Oct 162010

I’m going to take a break from writing about day trading because October was a milestone for me.  It marked 12 consecutive months of profitable swing trading on ES!

Before I show my account statements, let me say this:  There are a lot of dishonest people out there.  Trading is a profession where everyone wants to believe the dream.  There are a lot of scams, namely people posing as profitable traders in order to sell you something such as training or software.  And there are a lot of  wannabe traders pretending to be profitable traders just to have fun.  In just 3 years I’ve seen a lot and even been taken by a few myself.  I plan to write a few posts on that because I think it’s a serious problem with the trading business.  The summary is you can’t trust anyone.  Including me.

I hope by posting screenshots of my trades and parts of my account statements, you see me for what I really am:  A small retail trader who’s begun to be profitable over the past year.  No more, no less.  When it looks good I take the trade with real money.  When I’m unsure or if I’m experimenting I take it on simulator.  And I don’t hide it.  All posted swing trades are real money.  For daytrades, an account starting with “S” or “T” are simulator and an account starting with “7” is real.  If my DOM is blue it’s sim.  If it’s white it’s real.  My blog is about my trading.  If I pretend to be an expert trader then it’s not going to help me.  I have plenty of other hobbies to bring me happiness, trading is a business.

Now that I got that out in the open, here is the performance summary from October 1, 2009 to September 30, 2010 from my swing trading account at Interactive Brokers.  The stocks take up a huge amount of space, I was averaging a couple trades every day, so here is the futures part:

Prior to that I had many small wins and a few large losses that would wipe out all the winnings.  But in October 2009 I made a few changes:

  1. I started being more selective with my setups
  2. I started scaling out of trades
  3. I focused on ES

The first one was not easy.  My swing trading is discretionary.  I was looking at a lot of different data including the cycle charts, professional activity, the COT report, small option traders, and various other breadth data.  I was not trading specific “setups”. So how can I be more selective?  Intuition was a large part of it.  Sometimes I just knew ES was going to reverse.  I didn’t know when, but I knew it was.  As we’ll see, “when” is actually very important.

The second item I started doing was scaling out.  I noticed that I often let nice winners go to zero and I became determined not to let that happened.  So I scaled out as the trade went in my favor so that when it finally reversed I only gave back a portion of the winnings.  This meant I had to increase my size.  The most I was trading was 8 contracts, which I admit was too risky.  After the flash crash I traded one or two max.

The third item was I started focusing on ES.  You can see above that I lost money on stocks.  I was trading a mechanical swing trading system on and off for a few years.  I ended up pulling the plug on it this year.   You can also see Euro & Crude.  I never made money on those consistently.  The Euro leverage is huge and crude is very volatile, both not good swing trading candidates.  Also the DAX & Stoxx trades were actually day trades that I held thinking  they’d “come back”.  What I found was I could read ES very well but the other markets not as well.  So why bother with them?  Focus on what works and that was ES.

I made a little over $18k in the past year trading ES.  What’s really impressive is, up until August 2010, I only had a few really small losses (less than $500 each) totaling around $1k.  My profit factor at that point was around 20 meaning I won 20 times more than I lost.  Then in August I had a trade that went against me and instead of cutting it I let it go and ended up taking a $2k loss. This is also what caused the Dax & Stoxx losses.  Remember the issues from A look back on my journey – Part 2?  Up until this point, this series has been about day trading but those issues were present in my swing trading too.  It wasn’t a catastrophe but it did bring my profit factor down and it did get me to thinking about it.  And during my vacation I worked on redoing my swing trading to make it more mechanical with less risk.  To make it more mechanical I based it on the sine wave cycles.  I tested that for a few weeks on simulator and it was a disaster.  That’s one of the events that started me doubting the utility of the sine waves, which led to me removing it from my day trading, which I wrote about  in A look back on my journey – Part 4.

After that I put my swing trading on hold.  The great performance record had a hidden cost – excessive risk.  I was always right on my read of the markets, they did ultimately do what I thought they would.  But I was often wrong on my timing.  I was often too early.  And it was a serious problem.   The black swan could wipe me out.   I was actually long the day of the flash crash.  In fact I made money on my long which hit my target at 12:35 NY time while I was out.

Here are the trades:

After dinner a few hours later a trader friend of mine wrote to me on gtalk, saying he couldn’t believe ES.  I had no idea because I was away from the markets and had just gotten back to my desk after getting the kids to bed.  When I saw the market tank I couldn’t believe it.  What if I hadn’t exited my long?  What if I had held it, without a stop?   I’d be flipping burgers right now.

It’s amazing how much more clear you can think when away from the markets.  And that’s what our 3 week summer vacation was to me in August 2010.  Time away to rethink things through.  So when I came back I stopped swing trading until I could come up with a way to do it with very tight risk control (such as 1% of my account).  Actually I just put it aside totally so I could focus on day trading.

In October I’ve taken two trades, one on the Euro (technically in September on the last day of the month) and the other on ES this past week.  Both looked very good to me and I couldn’t refuse.  The Euro got me $497 and the ES trade $1042.  That $1k on ES isn’t included in the totals above because I did October 2009 to Sept 2010 to make it exactly one year.

Here are the trades:

I continue to be very hesitant to place swing trades.  I think it’s too hard to time the entry.  The market is too random in the short term to get a good entry without it going against me.  The only way I can see to safely swing trade is to enter the swing trade as a day trade and if it runs well then keep a portion on as a swing trade.  But in order to do that one has to have the day trading down pretty well and that’s what I’m working on now.

Let’s say I’d normally day trade 2 contracts.  I see a super swing trade setup.  My idea is to enter the day trade and then instead of closing out the second, if it looks like it could run then let it run.  This is much harder than it sounds because there is a high probability that the trade will pull back enough to trigger any “breakeven” stop.  If not on the entry day then overnight and the next day.  It’s quite complicated and I haven’t worked it all out so I’m just focusing on day trading for now.  However, when my intuition tells me there is a very good setup, well I just have to take it. 🙂

So now I’ve covered swing trading and next I’ll be writing about order flow.

Continued in A look back on my jounrney – Part 8 – Order Flow

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