MeetPips.com

Its been a while since Tony has revisited his blog. A bunch of things have kept me away from here, including the market.

While in school getting my business degree, it has become clearer and clearer that the investment banking ‘sales and trading’ route has become very difficult for the newly minted grad to penetrate. The onslaught of the black boxes, trading programs written by math PhDs that are capable of doing the job of market makers and agency traders, has pushed aside Joe Trader and replaced him with bespectacled mathematicians and C# programmers. Instead of talking about unemployment numbers (which Joe Trader is becoming a part of), they talk of stochastic calculus, Ito’s lemma, and hypothesis testing. The business model has changed, and as any trader knows, you must adapt or die.

Unfortunately I’m not blessed with high math or programming skills, so I’m not going to bother competing with those who are. Instead, I’m going to continue working on developing my own niche, which is old fashioned discretionary trading.

Having gotten re-involved in the markets, I’ve started to do better (as in, stopped sitting at pure break even) thanks to a few important realizations:

There’s no substitute for experience and screen time. I remember the first time I sat down behind a live chart, after having read about technical analysis. I had no idea what the heck I was supposed to do, how to form a thesis for a trade, when to get in, when to get out. There really is only one way to figure that out, and its to get behind a demo account and try stuff out. After watching for a long time period, you start getting the idea of how things work, and more importantly, how they don’t. You start getting a sense of probabilities. Yes its true, some people go to those 'trading camps' and get an education from someone, allowing them to trade a successful strategy out of the box. But trading is a process, and you have to live with the market for a time to really develop the confidence you need.

Keep it simple. There are indeed no secret patterns in the market, none that I have been able to discover anyway. All there is is a series of prices that can telegraph to you what people are thinking and doing. There are ranges, there are trends. Done deal. Whatever secret patterns happen, they are pretty quickly pounced upon, especially in this day and age of high frequency trading. Its better to think in terms of broad themes than specific quantitative measures, unless you want to play the quant game and that’s your bag.

But not stupid simple. That said, there is a whole composite picture that you have to put together of what is happening. Its not just 'buy on Monday' type of stuff. The devil is in the details. If you aren’t watching the higher timeframe, you won’t know if you suddenly reach a new high or low. If you get into a trade just 5 minutes before a news release, strange things will happen to price. You don’t have to be an expert in econometrics or program neural networks. All you need to do is take a look at a few things and most important, get an idea of how those things relate to what you want to do on your timeframe.  

Be observant. Continuing from the previous thought, notice what you are doing, what the market is doing, what time of day it is, what the mood of the market is (is it volatile or calm, is it waiting for news or digesting news, or has nothing to guide it at the moment). Notice under what conditions your setups fail and succeed. Look at the surrounding price action, is the market volatile, not volatile? Is the market in an ‘inside day’ or is it breaking new ground? Look for any preceding patterns that might clue you in. After a while, you will start noticing the fine details that you need to know in order to feel comfortable entering the trade. You start to establish probabilities. Perhaps even more important, what is your competition thinking? What are they going to do, to prove you wrong (kudos to Don Miller for that one).

You have to be ready to be wrong with no hard feelings. By this, I mean you have to not only accept being stopped out (and not do stupid things like loosen your stop), but have no hard feelings because of that. Whenever I’ve watched professional traders get stopped out, they are chill as a cucumber because they have confidence in their edge. Before you have developed that edge and seen it work, be it a system or discretionary, every time you get stopped out you’re going to think its because you suck. Yes, once you get smacked a few times in a row your confidence is shaken and you start wondering if you’ve been experiencing purely random luck all this time. However, when you look at each failed trade as an opportunity to catch mistakes, and spend time analyzing things as mentioned previously, then you’ve actually earned something in the process.

Trade less. I’ve heard enough professional day traders say that they trade very little. They spot maybe two good opportunities every day, but they know those opportunities well – that is where their strongest edge comes into play (which they know from experience). There are other ‘mini’ opportunities that they also see, but they trade those with much less size (risk). As Don Miller says, “Would you rather have 5 points on 2 contracts, or 5 points on 2 contracts plus 1 point on another 5?” The worst mistakes I’d make is when I’d get involved just because I wanted to get involved (its called being bored, or being angry). You have to be able to walk up to the screen and identify if you’ve got any business to transact or not. If you don’t really understand what’s happening, stay the heck out and watch. After a while you may get some ideas and actually divine a strategy from it.

