BECOMING a TRADER

Regret and the One-Contract Trade

2011-07-31T09:36:00.002-05:00

If you are learning to trade, and you are trading futures, you are likely trading with one contract. That’s what you’ve been told by numerous gurus, and it’s good advice. BUT since one-contract trades are often considered the stepping stone to money management using multiple contracts with scaled exits, the psychological impacts that occur during this first phase can sometimes be misunderstood. One of the most dangerous and damaging of these, at least for me, is Regret.

Regret. We’ve all been there. You exit a trade, either early or at a profit target, and price continues to run for one point, two, FOUR, F*&^! LOOK AT ALL THAT MONEY I LOST. STUPID. STUPID. Regret drives you to jump back into trades long after the edge has dulled. Regret convinces you to take the opposite side on a trend day hoping to catch the reversal of that big move you just missed. And regret is an absolutely natural aspect of one-contract trading. On the surface, this is obvious. With one contract, there will be many, many times when price continues to run long after you’ve exited at your profit target. What’s not intuitive is that you must then be able to sit on your order-entry hands, ignore that current move, and scan only for your next setup.

Easier said than done. Because Regret always brings along his sidekick, Impatience. Hate that guy.

So my advice is this. Don’t try to overcome Regret by strength of will. Emotional responses, such as Regret and Impatience, are rarely managed by purely mental antidotes. They are, instead, overcome by methods that counteract or limit the emotional response.

In my case, this was the simple act of simulating a three contract trade while I was trading one contract. I would take off my first contract, my real contract, at the first profit target; my second, imaginary contract at the second profit target; and my third would either trail or be taken off at the third target, depending on the strength of the move. My ego was assuaged. Only by projecting myself into the future, could I manage my present-day expectations. Along the way, I also developed skills that serve me well now that I’ve moved to actual three-scale trading.

There is a caveat to this training method. You may make less money when you are trading only one contract. If, for example, the third, imaginary contract is held through a retracement where you might actually re-enter with only one contract, then you will miss that trade. For me, it was worth that sacrifice.

As always, I’m curious to hear how others have managed. Best of luck with your trading.

Should You Paper Trade?

2011-07-27T07:18:00.001-05:00

Howard Lindzon, of StockTwits, asked the question, Should You Paper Trade?

My first reaction to this question was an unequivocal “YES!” Paper trading was an essential part of my trader development, and while I am still a new and learning trader, the evidence of my past year argues that, without paper trading or more specifically simulated trading, I would not have become consistently profitable.

But I understand, and agree fully with Lindzon’s reasoning. Until you place real trades, you won’t understand the foolish mistakes that you will make. You won’t understand how it feels to chase a trade beyond your planned entry. The fear when the ticks move against you. The impatience when your trade goes profitable. The regret when the move continues, and you’re not in it. You won’t understand your trading self.

So let’s not make this a binary decision. Should I paper trade or not isn’t the question.* How should I use paper trading? That’s the question.

To decide that question for myself, I identified live trading processes that I wished to learn—entry, trade management, money management, exit--then broke those processes down further into their mental and the mechanical aspects. A simple example is the act of order entry. Placing a buy limit order on the ask, learning to move along with price so that you can tag that order when order flow starts to turn—that’s mechanical. Being able to place an order on a retest of the low of the day—that mental. Paper trading can prepare you well, though not fully, for the mechanical, but it can only prepare you partially for the mental. This is your basic training. Paper trading is the drill sergeant screaming at you as he trains you to remain calm and execute while under stress. But screaming is not the equivalent of being under fire.

And that is where I, and likely other new traders, made a mistake. I paper traded until I was consistently profitable, then, and only then, moved to live trading. It gave me an inflated and inaccurate sense of my abilities, and no sense of my real weaknesses. So I suggest that, as soon as you understand order entry and stop loss management, put on trades. Pick one day out of the week that you will trade live. Or start each day live trading, then move back to paper trading after you lose (or make) a set amount.

Because it’s only by trading live that you will learn what mental and mechanical skills that you, not any new trader, but YOU need to work on. That how traders evolve. They find the balance between protecting their accounts while at the same time testing their limits. Build up your knowledge, then go out and find out how ignorant you are.

