I was talking to a friend about a potential career move.  It is a higher risk/higher reward move.  The first thing I told him is to make sure he understands the potential risk.  That never means accepting failure.  But many times a decision takes you down a path.  As you move further down that path it becomes harder to turn around.  Decision making when the pressure is on normally does not improve until maybe at the breaking the point.  All but the first time is a waste of energy, time, and usually money.

I touched on it in the previous post but if you do not know what you are risking on every trade you will never be able to accept the negative outcome in a positive way.  This is the point where you are most susceptible to revenge trading.  Letting one mistake turn to two or 10 or career ending.

Allow opportunities to multiple not mistakes. Know what you are risking before you risk it. Revenge trading feels good, like taking those shots of house tequila at closing time, but consequences are not worth it.  There are decisions that are good at the time and there are good decisions.  Know the difference.

The cure for revenge trading is asking yourself, do I want to be a trader?  If so, act like it.

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As far as the whether the market goes up or down an elevator is dependent on how scared people are and how volatile the market is.  If the market is in a range it is more likely to panic in the opposite direction of the bigger trend.  Even as we have seen the $ES_F fail to take out its 1352.75 the selling has been pretty controlled.

If we get out of range maybe that will change. You have had to be quick to take profits on either side.  The market is trying to find reasons to buy this and it has made sellers squeamish and might eventually lead to complacent buyers.  If you keep selling make sure you have bullets for when it happens. Have bullets when there is fish in the barrel.

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You just had a bad day or a series of bad days.  You broke your limit rules and are now looking up from a big hole.  You are in a horrible position, the worst kind.  You are carrying the weight of your past losses and it is effecting every trade.

How you got there. 

Chances are you broke some rule or worse you did not have downside limits.  Almost all brokers will set up a max draw down day.  This locks you out of your trading account till the next trading day.  It is important to have that set.  You need that because at that point you are at your weakest.  You no longer feel the pain of being down money.  Reality and money are separated.  The only thought process is to get it back, no matter what it costs.  This inevitable leads to more losses.  Your head is not in the right place.  You are trying to run on a broken leg and the hole is just getting deeper.

Before I take a trade I know how much I am risking, I automatically deduct that from my account. That way if a loss does happen it is not a surprise.  If it does not happen I am ok. Sometimes I look at it and I know I cannot handle it.  I wont take the trade.  There are some days when they just have your number and it is best to shut it down before it gets too bad.

Focus in the wrong place. 

A trader knows that there are always going to be other opportunities.  If you believe this you will almost always be able to see beyond the loss or the hole you are in.  Trading rewards the good more than it punishes the bad. When I am bad, they take from me.  When I am trading well, I take way more from them.

How to get out. 

The easiest way to get out is to not be there.  We are human and so it does happen.  If you have been trading long enough you know the certain things that make you susceptible to be in this situation. Take breaks, that is the easiest way to separate it.   Let the adrenaline subside and get back to a proper mindset.  Thinking it is going to get better right away is a fools game and can potentially take away from the lesson you are suppose to learn and trick you into thinking that it is appropriate behavior.  Bad gets worse very often.

When coming back you have to break up the losses, divide the work.  If you look at as a deep hole, you are going to do the wrong things.  If you are running a marathon you do not train by running a marathon the first day.  You run 1 mile and than 3 miles, etc.   Do the same here.  The recovery is painful and that should help you never do it again or at least prevent it from getting this bad.  Take your medicine or you will be sick forever.

I have talked to a few traders recently who are so focused on the hole they cannot see the light at the end.  There are very few certainties in trading but what I am certain is that you will never get out of the hole as soon as you want.  You have to pay the price and what you pay is up to you.  If you are staring up at that hole, you will never get out. You can figure that out now or when the hole is deeper.  You cannot escape the consequences of your mistakes. You may be able to get out by taking big risks when you are weakest but adding to a mistake always catches up to you.  Hopefully you have built a strong foundation so you do not have to start at the bottom.  If you haven’t you should consider that a lesson learned as well.

Conclusion

Keep your head up.  Take a break.  Yes, we are all in this for money but there are other things that are more important.  You made a mistake(s) and although you didn’t do anything about it this time you have the potential to change it the next time.  First you realize the mistake happened, then seeing it as it happening, and then finally fixing it as it happens.  If you do not own you will never get to step 2 and 3.  I have failed at step 2 and step 3 and might do it again but I will never fail at step 1 or I can’t be a trader.

