Wednesday, December 21, 2011

Being mentally ready to trade...and when NOT to trade

As the holiday season approaches, stress levels can increase significantly, which can then easily spill over into your trading.  It's so important to be in the right frame of mind to trade, and I've had first hand experience with NOT following this basic and common sense rule.  Combine elevated stress with additional external factors, and your flash point can be easily reached -- just like what recently happened to me. 

Tuesday 12/20: -13.00 (OUCH!)
On Tuesday, 12/20, my toddler daughter was sick and wasn't allowed to go back to daycare for 24 hours.  So I thought I would be SUPER DAD and occasionally peek at the market to put in one successful trade after another while keeping my daughter entertained and comforted, resulting in a win-win for everyone!  WRONG!

Tuesday turned into a very bad day and I lost -13 ES points after being down as much as -19.  As my mental frame of mind became more and more agitated and irate with both being wrong with my trades, along with trying to deal with a daughter that wasn't really that sick and wanted all of my attention, it was a bad lose-lose combination for everyone. 

You name the rule, and I broke it.  And it was all my fault for thinking I could pull this off.  What was I thinking?  I essentially lost all of my profits from the past 2 weeks, all in a single day.

Wednesday 12/21: +8 (morning session only)
Whereas today, I started the day with a +3.25 profit from the overnight session, which gave me a nice little cushion (especially mentally) to start the day.  After my first trade of the day was a loser, my next trade went as much as +8 in profits, but closed it out with only +2.50.  A bit deflating.

So what did my mind tell me to do after a negative experience?  I took a revenge trade only minutes after that prior trade, ended up being a full stop, and decided to settle down and regroup.  I kept looking for good setups and ended up being up +8 in the morning. 

I left and went out to lunch, and decided not to trade again so that I can be guaranteed of a +8 day as well as prepare for my in-laws arriving tonight.  And as expected, I had at least +6 or more in missed trade opportunities.

The in-laws effect
Since my in-laws are coming into town tonight, I don't have time to do my usual trade review to calculate my execution score and opportunity costs, so that will have to wait. 

I will not likely be trading tomorrow, especially since I'm sure my stress levels will be way too high with the in-laws roaming around.  Just imagine the effect that the spillover from the additional in-law related stress would cause on my trading performance! 

Maybe I'm finally learning to be a little smarter about when NOT to trade.

Monday, December 19, 2011

Deja vu?

Monday, December 19

Total gross profits-($175.00)  -3.50 ES points
Total trades:  10  [0 scratch]
Accuracy:  40.0%
Execution score:  65.5%
Opportunity cost: $ -5.75
(yes, my rogue trades actually benefited me)

Today felt like Friday, right when the markets started to tank in the late morning before the lunch hour.  And once again, I started to buy at various levels on the way down.  But this time, I was better prepared.  I kept telling myself how this feels just like Friday's action, and used a little more caution.

But in the end, I still ended up having 5 full stop losses out of 10 total trades (1 of them was a rogue setup).  The markets the past few days seem to have been very tricky, and so this must be the whole "thin volume holiday trading" condition everyone talks about.

Bad execution score / favorable opportunity cost?
My execution score was 65.5% (3.5 non-compliant trades out of 10), so I didn't do very well from that perspective.  But what's more surprising is that the related opportunity cost was a favorable -287.50 or -5.75 points.  This means that had I not taken the rogue trades, I would have had a bigger loss today.

But to be more clear, it was a single rogue trade I took at the end of the day that ended up making +5.75.  If you were to add up the opportunity costs from the other 2.5 trades, they washed out.  So I'm not sure how to take this.  On the one hand, I had a smaller loss than I should have.  But on the other, isn't this one step closer towards consistently undisciplined behavior?

And what if?
And this brings up an interesting question.  What if my opportunity costs start to become consistently negative?  Essentially, this means that my rogue trades or "mistakes" are actually net positive for the bottom line.

More tracking to do
I've struggled with avoiding trades that I know have a decent chance of working, since it's not part of my trading plan.  But this "opportunity cost" metric might be another way of tracking to see if there are certain setups that I "mistakenly" take, but have a good probability of working well over time.

Why fight it?
Because if the setups that I struggle with avoiding are truly valid, why fight something that screams at you from within your soul and works in the long run?  If that's the case, then I'll modify my trading plan so that I can take the trades and be at peace with myself.

Sunday, December 18, 2011

The jack broke while changing the tire, but I ended up OK

Friday, December 16

Total gross profits:  -($37.50)  -0.75 ES points
Total trades:  22  [2 scratch]
Accuracy:  50.0%
Execution score:  TBD
Opportunity cost: $ TBD

As I was putting the "tire" back on the car today from my ugly day yesterday (Thursday, 12/15), I thought I was making good progress. But then, the "jack" broke and the car came crashing down with a thud. Luckily, I didn't get hurt, regrouped, and ended the day about the same place as I started (excluding commissions).

I was up +4 (I'm back!), then torn up by a nearly -12 run (I'm not!), scrambled to gain nearly +8 points in less than 2 hours, and ended the day just about breakeven (phew!). A little roller coaster ride.

All the while, Renato made a call to short the high of the day (yes, once again) in the morning, and if you scaled out and held a runner until the close, you got at least +13 or more on the final contract. He had a nice, relaxing day before the weekend. Yet another impressive winning week for him.

This "digging out of the hole" trading reminded me of days when I was trading stocks several months ago. More often than not, I would start the day on a bad note and scramble my way back to breakeven. As noted in the prior post from a few months ago, I have a different mindset when trading from a position of having profits vs. being deep in the red with back against the wall. This is something I will continue to address, since there's something going on there.

  • Opex in December, low volume choppy semi-holiday feeling day. Does it really matter one way or another? Just trade what you see, right?
  • I have a tendency to get tired and sloppy starting around lunchtime. This causes stupid mistakes.
  • When the ES started to tank during lunchtime and it felt somewhat fake and lame news driven, my mindset became "get in on the action and fade the move!"
  • Did I mention how I tend to make stupid mistakes around lunch?
  • Am I done with my Christmas shopping yet?
  • I'm trying to learn to fish in a way that fits my style, that's why it's hard for me to blindly follow Renato's (very successful) Diamond Setups alerts.
  • When I follow my trading plan, everything feels simple and straightforward. It's almost mindless and businesslike to follow the process. And isn't this interesting, although it seems like I miss out on a lot -- results are generally good and stable.
  • When trading rogue based on instincts, it demands much more mental focus and energy beyond just execution. Results can be much more volatile (usually to the negative side).
  • When push comes to shove and I'm up against the wall, I don't get scared, and I don't give up. Historically, my scrambling has worked much more often than not.  
  • But what if it doesn't work?  Will I stop trying, when my account is at ZERO?
  • What am I scared of? We'll be having 5 people (including in-laws) staying with us for a week over the holidays. Probably will NOT be trading during that time.
  • Screen time and intensive trade reviews -- no other substitute for learning how to trade. My directions to trade have finally become IKEA like.
  • Supreme control over my mental chatter (i.e. "Gambler Grove") and only doing what's right -- this will be my holy grail. Biggest challenge now (and likely forever).
  • Interesting thought - without a good breakfast and lunch, I lose energy and don't trade well. Need to track, but I think there's something there.
  • Another interesting thought - when I exercise during the morning, I do better. Also need to track.
  • I can feel it -- 2012 will be a great year.

