WestCoastTrader

Tuesday (May 15) Narrative

2012-05-14T15:26:00.004-07:00

Narrative for Tuesday May 15

1. Lower Highs/lower lows still in effect (Daily chart)

2. Financials still weak thx to JPM

3. Greece still leading news cycle

4. Eurozone GDP on Tuesday expected to be negative

5. S/P now below widely watched 1340 inflection point

6. Spanish bond auction did not go well today

7. Dollar showing strength

Narrative:

The major technical signals on the Naz Futures include H&S breaking down (-1) on the daily and a bear flag on the 240 (-1); however, push at the end of the day did not send us into the Turbulence Zone on the daily or to new lows on the 240 (+2). We are at the bottom of the 2580-1635 trading zone (+1). The 20 ema on the 240 is keeping a cap on the up moves (-1). The up moves are getting weaker with tops now being set at 2606 rather than the 2630 level (-1). The daily stoch is now very oversold, while at the same time the 240 choppy stoch is now corrected (+1). The choppy stoch on the wkly is correcting down nicely and approaching the key reversal zone (+1). Price on the wkly is still holding the 20 ema, but weakening (-1). We have a Turbulence Zone below in the 2560-2586 area. Down volume is not increasing on this most recent down move (+1).

Price needs to show that it can mount and hold the 240 20 ema. Would then need to mount and hold 2606 and then 2630 levels.

Tuesday:

Tuesday: Retail, CPI, Inventories, and Empire

Daytrading Time Zones (Pacific Time)

2012-05-14T07:48:00.004-07:00

6:30-7:00: Fun Zone - A bit scary but everyone enjoys a roller coaster or two at the open. Make sure to wear the seat belts.

7:00-7:35: Reversal Revenge - think you are on to something in the first 1/2 hr? Well, let Reversal Revenge rip off your face

7:35-9:00: Honey Pot - once you have climbed the tree and fought the bees, enjoy the sweet taste of success

9:00 - 10:45: Rip Van Winkle - Everyone deserves a rest, but don't sleep too long.

10:45 - 12:00: Final Push - hope you are wearing comfortable shoes and have enough water in your backpack.

12:00-1:00: Finish Line - you can see it and its within reach, think Gabriele Andersen-Scheiss.

Nazdaq Narrative for Week of May 14th

2012-05-11T16:11:00.001-07:00

Jobless claims were a bit higher than expected – not a big deal

Inflation came in better than expected

Consumer sentiment was at 4 year high

Option Expiry next week

Price failure at end of the week was a negative

The overall weighting of the technical signals were negative with lower highs/lows still in effect (D). The close from this week was below the low from last week and the stoch is still correcting down (Wk). Price cannot seem to hold 2630, which is near Mo S1. This all is setting up a bear flag (240) which should be watched next week. Downside support is 2545, which is the Mo S2. The push up today was rejected by the 20 ema on the 240, which is also showing choppy stoch. This bearishness is setting up for a big week of news next week (see below). The one good piece of news was the weekly close showing a doji on top of the 20 ema. This is also the first test of the 20 ema all year, which would lead some to believe that we will get a nice pop up; however, this week did not show it.

Watch:

Wk:     20 ema is critical support

D:        2560-2583 is turbulence zone

D:        > 2630 is critical for reversal upward

120:    2642-2648 turbulance zone

120:    2585-2640 trading in range

Next Week:

Monday: Nada

Tuesday: Retail, CPI, Inventories, Empire

Wednesday: Housing, Indust Production, Capacity Utilization

Thursday: Jobless claims, leading indicators, Philly Fed

Option Expiry next week!

Remember the ones that worked and why

2012-05-09T10:30:00.000-07:00

There has been a lot of focus in these posts about what steps are needed to maintain a healthy P-n-L, but very little about what was actually undertaken to be profitable during my day trades. This blog is a trading journal written to myself for my own benefit with messages about failure, discipline, etc. directed squarely at...me. So, this particular post is about what specifically worked today while day trading.

I post this not as an ego trip but rather as a reminder during future dark times when I need to remember what actually worked and why. Not that today was an especially special blow out kinda day. Truth be told, I only used partial positioning today for both trades because the internals were so nasty. So, I guess that was Step 1 - use partial positions during counter trend trading when internals are especially nasty. Below is a screenshot of the $QLD trades I took this morning, which show the actual entry and exit points for today. I do not trade off the $QLD chart, I use it as a proxy for the setups I see on the Nazdaq Futures charts - a hold over from my futures trading days. I like it because I can also read the overnight action off the Naz charts.

The keys to success for today were as follows:

1. Key Support/Resistance
2. Time of Day
3. Setups
4. Internals
5. Positioning/Size

Key support was found both on the weekly and daily charts, with the 20 ema on the weekly and the recent lows on the daily. Time of day is so critical for my day trading. Through use of my stats, as well as the daily cycle of the market, I am able to zero in on key times that work best for me. The open is always a volatile time and somewhat of a crapshoot for my stats, but I do know that the market tends to lean heavily during the first few minutes of the open in one direction only to reverse into the 7 am hour (all times are Pacific time). So, all other things working in my favor, I would have no problem taking a quick scalp off the open only to jettison the trade a few minutes later when resistance is hit on the 5-min chart. The other things working in my favor for the opening trade included my setup on the 5-minute chart, price action at this level and the fact that I was going to trade with 1/2 size due to the gap down. The internals really do not come into play on opening trades since they haven't really set up for the day - this leads to some uncertainly during these trades. So when my trigger bar hit, I went long and held until resistance, which was defined this morning as the 200 ema on the 5 min Naz chart. No questions asked - I exited without thinking about the profit or what ifs. Nice profit for Trade #1.