And along the way, be kind to yourself. ‘Cause we’ve all been there.

* I know these guys don’t believe the question is that simple either. Simple questions stimulate conversations, though.

Everybody Remember What a Down Trend Day Looks Like?

2011-02-22T13:39:00.000-06:00

Yesterday's shortened session and today were both down trend days in the market. I didn't trade yesterday, but I did watch the action since I had opened a short position in my long term accounts from last week that was coming back into the money.

I was expecting more movement down today, potentially something large because market internals had been weakened with every push higher. Still this market of the last six months has shown (and may still show) an amazing apathy for analysis more complex than "buy the dip." As TICK and momentum divergences occur and sentiment indicators become extremely bullish, we should all lighten up and prepare for days such as today.

I only attempted two trades today, and the first blew by without letting me in (a gap trade upon the higher high after the open).

The second was a short shown by the yellow arrow below.

After the early morning, price ran up and was rejected by the 1332.50 VPOC (volume points of control). It then broke back down through the 33 EMA. Still, this has been a market known for false breakouts that trap shorts before surging higher. The 99 EMA was near, so I waited for a break through the 99 EMA, then waited even longer as price retested the 33 EMA and a re-broke the 99. At that time, it was also:
- Breaking through the overnight high,
- Breaking a head & shoulders neckline that had formed earlier,
- Breaking through the 60 minute 200 MA, and
- Breaking through the bottom of the uptrend channel formed on the 60 minute chart.

I was in a few range bars early, but price never broke back through the 33 EMA. The rest of the day, at least until I'm writing this at 1:20pm, was all down. I scaled out my first contract at 2 points, then held the second until the consolidation at 1316.

We are now at the 20 EMA for the ES daily, and price is consolidating. Below is support at 1310, then the bottom of a rising wedge on the daily chart at 1298-1300. Above is 1318-19, 1322.75, 1326.75, and 1332.50. As I finish this blog at 1:40pm, I'm seeing higher highs and higher lows plus high TICK readings for the day without corresponding price highs (Wyckoff signals) so we may reverse into the close. Or not. Either way I'm all out for the day, so I'll watch what the longer timeframe players do in the last hour.

Today was Love (or Agreement on Value), not War

2011-02-14T17:17:00.000-06:00

It was a quiet, balanced day as you can see from the Volume matrix on the left. I eked out $150 by quickly taking profits or scratching in the morning, then going long off the failure of the overnight low. The market sold off after-hours when Fed-Ex lowered their guidance, at least that's the trigger, but this market has closed above its open 11 days in a row and could use a breather.

Today was also an NR7 day with anemic volume, so I'll be prepared for a possible wide range or trend day soon, specifically watching for moves above or below today's high (1331.25) and low (1324.50). I'll be careful leaning short, though, because dips are being bought, and it would be foolish to fight that pattern until it changes.

Egypt in the News

2011-02-13T14:50:00.001-06:00

Friday was all about Hosni Mubarak's resignation. Once that news broke, the market moved quickly up and over the 1318-1319 barrier that had been holding for the last few days.

I wasn't in the market during the news, though.

I had taken a long, once again off a retrace of a trend break just after the open. Price had made a higher low. 33EMA was up. MACD signal line was above 0, and momentum showed a good retracement entry. The signal was there, so I went long at 1314. I scaled out 1 contract at 1316, then sold the 2nd and last when price failed at the 1319 support and began to consolidate. When the market traded above 1319 on the news, I waited for a retracement trade, but the chance didn't appear. In the future I'll work this trade, but at my current skill level, it was better to sit and study.

The second trade came when the MACD became extremely extended (greater than 1.50 with my settings). When this occurs, I wait until a reversal bar to enter. Because of the news, I entered with only 1 contract, but let it ride until the MACD diff showed multiple extreme readings on the other side, signaling consolidation. I made 2.5 points and was done for the day.

Down (and Out)

2011-02-09T16:18:00.002-06:00

I traded three times today. The first two were profitable, and the third was a loss.