Thursday, December 15, 2011

A wheel fell off today

Thursday, December 15

Total gross profits:  -($300.00)  -6.00 ES points
Total trades:  30  [5 scratch]
Accuracy:  40.0%
Execution scoreFAIL 
Opportunity cost: $ [Didn't bother to calculate]

Over the past couple days, it was pretty clear that the wheels were starting to wobble. Well, today, one of the wheels fell off. I'm lucky I didn't end up totaling the whole car, but I did suffer some damage.  Due to the number of trades, the commissions are a bigger factor and will bring the net loss closer to -9 ES points.

The problem was entirely mental:
* Lack of sleep - that's life, it happens. But I can choose not to trade.
* No patience - I felt like I needed to try and trade every turn on a tick chart.  I couldn't walk away and wait for a the right setup.
* Rattled mindset - instead of being relaxed, I was way too rattled and scattered.  Lost focus of my plan.
* Focus on profits, not process - mental chatter was "gotta get some profits!" vs. "must follow process"

From the very first trade, I had a mindset that I needed a winning trade. When the first couple ended up being breakeven trades, I tried to press harder, resulted in a full stop loss, resulting in the need to make it up. 

I was constantly looking for setups that weren't really there or clean.  Upon my trade review, I even noticed that I even became fixated on a particular pivot level that was not very relevant throughout the day (which resulted in a few bad trades). 

This type of mindset carried on through the entire day and the performance figures speaks for itself. My usual stats are relatively consistent, but today, they are very much out of the normal range.  When I focus on profits instead of process, it's clear that I can get into trouble.

Sure, the market was perhaps a little slower and choppier, not so unusual as we approach opex and the holidays. But I can't blame the markets, I take sole responsibility for my actions. 

I will regroup, reset, and adjust my frame of mind -- learn to slow down, focus, and match the conditions of the markets.  Focus on process NOT profits.  Failure to do so will result the other wheels to wobble and fall off, possibly leaving me stuck in a ditch!

Wednesday, December 14, 2011

Not so perfect execution day

Wednesday, December 14

Total gross profits:  $200.00  +4.00 ES points
Total trades:  19  [5 scratch]
Accuracy:  57.1%
Execution scoreFAIL 
Opportunity cost: $387.50  +7.75 ES points

Yesterday, the final sentence in my update was: "Now the tough part is to maintain focus and consistency to stick with the plan."

Well, that didn't last very long.  Today, my execution score = FAIL.

After a morning with: (1) several trades that went +1.50 before getting stopped out at breakeven, or (2) not getting fills on trades (that ended up working), or (3) gritting my teeth while avoiding great non-strategy setups (that ended up working), I thought I was taking everything in stride.

Here's how it started
There was one trade I took after lunch that I knew immediately prior to pulling the trigger, was rogue.  Terrible feeling.  I exited a little early with a reduced loss, but the damage was done.  A crack was formed in the foundation.

Later, after I entered a trade with a short position that should have been a long, I immediately exited with a -1 point loss, but the crack in the foundation grew bigger.  The erroneous short would have worked just fine, had I not caught the error, but instead, I got a full stop loss with the "correct" long trade.

This flustered me, and my mind went into partial REVENGE mode to try and quickly correct what went wrong.  I had to get it back, and more!  From this point forward, my sense of control was partially gone.  But upon review, the biggest loss of control was not in stock selection, but in my trade management.  Upon entry of a trade, I threw my +2 target down the chasm which used to be just a crack, and started seeing every trade as a potential runner for +10 points.  Shame on me.

Don't I get it?  If trading just 1 contract, stick with a +2 target!
In my trading log, there were 3 trades during the forgettable afternoon that I entered properly per my trading plan, but I decided NOT to take the +2 profit target (instead, I moved my stop loss to breakeven and let it go for the big runner).  The opportunity cost for those trades was +$300.00, or +6.00 ES points, out of a possible $387.50. 
I'm sounding like a broken record this week, but today should have been a 10+ ES points type of day.

On the bright side
At the end of the day, it felt like I was just involved in a day where I had lost -20 points.  But due to the combination of the Diamond Setups methodology along with the experience I've been gaining over the past 9 months, I feel as though I've hit a milestone of sorts - if I can continue to minimize my "bad" days to small losses or at breakeven, this will truly be a significant accomplishment.

I also felt that even with these tricky markets, I'm starting to gain a better feel for the constantly shifting conditions of the markets, as well as reading the quality of the setups as they take place.  Although I believe I'll always continue to make adjustments to my trading plan, I feel as though I'm finally getting in the ballpark with a trading plan that works for me and my style.

And lastly, similar to how I ended my entry yesterday, I will need to prove to myself that I can maintain my focus and consistency so that I can earn the right to trade bigger and expand my trading plan.  Focus on the what's right.  And soon, those 10+ ES point days will become a reality.  I really can sense it.

Tuesday, December 13, 2011

Perfect execution day

Tuesday, December 13

Total gross profits:  $225.00  +4.50 ES points
Total trades:  3  [0 scratch]
Accuracy:  100.0%
Execution score:  100% 
Opportunity cost: $0  +0 ES points

The FOMC minutes news release seemed to stall the markets after the lunch hour began, and 30-45 minutes after the release is when the markets really started to move. All my trades were in the morning.

Perfect Execution
I only had 3 trades today, but achieved a 100% execution score of those trade. I couldn't have done any better to follow my trading plan, so this is a nice successful day based on that metric.

However, there were several trades I missed either because they didn't quite fit my trading plan; I wasn't around; or I simply froze.

For example, Renato's final alert of the day at 15:33 was to buy as low as 1213.00. And the low of the day ended up being 1212.50 about 3 minutes later.   At the time of the call, it felt like the ES was a runaway freight train headed to 1000.00.

I froze
I froze, and couldn't pull the trigger.  Not usually a problem, so it's a mental challenge I need to work on. Time and time again, Renato uses the Diamond Setups method to give timely and gutsy alerts that end up catching big turning points. It's very impressive to see.  So why is it so hard to just execute the alerts?

Coulda shoulda woulda - missed trades
I'm made it a point not to include missed trades in my opportunity costs or execution score, because in the big scheme of things, I will always miss trades.  But today was a day that I can't help but think of them.