Given the Time of Day, I knew that I wasn't going to take a day trade regardless of what showed up on the charts as long as it was between 7:00 am and 7:35. This reversal period is notorious for ripping me up. So, I got up, grabbed some breakfast and came back to monitor during this period. Once we got through the 7:35 period, I watched the various charts and noticed a beautiful reversal off of a push into strong support on the 15 min chart. One of the tough things to do in day trading is waiting for confirmation, because a lot of the time that is a big part of the move. But this time, I had no problem taking the trade off the close of the confirmation bar because the internals were setting up nicely. We had the Put:Call rocketing above the 1.20 level and rising and we had the VIX pulling back in off its highs. I absolutely love this combination and will typically take it as a buy and hold regardless of the setup on the bar charts. But this time everything converged, which made it a no brainer. So, I had Time of Day working, Key Support lined up with a setup supported by internals and a mind set that resulted in proper position sizing. The only thing I would have done differently, would probably have been to step on the gas a bit more with position sizing since everything else was kicking ass. Nice profit for Trade #2.

All in all, near flawless execution.

Focus on getting it right, not being right.

2012-05-04T07:41:00.000-07:00

Wait! WTF!? I didn't mean to buy at the market, I meant to put in a limit order. How many times have you uttered these words or similar words at the beginning of the day? Happens more times than you want to admit, but you need to correct it right away, not justify it. It's not what you wanted and it could start a huge chain of events that may lead to some real damage. This was not your trade, you got in at a level that is unacceptable. Exiting right now and taking 1/2 hr break may mean a small loss, but that's all it is - a small loss. Easily overcome with sound trading.

Holding on to an unintended entry leads to a "let's see what happens" trading mentality, which leads the $$$ side of the brain rather than the strategy side of the brain. You begin to watch the P/L with every tick because you know this is not what you wanted, in the mean time you completely abandon the internals, news, etc. because you are obsessed with making this work from a dollar standpoint and not a setup standpoint.

You are obsessed with being right.

Your brain has no capacity at this point for the objective, strategic side of the brain. You have triggered the emotional side of the brain. One thing leads to another and pretty soon you are letting it blow past your trade loss limit, then your daily loss limit. Why not? You started on a path of plan violation, it's pretty easy to toss out the entire book and "see what happens." Pretty soon you are down 2x your daily limit and the move against you stalls. Well, this is a good time to average down - a move that violates every daytrading rule in the book, but you know "let's just see what happens." The market pops a bit, hits resistance and then....yup, blows down against you compounding your losses. Now it is relentless and has erased the entire weeks profits and there are no signs of a reversal, but you knew that - you knew that was going to happen and you knew that these types of trades end in disaster 95% of the time.

Well, I guess you got to "see what happens." Now you need to go through the entire weekend wondering if you really understood what just happened. Not that it was the dollar loss, that isn't going to knock you out of the game. No, it's a matter of wondering if you are going to come back more disciplined as a trader, able to be your own enforcer when it comes to your laws of trading. A destabilizing feeling to be sure, but you are used to it. Is this a basic flaw in your being that looks to creep out every now and then waiting to destroy your success one more time?

You have just the next trading day. All you can do is take each step with the fullest intent to do what's right. What happens three, four trading days down the road is of no consequence to you. It's what happens tomorrow because there may be no three or four trading days down the road if you blow out tomorrow. Come back from the nonsense and read your rules cover-to-cover. Where is your trading plan you ask yourself? Find it. Lay out an objective gameplan narrative for the next trading day, set limits and focus in on what will trigger your next trade. The next time you do this - take the next trading day off. The next time after that - the next week. You need to draw the line somewhere.

Focus and stay determined to get this right, not be right.

It's not the loss, it's the coverup

2012-05-03T11:55:00.001-07:00

I would venture to say that pre-determined stop losses very rarely blow up accounts and drive people out of trading. It's the "cover up" of those losses. Whether it be because you can't handle losing, concern about win:loss percentage if this one goes down, concern about avg net win rate vs net loss rate, whatever, trying to cover up a legit loss has got to be the #1 reason for trader laziness and blowing out accounts.

How many times have you heard that someone blew up their account because they took all their pre-determined stop losses. It doesn't happen. Why? Because if pre-determined stop losses are taken (whether they are per trade or per day stop losses), it sets off a chain of events that leads to better performance. But you don't know this because you are constantly trying to game the market to be right on every trade - it can't possibly happen. You need to embrace the fact that losses are part of what makes up a beautifully upwardly sloping P/L curve.

If you are disciplined enough to take stop losses consistently, then you are also the type of person to figure out what the hell is going on when a string of losses is put together. Is it because of normal draw down, or is it because something isn't working either with the setup or with you. You see, you will do the work necessary to figure it out and change things up a bit if you are the type to consistently take pre-determined stops - primarily because you are tired of the down time.