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Risk/reward is set in concrete. Nothing in trading, with the exception of the process, is set in stone.  I have seen that stone sink many peoples trading careers.  Risk/reward is as much of a filtering process as it is risk management. We look at market in terms of volatility, it keeps us out of slow times but it can dry up quickly.  If it does we get out before the “reward”.  If we see it expanding and everything lines up we will get out after the “reward”. We are always adjusting to the situation.

Every market move is a reason to trade.  There are so many opportunities that there is no reason to create one.  Once again, this is where the selection process comes in play.  Staying on the sidelines is a trade.  Being able to separate what happened from how you felt is important and makes it easier.  Missing a move is part of being a trader, you can get over it now or later.

You make money everyday.  It might be possible to make money everyday but that is not the point.  The object is to make the most money taking the least amount of risk. Sometimes that is $100 other times it is $10,000.  It is very possible to do everything right and lose money or do nothing right and convince yourself that you did something right because you made money.  It is important to evaluate winners and losers the same.

Trading is exciting.  The first time I ran on the field to 100k people I was so excited I puked.  Luckily and in some ways sad, that went away.  I gave up that excitement for performance.  Trading has done the same thing.  That does not mean that nervousness ever goes away. Or the seriousness ever goes away. It can’t.  But my focus had to shift to something that helped my performance. Trading is a lot of learning, waiting and doing nothing.

Traders take big risks.  Bad traders take big risks. The difference between a retail and a professional is the professional trades bigger taking the same risk as the retail trader.  That is in part because a professional sees more of the market and is flexible.  They understand what they are comfortable risking and never get beyond that point with very limited exceptions. You cannot run away from the risk, it always reverts to the mean.  But what you did before and when it does revert is the difference between profitable and unprofitable traders.

Add other myths in the comments and I will add them to the post. 

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Futures markets have a way of producing bell curves in both TPO and volume.  Markets tend to go back and fill in low areas of volume and TPO’s.  When they do not it can be sign of a strong directional move, as it moves away, creating single ticks.  Single ticks are created when the market only trades at those prices in a single half hour period.

Single ticks from 1330.00-1326.50

We look at single ticks in a couple of ways. The first is when the market gets directional.  Lets say the market breaks hard in a 30 minute period.  When the new 30 minute period opens there will be single ticks above.  We will use this information as either a place for a really cheap risk/reward play or as a place to put our stop.  If the the directional move is strong it will not fill in the single ticks.

The second way we look at it is for the market to fill them in. Lets say the market has created single ticks below.  This could have happened a a month ago or a day ago or earlier in the day.  We are short heading into single ticks, we look to exit our position going into those single ticks.

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I was talking to trader who trades 1′s and 2′s.  They were not happy with making $200 a day. First, I think it is important to look at % return when looking at risk but in the end you do have make enough to survive. I understand there is a paradox. If you are trading the e-mini S&P and intra day margin is about $500 a contract and you made $200 trading two lots. Than you returned 20% on that risk.  As a trader I am looking for the opportunities to really crush it.  Those may happen 3 times a day or week or sometimes a month. Those moments give me a chance to return unlimited % return. That is why we are trade, for the unlimited upside.  These might not present themselves.

If your goal is to continue to grow as a trader, you need to have muted dollar amount expectations while trading 1′s and 2′s.  This is the learning phase. You build a foundation from that.  Yes, we all want to make money but it is significantly harder to keep up that pace of 10% to 20% a day with 1′s and 2′s without having a couple 100%+ days.  The unlimited upside is limited and of course you are going to take some bumps along the way.

You can’t move on until you are ready.  I have seen people move up too fast and give back in days what took them weeks or months to build.

Worse, I have seen people who do not realize that the reason to trade smaller is to learn and so they waste all of that time and never get to the next level.  Once again, nothing wrong with making money.  You should not be trying to lose it but the idea is to be able to deploy more capital when the foundation is built.  The cliche is let your winners run and get out of losers.  Our philosophy is to let your winners be your largest trade and who cares how long it runs.  We are constantly looking for situations to get our max position on.  When that happens we look for bigger % returns.  When it doesn’t, 10% to 20% a day is great.

Until you can trade more than 1′s and 2′s you should look at it in terms of percentage.  When you can trade larger than you can talk in terms of cash.  If you look at it in reverse it is easy to forget that this is a learning process.

