the price levels associated with the bars, and of course the daily volume. Volume has never been an issue for me as trends are trends, moves are moves. Pictures often tell more than words, so most of my posts will be screenshots. We all have different trading plans (you DO have a written trading plan, right?) so my style will suit some, but not all. We are all different with our own risk characteristics, backgrounds (the "baggage"... that's rarely a word used in a positive light...we bring with us), and our experience level. But we all share a love of trading, and that makes us pretty special, and unique. We go where few others dare to go. I'll end this segment with a favorite quote, short, simple, and deadly true: "Believe and Achieve ... doubt and die". It says it all, doesn't it?

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