Try it for one whole week. Take pre-determined per trade and per day stops as dictated by your plan every trade, every day for the week. You say, "ahem, but of course I take all of my pre-determined stops all the time" - yeah, right. If this is new to you because everything about your game is discretionary, then you will find a lot of time on your hands over the course of the week. Once you get past the frustration of taking another pre-determined stop (and you will blame the "fucking stop"), you will use some of that extra free time to really look at your stats, trading system, or yourself and tweak it because you are goddamn tired of just sitting around when you cannot trade anymore that day due to stop losses.

If you cannot do this? Enjoy the ride while it lasts.

Stop selling yourself short

2012-05-01T08:41:00.000-07:00

Stop putting upside limits on your profits by getting stuck in some arbitrary notion of how much is "enough" for today. I believe this whole trading/investing enterprise is a random walk, and the average discretionary day trader will be close to a 50-50 winner over the long haul. That statement alone is enough to generate a bunch of debate. Look, you may be able to have a 70% win rate but you need to tolerate rather large draw downs and there is always the risk of holding on too long resulting in a blow up. I'm sure there are 70% and higher long term discretionary traders out there, but they are not the norm. Bringing in the loss limit on your trades to reasonable levels will result in a higher percentage of losses but should widen out your average dollar per win ratio compared to your average dollar per loss ratio. So, playing around with trade parameters trying to attain a 3:1 avg dollar win to avg dollar loss ratio will drive your win percentage down into the 50 percentile.

None of what I said above is related to mechanical trading, but how many of us have an HFT we can switch on every morning? With all of that said, the big difference for the discretionary trader is going to be money management. We are always seeking ways to widen out our avg dollar per win to loss ratio. So, you have figured out and religiously implement the downside rules when your stop limits are hit, but the big test is on the upside moves. Are you giving yourself the freedom and credit to make the right decisions, or when that magical number is hit, well - that's good enough? In my trading, I have historically had problems with preconceived notions about what is good enough in terms of day trading profit. When a particular number is hit, say +$500 for the day, my mindset would tend to switch to P/L rather than my current setup. How is it possible to widen out my avg net win per trade vs avg net loss per trade if I hold my downside AND upside steady and if my win rate stays around a certain percentage? I have to improve my ability to milk trades better.

The first step is to train the mind to stop thinking in terms of P/L - stops and profit target decisions need to be made before the trade is entered because the trader needs to forget about P/L once the trade is on. Focus, focus, focus being in the moment and really absorbing what the charts are communicating. Occupy the mind with chart and news information so as to eliminate P/L thoughts. Once the trader can get to this level, then you can allow yourself to play out trades to maximum profitability levels.

Stop selling yourself short.

Let your brain engage the market

2012-04-30T08:17:00.000-07:00

The brain is a very powerful thing, doing shit all the time that you are not aware of - processing, processing, processing. However, it can only process what you expose it to. You sit in your house day after day listening to biased crap on the TV and your brain only has that to process. To get close to the truth, you need to expose it to the wealth of information that is the world and then let natures little computer crunch the data.

And so it is for trading.

When the bell rings, hopefully you are taking mental snapshots of market information so that your brain can process the trend that is occurring as the market makes its way through the day. It is this collective information that you use to make trading decisions - not one sudden thrust in the TRIN or the TICKS that happen as you are watching. All of it needs to be put in context and in order to do that, you need to be constantly exposing your brain to the this information. One of the ways that I remember the past while looking at the present is to snap a picture 10 minutes after the open with my iPad of my data screen, which houses my market internals. A half hour later I go back and compare what was with what is. You may say "hey dipstick, you can easily look at a chart and do the same thing"; however, I am more objective when I am looking at numbers rather than squiggly lines. I actually get lazy when it comes to charts. I see the charts, but many times I do not actively engage my mind when I view them - sometimes flipping mindlessly from one to the other. So, every 15-20 minutes I process the data and let it sink in and really allow the data to communicate the market's message.

Don't sit like a zombie and and wait for a miracle. Actively engage the market with your mind (figure out the method that works best for you) and you have a fighting chance because you will start to trade based on collective knowledge of the data rather than trading based on hope and a roll of the dice.

For God's Sake - Take the Trade!

2012-04-28T07:56:00.002-07:00

The amount of ridiculous effort you put into your craft cannot be wasted on "drifting" at critical times. You see it happening in real time but you become a zombie and...really don't care at the moment. Get the necessary sleep, engage in the requisite diet, and make sure you are "there" every day when the bell rings. Maybe that special someone came in to your office and saw you "just sitting there" and thought it was a good time to tell you all the things that she "forgot" to say when you were having dinner or wrapping up the evening before. But the worst of it is, you let it happen.

Ya know, the lines on the chart mean something to you - you put them there. The information you gleaned from your review was strong enough that you not only drew a line on the chart, but you drew a THICK line on the chart. If only you could click on the line and a dialogue box appears reminding you why you placed that line there....hmmm. But what invariably happens is that as the day drags on, or as the excitement heats up, you drift. If for a bad nights sleep or other self-destructive reasons, you just sit there knowing what you see, but the energy is gone.