The first trade was the same as the first trade for the last two days. The market opened, again, in the middle of a bull flag, but this flag began forming at the end of yesterday's close so it could be a downtrend channel instead. After seven days of up days, I was hesitant about pressing longs too far. Still, when the market broke through the flag on the open, then successfully retested the top of the channel, before closing back up through the opening price, I went long. I scaled out at the most recent overnight swing high, then scratched the second when it returned to my entry price.

Then there was the second trade. I was correct in my strategy, made a profit, but then broke with my rules, exiting far too soon to capture the strong move down.

When price closed the gap to the previous day's close, then failed to reach the previous day's high, I entered short on the close of the reversal bar at 1320.75, setting my stop at 1322.25. Price bounced backed up to 1321.50, and I scratched one of my two contracts back at 1320.75. That was no reason to do this, except anxiety. Price moved down, and with only one contract left, I played out my single contract process which takes me out at 2 points profit. Profitable, yes, but you can see how the move continued down without me.

My third trade was a small 3 tick loss. Price returned back to the 99EMA, then reversed. I entered short, but the market continued up. I then had to leave for the day, or I would have (hopefully) re-entered when price again went through the 99EMA and reversed. Playing more conservative, I would have waited for price to break through the 33EMA before entering at 1316.50.

The market closed back in the 1318.25-1319 two-day balanced value area that I tweeted about last night. Good luck tomorrow.

You might wonder why I didn't enter long around 10:30 when price reversed off the bottom of the Keltner channel and returned back through the overnight low. Notice the "+" signs. I've programmed those to indicate extreme readings in the MACD histogram, and I've noted that 3-4 signals in a row often results in consolidation. So I waited to see how that would resolve.

Thin Tuesday

2011-02-08T15:32:00.003-06:00

Tuesdays are not good days for me. Based on my limited records, my weakest trading occurs on Tuesdays, primarily because they have often been slow, range days for the last four months of 2010. So until I learn to make Tuesdays fat, I trade only one contract. I still exit as if it's the first scale of a multiple contract trade, which means I get out at 2 points if the trade moves in my favor.

Today's first trade was identical to yesterday's--a pre-open bull flag resolving to the upside. As price broke through the flag, it was also breaking through the 33EMA and the opening price. I was more aggressive today, entering at 1316 on the close of the bar at 8:53 with a tight stop below the 99EMA at 1315. I scaled out--nope, only one contract--I completely exited at 1318, then simulated what would happen with a second contract. I bailed on that imaginary contract, also, at 1318 when price went up through the previous days VPOC (volume point of control) at 1318.25, then broke back through.

Since the uptrend continued, I re-entered once more at the second yellow arrow, taking the signal as shown by my custom indicator (those small green dots), and exited for two points. I didn't take the last trade at the third arrow because the entry was at 1318.25 and price had been halting and rotating there all day. There were divergences on the MACD so I thought it was more likely the move down would continue. I was wrong, and it would have been a profitable trade, but it wasn't a loss, and, for Tuesday, I'll take it.

Back in Business

2011-02-07T19:53:00.002-06:00

As the lack of posts on this site since October may have indicated, my project management contract was extended through the beginning of January, so my trading efforts during that time were minimal. My wife and I also visited Spain for vacation when my contract was complete, so I'm only now returning to full-time trading.

In the last few months, I've continued trading the ES part-time, and I've attempted to identify and correct some of my weaknesses. One weakness was exits. My win-to-loss ratio has consistently been around 60%, but I wasn't allowing my winners to run as long as necessary. One step that I took to address this issue was to shift to range bars (currently 1.25 ticks for the ES) instead of 5-minute bars on my charts. This eliminated much of the visual noise that accompanied small movements--those movements that would shake me out of trade. Combining this with a method for scaling out of trades, I began to find confidence and consistency in my exits.

My first trade today was when the pre-open bull flag began to resolve to the upside. The 33EMA was above the 99EMA. The MACD began to trend up again, and I anticipated a retest of the overnight highs. Since I'm conservative, I didn't enter upon the initial breakout, but waited for a re-test of the flag. I entered at 1311.50, scaled out of my first contract at 1313.50, then held the second contract until 1316.50 when the MACD fast indicator registered an extreme reading and price broke back down through the Keltner channel.

