Jan 212011

Recently I wrote about the Auction Process and that has been my focus this week.  I’ve traded this week on sim with the exception of one trade that was too good to pass up.  My results have been much better than anything in the past months.  I’ll post the results this weekend once the week is finished but I wanted to write about my “break-through”.

I feel like I’m starting to understand the auction process.  This week when I made a mistake I was able to recognize it immediately.  In the past I’ve felt lost and FT71 would make a comment and I’d have a lot of trouble understanding why.  This week I was much more in sync with FT71’s tweets.  A few times I had on a trade and he’d talk about targets and my target orders were already on my DOM at exactly the same levels he tweeted.  Here is an example from yesterday:

There are still plenty of things I don’t understand especially real time but I really feel that I’ve made progress in the past week.

Here are a few changes that I made:

  • I trade 3 contracts so that I can scale out and stay in the trade for the big wins (such as Dalton’s “Destination Trade”)
  • I trade only one market and focus intensely on the auction process.  I keep asking myself FT71’s 3 questions.
  • Since my losses are small (3-6 ticks usually) and the payout is large, I’m not afraid to “try it”.  I’m accepting that the next trade could win or lose and that the next trade is just one of many.

Now this week has been on sim so the question is can I do this with real money?  It’s hard for me to stay in a trade with real money, knowing I could give back the open profits.  Here is an example of an open bund trade as I’m writing this:

It stopped short of my target and it’s pulling up to 74.  But I’m leaving it alone.  60 is well ahead of the destination so I think it will get filled.  Yesterday I let it go and left for lunch and came back to find it filled.  I realize that in the past I was so fast to grab 3-6 ticks that I was missing out on some great opportunities.  And now I’m working on capitalizing on these opportunities.

When wins are small (my expectancy hoovered around 2 ticks for a while), missing a trade is not that big of a deal.  But when wins are big, missing a trade can be the difference between a profitable day and a losing day.  So my current focus is on better understanding the auction process real time in order to eliminate mistakes.  I’m not sure if I want to go back to real money next week or stay on sim.  For me the learning process is continuing and I think it’s better to continue the learning on sim without the psychological issues of trading with real money.  If I can trade better next week then I’ll have more confidence to trade real money the week after.

I hope your trading went well this week.

Jan 172011

Last week was an interesting week.  I’ve been experimenting with different approaches and I’m seeing what works and what doesn’t work.

One idea that I’ve been trying over the past week or so is to simplify.  Just take trades at CLVNs and hope for a move back to the LVN.  No scaling out.  Target or stop.  It didn’t work so well for me and I realized that by Wednesday and traded mostly sim on Thursday & Friday.

On Wednesday I made a mistake on a stoxx trade.  I had several levels grouped together and I went short, it went to the next level and I saw sellers coming in so I went short again and planned to scratch the first one.  It popped up to a third level and I did the same and that was the day the stoxx rocketed up into orbit.  I took a big stop on that one and took a big hit.  And that’s another reason I went to sim for Thursday & Friday.

So Friday I had an epiphany.  I was very patient on Friday and then I saw professionals selling the market around 1283 so I went short.  I ended up taking 1 pt as I saw buyers coming in.  I was happy to have my point, it was the only real money trade I took on Friday.  And then FT71 was saying how 85.50 was likely and I didn’t understand.  I was just shorting 83 and pre-market we had broken below support at 76-79 so I didn’t see why 85.50 was likely.

We had an interesting dialog where he asked me what I would do if I was holding inventory of an imaginary object.  It was a very interesting exchange and I really enjoyed it.  Frankly I’m very appreciative of the fact that a pro trader would put up with my silly questions and provoke me to think for myself.  I learned a lot from that exchange.  I don’t know how to to search Twitter archives but if you’re interested I’m sure you can find it on his Twitter streamUpdate: Markus posted it to the forums here.