Oh, you know what's happening - you can see it for god's sake right in front of you. But ya know, the internals are trending strong, except maybe for the TRIN and a few sectors blah, blah, blah. It's called SUPPORT AND RESISTANCE for a reason. You see, when you are a counter trend trader you step in front of vehicles all the time. Sometimes its a bus but hopefully you are adept enough at reading the information to know when to stay away from those incidents. The ones that hurt, the ones that really piss you off are the ones you ignored for no good reason. And for good measure, reversal signals-a-plenty were slapping you around like a girlfriend that just caught you with her best friends boyfriend. You just didn't act when you were supposed to act.

This profession can be fun, but the enjoyment comes from performance excellence. When you step on the court of the trading professional you need to bring it the entire time. Remind yourself ahead of time what you are going to do during that 6.5 hr period. What is your narrative? What are your levels? What are you going to do when your levels are hit? Look for confirmation or just goes balls-to-the-wall all in on a position because of x, y and z reasons. You will amaze yourself how many times you are right on with your assessment if you just take the time ahead of the market open to objectively analyze, and most importantly make sure you have a reason to take the trade.

Map it out.

The parameters could be as simple as 1 ATR every day. That is, considering a 1 ATR daily move, what key areas do we hit and how does that line up with the short term and intermediate term trend? Within this 1 ATR what decisions will you make when those key levels are hit? Fade into resistance if this that and the other thing happens or wait for price to mount the level and hold and then jump on long because the next major resistance is 20 Naz points away AND that is still within the 38 point daily ATR AND because that move is with the trend AND it is supported by the key internals. Decide what you will do if you are faced with a 1.5 ATR gap in the morning. Would you consider a flat out fade because of x and y reasons, or will you be waiting for a pullback to support to get long because it represents a trend reversal as long as the internals stay in tact?

What's your playbook for today?

And don't fucking ignore it once the bell rings. Don't be one of those that starts panting and running after colors when the market opens forgetting about all the hard work you did the night before and the morning of, only to break a wry smile after the market closes and after you blew out 3x your daily loss allotment because you realized you were dead on perfect about your levels but you acted like Pavlov's Dog when the bell rang. There is no satisfaction in realizing you were right after the fact, unless you are that type of person.

Stop dicking around with your success.

Put in the Effort

2012-04-27T13:00:00.002-07:00

Get to know important market levels by heart and be able to know where you are within that market structure when you either see or hear the number. Knowing and being able to do these two very important things will put you in the camp of the top 5% of traders. Most traders are monkeys following the bouncing ball and getting pissed when the ball changes direction. The top 5% know the narrative (big and small picture) and know the chart like the back of their hand. How many times have you been watching CNBC and hear a market analyst recite numbers and levels. What happens to your attention when you hear this - your friggin eyes roll up in the back of your head because those numbers mean jack to you. They really need to mean somthing to you, which is why you need to develop them yourself and stop listening to anyone else. I really think that technical talk on CNBC and elsewhere has been the worst move they could have made over the past 5 years. All numbers and levels have importance to the person that develops them - no one else. For the person that developed them, he/she has put in many hours to understand:

(1) Big timeframe narrative (Europe, U.S., current reaction to Europe and U.S. news, where we are in the year, is the public over/under invested, election year, interest rates, bond auctions, etc.),

(2) Small timeframe narrative (sector rotation, oversold/overbought, recent fed speak, market reaction to earnings/data, etc.),

(3) Big timeframe market levels (support and resistance), and

(4) Small timeframe market levels.

You need to do the same thing. If you follow the green and red lights without knowing anything about context, go to the casino. Not that I don't visit the craps table every now and then, but I understand the difference between the two - one is entertainment and the other is a job. Entertainment is supposed to cost you money - you expect it and make the very important decision to allow for it, but a job is supposed to satify your passion and make you money. BTW, I don't have a problem equating a job with passion - I'm ok with it.

To make the numbers mean something to where you can place them in context, you need to refresh your narrative every night - market fluctuations change the story. This is where a lot of traders get it wrong. Ever hear the complaint that this or that system doesn't work any more and their P/L is getting slaughtered? If you put in the hours to keep up on the market narrative then you would know what systems work in this particular market narrative. Unless you are a multi-billion dollar hedge fund that can turn on and off the switch for years and allow the averages to play out in your favor, blindly following a meacanical system is, in this authors opinion, asinine.

You also probably hear a lot of complaints about how much time it takes to understand and update the narratives/levels. These are the same people that get sucked into the garbage at trade shows that feed on that absolute bullshit story of trading being equal to easy street/do-what-you-want-way-of-life. If it doesn't fit that marketing gibberish, then you will just find the next indicator or trading system. Do yourself a favor and take that money that you would otherwise use to purchase a $3,000 indicator or pay $4,000 for a weekend of "intensive technical training" and funnel it into endeavors that will help you understand the worlds markets.

If after reading this, you say "ahhh, that is too much work, it doesn't fit my real world view of this profession." Well, ok - you're right, you don't need to put in the effort.

We don't need no stinkin rules!

2012-04-26T07:30:00.001-07:00

You are mindlessly staring at your monitor while in a losing trade, or two, for which you have no hard stops. You know you are about to break every rule in the book when this happens - and you don't give a shit. Hell with the rules, you wrote them, you can break them. That's a big part of the reason you got into trading in the first place, to do what ever the frig you want. No boss, no clients, no employees, and best of all - no goddamn rules to follow.