My Problem with Trend Days

2010-10-06T10:47:00.007-05:00

Yesterday was a trend up (up and away) day. On days such as yesterday, I still have difficulty shutting off my contrarian nature and accepting the trend. I recognized the day's structure, but I wasn't aggressive enough in my exits. I'm not taking as much advantage of those days as I should. The foundational work is there, but the psychology is not quite. When you see such issues within your own trading, how do attempt to avoid them in the future?

For this particular issue, I created a single page trading plan called "How to Profit from a Trend Day." This is the page that I pull out, pre-open, when I see some or all of these possible indications of a trend day:
- Overnight gap.
- Upside breakout from trading range or trendline.
- Previous consolidation day.
- Price hitting R1 (or R2, R3) early.

After the open, I watch for:
- Failure to retrace the gap, especially a 50% or less retracement.
- Breadth skewed higher.
- Volume higher.
- Market continuing to trade above VWAP.
- TICK being +/-800 on one side without going +/- on the other.
- 5MA of TICK never, or rarely, going below zero line.
- 20MA serving as support.
- 50MA serving as point of final support.

Then I go ahead with the rest of my trading plan.

It sounds simple and perhaps even unnecessary, but what this single page trading plan does is convert a psychological issue into a set of mechanical steps that I follow. Rhetoricians will tell you that it's almost impossible to counter an emotional argument with a logical one, and that includes arguments within yourself. So reading about trend trading, analyzing past trades, telling yourself that you won't let your emotions take control next time likely won't work.

Instead, I follow the path of programs that are successful at overcoming psychological barriers, such as AA's 12 step program. Convert the "cure" into concrete steps. Those steps avoid engaging your emotional defenses as aggressively, and that, hopefully, allows new habit creation to be more successful.

I'll leave you with this snippet from James Dalton's "Markets in Profile" where he discusses this approach and also suggests why you should be patient with yourself as you work to rewire your brain:

When I first heard the phrase cognitive dissonance, a condition of conflict or anxiety that results from inconsistency between one’s beliefs and one’s actions, I paid it little heed. I considered it nothing but a psychological term that clearly didn’t apply to me. However, following several periods of extremely shaky trading, I realized that several of the trades that had caused me the most harm clearly went against my analysis. I had seen the opportunity correctly and my timing had been good, but when the time came to act, I couldn’t pull the trigger. On more than one occasion, I did pull the trigger, but in direct opposition to what my research was telling me to do. Delving into behavioral science literature and neuroeconomics helped me greatly reduce the negative effects of cognitive dissonance.

For example, once I began to understand what neuronal networks are and how they’re formed, I made several trading breakthroughs. Neuronal networks begin to form as the brain encodes our repeated experiences. This occurs as the result of practice over time. As I correctly viewed and acted on market-generated information, it became better encoded in my brain and assisted me in overcoming cognitive dissonance. “Over several games,” to quote Dr. Restak again, “but not necessarily in a single game, these networks will prove superior to the trial-and-error approach of the novice.”

So That's a Quad Witching Week.

2010-09-19T12:11:00.001-05:00

Last week, due to some personal family issues, was a quiet week for me, but I did trade on Thursday and Friday.

Corey Rosenbloom of the Afraid to Trade blog often teaches about confluences--times when multiple signals combine to indicate support and resistance areas which can lead to reversals, breakouts, or other significant movements. One of my trades on Friday made use of this concept.

In the overnight session for the e-Mini, the market drove up to 1032-1034, then began trending down. After the 8:30 open, price touched the 1123.25 support area, already touched two times in the pre-opening hours. When it moved below, I was able to snatch a few points on that move. But that's not the trade that I want to write about today. It's the next one.

Price started to climb up around 9amCST. I was closely watching to see what it would do at the 20, then the 50EMA.

At the 20EMA, the TICK indicator hit +1000 which can indicate a reversal, and I almost went short. A doji candle had formed, and the next bar closed below the low of that doji. In the future, I might take this trade, but the criteria wasn't there. So I waited, which then led to a better setup--the one marked with the red arrow below.

The following were all setting up in one X-marks-the-spot location:
- The trend line from pre-open to open, touching
- the 50EMA, touching
- the upper Bollinger band, intersected by
- the former 1123.25 support line broken just after the open.