I guestimate at least +4 to +6 points that I left on the table.  Maybe it was the higher level of conviction I had with these missed that made me dwell about them more?

On track / plans for next month
But from the big picture perspective, I believe I'm slowly but surely headed in the right direction, especially based on my goal of maintaining discipline to strictly follow my trading plan.

If I close out this month and score well to maintain my discipline to follow my "highly focused" (i.e. restrictive) trading plan, then I will consider loosing up my plan ever so slightly to include other setups starting in January. 
Now the tough part is to maintain focus and consistency to stick with the plan.  

Monday, December 12, 2011

Was this a difficult trading day?

Monday, December 12

Total gross profits:  $87.50  +1.75 ES points
Total trades:  12  [4 scratch]
Accuracy:  62.5%
Execution score:  75% 
Opportunity cost: $350  +7.00 ES points

New metric:
Execution Score.  % of trades that followed the plan based on: 1) trade selection and 2) trade management

I'm sure there were other folks out there that just shorted this market early and rode the wave down.  But for someone who is generally trying to scalp +2.00 ES points, today seemed to be a lot more difficult to find good setups that worked.  Somewhat surprising, especially for what appears at first glance to be a nice 18 point down trending day. 

When I did get into a trade, there were at least 5 of them that either went +1.50 or +1.75 and then stopped me out at break even/couple ticks profit.  Or, I made sloppy mistakes such as bringing down my trailing stop too soon, thereby stopping me out before my +2.00 profit target was hit.

When I calculated my opportunity cost today, I realized that there were 3 trades that accounted for total of +7.00 ES points, so I was quite surprised by this.  2 of those trades were scratched or had a small loss due to bringing in stops too early (or I panicked), and those could have had +2.00 profits each.  And the other trade was one where I entered the wrong order, got filled, realized the error, but decided to let it ride to a full stop loss.

It's interesting how these seemingly one-off trades can really make or break your day.  I'm just thankful that my day didn't end deep in the red.  Because these are the types of days that can test ones patience, and eventually make you take careless actions that you later regret.  In the past, I would have been chopped up by this market.  But now, I'm better prepared to mentally handle these types of days, although I'm far from perfect and still have a lot of room for improvement.

One big factor that helps me deal with these challenging days is by being in contact with the community of traders and with Renato in the Diamond Setups chatroom.  This has been huge.  In the past, it felt as though I was trading in isolation.  But now, if feels as though we're all working together towards the same goal.

Tomorrow's a new day, and I'll be ready, a little bit wiser.

Saturday, December 10, 2011

Rogue trades appeared, but luck was on my side

Friday, December 9
Total gross profits:  $262.50  +5.25 ES points
Total trades:  15  [2 scratch]
Accuracy:  69.2%

The morning started strong and had I just stuck to my +2 profit target mentality, I could have had 5 winners with +2 in a row, before getting my a full stop loss.

But I believe there was a bit of greed that came into the picture, since the trades I tried to let run were Diamond Setups chatroom alerts (they often run for much more than +2), and so with lack of sleep the night prior, I was not as mentally strong to stay disciplined to my plan.

Of the 15 trades I took today...
1 was an error I didn't expect (confirmation was accidentally off on my DOM)
1 was a decent setup, but in hindsight, not according to my plan
2 were flat out rogue trades. These were most disturbing to me.

Without those erroneous trades, I would have had about 11 trades, which seems like a nice sweet spot for my personality and style.
I broke down
I was doing so well this week with my discipline of sticking to the plan, but after a full stop loss during the lunch hour, I entered a couple rogue trades, fully aware that it was not a part of my plan. This was disturbing.  Old revenge habits came back.  But I became aware of it, and stopped before it got out of hand.

Lack of sleep combined with end of week fatigue is not a good combination. Perhaps  I'll need to consider ending the trading early on Friday.  And if tired from a lack of sleep, I will need to find a way to walk away and avoid trading.

My opportunity cost
+6.50. If I would have simply exited at a profit target of +2, I would have made +6.50 more to my +5.25 day.

So, +11.75 is what I could have made today had I been more disciplined in simply exiting at my primary target of +2.

What's very surprising is that my rogue or trades taken in error were actually either breakeven, or even had an opportunity for decent profits. This is unusual, since in my experience, they usually hurt you a lot. I will credit luck.

But overall, this wasn't a bad way to end my first week back trading live.  I'll take it.

Thursday, December 8, 2011

Deceptive performance - I pulled 'da trigger but...

Thursday, December 8
Total gross profits:  $262.50  +5.25 ES points
Total trades:  8  [1 scratch]
Accuracy:  65.0%

With 10 trades today (I pulled the trigger and they were all within the trading plan) and many more profitable trades that I passed up (continued sign of discipline) or simply missed (can't get them all, I'm human), one would think that I would have cleaned house and banked more coin than usual.  But the "average looking" bottom line results today is a little deceptive.

During the trading session, I wasn't paying as much attention to the "what could have been" with the trades that didn't quite work out -- just trying to focus on taking good setups and solid trade execution.  So when I reviewed my trades today, I discovered that the element of "luck" was not on my side, much more than I thought during the day.
There were several trades that hit +1.75 and didn't get quite at or beyond +2.00 for a fill on my profit limit order.  So I got stopped out at breakeven or a couple ticks profit.  In total, when you add up those "unlucky" trades as well as the other actual trades taken but with errors, my opportunity cost (i.e. what could have been) would have added +7.75 points to my bottom line.

Which means, if luck was on my side, I could have had a +13.00 day.

From the execution perspective, there weren't too many errors, although there were a couple.  I didn't scratch the first trade as I should have.  But what was much worse was my second error -- my personal bias kept me from staying with Renato's alert to buy.  I was short biased entering the trade, and when I was almost stopped out, I exited at +2 ticks instead of sticking with the trade.  And of course, the trade eventually made at +2.00 points.

Looking back on today, I like this new mindset of focusing only on good trade selection and executing properly...according to the plan.  Forget about everything else.   Day by day, with the foundation of the Diamond Setups methodology on my side, I'm realizing that if luck is NOT on my side, I won't get hurt too bad.  But if luck is on my side, the potential for having a great day is really possible...a lot more often than I would have ever imagined.

Wednesday, December 7, 2011

Did I forget how to pull 'da trigger?

Wednesday, December7
Total gross profits:  $237.50  +4.75 ES points
Total trades:  3  [0 scratch]
Accuracy:  100.0%

NOTES:  After what I thought were the less than perfect conditions over the past couple days, we end up with a day like today where the ES seems to be working the way it's supposed to.

You know those days, where you say, "It'll go up/down from here", and it does, and again, and again...  There seemed to be great setups all over the place in the morning, as well as the afternoon once the usual lunchtime doldrums passed.  I could have had ten or more trades today, and perhaps booked +15 ES points or likely much more.  It was that good of a day.