This attitude gets you a bit revved up, a bit excited, puts a little bit of life back into your otherwise straight jacketed disciplined life. This is what you signed up for in the first place. This is your "let it ride" look, or better known as Custer's Last Stand - and you dig it. You ask yourself, what other stocks can you find to pile into to while holding onto the crap you are currently in? These new stocks will more than make up for the failing positions you are currently in. And somehow, you know....you just know, that once you pile into 3 positions too many 5 minutes after the open, that the market will reverse and rocket in your favor. You already have the profits figured out in your head - this is going to be one huge payday! The weekend is going to be a blast!

The market will reverse, it has to reverse, because you are going long, it's that simple. You can stop monitoring internals, sectors and the news because the mere fact that you are piling in long 3x leveraged for the day means that this is going to be blowout. For a second, just a second, you allow yourself to think about the consequences of your actions and in response you say "fuckit" and slump back and fold your arms and continue to stare.

You are simply not ready.

Honesty is the Best Medicine when it comes to Daytrading

2012-04-24T12:23:00.000-07:00

When you have the guts to slow down and evaluate/accept the objective data/facts about yourself and your trading results, you will be in a position to take the baby steps needed to correct your trading flaws - oh, yeah you have trading flaws. Continuing to trade like a bull in a china shop will be fun for the period that you have money to burn, BUT YOU WILL LOSE IT ALL - no doubt. If you are just starting out in trading and find it "fun" and "too good to be true", it is and you will be off doing something else soon unless you make the sacrifices necessary to be a successful trader. You will need to be open to finding out all kinds of shit about your personality that may make you successful in other endeavors, but absolutely destroys you in trading.

Are you ready to face down and change personality traits that heretofore were not even on your radar?

If not, find something else to do. Aside from all of that, you will also need to come up with a system that works. This shit is interesting. You spend your entire life in the world socializing and embedding personality traits that allow you to get by or excel in everyday life. You are programmed to read people quickly, push the right buttons, stay away from the wrong buttons, join forces, divide and conquer, step on the neck of your opposition either openly or behind the scenes - all of this social programming that works in the corporate world means jack in trading. In trading, you sit in front of a terminal and face....yourself. Try and fuck with that one. Lie to the person you are facing everyday trading and you end up screwing yourself. Try to blame someone or something else when trading...you get it.

I hear other "professional" traders say all the time that you need to let the market lead. This means you need to get out of your own way, and you can't do that until you have an intervention with yourself. I posted a few days ago about the making of trading rules. The next time you blow up day trading losing 3-5x your daily allotment (and you will), use that period to allow yourself to be honest with yourself and write down the top 3 reasons why you blew up and 3 rules to fix it. These reasons and rules need to focus on chronic issues, not something that happened in that one particular day. For me, past chronic issues included piling on with many different positions all at once trying to hit a home run that day - when the vagaries of the market hit, I would hold into colossal losses when my original intention was to hold those stocks for no more than 10 minutes. A rule that I developed along the way is to not hold open more than 2 day trading positions at once. Another one was flip-flopping my trades due to my past inability to accept a loss for what it was. I would enter a trade based on my system, but having a too large of a position (another prior issue) I would jettison the trade before any signals warranted this action. I would then want to make the money back right away and would flip my trade to the opposite position only to have the market rocket in the direction of my original direction. My solution here was to take a 1/2 hr break after each day trading loss. All of this came not from one or two powerful losses, but from years of fighting it and realizing that this was something that I wanted to do for the rest of my life and I had better be honest with myself if I was going to make the necessary changes.

It's like being in AA, you need to remind yourself everyday that these are chronic issues you have and here are the rules to use on a daily basis. But the first step is getting yourself to a place that allows for open, honest assessments of the self. No one else is going to do it and the market will not feel sorry for you when all the money is gone.

Allow yourself to take one step back so you can take two steps forward

2012-04-24T08:18:00.002-07:00

This whole thing is about making money; however, thinking about making money while you trade will result in either significant under performance or flat out failure - the paradox of trading. Honestly assessing my past trading style, I can tell you that I historically would exit the majority of my day trades based on P/L rather than technicals. I would sit there in a trade watching the P/L until it got to a profit range that I was "comfortable" with. I would be out of the trade in the first 15 minutes of trading and then watch the rest of the day as the market roared to a 2x ATR day. Once you focus on the $$$$ while in a trade, you activate parts of your bodily system associated with greed, survival, etc., which takes away critical strategic decision making ability based on implementing a technique that will make you consistent money over the long haul. Focusing on the internals and market structure (truly focusing) would have resulted in a system response that would have allowed the market technicals to trigger decision making rather than greed/fear.

The solution?

Trade small, have limits and find a technique or two that will allow you to accept losses with as little internal turmoil as possible. Once you can do this, you can train yourself one of the most important aspects of trading, if not the most important - learning how to take a loss. Once you can "take a loss" then you can begin to control the pain of being wrong. One of the ways to take a loss is to understand that you are in it for the long haul, this is not a get rich quick scheme. You need to build the foundation of wins AND losses that allow for an acceptable equity curve. Crazy position sizing wrapped in too much emotion will not get you an acceptable equity curve over weeks, months and years.

Work on it - find one thing about your trading style/emotional response that is preventing you from having an upwardly sloping 45 degree equity curve. Change it today.