Price could stop right there. If it did, then the move down could retest the 1117-1118 low of the day. If price kept rising, it would quickly invalidate the criteria for this trade, so I could short with a tight stop at 1124-a 2:1 reward to risk trade.

Price came near the X-spot, forming another doji candle, TICK went back to +1000, and the RSI(5) showed oversold (when price is trending I only use the RSI readings opposite the trend), so I sold.

The market dropped, and I began to scale out at +2 points. When price avoided the low and TICK began to turn back up, I closed the rest of the position. In the four days before, most of the volume had traded between 1113 and 1118, so I thought it a good call not to hold this position longer. Also, this was my first time trading during a quad witching week, so I'll admit to a little fear over that inexperience.

The market began to flatten out, so for the rest of the day I sat and watched.

I was happy with today. My goal for September is to reach break-even during simulated trading, and it appears that I will meet this goal. Next stop (fingers crossed) is consistently profitable.

Good trading next week, folks. Thanks for reading.

What We Talk About When We Talk About Gaps.

2010-09-08T15:52:00.000-05:00

Yesterday began with a gap down. The overnight session had trended down, and there were hints it would continue during the day session (my basket of sector ETF’s all showed relative weakness, multiple TICKs below -800), but price ran up against the support at 1089-1091.50 and then spent most of day building a bear flag (or two bear flags depending on your time frame).

I found it difficult to trade the late morning and afternoon session which indicated another type of gap—a gap in my trading methods.

How should I address such a gap in my trading plan when, at least for now, I'm mentoring myself?

First I believe that it’s important to clearly define the gap. Can I describe the gap in a concrete way, full of specifics that circumscribe the problem? One way to validate a concrete from an abstract problem--can I explain the gap to my wife, who has picked up some knowledge of trading by osmosis, but, in general, is not familiar with trading? (Granted this is a cheat, because she's extremely intelligent.) If the answer is no to these questions, then perhaps the size of the gap is larger than I suspect. Don't underestimate the work necessary to close this type of gap.

But I don't believe that is the case here. My gap, or what I believe my gap to be, is difficulty trading a day that begins as a trend down and then resolves into a tight trading range with a bias opposite the initial trend. Ironically this is partially because I’ve implemented trading methods to counter my inherent nature to be a reversion-to-mean, contrarian trader—a nature that could work well on days such as yesterday, but causes unfortunate unprofitability during a true trend day.

Now that I’ve defined what I need to learn, here’s the next question. How much does this gap harm my trading? Even more specifically, how much will this gap harm my trading tomorrow, or this week, or this month? If the answer is little-to-none, then perhaps now is not the time to address this issue or to only address it with minimal reactions. I say this, because as a new trader or as someone learning any new skill, you must also be aware that your time is a resource, and there is a cost to using that resource. You should weigh the expenditure of this cost against the benefit that you will receive. Or in clichéd terms, don’t bother with this if your time is better spent elsewhere.

I realize that this may sound overly methodical, but I’ve seen people (ME!) get lost researching issues that barely impacted the day-to-day operations of their business or their life. They disappear down the rabbit hole of the Web, sometimes for days and days. When we do that, we are not training ourselves to be better traders; we are training ourselves to be better at reading about how to be a better trader. There is a difference.

Anyway, I determined that my gap in knowledge has a small impact on my trading days, but that there is a great benefit to me if I can learn to rely upon my contrarian nature when needed and holster it when it is not. Trend and range day identification are critical components to my trading, so a more complete understanding of transitions between each should help me in other ways. However, because it does not impact me often, I limited my research. I re-read a few articles on trend transitions with the context of yesterday's trade day in mind, and found a few more articles on low-volatility and reversion-to-mean trades. From those I identified one method that I will practice in the future, and I’ll track my win rate to see if this is something I can add to my toolbox.

It's 90210 day. Welcome Back to the 90's.

2010-09-02T16:27:00.004-05:00

1090 that is. The E-mini drove up the channel today to a couple ticks above 1090 and closed above the 50MA on the daily chart. As you can see from the 5min chart, price started to trend up in a channel early this morning then continued up the pipe during the daily session--a decent continuation after yesterday's spike up.