But...only 3 trades today
But today, I only had 3 trades and all of them were before lunch.  Whereas Renato and his Diamond Setups alerts had at least 10+ points and few more trades.  I missed some of the DS alerts simply by not being here, or having an order not get filled.  But there was one DS alert late in the afternoon that I deliberately passed (bad decision, it made money, and rule #1 is to take all of Renato's trades).

The one that got away
And another near perfect setup I missed (I returned to my computer about 1-2 minutes too late) was late in the final hour that ended up riding the news driven move sharply higher.
ESZ1 30m - The one that got away
I am too critical?
Perhaps the pendulum has swung the other way a little too far, and now I'm being too critical of my setups?  Did I forget how to pull the trigger?  I thought about that, and for now, I believe everything is OK.  After trading in the style of the Wild Wild West for the past month or so, any type of rigid discipline will feel quite restrictive to me.  This is only my 3rd day on "the plan", which is restrictive and focused by design, so I consider all of this a part of my adjustment period.

Bottom line - Success!
With that in mind, I was very successful today.  No rogue trades, and many setups were rejected (and nearly all were profitable).  I was very disciplined.

Next time...
In the future, when I see this type of day come up again, I'll be ready.  Interestingly, I don't feel any regret or disappointment with today, since I know this isn't the last time we'll ever see a market like this again.  So when days that are "in tune" with your trading method come up and you're in the zone, you really have to capitalize on it and go for the jugular.  As a trader, I believe there are absolutely no excuses not to pounce hard when great opportunities presents itself.

Tuesday, December 6, 2011

OK execution but mistakes cost me a lot

Tuesday, December 6
Total gross profits:  $75.00
Total trades:  10  [2 scratch]
Accuracy:  50.0%
Contracts per trade: 1

After an uneventful day yesterday, I was pretty sure today would provide better opportunities, but it was only a little better. Most of the regular trading day was in a choppy narrow range, except for a sharp 9 point news driven move, both up and down, during the final 1 1/2 hours.


  • Of the 10 trades taken, it was clear that 2 of the trades were not traded according to plan.
  • Rogue trade #1: Took place when I exited a short trade generated by Renato's DS alert trade while it was still active, only to take a long setup that had a full -2.50 stop. Renato's trade went more than +5, so I could have gotten at least a +2. OPPORTUNITY COST = 2.50 + 2.00 = 4.50 points.
  • Rogue trade #2: Was when I had gotten stopped out of a trade due to yet another Euro bailout news, and then tried to short against the news driven move before even waiting for the 30min bar to close. This was partially revenge driven and resulted in a -2.25 trade.
  • I missed Renato's final call of the day and missed a fill by just a few ticks. Based on how I usually execute his alerts, it would have gotten hit, but for whatever reason, I entered a more conservative entry level. That trade went as much as +9, but I count this as a +2 "could have" trade. 
Screenshot from my journal - it's great, it's FREE!

6.75 points -- that's conservatively how much the rogue trades cost me today. 4.50 + 2.25 = 6.75. Wow.  I'm not even including the +2 trade based on Renato's final alert that I missed.  Shows how a couple of mistakes resulting in losses and lost opportunity can really impact the bottom line.

Therefore, a +8.25 day, that's what today could have been vs. a +1.50 day, had I been more careful and executed well against my plan. Perhaps I need to reconsider what I wrote in the first sentence above!

I only took advantage of some of the key areas today (highlighted in dark green) as appropriate with my current trading plan.  This is NOT a part of the Diamond Setups.  In the future, I will utilize these charts to better supplement the Diamond Setups trades. 

I believe there is great synergy and opportunity, but for now, I need to keep things as simple as possible and just execute well against my plan.
ES 5 min 12/6/2011

Monday, December 5, 2011

Back trading live and it's a scratch day

P&L shows loss on the 5min bar after I had already exited the position.
Monday, December 5
Total gross profits:  $0.00
Total trades:  4  [2 scratch]
Accuracy:  50.0%
Contracts per trade: 1

NOTES:  First day trading live since last month, and the gross P&L of $0 pretty much explains how most of my trading day went today.  Only 4 trades today, which is also unusual.

However, there were definitely some moments of action that moved the markets. A planned ISM news release at 10:00 AM moved things a tad, but it then chopped sideways in a 7.50 point range for several hours.   There was also unexpected news around 14:00 regarding the pending downgrades of 6 countries by S&P, which really woke the market up.

But for whatever reasons, I was not able to capitalize on the volatility. The chatroom was also pretty much close around break even or up a small amount today...that is, up until Renato made a final call to short that triggered around 15:00, made at least +7 to +9 ES points.  Since I'm only trading one contract and can't scale out, I had at least +1.50, got stopped out at breakeven, and then saw the market really tank.  Can't get 'em all!

Execution Review:

  • Of the 4 trades I took, the setup selection quality was good to excellent, and the trade management execution (moving stop orders) went well.  I'm satisfied with the results of the trades taken.
  • Even though there were a couple instances where I was stopped out at breakeven even after the trade was +1.50 to +1.75 profitable, I followed my rules.  I feel absolutely no remorse or disappointment that I did not close out with a profit vs. breakeven, because over time, learning to hold on through the shake outs will be more profitable (for example, when I start trading multiple contracts to scale out).
  • There were a few other good setups that I missed, but missing trades will be relatively normal and acceptable. What's absolutely critical is that I don't offset my missed trades by taking low quality setups.
  • Speaking of which, I did NOT overtrade, which was a BIG WIN today, especially since choppy periods have historically lured me in and chopped me up.
  • During the morning and through the lunch hour, I was bitching and complaining how everything was choppy, range is too narrow, how most setups were not "clean", etc. My plan is to wait for the close of the 30min bar to help determine the next course of action, and that was vital in keeping me out of overtrading trouble. One way I helped accomplish this was to leave the computer and return by the close of the 30min bar.
Today was a day when there weren't many "no-brainer" setups.  But for the first day back live, I'm glad that this type of day took place.  I'd rather have as many days with adverse market conditions to experience while I'm learning on SIM or trading small, so that I'll be better prepared in the future.

Friday, December 2, 2011

Final days of SIM trading

After accidentally trading live last month, then saying "what the heck" and continuing to trading live, then suffering some ugly meltdown losses, then going back to SIM with tail between legs, then doing a lot of various experimentation with trading styles, then digging deep into the psychology of trading, then understanding my strengths and what works for me, then finally settling down and writing down a trading plan I'm totally bought's time I start trading live next week.  

This time, I'm ready.