This weekend we were very busy and I only had a few hours to study my charts.  I started going over past days, day-by-day and seeing how the market reacts to composite levels.  I determined that just blindly fading these levels isn’t going to work for me.  (If anyone is having success or failure doing this please let me know).  What I realized is that one really needs to understand the auction process as it unfolds in real time.

On Friday I saw a break of 76-79 as a sign of weakness and I was expecting 71.  To be honest I had a short swing trade position on and I covered 1/2 there and was holding the other half for 71 & lower.  I was happy I got half scaled out and things were going my way.

I can’t speak for FT71 and say what he thought, I don’t want to put words in his mouth.  So let me say that after studying this in hindsight and after our exchange together, I saw that 74, which was the top of the previous trading range, held and that buyers came in and lifted the price all the way to 80.  From this point of view 74 held and price was going up.  85.50 did seem likely.

That’s two different views.  One could have made a lot of money and one made $50.   I was trading against the rotation.  And this is probably why my expectancy has been hovering around 2 ticks over the past few months.  I’m not seeing the big moves.

Now here’s the challenge:  Seeing both points of view in real time.  Dalton talks about the “Destination Trade”.  When one side of a trading range is tested and rejected, the destination is the other side.  This, in FT71 speak, is like saying if  a CLVN holds then the CLVN on the opposite side will be tested.

Now this doesn’t always work, sometimes price will stop in the middle of the trading range (or at the CHVN).  But we can at least have a directional bias and avoid trading against the rotation.

This is also why scaling out is so important.  This past week I tried entering at CLVN and targetting CHVN.  Many times price would go 6-8 ticks my way and never make it to CHVN.  or make it to CHVN and then go all the way to the destination (without me).  We can’t know what will happen.  We can say one outcome is more likely than another, but profiting from it would require staying in the trade until the destination while at the same time not losing money when it doesn’t reach the destination.

This is where the math comes in.  One could have 4 tick stop and if the destination is 24 ticks that’s a 1:6 ratio.  One would have to be right a small percent of the time.  But that conflicts with the normal human tendancy to want to be right.  Losing 80% of trades is not easy, even if it’s profitable.

Scaling out may not be mathematically optimal in hindsight, but real time we don’t know the exact probabilities so scaling out let’s us take more guesses.  It can provide psychological comfort.

November was my best month.   I was trading 2 contracts and scaling out.  I forget when I did it but I went to trading one and my trading hasn’t been doing as well.

So now I’m putting two things together:  scaling out & destination trade.  The problem is which destination do I choose?  The closer the destination (target) the more likely I will get it.  The further away the less likely but the bigger the payoff.

Here is an example from a bund trade this morning.  I came up with 5 destinations.  I regrettably took my first target at 3 ticks, which left me only one contract left.  So it went to the next destination.  Now price could have turned around and dropped down and I would have been happy to have gotten all of this move up.  But price is continuing up (as you can see in the chart) 10 ticks past my entry.  If I had a 3rd contract I could have gotten those 10 ticks.

Trading with 2 contracts is very difficult.  If you see weakness and take one off, then you’ve reduced your risk but also limited your upside as well.  Three contracts would be much better.  But you better be profitable because stop outs with 3 contracts really hurts.  I identified 5 destinations plus the one I took at 3 ticks that makes 6.  You can see why FT71 scales out in 1/8 increments.

One has to be careful trying to trade like him with only 2 contracts.  And so now I’m debating if I should trade 2 or 3.  FT71 once recommended to trade 3 minimum.  I think that’s what I’ll do.  But I’m going to do it on sim to build confidence.  As I’m writing this the bund is now almost 20 ticks past my last target and 124.87 is looking very likely.

This is a complete change from some thinking I’ve had in the past.  The whole “Don Miller discussion” made a great case for a very small edge, even a few ticks.  But I’ve been studying Dalton and I see a lot of similarities between Dalton & FT71.  So another experiment begins.

One final thing, earlier I said one has to truly understand the auction process to be able to come up with these, as Dalton says, “asymmetric opportunities”.   I realized that my trading two markets has only hindered my ability to do this.  So back to one market.