I only took two trades today, since I'm now learning the intricacies of TradeStation. I've been using NinjaTrader, but have decided upon TradeStation as my broker and platform. Both trades were support plays off the 5min, 50EMA, and both were successful.

Thanks to the shift to TradeStation, I'm now incorporating the NYSE $TICK indicator into my trading. I use it in three ways: as an indicator of extreme buying/selling, as an indicator of divergences, and as an indicator of trend. Or at least those are my objectives. Today I primarily used it to gauge trend. Only once did the TICK register below -800, while going above +800 numerous times, a strong sign that price wants to go up.

Notice also that up until noon CST, there was a negative divergence occurring in the TICK (and also in the MACD), so I was being careful of a possible reversal. None came, and price continued up and over 1090.

What's next? I'm also seeing divergence on the 60min chart for volume, breadth, and momentum. Tomorrow morning the non-farm payrolls and unemployment rate numbers are released at 7:30CST, and those have been the talk of the tweets all week, so we'll see. It's a non-trading day for me, so I'm literally going to sit and see. Good luck to everyone tomorrow.

Thank You SMB Capital, Briefing.com, and Wall Street Cheat Sheet

2010-08-31T15:13:00.003-05:00

Today was one of my full simulated trading days (usually Tuesday and Thursday). I ended the day having made 5 trades, with 3 profitable (+162.50, +162.50, +350.00) and 2 not (-50.00, -75.00) (before commissions). As I've written before, for my first stage of training, I trade 2 contracts, so that I can practice a scaled exit strategy. I scale out of the first contract at a 2 pt profit while allowing the remainder to continue until my automatic strategy or I sell it. I want to be consistently profitable with 2 contracts, before moving to 3.

I was happy with my trade management, but I was too impatient on entries. I also avoided taking the long trade off the 1039 retest just after the open, because I wanted to watch the market's behavior. That's a trade I should certainly make in the future.

It was a light day, with pops and drops from the economic announcements. I highly recommend (and I imagine others would demand) that if you're going to trade, part of the research before the day begins should be notes on the economic announcements. Even if you don't fully understand how they move markets, you should know when these announcements are scheduled to hit, so you can be prepared. Check out Briefing.com for their economic calendar, or if you are trading the E-mini like me, head over to Wall St .Cheat Sheet for their Must-Read Morning Cheat Sheet. It will also give you information on market profile, daily pivot points, and possible targets.

I'd also recommend reading this article on time of day tendencies from SMB Capital. It's a concise explanation about why different times during the day are important. Just read this article while reviewing today's chart to see the value of this knowledge.

Slow Ride. Take It Easy.

2010-08-30T16:00:00.000-05:00

Today was a slow ride down. Other than a brief moment after the open, the E-mini never rose above the 50EMA and barely rose above the 20EMA. It wasn't dramatic, but it was consistent, and that made it valuable.

On a trend day, I rely upon the EMA's more than usual, and I ignore the RSI and MACD more than usual. I still watch for momentum divergences, but I avoid using them as any indication of oversold or overbought conditions.

When tracking momentum divergence, I have the habit of drawing an arrow line on the top and the bottom of an indicator, as you can see around 10-10:30am CST on the screen capture below. Yes, I was seeing higher lows in the RSI(5), but I was also seeing lower highs. It was the disappearance of momentum, not a divergence, so I stayed with my trade, but prepared for the return of momentum and a possible reversal. Instead there was a continuation of the trend. For me it was a reinforcing example why you shouldn't trade off any one signal, but should use confluences of signals, and always, always seek confirmation from price.

Today was a good day since I identified the trend day early, then watched for counter-trend movements, specifically returns to the 50 EMA, before entering with the trend.

"I've got it! I've got it!" Catching a baseball vs. catching a move in the market.

2010-08-22T15:00:00.004-05:00

Have you ever heard of the gaze heuristic?

When a ball player moves to catch a fly ball, an outsider observer who knows nothing of the human species might hypothesize that he is calculating the equations associated with parabolic flight in his head, in real-time, while also continually adjusting for changes in wind speed and the amount of air vapor present.