* * * * *
The final days of SIM

Thursday, December 1
Total gross profits:  $87.50   +1.75 ES points
Total trades:  4  [1 scratch]
Accuracy:  66.7%
Contracts per trade: 1

NOTES:  Wasn't able to start watching the markets until 1:00 PM, and I ended up taking 4 trades, one of which was a loser and 1 scratch that I closed out at b/e. However, if I had just stuck to the plan, the scratch would have turned into a full win. Opportunity cost was $140.

Friday, December 2
Total gross profits:  $400.00   +8.00 ES points
Total trades:  14  [0 scratch]
Accuracy:  71.4%
Contracts per trade: 1

NOTES:  Late start, did not start trading until 10:15 AM, well after the unemployment report was released.  Ended up having a lot more trades than expected (and desired), since I became fixated on the 1250 level during the lunch hour and had 6 trades during that time.  Although the bottom line was fine, I was less than satisfied with the quality of trade selection during that lunch hour -- net result was -$100 gross.  There were also 3 trades that went nearly +2 (missed by a tick or two), and closed just above breakeven (just wasn't lucky).

* * * * *
An interesting update is how well the 5 minute chart I update during the day is integrating well with the Diamond Setups system.  In the chart below, the dark green highlighted areas represents good locations for trade entries. 

So when a DS setup also lines up in those particular areas, I believe it increases the confidence level for that particular trade.  Therefore, this may help to increase the overall accuracy and profitability of my trading, although further tracking and research is necessary to make sure I'm not fooling myself.

Wednesday, November 30, 2011

Rules of Engagement - Trading Plan for week of 12/5/2011

No trades today 
I was out longer than usual this morning and when I returned, that big spike up due to the "collusion" of the world Central Banks injecting Cortisone threw my charts (and me) for a loop.  Therefore, I generally stood back and just watched.

In addition, the sound of construction workers banging away in the basement combined with not enough sleep last night also contributed to my lack of action (to play it safe, even on SIM).  However, I did try an entry, but it didn't fill.  And I also missed one of Renato's alerts that ended up being profitable.

Although I didn't trade, Renato gave several alerts that I believe gained at least a few ES points in total.  The summary he gave of his net performance for the month of November was simply amazing and inspiring.  He has made me into a believer that taking small and steady bites every day can add up to substantial returns over a month.

So I worked on my trading plan
The lack of trading gave me time to focus on my trading plan for next week when I start trading live once again.  As I wrote in my last trading plan back in August, the primary goal will be to test my ability to follow my trading rules -- in other words, maintain discipline to focus on the process.

I have deliberately simplified the setups in the trading plan below in order to respect the proprietary nature of the DS system.  But for those who are familiar with DS, I'm sure you'll see that these rules are very straightforward and should be easily to execute (at least in theory).

How I will judge myself
At the end of next week, I will not rate myself on whether I made a profit or not, but how well I executed according to the plan.  I know based on my trading schedule, I will most certainly miss many good opportunities during the pre-NY open.  However, of those trades that I do take, I will score them based on how well they met the criteria as well as how well I executed according to the plan.

* * * * *
Trading plan for week of December 5, 2011
[Not locked down yet, so this is still subject to revision] 

       30 minute and 377 tick charts based on DS levels, as well as my 5 min chart

       RSI, moving averages, vwap, pivot levels

The following setups are in scope:

(1) Renato's DS Alerts
  • They work -- just take them!
  • If applicable, refine entry point with 377t chart
  • If there are conflicts, Renato's trade overrides all other setups
(2) Retest of 30m DS level
  • Wait for close on 30m bar, with entry on following bar
  • Ideally, trades should not be taken between 11:30AM and 1:30 PM
(3) Reverse Play on 30m level
  • Similar to Reverse DS4 setup, except this can apply to any DS level
  • Ideally, take this in the direction of the intraday trend
(4) First Touch of 30min DS level
[Not sure if I'm going to leave this in here or not for next week]
  • If DS4 is involved, wait for the farther level (and realize that many profitable entries will be missed!)
  • These FT setups should account for < 20% of total setups
  • Since FT may be riskier, these setups must have one of the following, or else pass!
       (a) 377t DS4 with RSI, or
       (b) Confluence with additional non-DS level such as trendline/vwap/pivot level
Limit order will be placed at +2.00 points (8 ticks).  This order will be sent automatically as part of a bracket order at the time of entry.

Exception: In an instance where the setup takes place at a known critical support or resistance level, once the stop is raised to +2 ticks, I will have the discretion to let the trade ride for a greater profit.  However, this should only account for < 10% of total trades.

Risk per trade not to exceed 2% of portfolio

Start by trading 1 contract (therefore, risk per trade will be < 1% of portfolio)

General rule - allocate $8k-$10k per contract

The stop will be placed -2.25 from entry price, unless there is clear and compelling reason to adjust by no more than 2 ticks.

The stop loss will remain at the original location unless:
   (1)  The trade is +1.50 (+6 ticks), then stop will be raised to entry price/breakeven (0 ticks)
   (2)  The trade is +1.75 (+7 ticks), then stop will be raised to +0.50 (+2 ticks)

Max daily account loss = 5% of portfolio

Max intraday drawdown = If daily profit > $500, drawdown will be kept < 30% of max profits (i.e. highwater mark)

  • Find ANY REASON to pass up a trade -- I don't have to trade.
  • However, if the setup is valid, pull the trigger!
  • Don't fight the trend, save your mental and emotional capital.
  • Remain in the "Now Moment" -  Follow the plan and just let go -- let the trade win or lose.  Zen out, man. 

Tuesday, November 29, 2011

My swing trade finaly got stopped out, so now what?

It eventually had to end.  My short ES swing trade from last week was stopped out, and although I had my stop loss set at +.25 (so that I can say I never let that +50 point winner turn into a loser, ha ha!), I actually got serious slippage even though it was a SIM trade (surprise, not!).  It was 1 full point slippage...IN MY FAVOR!  Well how about that.  Ended up closing that swing trade with +1.25.

For kicks, here's the daily P&L of that single contract ES swing trade short @ 1198.00 from 9/22:
When will I trade live again?
I'm starting to think that I should start trading live again in December, for maybe a couple weeks or so before the Christmas holidays takes over.  Starting in December gives me a nice clean starting point, and I'll do my best to end the year on a good note.

The rest of this week will likely be difficult for me to trade during the peak morning hours, so I might end up waiting until Monday.  However, this will give me time to start writing down my trading plan as well as my goals. 

For whatever reason, it has only been in the past few days where I can truly "feel" and be comfortable with what my trading plan and strategy should be. 

Now it's time to write everything down, lock them down, focus on the process, and execute the process as flawlessly as possible.  I have absolutely no doubts that if I focus on trading the plan, the profits will follow.
* * * * *
Tuesday, November 29
Total gross profits:  $287.50   +5.75 ES points
Total trades:  7  [3 scratch]
Accuracy:  100.0%
Contracts per trade: 1

A somewhat uneventful day, but one that was profitable.  If I can consistently keep up this type of performance every day for a month, it will be a very respectable month.  The markets seemed to be in tune with the Diamond Setups method and levels.