Stop Adding at Resistance

2012-04-23T08:47:00.001-07:00

You have started a position based on extreme oversold conditions. The market struggles to go your direction because the internals are completely against the counter trend move, except maybe the Put/Call Ratio, which has blasted to the 1.3 level. The market suddenly rockets in your direction, predictably, to your favorite MA on the 5 min chart. This is the place where the shorts are thinking about covering and you want to take advantage of the pop that happens when they cover. The move was very convincing and you are anxious to add to the position.

STOP!

Don't be in such a hurry, even if you have a vision that the move is going to let loose and shovel piles of coin into your pocket. You are sitting pretty, don't be in a hurry to put yourself back into an uncomfortable position by being too large at a most questionable time. Let price jump the shark AND THEN add to your position when it comes back to support AND HOLDS. All too often the blast above resistance is just short covering with no sustained purchasing on the other side. If you are right about the move, waiting a few points in what could be an extended move in your direction will only add to the certainty - a small price to pay. Do you want to add at a time when most bounces fail only because you fell victim to your excitement and poor trading techniques, or add when you have new found support and a market that has proven to be supportive of your thesis?

Pretty simple decision.

Worst case scenario is that you get stopped out for an amount and at a level that you previously determined was acceptable, which was at a much lower amount than if you jumped the gun. Stop putting yourself in uncomfortable positions. The market is full of risk - every time you execute the trade to start a position, you enter a world of risk. Don't compound it by making stupid decisions.

One Simple Recommendation to be Profitable in Day Trading: Listen to the One Who Knows

2012-04-21T08:07:00.002-07:00

You have sat there for years evaluating the markets, evaluating the data and assessing the internal turmoil that make you the trader you are. Along the way, you have devised rules based on your unique makeup and understanding of the markets. No one knows your situation better than you and you have devised your plan, in part, based on this deep understanding of who you are. A lot of your rules were born out of trading frustration, angst, and despair. Truth be told, very few of your rules were born out of success, perfect execution and flat out nailing it. What is key about these rules you have developed is that they represent the "truth" about what will make you better because they were designed when you were you were the most open, honest and vulnerable. They were developed at times when you gave in and allowed for the slightest possibility that the market, and not you, were right. Your rules, developed over years, represent a compilation of those moments in your trading life when you allowed your ego and fight to diminish enough to allow you to realize what the market has been trying to tell you day after day for years. It's a fucking gold mine designed especially for you. These rules aren't masked with bullshit that you have read elsewhere, or chock full of self-important drivel based on what you think a trader should be. They represent a line in the sand separating you the successful trader from the trading abyss.

On a more basic level, they reflect the moves that are necessary to make you a successful trader.

The trick is to be in the moment every trading day lining up an ego that, at the moment, is in sync with the ego that allowed you to write those rules over the years. You see, once you have written the rules, you start to feel better about the situation, which allows more of the destructive ego to come back to lead the effort. So, how do you dial in to the frequency every trading day that corresponds to the frequency that existed when you wrote the rules in the first place?

That, my friend, is the trick.

Oh, by the way, I was a loser in my first trade on Friday. As noted in yesterdays post, my rules are as follows when I experience an opening losing trade:

1. Take 1/2 hr break: clears my head and breaks the cycle of revenge trading that I experience when I have a loss,

2. Objectively assess the market and internals upon return: Stops me from fighting the trend because of my need to prove the market that I was right in my previous trade,

3. Focus and adhere to my daily loss limit: keeps me focused on my stats so as not to blow out to the downside, and

4. Adhere to my 2 loss in a row limit: forces me to really focus on my next trade knowing that the system will be shut down for the day if I experience two straight losses.

The result? I did turn off the machine and walk away for 1/2 hr, I did take my time to objectively evaluate the market when I returned, and I did eventually place a second trade based on what I saw in the moment. I was a profitable day trader for Friday.

If you are not going to listen to yourself and follow your own rules day trading, then stop trading and do something in life where you will be forced to listen to someone else. For me? That is not in the equation.

One Simple Recommendation to be Profitable in Day Trading: Follow your Rules

2012-04-19T09:56:00.000-07:00

My statistics are showing me an interesting trend. Over the past month, all of my losing days started with a losing trade, and 100% of the time that I have an initial losing trade, I follow it up with a second losing trade within the same time frame. The reason for losing days all starting with a losing trade stems from the fact that I day trade an average of 2-3 trades a day, which puts me significantly behind the eight ball if the first trade is a losing trade.

Easy enough.

The reason the follow up trade is a losing trade is a bit more mental in that I get wrapped up in revenge trading. That is, if I have an initial losing trade I want to recoup those losses immediately, and attempt to do it with a less than stellar effort - no patience and use of questionable setups.

My solution? More rules!

I shall prevent a second trade from happening for at least 1/2 hr after the first trade if the first trade is a loser. This gets me up and away from the computer, somewhat akin to taking a walk when pissed allowing me to decompress and come back with a fresh outlook. If the first two trades are losers? I shall exit all platforms and cease trading for the day. Yeah, that'll do it.

Oh, by the way, I had the situation hit just this morning. I exited my first trade with a loss - a good trade really. I knew that I was to walk away for 1/2 hr.....but, you know....I saw something. That something turned out to be another loss. Two in a row. so, the game plan is to exit for the day. Keeps the losses to a minimum thereby allowing my winning days to outshine my losing days - right? Yeah right? I saw something again, and went right in to another two trades, which resulted in....yup - losses.