We know they’re not, but what are they doing? How are they in the right place at the right time when the ball comes down?

They rely on an unconscious rule of thumb called the gaze heuristic. When a ball comes in high, a player fixates his gaze on the ball, starts running, and adjusts his speed so that angle of gaze relative to the ground remains consistent. It’s fast because it can solve the problem within a few seconds, and it’s frugal because it requires little information, just the angle of the gaze. (Gigerenzer, Rationality for Mortals, pg 22.)

Heuristics differ from solutions based on statistical optimization, because they do not seek the most optimal solution to a problem; they seek the first solution that satisfies a defined goal. In many cases, in a complex or chaotic system, such as life or financial markets, heuristics will outperform a system based on statistical optimization, because the statistical model over-fits to the historical data (it can describe, but not prescribe) and because the statistical optimization may be not only computationally intensive, but computationally impossible.

This is a lesson that that I wish my younger self, the one that began trading just out of college, would have learned earlier. It can be difficult for new traders to trust that a decision in a complex or chaotic system, such as the stock market, can only be based on incomplete information. A trader’s first experience with a major loss will often lead him down a path of education, a path that hopefully includes lessons on money and risk management, but it may also lead to a crippling lack of confidence in their own ability to make decisions. They become afraid to fail and, as such, seek out any methods that will help them avoid losses. These traders, and I count my younger self among them, often succumb to paralysis by analysis—the inability to trade until they have the “complete information” necessary to guarantee success. And that’s just not possible.

Meanwhile a heuristic system, the one based on simple trading rules that can be quickly and consistently applied, can work, and in some cases outperform more complicated systems. My younger self took some time to learn this. He studied widely, but shallowly, of indicators and chart patterns, of cycles and waves, of anything that would help him feel safe in the market--his charts and indicators en masse were as complicated as a map of the London Underground and more confusing.

Along the way I learned a lot about technical analysis, but I didn't learn much about becoming a trader.

My chart setup is now considerably simpler, and my trading plan actually exists. I know that I am making decisions based upon probability and not certainty. I know that there is such a thing as a good mistake, a mistake that must be made in order for a person to progress. I know that in order to become a trader, one must actually trade, not just read about trading.

And I know there are still many areas in which I need to improve, but I believe this shift to simpler solutions that satisfy a goal instead of overly complicated solutions that attempt to protect me from all danger will give me a better chance to actually survive as a trader.

Do You Like This Trade? Check Here for Yes.

2010-08-17T15:56:00.000-05:00

As a project manager, checklists have kept me sane within the controlled chaos of multiple projects. I rely on them for to-do lists (and did so before GTD made it cool) and for any repetitive process, so naturally I brought them along with me when I became a trader.

Today I knew that I would only be watching the market in the morning as I had appointments throughout the afternoon. It's also my first week in live, simulated trading, so I have only two weekly goals. Watch price movement to gain a sense of the current volatility, and, each day, identify at least one trade that meets the criteria of my trading plan. My mantra to myself. If I can make only one trade per day, what will that trade be?

The big picture indicators were hinting at a decent move. There's been considerable compression in range over the past few days, as everyone has seen on their longer term charts, so it was time to identify the areas to watch for breakouts, and to have the checklist ready that I use prior to enter a breakout-from-compression trade.

As a newbie trader, I sat on my hands this morning, watching price bounce around between 1083.25 and 1087.75 on the e-Mini. Price had creeped higher during the overnight session, and the longer term indicators on the 60m chart were showing higher highs and higher lows on the MACD and RSI, The RSI(5) on the daily chart was still slightly oversold. Price had moved above the 60min, 20 and 50EMA. My bias was for a break out higher.

BUT, that's only a bias. I'm an either-or trader, so I like to have a set of if-then statements ready.
- If the market goes above 1087.75 on strength, be a buyer.
- If the market goes below 1083.25 on weakness, be a seller.

Yes, that's greatly simplified, as there's quite a bit of detail included in those words "strength" and "weakness," but those statements helped defined my plan for the morning trades.