It was a very steady day where most trades generally moved in my favor almost immediately. I also had a certain feel, and when the trade wasn't working any longer, I correctly exited ahead of the adverse moves for scratch.  Perhaps it was due to my rested state of mind (it has been about a week since I last executed a trade).

These "boring" but yet profitable days are what I would appreciate every day!
* * * * *
Once activity that has helped me to keep focused (and out of trouble) on the overall markets has been to update a 5 minute chart with trendlines and key support/resistance levels.  What's surprising is how well and how often these trendlines line up with the Diamond Setups trades. 

In this example, you can see how the trendlines I drew and extended ended up working well for certain DS setups (see green shaded areas).

Monday, November 28, 2011

From +50 ES point to +2 to ???

No trades for me on Monday, November 28th.  Since getting into the ES 1198 short on Tuesday 11/22, I've continued to let it ride, especially since I've been busy with non-trading related tasks as the holiday season starts to ramp up. 

So here are some thoughts as I saw my ES swing trade go up to nearly +50 points in profits, only to then watch it gap up around 20 points against me on Sunday night, and then getting within 2 points of being stopped out at break even today (Monday).
  • If this was a live trade (not SIM) I most likely would have exited earlier, probably on Sunday night for about a +20 gain.
  • Renato had a buy alert... right below the 1150 area (yes, the low of the move on Friday), so although I'm not sure I would have exited there on Friday afternoon (because weak closes are usually a bearish sign), that was potentially another option.
  • I could have done better daytrading vs. this swing  Assuming that I closed this single trade at the max possible +50 points, there were many daytrade opportunities that could have made just as much or even more during the time I was in this one swing trade.  But...
  • Big but...  Whether I would have captured all those daytrades and actually made that much is another topic of discussion.
  • Quick to enter trades, slow to exit.  That's my general nature (even as a daytrader), and the reason I've been able to hold on to this position for so long -- I'm slow to exit.
  • My natural Valium?  Having an active open position is somewhat like putting my trigger finger on Valium.  It makes me much more selective to enter new trades, unless they are very compelling. 
  • Permanent swing position?  So maybe I need to consider having a very small swing position as a way to counteract my need to always have something cookin'.  A mini-forex position comes to mind.
  • External non-trading diversions  There are times when I feel I'm too close to the markets.  It's as if I'm getting too clingy.  So how will I feel when the market treats me bad someday and I have nothing else to fall back on?  Either having other hobbies and interests or being forced onto other tasks should help provide balance.  Consequently, I believe having better balance will improve my ability to stick to a plan with discipline.
This particular swing trade has also been yet another interesting experiment to try rattle and shake my soul so that I can gain better understanding of myself as a trader.  This isn't the first time I've had a swing trade, but this time, I am much better prepared to observe and record myself to see how I think and act in a volatile market conditions.

Sure, if I had real money on the line, it would likely have been much more stressful, but either way, I believe this is a lower stress way of become more self-aware with myself.

When I am trading live again, I will likely go back to daytrading/scalping primarily for +2 ES points  I might consider swingtrading once I'm trading with an initial position of at least 3 or 4 contracts.

So the question that is getting louder in my mind -- when will I start trading live again?  I tell myself I'm in no rush, but there's also a side of me that wants to get back in the real game NOW.  Depending on market conditions, I'm thinking maybe next week at the earliest and sometime in January at the latest.

Wednesday, November 23, 2011

A +40 ES trade - it's only SIM, but let me dream...

A brief interruption to the holiday madness...

My "fluke" ES short trade from early yesterday morning seems to be doing quite well.  This turned out to be one of those < 5% of my trades that ended up running, and running, and running... 

So far, it's up almost +40 points (still open, so it could change) from my 1198.00 entry price around 6:50 AM on 11/22.  One trade, 1 contract, 1 1/2 days, not too bad.  I checked up on this trade throughout the day via my phone today while running errands, and saw no reason why I should have exited.  Too bad it's a SIM trade and not real!

Even though I'm not counting this trade as legit (it was slightly rogue based on my trading plan in effect at the time), there was something about this trade that made me take it AND continue to hold it.  I could also say the same thing about countless other trades that LOST money.  But at a minimum, it is a bit of a confidence booster and shows my strength of being able to hold a runner through ups and downs for the big move.

Although my primary goal in the near future will continue to be capturing +2 point scalps, this example also identifies the power of identifying a trend and sticking around for a nice ride.  This is further incentive for me to get up to trading 4 contracts so that I can have more opportunities to let a kicker contract run.

Maybe there's something more to this trade than I'm giving myself credit, so as a reminder of what a big win looks like, I'll post this as a reminder of what's possible.

Tuesday, November 22, 2011

Winding down for the holiday week

Between the construction workers finally banging away and fixing our basement due to the hurricane Irene floods (how long ago was that already??), preparing for family visiting tomorrow, as well as endless other circumstances of life that popping up, it makes focusing on trading very challenging. 

Yesterday - Botched SIM again
However, I did do some trades yesterday (Monday, Nov 21), but then ran into the TradeStation SIM confirmation delays once again.  This threw me off track.  By nature, when I see a problem, I try and isolate it and determine the root cause or at least better understand what's going on. 

So I began finding excuses to put on trades just to try and make it "break" and replicate the problem.  It's OK to do in SIM, but it's not OK with a live account.  Needless to say, I ended up straying far from the trading plan and it's not even worth posting the performance.

Overnight trading and the "one trade" today
Last night, I decided to give overnight trading a shot, and I ended up fighting the trend, and shot myself.  And before I had to head out this morning for a doctors checkup, I shorted the ES at 1198 during the pre-market session. 

The trade gained as much as +18.75 on one contract, before it hit the bottom before lunch (where Renato made a Diamond Setups call at 10:57 AM to buy at 1182-80!) and it then shot up due to the IMF news about the liquidity line.

Since I was in and out all day today, I held on and it got within 3 points of my breakeven stop.  I thought it would be "tragic" if I got stopped out at breakeven, but hey, it would be a lesson learned.  Luck was on my side, and the ES drifted back down.  And then right around the close, more news.  New stress tests for banks.  It ended up closing +16 in profits, and I will hold it into the overnight session.

By the way, this trade won't count on the "official" performance report, either, regardless of whether it closes with big profits or b/e.  It's more of a rogue experimental trade that I had a "hunch" about.

The bigger picture
Looking back on the past few weeks, it's clear there's a big gap between my desire to go for profit targets of +2s vs. runners that go +10s and beyond.  It's not necessarily mutually exclusive, but it is much more difficult to do both when trading only 1 contract, so I'll need to work on a plan to get up to 4 contracts as soon as possible.  Lots of planning and goal setting work for me to do.