A long post, but this really sums up my thinking & experimentation over the past month. Every time I try a new idea on sim it’s a learning experience.  Even if what I try turns out to not work, it’s still good experience.

Almost forgot, here’s my results from last week.  This is all real money day trading, sim & swing trading is not included.

Expectancy was actually up for ES & Bund.  My Stoxx mistake really hurt though.  Without it, I would have had a good week.

Nov 302010

Benkotrader posted an excellent comment the other day and it deserves its down post.  I’m not very good at chess, sometimes when I trade it’s like I’m playing AntiChess but the analogy is great.  And the summary of the open types is excellent.  I use this thought process before every open.

Here’s his comment:

Hi Michael,

Thanks for mentioning me on your blog. Let me start by saying that I really like your trading approach. I too am constantly working on my trading in the hope to be able to trade full-time one day.

I think that you are absolutely right in waiting with creating hypotheses when we are closer to the open. These days the Globex moves and ranges have become substantial so that the market’s position in relation to prior day(s) value(s) and range(s) can change within a few hours. Also, I totally agree that it is crucial to think of opposite scenarios. I see strong analogies between trading and chess and I very much like to think in these analogies.

In chess, you have two forces fighting for control on the board at any given time, whereby there is always one single “best move” for White just as there is one “best” move for Black. Though they are there, very often the players will not see them due to the complexity of the position, or maybe even see them but for some reason still not take them, just like we do not always take the best trades. However, in chess, like in trading, a position will generally give the players many other good or at least acceptable moves which will keep them in the game.

Next, in chess White and Black always have a plan which they must adapt in accordance with the last move that occurred on the board – just like in trading, where we have to “flow” with the market and change plans to reflect constantly changing configurations. Finally, and this is something which I think is crucial, a professional chess player will not make a move unless he has fully understood the position on the board – this is left to amateurs who make moves because they “look” good (only to find out that they cost them the game). The professional chess player’s understanding of the current position is a function of a deep, computer-like analysis or intuition (mostly both), it can come within hours, minutes, or seconds – sometimes a chess player won’t see the “right” move for a long time, sometimes it will just jump out immediately. The same holds true in trading where all our decisions are made at some point between complex calculations and intuition.

Finally, a chess player’s understanding always includes the opponent’s position and the opponent’s options. And this is why you are 100 % right – we must always think of opposite scenarios. That day, when we opened out of range, I was expecting responsive selling which would bring us nearer back to prior day’s value, however the Open Drive which occurred immediately made me abandon this hypothesis very early. Like Dalton often stresses – much more important than “what took place” is what “should have taken place but didn’t!!!” In this case the expected responsive behaviour did not occur, opening a new scenario.

One more word in relation to openings and how I approach them. In an attempt to make life easier for myself I have structured the opening types by the place they occur relative to prior range and value. One result of this classification is the following:

Basically, when we open out of prior day’s range, I already know that OTF will most likely step in at some point (as the perception of value has changed positions must be reassessed, closed, opened, defended, etc.). So, the immediate question is for me: “Can I see a drive by OTF?” If yes, I MUST expect an OD and in fact a Trend Day until proven wrong – there is really no other logical conclusion at that point. If no drive occurs immediately, the market might have to commit itself first before OTF decides to move it in one direction or another. This could happen through a test of a level, giving us an OTD, or a failure resulting in a ORR which will probably lead us back to value. Should neither occur, we are likely to stay out of range and have and OAOR which tends to be rotational while OTF buyer and seller are fighting for control.

This classification greatly helps me to see both sides of the board, to use the chess analogy, and to keep my expectations within a logical framework. You are a programmer so you will see that the last paragraph could even be translated into a flow chart and thus serve as a quick “what to expect”-reference. In fact, I might even do this for myself :)

I hope this helps!


Looking forward to a flowchart type reference for the open type.  And one for day type too.  Thanks for sharing.