I am not saying you can not make money trading 1′s and 2′s it is just you have to take on a lot of risk and be really good.  It is easier, for those that have built a foundation, to make money trading larger.  There is extra responsibility in trading larger as it will punish you quickly.

Note: You should not be risking your whole account or be fully margined intra-day.

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Yesterday, there was not much to do. I traded 7 a side.  I never got a chance to get a full position.  I made a little money but it was not in a repeatable way.  Meaning it could have gone either way. I save a little bit of ” pure risk” capital each day. Important, I have earned the right to do this.  If you are trading more risky setups keep a track of how you are doing over.  The trades you missed will always stick out more in your mind if you do not have a hard copy next to you.

So, I came into this day knowing that I had to wait. I was oversensitive to it. I got lucky yesterday was not going to take the same risks.  I knew that the thing I had to work on was patience.  I knew I had to fight that gnawing feeling you get by just watching.  I felt it coming yesterday.

Finally, everything came together. There was a clear set up and I had a chance to get a full position and it worked well.  As a trader that is what you look for.

The next setup came and it was a buy.  It was as solid of a setup, like the first, took almost no heat and just straight up puked it. In retrospect, I used up too much of my patience.  Everything I know about trading was erased because I ran out of patience.  It was like my first trade again.

I had a cushion, should have been an easy reset.  I was right to puke it because there was no way I was going to make the most out of the trade anyways. A good decision is not based on what a trade does, it is based on what you did with the information at the time.  Let me say that again, even though I bought the current low and it rallied does not mean it was a poor decision to get out.  The poor decision was taking the trade in the first place, I was not going to compound it by staying with it, regardless of what could have happened. For the third time, it was a mistake to get in it and I did not want to compound it or reward myself.

The decision was easy.  The money is not as important as the lesson.  Experience lets you see things a little quicker but without taking action, it is wasted.

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(Italics are the reader)

Well, I almost agree, but just almost.  Or, I think I agree with your overall idea, but I strongly disagree with your statement that “strategy is the least important part of trading”.  To me, strategy is nearly as important as process (and risk management is a part of my process),  but it’s not a matter of which is more important but which must come first.  

The reason process is more important is because you have to be a trader to know it, to understand it, to explain it.  You have to experience it and perfect it.  You can know nothing about trading and put together a strategy that works at least  for awhile.  As a trader, I am spending my time doing things that are repeatable.  That is why I have a process that allows me to execute any strategy. The process will allow you to get the most out of executing a strategy.  Once a process is found it only requires slight adjustments.  It takes more time to understand it and believe in it.

With traders, as with anyone involved in a performance activity (athletes, surgeons, musicians, etc.), the process part must come first.  Process is the precursor to strategy that gives you the ability to consistently act/react in the best possible way given the situation.  I’ll give a baseball example:Process:   Keep the bat off your shoulder, keep your right elbow up, keep your head down, use a level swing, eyes on the ball all the way, step into the pitch, rotate your shoulders and turn your hips.  And, most importantly, practice all of this over and over again until it becomes part of you.  These are constants that need to become unconscious, to exist in the realm of muscle memory.Strategy:   No outs and a runner on second.  You want to hit the ball hard to right field, over the first/second baseman’s head, to get that runner to third with one out, worst case.  Hitting a grounder right to the shortstop will only result in an out with the runner still on second (technically speaking, this is more tactics than strategy, but it still works as an example).  In the example above, your team might still win this one game without a good strategy if you and your teammates have good process.  Maybe your pitcher throws a shutout, or you whack the ball over the left field fence.  But your team will probably be sitting at home when the playoffs start.  In the same way, if you have good overall process you might have some small success as a trader, as long as the market doesn’t evolve into a different animal than the one you initially learned to trade.  Imagine, for example, someone who started trading in August of 2010.  Now, imagine that person trading from July through November of 2011.  If he didn’t adapt his strategy to the conditions, he might be a former trader at this point. I’ll agree, though, that you can forget strategy if you haven’t first gotten your process down.  That would be like knowing that you need to hit a fly ball to right field but not being able to hit major league pitching.  So, yes, process is probably somewhat more important, but at the end of the day it’s really a moot point because trading is so challenging that you really need all facets of your game to be the best they can be in order to be successful.

The purpose of the process is to be efficient.  To take the steps that you everyday and create a routine. Trading is mentally draining but getting ready to trade, what you do during a trade, and after should not be.  Lesson decisions, more reacting in this part of trading. This allows you to be “alone with the market”.  Inserting yourself in the market should be used sparingly. It relieves part of the stress of trading.