Back to the tape. And more sitting on of the hands. We all know how hard it can be to remain patient, but many others feel this way, too, so I told myself to wait for the confirmed breakout, then that pent-up energy of the mob would work in my favor. I might miss trades, but I won't deplete my account by over-trading. Easy to say, I know. Harder to do. I tell myself that I'm at the beginning of a journey, so I should be patient with myself, also.

As the morning continued, the range that I was watching compressed even further in a set of lower highs and higher lows. I drew the triangle on my chart and watched for breaks of the upper and lower limits.

Price broke through the upper triangle line. About 7 minutes later, it broke through the 1087.75 mark. And I broke out my checklist. Did I like this trade?

The 5 min bar had closed outside the upper Bollinger band.
The top and bottom Bollinger bands had each turned out.
Volume was ascending, and the volume for this 5 min bar was the highest of the day.
MACD wasn't showing any divergences.
RSI wasn't showing any divergences.
Price had closed in top third of the 5 min bar.
20 EMA was above 50 EMA and both were curving up.

Yeah, I liked this trade, and I voted by buying two contracts (reminder: I'm in simulation mode.). I started my simulated trading with two contracts, because 1) I wanted to start small, and 2) I wanted to trade using a scale-out exit strategy. With two contracts and my methods for stop-losses, I'm risking less than the recommended 2% of my account, too.

I scaled out of the first contract at 2 points and let the second contract run until price made a higher high, but closed within the Bollinger bands. First simulated trade complete. Then the review began. Should I have let that second contract run longer? Was my entry in the best place; should I have entered earlier or even later?

But then I paused, because I needed to show some respect for myself before I began the trade introspection. It felt good to finish my first trade on the path to a possible new career. I may fail, or I may succeed. Today, though, I'm proud that I'm trying.

And a little scared :-).

And those questions about my first trade? I put those on my to-do checklist.

The Big Picture, Now Playing on Monday, Wednesday, Friday

2010-08-16T18:34:00.004-05:00

In my new circumstances, I'm at my part-time, working-for-the-man position on Monday, Wednesday, and Friday, so I've decided to designate those days as Big Picture review. I can't watch the market as closely, but I can check in every few hours. One step I follow on these days is monitoring how the market behaves around support and resistance on the higher time frame charts.

Take, for example the 50 and the 20 EMA on the 60 min E-Mini chart below. For me the bounces down off the 50 EMA reinforce how important it can be to check out higher time frame charts (60m, daily, weekly) upon occasion--for me those occasions occur in the morning, in the evening, and before I put on trades. If I'm calculating risk and reward, I want to know if a 200 or a 50 or a 20 MA at a higher time frame is sitting just a few ticks above or below my entry. I've have, unfortunately, ignored those at my peril.

Those moving averages aren't flashy--not like that RSI guy who's always invited to the party--but I continue to respect them.

Is it the Fall (of 2010) that will kill me?

2010-08-13T11:59:00.001-05:00

Hopefully not, because as of today, Friday the 13th, I've resigned from my job. After 20 years in software development and 15 years as a project manager, I've decided to become a trader.

Actually that first sentence is not entirely true. Yes, I quit, but I negotiated with my employer to hire me half-time as a consultant (with higher pay). Consider it risk management. I've established a trading plan, but I'll still begin with simulated trading before I go live, since we all need to learn a little about ourselves before we step out on the ledge.

I hope this blog will help me avoid being too insular. I've been trading on and off within the stock market for 15 years, and the early days were filled with mistakes that cost me both money and pride--some because I refused to look critically at the choices I had made. I imagine nearly everyone reading this blog understands.

In my soon-to-be previous life, I'm a project manager. Project management, at its core, is about identifying and controlling risk, and I'll probably return to that theme often. There are multiple facets to risk--the likelihood that something will happen and the impact that will occur if it does. You can't avoid risk, and you can't avoid all the impacts, but if you keep an open mind about what the future might bring, you can identify mitigations that will help you avoid the most dangerous paths.

Project management, though, is also about making or facilitating decisions. You have to move forward, or you'll remained locked in analysis mode for too long, awaiting a perfection that isn't possible. It's about trusting your and your team's abilities to learn, adapt, and address the issues that arise during the journey.

Except I don't have a team any more. :-) It's just me (and one exceptionally supportive wife).

Time to leap.