Well, time has run out and more non-trading duties call, but best wishes to all for a safe and wonderful Thanksgiving holiday break!

Friday, November 18, 2011

End of a long week - more experimentation

It was a long week, but one that ended on a relatively good note.

Friday, November 18
Total gross profits:  $587.50   +11.75 ES points
[SIM adjusted gross profits:  $325.00]   +6.50
Total trades:  14  [1 scratch, 7 losses]
Accuracy:  42.9%
Contracts per trade: 1

An OPEX day that ended on a fizzle.  I stopped trading by 2:00 PM when it became slow.  But there were enough decent swings earlier in the day that allowed certain trades to run, as well as choppy areas where the DS levels did well to capture scalp trades.  Yet another experimentation day, focusing primarily on the whether to use the profit target or not.

No +2.00 profit targets on some trades
Today, I decided to lift the +2.00 profit targets for certain trades that "felt" as though they had room to run.  The result?  My percentage accuracy went down considerably and overall average profit per trade (expectancy) remained relatively the same as a good scalping day.  But the average $'s of winning trades went up considerably.  Why?  I had a few trades that ran a decent amount.  For example, I had one trade go +6.25 and another that went +8.00.

The primary criteria I used when allowing a trade to run was whether it was near the highs/lows of the day, and/or whether it is considered a significant area due to key trendlines.  These criteria in confluence with DS levels seem to provide a better than average opportunity for a trade to run beyond a typical scalp.

In this chart to the right, it's clear to see that rationale behind some of the trades were allowed to run without a +2 profit target order.

So the question remains, what style works best for me? 
Since starting to trade earlier this year, a certain pattern I've tracked is that I am very impatient to enter a trade, but once I'm in a trade, I'm almost too patient to stay on board. 

Therefore, I usually don't have the tendency to exit a profitable trade too early, but instead, I tend to overstay my welcome.  This works very well on those small percentage of trades that end up running far, but in most instances, I'll let a profitable trade stop me out with a scratch or a small loss.

I believe my ability to hold onto profitable intraday trades is a strength, and so I'll have to factor that into my overall trading strategy.  I'm willing to sacrifice winning accuracy in order to let certain trades run, because I feel that having those types of trades provides me with a sense of accomplishment.

And finally, are my SIM adjustments too tough?
As I continue to apply my SIM adjustments to the daily trade record, I wonder if I'm being too penalizing to my initial gross figures.  One thought that's crossing my mind is whether I just need to trade live again to find out once and for all.  Earlier this month, I had to trade live just to see how the real fills will be.  But that ended in a mini-disaster, so perhaps I should wait a little longer!  In the meantime, I'll just be extra conservative, and will continue to calculate my SIM results as I have been.

Thursday, November 17, 2011

An interesting SIM experience

A very interesting day, to say the least.  To begin, it was a day I probably shouldn't have traded due to a migraine headache, but it was mild enough for me to overlook some pain in order to experience my endless fascination with the markets. 

The bottom line end results don't reflect my true performance.  In general, there's much to feel positive about what I accomplished today.

Thursday, November 17
Total gross profits:  -$775.00 (see section below: "TradeStation's SIM was terrible today")
[SIM adjusted gross profits:  -$???.??] 
Total trades:  39
Accuracy:  44.7%
Contracts per trade: 1


Rough start
As I began the day, my plan was to scalp the day, and it didn't start off well, with a couple stop losses right away.  As I approached the $500 gross loss mark, I entered a short trade and realized that a call from Renato's DS alert was near the top of the downward trendline, which was also the top half of an intraday triangle.  Nice confluence of resistance.

Placed a trade and took a rest
Once the trade went in the money far enough for me to move the stop close to b/e, I took a break to rest.  Since I wasn't sure how long I'd be gone, my profit target was set to the lows of the day, which at the time was 1220.  So in some ways, you can say I broke my rules of not getting out with a +2.00 scalp profit target.  Maybe I went rogue, or maybe not?  This was an instance where I felt strong enough with the trade to walk away and let it run.

A nice surprise when I returned
When I returned, it was nice to see that I was up around +8.00 ES points.  And although it had broken out of the bottom of the triangle, there appeared to be good support right under the breakout of the triangle, so I booked the profits and went long.

After a few losses in a row trying to go long (i.e. going against the trend!) and and seeing that my my original profit target was eventually hit (which means I should have rested and stayed away longer!), I realized the trend was down.  No more mistakes like the prior few days, so I entered a short trade based on a DS level and let it ride for another +6.00 trade.

Nice recovery
With that trade and a few others, I went from a -$500 day, to a +$200 (gross, non-SIM adjusted) day based on 1 contract.  Not a bad +$700 (+14 ES points) swing, especially since I was feeling crummy and the markets were quite difficult to trade.  I felt I got some redemption, since unlike the other day, I was able to stop catching falling knives and traded with the trend.  A thought crossed my mind that I should stop for the day here, and be happy.

Shouda quit...but did I?
I couldn't stay away.  And from that point on, things got weird.  Maybe due to the trading volume, but my TradeStation SIM account started to freeze up when a stop market or a market order was placed.  The charts and data feed continued to operate as normal, but I'd have to imagine that TradeStation doesn't allocate much resources to their SIM order servers. 

TradeStation's SIM was terrible today
Confirmations were taking 15 seconds up to a minute or more.  I would watch my stop loss orders get hit, and filled at prices up to 4.50 points away (NOT ticks)!  Granted, I did get a few fills where I got 1 or 2 ticks in my favor, but those were rare.

And what really confused TradeStation was when my stop was hit (but pending and not filled), and when I entered a new position a few points away.  There were then 2 orders floating and getting queued up.

For example: Instead of properly executing the stop loss first at b/e, and then executing the new entry, TradeStation processed my 2nd order first, and essentially let the first order get rejected or processed at a price a significant distance away from the stop price.

In other words, my fills became a total mess.

A WTF moment!
As the SIM fill confirmations continued to take longer, there was once instance where I deliberately entered 3 orders with brackets (OCO profit and loss orders) in relatively close proximity, waited a few minutes while the orders were pending, and ended up with over a $300 loss!  Yes, it was a WTF moment.

So after my "nice recovery" morning, the afternoon was a completely different story.  Based on a combination of a less than perfect SIM order execution, and then my "let's try and break the F'in SIM" attitude, I ended the day with a -$775.00 gross loss. 

As the SIM order system really started to freeze up and snafu the orders, my last 3 trades of the day within a 20 minute period accounted for an amazing -$600.00 against my P&L!  This better NOT happen when I'm trading my live account.

So there is no need to even make any SIM adjustments today, since most of the stop and market orders in the afternoon had unrealistic slippage of considerable amounts.  In normal market conditions, how often would you get a 4.50 point slippage?

