May 302011

Friday I wrote about A Broken Stick and how I thought of an analogy with trading.  The analogy might not be clear to everyone and there could be multiple analogies possible so I thought I’d share mine and if you have a different one, feel free to share yours.

As I kept swinging the stick around, unknowingly to me, it was getting weaker and weaker until it finally broke.  When it broke, I had a shorter stick that was still working.  And while swinging the shorter stick, it was getting weaker and weaker until it finally broke.  And then there was nothing left.

The stick is like a support/resistance level.  Let’s use resistance in this case.   As price tests resistance it can get weaker.  As price continues testing it, buyers are buying up the supply and diminishing supply makes the resistance level weaker.  I say it “can” get weaker because resistance will also attract more supply as traders see a top and expect it to hold.  However if buyers keep testing the level then it’s more likely the level will break.  In fact professionals will purposely break the level just to trigger the stops.  When it does break, price will usually advance.  This is due to several reasons:

  • The supply has been removed so the market has to go higher to find more supply.
  • The “breakout” brings in breakout traders who jump on board.
  • The shorts will need to cover by buying back their contracts, often via stop loss orders

All of the above sets off a chain reaction.  So price goes up until it hits the next level.  And then the scenario repeats.

Think of a double top.  Many chart pattern traders will see a double top and expect it to hold and will fade a retest.  However each retest is making the supply causing the top weaker.

This can also be seen in the triangle patterns.  The general rule is the horizontal edge of the triangle is more likely to be broken.  This is the same reason – as it’s tested more it gets weaker.  There is a contradiction here as in the double/triple top is expected to hold but the triangle edge is expected to fail.  It’s the same thing.  Does it really matter if it makes a pretty triangle or not?

I don’t fade double/triple tops.  I don’t fade any level that’s tested several times because I know the stick can break at any moment, and when it does, watch out.



May 272011

I go for runs/walks in the forest by our house during my lunch break.  It helps me to clear my head, de-stress, and go over my trading performance.  Plus it keeps me active.  My favorite part is when I take the path that goes to a scenic view of Paris with the Eiffel tower.

Today on the way to the woods I saw what we called a “switch” when I was a kid. A switch was just a mall tree branch that my grandmothers would use to whip us.  Think of a real thin long branch.  I picked it up and swung it around in the air.  WHOOOSSSHHH! I liked the sound it made so I decided to take it with me on my walk.

I was whipping leaves hanging over the trail, tree trunks, and just about anything I could find (except people).  I was also  whipping it around in the air.  I was making a rhythm out of it and it was quite fun.  I had a beat going.  Until the last 1/3 of it broke off.  I thought it was ruined but no, it still made that WHOOOSH sound in the air and I kept swing it around like an explorer hacks through the jungle with a machete.

And then about 45 minutes into my walk, it broke again.  No more WHOOOOSH sound possible.  So I threw the other half of the stick into the grass and I continued on my way.

And then I got to thinking:  What a wonderful analogy to trading!


May 252011

Trend days are my weakness.  I’m well aware of it and I accept it, but I do try to improve on how I trade trend days.  The problem today was that it wasn’t obvious that it was a trend day until the trend was over and it was balancing in the upper distribution.

I feel I traded terribly today and that’s why I thought I’d blog about it.  First on the bund I didn’t take several trades.  I’m not sure why, in hindsight they lookd great but real time  they just escaped me.

Then on ES I fought the move up both in pre-market and during the regular session.  My main hypothesis for today was that we’d retest the low at 1302.  So every time price pulled up to one of my resistance levels, I was getting short.  I managed to scratch a few and get a few points on a few others.  Then for some reason I froze when it came to one of my levels at 21 and that ended up being the high (still have 2 hours left so it may be taken out).  When it happened I thought yesterday’s high was next.  It’s hard not to listen to our emotions when the market makes a quick move.  Hard for me at least, the professionals jumped all over 21 and hammered it back down to 16.50.  That’s 5 points.

One thing I need to improve upon is coming up with more detailed hypotheses including determining when I will be wrong.  I need to force myself to come up with both bullish & bearish hypotheses.  I’m already spending over one hour a day on my homework and it’s very tempting to take short cuts.  The problem is the traders against which I’m competing are much better than I and they’re not taking shortcuts.

I also need to mentally rehearse my trades.  Imagine the market moving up to my level and I take the trade.  I’m not scared, I’m focused.  I know I have an edge and that any single trade is not that important.

I finished the day right on my average for the month, however I am bothered by the fact that it could have easily been twice the average day had I not made my mistakes.  Just the missed trades would have given me twice my average.  Seeing the trend move up would have given me twice the average.  And both of those would have made a stellar day.

Here are the stats:

I actually had one long – it was a total accident.  Somehow I had a buy order that never got canceled, not sure how that’s possible since Ninja automatically cancels orders when a strategy terminates.  I had to restart Ninjatrader when it froze earlier in the day and I think that has something to do with it.  So if you restart Ninja while in a trade, verify that you don’t have any open orders once your trade completes.

So I’m sitting here and I hear “order filled”.  Right when ES made a move down toward the lows just before the open.  The proper protocol is probably hit the “CLOSE” button but I didn’t know if I was short or long.  If I was short I would have held it in case we touched the lows.  By the time I found out ES was bouncing up.  I was relieved to see I was long and I immediately closed it for +3 ticks.  That was at 1307 and the market never came back to that level.  Ironic isn’t it?  That “trade” would have made over 10 pts.  But I was just happy with the free 3 ticks.

So has any of that happened to you?  If so feel free to share.  And good luck for the rest of the week.