Guess I need a rule about following the rules.

Son-of-a-bitch!

One Simple Recommendation to be Profitable in Day Trading: Allow Yourself to Trust your Internals

2012-04-18T10:35:00.001-07:00

You use internals because they give you an edge - not matter how you use them. Otherwise, you are wasting your time and your money.

If the foregoing statements are true, then why would you possibly ignore the message that is being sent by said internals? It's either because you are not absorbing the information being conveyed (aka, not being in the moment, not trading in the zone) or because your gambling side has taken over. The gambling side takes over when you use statements like "let's see what happens," "I have a feeling,", and "yeah, but this time..."

Looking at the data of the internals and understanding the message of that data, but trading in the opposite direction makes using the internals a complete waste of time. Traders will say "well, I am looking for a reversal-n-rip." Even reversals-n-rips give clues via shifting internals or the set up of divergences. If you do not see the shifts or divergences and the TRIN is ramping up to 1.75, the Ticks are pounding -1,000, the VIX is up over 10% and breadth is -2,500 to +300 - why would you go long? Is it possible that the market shifts in the face of the internals and rips in the opposite direction dragging the internals with it and then eventually reversing? Sure. But are you going to use this as the foundation of your trading plan?

Seriously?

Here is some sage advice, if you zone out during day trading or have a habit of pursuing FU trades -get up for a moment, focus on something else for 15 seconds (assuming you are not fully leveraged in a scalp play), stretch, sit back down, review your internals and ask whether or not the internals support your trade right now - not whether or not they are shifting or could shift.

What is happening now?

If you are trading a counter trend day trading scalp, then the internals are most likely against you - by definition. Does this mean to not take the trade? No - just make sure you focus on quick profit taking targets and do not convince yourself that this is the start of something beautiful.

Bottom line, if you are looking for the bull or bear run over the course of the day in your daytrade, the internals need to be with you - in one way or another. Don't lie to yourself unless you are the gambling sort. If you are the gambling sort......c'mon Lucky 7!

One Simple Recommendation to be Profitable Day Trading: Take Profits

2012-04-17T07:33:00.002-07:00

No shit! However, you would be surprised how many people completely forget about their targets while getting caught up in the move. I do. I constantly need to remind myself of my game plan. You know, that plan-your-trade-trade-your-plan crap you always hear. As annoying as it is, its necessary. You spend a lot of time doing your homework the night before, don't lose it while on the play ground. I don't need to tell you how painful it is to do your end of day review only to see how obvious the turning point was when your +$400 profit for the day became a -$350 deficit. Price moved right up to the 200/20 ema cross resistance, which was in the zone of turbulence that you identified the night before, but while the move was happening all you saw was the potential for great rewards if you threw out all your research and just held for the major push that you conjured up in your mind, while the market clearly showed lower highs and lower lows for 2 weeks. You got the push, you have a nice profit into your target zone, bank it, shut down the machine until the afternoon session. Taking profits are just as important as taking a loss. Don't fuck it up by getting greedy.

One Simple Recommendation to be Profitable in Trading: Keep and Open Mind

2012-04-16T07:29:00.000-07:00

One of the problems I have in day trading is my built in bias that arises from recent positive/negative news, even though price is sitting on support/resistance. Case in point, over the weekend I noted that 2,710 was significant resistance on the Naz Futs b/c a bunch of technicals lined up at that level. This morning retails sales come out positive and price shoots straight up to the 2,710. Instead of getting short here, which made the most sense (obviously in hindsight), I was looking to go long because of the retail sales number, So I completely ignored the possibilities to the downside. The end result was that I was sitting on the sidelines as the market sold off hard in response to an AAPL sell off. I completely missed the opportunity because I closed my mind to the possibility and because I weighed the most recent piece of data more heavily than all the other pieces of data that I gathered over the weekend. Stay open to all the possibilities and constantly monitor ALL the data gathered in preparation for this days trading.

One Simple Recommendation to be Profitable in Day Trading: Stay away from the end of day trap

2012-04-13T11:57:00.007-07:00

Day trading is just that - trading during the day. Get flat at the end of the day! If you are honest with yourself when you enter into a "day trade" - holding that position over night breaks your rules. I typically get caught in this violation as I am hunting down trades in the afternoon, while losing track of the time and using 15 and 30 minute charts. As the afternoon time passes, look at smaller and smaller time frame charts. However, consider your success rate and parameters when changing time frames. Entering a trade based on a 15 minute or 30 minute chart when there is 1 hr left in the trading day is a recipe for an afternoon trap if you are a day trader. Trading off a 15 or 30 minute chart with 1 hr to go is ok as long as you are treating it as an overnight trade and not a day trade. There are different risk parameters and position sizing considerations to consider when making this shift. I typically use a position size several times larger for day trading when compared to overnight trades. For example, at the close last night I was carrying 1,000 shares of QLD from earlier on as I scaled into my day trading position. As the day was winding down, the market was making a last minute push into the close. This move typically happens when we have the type of internals that we had working yesterday. So, I held right up to the close- this is a day trading decision, not an overnight position trading decision. Had I held the position overnight, I would have been destroyed this morning with the sell off that we had, which was based on overnight news. If I wanted to go long overnight because of whatever reasons I may have had, my overnight position would have been no more than 200 shares of QLD due to the risk factors associated with holding an overnight position. One fifth the position of my day trading position. Be aware of the clock when trading in the afternoon, and be honest about the type of trade you have.

