Jan 132012

Over the Christmas break I rewrote my trading plan.  The idea is to look for specific setups on the big picture and then trigger the entry with volume on a fast chart (tick and footprint).  The main focus is to reduce risk as much as possible.  My ideal max stop is 2 pts but on several occasions I felt I was right but just early and gave it a little more room.  I never had a large MAE and most of my losses were just 5-6 ticks (on ES).  I traded real money when things lined up and if I had doubts I traded on sim.  I kept a journal and a very detailed excel sheet with my trades.  I traded only 1 lot and tried for 3-4 pts but would settle for 2 or less if I had to.  That’s a summary of my plan.

Trading 1 lot was very difficult.  I’ve been trading 2 for over a year and it was hard to adapt to 1.  I think that was more a consequence of the slow low-volatility we’ve seen so far this year.  Many times I had 2 pts open profit and stopped out breakeven.  Many times I wanted to scale but I knew if I did I would be out.  I think it’s very hard to be profitable trading 1 lot.  It’s a bit more like rolling the dice.  You put your stop & target and roll’em.  With 2 lots you can be more active.  You can scale if you need to.  The converse of this is true too:   With 2 lots it’s much easier to cut winners short in the name of scaling or hedging.  so trading 1 lot is a good exercise for this because with 1 lot your R:R must be there.  I plan to continue trading that first lot the same way, whether I have 1, 2 or more total.  I want a minimum 2:1 on first scale but if I see absorption or weakness I will take the scale sooner.  I hope that makes sense, it’s hard to describe.  But I will say I’m very glad to have passed the 1 lot trial period.

The results are quite good.  Trading real money I averaged 3 pts/day.  My sim trading was not so good.  I can give two reasons for that:  Any good setup was taken with real money, leaving the “risky” setups for sim.  I tried the Bund on sim.  I haven’t traded the Bund in a long time, when the interest rates where going crazy I switched Bund for Stoxx.  Over Christmas I mistakenly decided that if I look for specific setups I could watch Bund in addition to Stoxx & ES.  The sim results show that it’s not the case.  Maybe later when I have more experience I can try the bund again, but for now I think it’s best to focus on one market, or in the case of ES & Stoxx, two very correlated markets.  I do Stoxx in addition to ES for the European morning because sometimes Stoxx gives a more clear picture due to more liquidity and volume at that time.

Yesterday Dalton did a webinar on a new book that’s out called Thinking, Fast and Slow:

I haven’t seen the webinar but I did start reading the book.  So far it’s excellent.  I can appreciate just why things look so simple in hindsight but during the stress of trading they look complicated.  As I mentioned, I need to focus more.  I need to stop multi-tasking and really focus & concentrate.  The book cites many examples of how we can be distracted and make bad decisions as a result.  I just started the book but I’m really enjoying it so far and I highly recommend it.

My plan is to increase my size by 1 contract every 2 weeks as long as I’m profitable. This is a bit like the Al Brooks approach where he says to make 1 pt consistently and you can have a $100k/year income.  Last year I was going for big wins and would be proud whenever I got 10 pts in a single day (at 2 contracts that would be 5 pts/contract).  But I was taking a lot of risk to get that, and a few times lost 10 pts in a day, sometimes more.  That weighed pretty heavily on me psychologically.  By using small stops and accepting that I can be wrong 60% of the time and still do quite well, it’s much less stressful.

A criteria for increasing size will be to have a profit factor of 1.5 or greater over the past 2 weeks.  I want it to be obvious I’m profitable and not take chances.  If I loose money I will decrease my size by 1.  If my profit factor is between 1 & 1.5 then I’ll stay at the same size.  2 lots is enough to pay the bills so I’m not going to rush it.  But at the same time I really hope to do more than just pay the bills.  The good thing about this plan is that it allows me to use the profits from the week before to cushion the impact of adding a contract.  I’ve been wanting to do this for a while but I never had my risk under control.   I think I’ve made a lot of progress in this area and am much more willing to accept losses as a necessary thing.  And I think I’m finally ready.  But one step at a time.

So that’s how I did.  I hope you did well.  If you feel like sharing your performance & plan for 2012 please do.

Enjoy your long weekend.




Dec 142011

The difficulty of holiday trading in December is compounded by rollovers and lower participation.  Here’s what I’ve observed:  Instead of one continuous auction, we have many mini-auctions.  Volatility will dry up and price will barely move until some external stimulus provokes market participants to initiate trades.  When this happens the market will then zoom to a new area where volatility will dry up and the cycle repeats.

For me it makes for especially difficult trading.  For one I need a lot of patient as the first trade from yesterday’s RTH session demonstrates:

If I’m going to trade like that, why trade at all?

A lot of my trading is based on my analysis of volume (I’m avoiding the “order flow” buzzword).  And lately volume has been reduced which makes my methods less effective.

We’ve also seen a little decoupling from the Euro as the Euro is dropping much more than ES.  I think one of the two may come back inline, will it be the Euro who will start going up or will the ES retest previous lows?

Over the past few weeks I’ve been modifying my plan mentally and I have lots of paper laying around my desk with “setups” sketched out on them.  Over the next few weeks I plan to put all that into a word document and focus all my attention in January on trading the updated plan.  I need to detail exactly what I must see in order for me to scratch a trade.  Lately I’ve scratched more winners than losers, so that needs to be more mechanical.