I like the first example better. It is acting for a reason. Giving the team the best chance to win. You can’t guarantee a win and if you do it will not be much to win. Low risk, low reward.

The second analogy is where I think I did not explain myself well enough in the original post.  The purpose of the process is to be able to adjust.  Think of yourself as a business owner.  Which one would you rather be, the owner that runs the business and is focused on that or the one who is the secretary, accountant, janitor?  The process is allows you to be the first.  All of your energy is directed to the right place, running the business/executing the trades.  Once again, I do not think that must traders ever get to that point but unlike hiring a new employee it does not cost you money only time.

My favorite writer on the subject is Dr. Brett Steenbarger.  His books and blog, (Traderfeed) focus on trading as a performance activity, and I don’t believe a person can find a better resource on this topic anywhere on the internet (and it’s free).  He has moved on and no longer updates his blog, but he has left his wonderful archive of information intact.

Yes trading is a like a football game.  Your mind has to be in the right place.  I think people do not see that.  When I stepped on the field as a freshmen in college I improved instantly.  I was around better players and I was afraid of getting my ass kicked.  I take that same mindset to the screens, everyday.  When I don’t they win.  I am familiar with his work and reading it I am very certain he has traded before.  I understand the irony, because this blog is about trading psychology, but a process (followed and believed in) all but eliminates the need for trading psychology.

A strategy should not be taken lightly. It is important and like the reader said it comes later.  It is best to make the strategy work for you than keep searching for the new hot strategy.  When you jump strategies you have to start all over.

Once again thank you for the comment and I appreciate all comments.  It gives me a chance to understand the reader and a second chance to explain myself.

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So the lastest blogsphere spat is being Mr. Ritholtz and Mr. Zerohedge on NFP.  I respectively say, they are both wrong.  That is what is great about data, you can make it say anything.  Even data is not black and white, it rarely shows what is the most important factor.  It still needs to be extrapolated.  It is a great way to reveal a bias, if you have one.

They are both wrong because they are trying to tie the old way with new data.  The most important part of the data is that they changed the way it is calculated.  It is like predicting the way the game is going to end by the first play.  Stay patient grasshoppers.  We just kicked off.  I understand you can adjust it and make calculations but it is hard to tell what it means to the people.

This is an epidemic that has plagued finance; looking at data that has changed, the same way.  If I am wrong, I will gladly admit it.  I am not an expert on NFP, not worth it for how I trade.  What I am good at is looking at data and formulating both sides. Mr. Ritholtz has put together a strong and logical argument and if more people believe it, it will come true.  I just have a hard time believing that the current market participants care or will find it important and that that the same way it has been critiqued in the past is the best way now.

I believe the goal of the indexes is to attract the most participants. That means higher prices.  The cheapest way and best story is to move the broader market through the NASDAQ. If it gets stuffed and no other index takes leadership I will change my thesis.

Link to Mr. Ritholtz well articulated argument: http://www.ritholtz.com/blog/2012/02/a-few-thoughts-on-the-employment-situation/

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For most people, the Super Bowl is less about the game and more about  what surrounds it.   The shrimp cocktail, keg stands with the crazy aunt, the betting, the commercials, etc.  What takes place at the exchange is not much different then what happens outside of it, it is just taken to the extreme. Jeffrey Carter talked about the $10K a square pool and although I did not know about the G-man sting, I knew it was almost impossible to get into that pool.  It was hard to get in because professional athletes and celebrities got first crack. There is something alluring about winning $1 million cash and only risking $10k.   It should be noted that the CME was not too happy with the publicity it was getting and put the kibosh on it. If that pool exist today, I or anyone else wouldn’t tell you.

The other big difference is the behavior of the members during SB time.  When you draw money from your trading account you can have it wired, check, or cash).  Although most if not all have stopped giving cash.  I estimate the cash box of my clearing firm had $10k at all times.  On the Thursday and Friday before the Super Bowl or Christmas week  it would easily have $100k-$200k.  The first time I saw it, it was out of place but like most things in that building you become desensitized.  No one looked twice, there was not extra security it was just normal. It speaks volumes about the opportunity that the exchange holds or held.

Most spectacular things do come to an end. It was fun while it lasted, but it was replaced by consistency.  Everyone has a chance and that is a good thing.

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