One Simple Recommendation to be Profitable in Day Trading: Don't Stare, Absorb.

2012-04-11T07:16:00.001-07:00

Don't have an idle mind when it comes to day trading. Keep observing and processing the data, whether it is chart formations, news feeds or fundamentals. Allow for your brain to absorb the information and for the natural processing of that information. Trades need time to play out, so let them do what they do. But you also need time to process what is happening in the markets. Act on the whole of the information processed - not one thing. It's ok to allow one thing tip the scale, but don't try to extrapolate one piece of information into market decisions. And never, never just stare at the chart after an entry is made. I don't believe staring is in your trading plan. If you feel yourself starting to zone out, talk it out. Describe out loud to yourself what you are seeing. This is work - get on with it. The entry was made on a lengthy process of what we call "homework", don't zone out after the entry is made. Get off your ass.

One Simple Recommendation to be Profitable in Day Trading: Believe in the Narrative

2012-04-10T08:19:00.005-07:00

Give yourself enough room to allow the narrative you have drawn up to play out. All too often trades are entered with the expectation that every tick will go your way and every tick that doesn't go your way causes extreme internal pain. The pain results from two things: (1) position sizing is too large, and (2) you don't truly believe in your own narrative. The market goes up AND down, and it does this during your trade. This doesn't mean your narrative is wrong. You should expect that the net movement will be in your intended direction as defined by your narrative relatively soon after entering the trade. However, you need to create a setup that accommodates the choppiness of the day trading market - whatever time frame you use. And it needs to do this with as little internal turmoil as possible. If, while in the trade, you are hanging on every tick while you know the targets are some distance away from your current level, then either #1 or #2 above (or both) applies to you and you need to make adjustments because you will try and out think your trades before the move has occurred. Internal calmness is critical to providing the patience you need to get at least 85% of your move or to be certain that this trade will not work out. I say 85% because there are often times that I will jettison a trade prior to my target being hit - it's not about being right, its about making money. So, if I have 85% of my day trading move being achieved as we are entering the doldrums, will I hang out through the chop to see if I can get the remaining 15% ? Most likely no. However, in order to bank the profitable move, I need the calm and confidence that is required to allow me to continue to believe in my narrative. Internal turmoil distorts the narrative.

One Simple Recommendation to be Profitable in Day Trading: Buy Low is Your First Entry

2012-04-09T08:44:00.004-07:00

Make "buy low" apply to your initial entry and not subsequent adds. I have blown out many trades by starting a position and then averaging down. While this approach may have some validity to longer term trading, day trading by definition is over within that particular day. Do you really believe that averaging in at lower prices from an initial position that you started because you believed in the discount is a smart move within the restrictions of 6.5 hrs of trading? A better way to think about the move against you is that you are either: (1) wrong about the trade, or (2) the trade is feeling around for support and will climb higher to minimize your initial loss or result in a profit. The time it takes to allow for this to materialize doesn't leave much for error when considering day trading. So, the best approach is to allow for the market to feel it way below your entry price while holding just the initial position, and then add WHEN PRICE GETS ABOVE YOUR ORIGINAL ENTRY. The thing about day trading is that you should be right in the trade pretty quickly due to the time frames you are working from. If price drifts below your entry, then there are a lot of things working against you besides technicals such as doldrums, reversal times in the market, and chop. In summary, hold your initial position if it drifts lower after entry (and is above your bail out location) and only add if it goes in your direction with other signals in place that support your narrative for the day trade (volume spikes, holding key levels, right time of day, etc.).

One Simple Recommendation to be Profitable in Trading: Psychology

2012-04-05T07:27:00.002-07:00

Bring psychology into the equation. We just had a sell off yesterday where all sectors were getting hit; however, we had a good ADP number at a time when the risk is looking for a home. Sentiment in the markets this year has been to buy the dips. As traders, we milk sentiment until it doesn't work anymore. Friday is a holiday in the markets; however, we get the government's non-farm payrolls. Today we had a weaker than expected weekly jobless number. So, two important numbers leading up to the jobs number provide optimism for Friday. People are gamblers and with the door shut on Friday may want to get positioned ahead of the number, especially in the face of a nice discount thanks to yesterdays sell off. This information allows me to place a check mark in the "upward bias" column for my day trading consideration. This doesn't give me the reason to go long, but all things considered, I will have an easier time hitting "buy" when my setup materializes today. Understand, absorb and process all facets of the market. Weigh them equally.

One Simple Recommendation to be Profitable in Trading: Don't Average Down

2012-04-04T09:53:00.002-07:00

There is a great desire, when you are in the wrong side of a move, to average down - resist the desire. Those moves are the ones that destroy your trading capital. As much as you believe that this is a sound move because it reduces your average entry point, you are not giving enough consideration to a basic fact - the momentum is down! This will only compound your troubles in the long run. Averaging down also reveals that you are mentally entrenched in the trade, so creating a bigger position when the momo is against you when you have no intention to sell....hmmmm. Do yourself a favor, if you are a fold your arms and stare kinda trader, keep your position static. Don't delude yourself into thinking that a larger position after a bloodbath in the opposite direction will somehow convince the market to reverse in your favor. Never average down, always average up while day trading.