Care less about catching the day’s range. Some days the market will move 100 pips. You get ticked because you maybe only caught 10 pips somewhere. Who the hell cares? I’d rather take 10 pips with 70% certainty than shoot for 100 pips at 50% certainty. If you suck at buying breakouts (like I do), and your main secret ingredient is range bound markets, then stick to your thing. There’s nothing wrong with learning breakouts in demo mode until you’ve built enough confidence with them to go live.

Think of yourself as a company with a product line. Each approach to trading (ranges, retracements, breakouts) is a product. When you apply it to different instruments (Fiber, Swissy, Cable, etc), you are creating sub-products. Each product has to go through R&D and testing before release, each product has to be refined in a continuous improvement process (the Kaisan principle), each product has to be tweaked as the market changes (think styles and fads, consumer preferences). As you get better, you can add more products and sub products to your product line and pull more profit out of the market.

Control your risk with size. This is another gem from Don Miller, which I previously resisted. Many traders use multiple contracts, as a matter of fact virtually every discretionary trader I’ve spoken to uses this technique. They add to winners, and scale in and out. It helps from a psychological standpoint a lot. The market is imperfect as are we, and having multiple contracts lets you stagger entries and get a feel for what is going on.  

Risk-reward is a difficult game. Everyone always hears that you should take trades with a 1:2 risk reward, so that you don’t have to be right all of the time. Well, I don’t think that on a day trading basis that is too realistic. I regularly do 1:1 on my entries, and it works. I just aggressively start tightening my stops once I’m taken in. If you have tighter stops or greedier entries, you will get stopped out more and miss more entries. Is the balance of it better or worse for your account? You will find out I guess.

The market does whatever the heck it wants. You get into a trade, it starts moving in your direction, then it pauses. It pauses for quite a while, and the candle starts creeping down toward your stop. Get the heck out, or lighten up your load – because that is what everyone else is going to start doing sooner or later and that is what will cause the price to take you out. That’s what they mean when they say ‘cut your losses fast’. Sure, it can jump right back up and go running beyond your take profit. But this is all about probabilities. Sometimes it will pop right up to your take profit. Sometimes it will immediately take you out. Most of the time it will do something in between, and with time you will develop the intuition of when to bail and when to stay and hold your ground. You need to learn to deal with it and not expect picture perfect things to happen.  

Be focused. This is probably the biggest problem I used to have before. I’d trade, then I would be too lazy or despondent to analyze. If I did well I’d just cheer and feel like I’m really getting it, somehow magically. If I screwed up I’d just feel like an idiot and wouldn’t want to back and learn some lessons (don’t get into the middle of a range, don’t buy a breakout with a ridiculously wide stop). Gary Smith pointed out that this was his biggest revelation which turned around his 19 year slump and finally made him a profitable trader. Especially if you’re going to be discretionary, you need to be focused and self observant.

Give yourself plenty of time to succeed and don’t set unrealistic targets. The main business goal is to maximize the amount of high probability transactions you make in the market. You need to know when those opportunities exist, and how to execute them properly. The more you watch the market and observe in a truly focused manner, the more you learn, the more you stand a chance of profiting. It’s a game of not only maximizing the probabilities, but getting out your inner demons, the demons that prevent you from being a focused entrepreneur. You must be patient with yourself, you must be patient with the market, and not care how long it takes you to get this right. Successful entrepreneurs care less how long it takes for them to succeed if they believe in what they are doing. They find a way to keep financially afloat and continue troubleshooting the engine until it finally revs up. They are perfectly fine with repeated failures as long as they are learning about what doesn’t work and what does. Find yourself an ICF (instant cash flow) to free your mind from being too cluttered with worries about profitability, so you can focus properly on learning to trade.

Send the naysayers to hell.  “It is impossible to make a profit day trading after commissions and slippage”, “High frequency trading is putting day traders out of business”, “The Forex market is run by insiders who suck you in to take your money”, "Trading is gambling, in the end you blow up like all gamblers". Bull feathers. This market is all about competition. The most dedicated, focused players who are adaptive and nimble win. The whinos never win, because they set themselves up for failure. To them, FX might as well be the same as buying into a work at home scheme.

So that about wraps up my main thoughts. Hope you are all doing well and are getting in that screen time!

As a final note, wanted to paste in a video of Don Miller doing his thing live. Very inspiring stuff.