Just a word on scratching.. I normally do it when I think the trade is no longer valid.  I can exit without a loss.  But I know this is not the most efficient.  If a loss is on average 2 pts and a win is on average 4 pts, then I only need to be right 33% of the time to be breakeven and a 40% win rate would give me a profit.  When I scratch a trade, I’m saving myself from a 2 pt loss, but I’m also denying myself the potential 4 pt winner.

So lots to think about over the next few weeks.  I also plan to release an indicator I’ve been working on for a long time now.



Nov 222011

I can’t believe it’s been 3 weeks since I updated the blog.  I’ve had a few people ask me if I was still trading!  I guess they don’t follow me on Twitter.

As I’ve said in the past, I think Twitter is currently the best tool for public real time collaboration in trading.  To me it makes a lot more sense to Tweet my plan before the open, and then tweet what I’m seeing real time.  Tweeting takes a few seconds, writing a blog post takes a lot longer.  This may not seem so obvious but when writing a tweet it’s a short idea and you fire away.  On a blog post I think things over, reread, proofread, rewrite, add images, etc.

I said Twitter is best for real time.  After the market is closed is a good time to review trades and study what went right and wrong.  And that would be best shared via a blog post.  There’s a problem though:  My time zone.  I trade until 6pm my time and then that’s it, family time.  If I’m lucky to get some time to do my homework at night I do it but usually I do my homework in the morning before the open.  Which is a real challenge while getting two kids ready for school.

So when something has to give, it’s the blog.  And to be honest I’ve haven’t had much to say lately.

There are a few tricks to using Twitter though, and many traders I know purposely don’t even look at it.  Here are some ideas:

  • Only follow a few traders who trade in a similar style as you.  Or if you’re learning, those who trade in a style that you would like to learn.  Traders on Twitter all have different ideas and methods, so it can get really confusing.  For example I follow one trader who is very nimble, likes to fade, and can flip directions on a dime.  Another trader looks for big setups and doesn’t fade.  That’s OK because I am very familiar with them and understand their thought process, but someone unfamiliar with them could be totally lost.
  • If you have your own method & plan, don’t be influenced by Twitter.  I used to catch myself taking trades outside my plan because someone else Tweeted a trade idea.  That didn’t work very well.  So now I do my best to stick to my plan.  If a trader whom I respect tweets something supporting my trade, it gives me confidence.  If they Tweet something that doesn’t support my trade, I can re-examine it to make sure I didn’t overlook anything.  But it’s important I stick to my plan.  I have a hard enough time doing that without Twitter.
  • Don’t expect traders to tweet everything.  I’ve been long thinking I was long with another trader and then had them say they’re scaling out of a short.  Oops!  They flipped from long to short and didn’t tweet it.  Which leads to the next point:
  • Don’t try to tweet too much.  It’s really hard to trade & tweet.  I’ve missed key setups and/or scales because I was not fully focused on my chart.  While waiting for a trade I set alerts and try to do other things, but when I’m in a trade I need 100% focus.

I emphasized “public” when recommending Twitter.  I think Skype is the best tool for private collaboration and I’ve been doing that with a few other traders.  It’s useful for me to explain what I saw and even more useful to hear another point of view when someone else explains what they saw.  Which leads to:

I think it’s very useful to have a “trading buddy”.  If you don’t have one, I suggest finding one.  Someone better than you is a good choice but even if it’s someone not as far along as you, you will learn by explaining things to them and by answering their often challenging questions.  I suggest Skyping with them before the open and after the close, and if your trading methods are very similar, maybe even while trading.  I’m still not sure on this last point as it has tons of advantages but also can have disadvantages as well.

On a personal note, the main reason I’ve been quiet is because I’ve been working on my own issues that are mainly psychological.

  • I’ve been adapting my plan and working on decreasing risk.  I’ve been trading mostly 1 contract so that I can work out these issues without stressing out.  I use tighter stops and trail my stop.  I expected to make less, like half as much, but in fact I’ve been doing OK trading just 1 contract.  Now I hate trading 1 because it’s harder to stay in for the big moves so this is just temporary, but it’s a lot less stressful.
  • I’ve been working on staying in for my full target instead of finding excuses to cut the winner short
  • I’ve been working on trusting my stop loss instead of scratching trades.  I hate losers so usually I prefer to scratch rather than take the risk of a loss if the trade isn’t going right.  However even if there is 50/50 chance of a loss, as long as my target is bigger than my stop, it’s still better to sit tight and let it play out.

So I’ve been working on these issues and there isn’t much to say.  I can show a chart with my target and where I got out but I don’t think it’s very useful.  Here’s an example on my two Stoxx trades this morning:

The first I cut short.  Now I had a good reason to do that, based on the order flow, my reason disappeared a minute later.  Need to be more patient.

The second is a classic mistake that I make a lot and I really need to get that under control.  It went to 60 and didn’t hit my target (57) but I could have gotten out at 62 and had 7 ticks.  So avoiding a potiential 5 tick stop was not a good decision on my part.

So you can see a lot of my work is rather personal, psychological.  So that’s one reason I haven’t updated.  It’s not easy to talk about the more personal issues, and since I don’t know if this applies to everyone I’m not sure it’s useful.  I tell you though, once I get these issues worked out, I will be tearing it up! <grin>

As always, I enjoy feedback on what you find useful or what you’d like to see.  Explaining this does help me but this post has been in progress for over 1 hour so it takes an enormous amount of time.

Good luck with your trading and maybe see you on Twitter.