What went well?
  • Even when I had a large drawdown today, I never gave up.  As I have done more often than not in the past, I recovered from a large deficits.  The more I do this, the more confidence I gain.  But I'd rather be trading from the position of having a large profit!
  • I identified the trend and utilized the DS levels to identify entry points that kept me trading scalps in the direction of the trend. 
  • I did fade the trend if there were many confluences that indicated a significant high or low was in place (shorting the top of the triangle is one example from today), and let them run beyond the usual +2 ES points.  But I have to be careful that I'm not doing selective rogue trading on a whim. 
    • I've noticed that many of the big runners take place on contra-trend trades that are near the highs or lows of the day, and also near other significant levels.  
    • This is something I will continue to analyze and refine in order to help understand when to let a trade run (it'll be much easier once I start trading enough contracts to scale out on all trades).
These markets are no where as easy as what I experienced in early October, but I welcome these adverse conditions.  Bring it all on now, both good and bad, especially while I'm on SIM.  This way, I'll be better prepared to handle what the markets will throw at me once I'm trading live.  Let's go.

Wednesday, November 16, 2011

This is why I'm still on SIM

Yet another example of Murphy's Law.  I write extensively about something and feel as though I have it nailed down.  And then the next day, I get burned by what I had thought I learned so well and told the world about. 

Yes, I traded the ES...against the trend.

Here's a snapshot of today's market with my notes. 
   SH = Swing High (that preceded the critical swing low or LOD)
   SL = Swing Low (that preceded the critical swing high or HOD)
My only excuse?  My prior examples were based on the trend changing from DOWN to UP.  Today, it changed from UP to DOWN.  So I couldn't recognize the change as well [cough, cough].  But after today's example, there will be no more excuses.

This is one of those days where I'm glad I'm trading on SIM.

* * * * *

Wednesday, November 16
Total gross profits:  -$300.00   -6.00 ES points
[SIM adjusted gross profits:  -$687.50] 
Total trades:  22  [1 scratch, 14 losses]
Accuracy:  33.3%
Contracts per trade: 1

NOTES: Volatile overnight session leading to a gap down opening with a little over an hour of range trading.  The gap eventually filled before lunch, and then the markets went choppy during the lunch hour.  After a run to new highs, the ES stair stepped down, and finally dropped sharply into the close (hey, just like my cumulative P&L chart!). 

I had a late start today, so I took a little longer than usual to get caught up.  And up until about 3:00 PM, I was only down slightly for the day, which was OK since I thought today was one of the more difficult days to trade.  Even though I had identified the trend to be up, for some reason, it didn't help much.

As shown in the trend chart example earlier, after 3:00 PM, there were multiple signs that the trend had changed, including the break key trendlines, vwap, support levels, in addition to a 1-2-3 top formation.  And when I began taking multiple stop losses in a row trying to scalp +2s as the volatility increased with the market drop late in the afternoon, I became impatient and started looking to get back and recover my losses, trying to BUY in order to prove to the markets that I was right (red flags are waving here).  The 33% accuracy rate clearly indicates that my trade selection was poor. 

Key Takeaways
If the volatility of the markets become unusually high and various support and resistance levels are being broken like hot knife through butter, then take extra steps to identify the trend and to WAIT PATIENTLY for a high probability setup in the direction of the trend.

Or better yet...

Also realize when markets are volatile, I DO NOT have to trade.  It feels like 22 trades is a bit too much for a (shorter than usual for me) day like today.  I need to keep a clear mind, and reenter only if the odds are strongly in my favor.  Otherwise, wait until the markets return to normal conditions where I know I have an edge.

Next time, I'll be much better prepared.

Trading with the trend: Follow-up

After waking up this morning, my mind must have done some more thinking while asleep.  So here's a follow-up to the prior post on trading with the trend.  Even though I'm generally scalping for +2.00 ES points right now, there is value in knowing the direction of the trend. 

On my prior post, take a look at the swings when the trend is up (right after the 1-2-3 bottom).  The swing legs going up are bigger than the swing legs down.  It's one of those "no duhhhh" statements that can get lost in the heat of the battle, or especially if you think you're "right" that the trend will change.  So if the trend is up, it's usually much easier to make money on the long side.  Once again, "no duhhhh!"

Here are some additional takeaway thoughts:

  • Timeframe
    • Evaluate trend using 5 min chart, which is a good timeframe for my current scalping strategy.  However, any timeframe may be used based on your trading style.
  • Trend up 
    • Long trades - take as normal, and potentially add a runner/kicker in the future to scale out.
    • Short trades -  take the fade trade, especially if the levels are strong.  But be more careful, potentially exit quicker, and/or possibly go smaller profit targets if the levels are not strong.
  • Trend down 
    • Long trades - take the fade trade, especially if the levels are strong.  But be more careful, potentially exit quicker, and/or possibly go smaller profit targets if the levels are not strong.
    • Short trades - take as normal, and potentially add a runner/kicker in the future to scale out.
  • Potential trend change 
    • Take trade as normal, range based markets work well for scalping.  But realize it might take longer based on the market conditions at the time.
Just some additional thoughts as I continue to refine my trading strategy.

Tuesday, November 15, 2011

Trading with the trend

[EDIT 11/16/2011: Follow-up to this post here]

One of the challenges I've had when trying to define and clearly articulate my best trades is, well, I haven't had enough of them under the circumstances.  Since I'm still in the early stages of learning the Diamond Setups methodology, my experience was generally "given fish while learning to fish" during the first month, and that sure turned out to be quite a solid month that didn't seem real. 

Even if I were to look at back at my most profitable trades in that first month, I wouldn't have been able to tell you why I took it, except for the fact that Renato gave an alert and I entered the order (and it usually made money).  As great as it is to make money that way, I have an even more intense desire to be able to trade based on my own independent analysis.  So that's what's great about Renato's program -- he has no problems teaching you to how to fish based on everything he knows, and he does a very good job at it.

The lightbulb
When I started to try and "fish on my own" after 3 weeks of starting the DS program, things got a bit stale for a week, then a bit rocky, and finally I had the big meltdown(s) just as I started to trade live.  But upon reflection, I did learn and study what worked well for me, even as the red ink was spilling everywhere.

One of the "lightbulbs" during those dark times is so simple and something that I already written about it in the past.  How to save your emotional capital....simple, don't fight the trend!  Since the aggressive trading method I use generally goes for +2.00 profits, knowing the trend will help me ride the wave instead of against it, so that I can get that little extra "umphhh" to carry me to the finish line.  Every little bit of help counts.

Determining the trend

There are many ways to determine the trend, whether it's by trendline, moving averages, chart patterns, etc.  Like anything else in trading, there's no right or wrong way -- just a way that suits your personal preferences, each with their pros and cons.  I'm using a method that I learned many years ago, so it's something I feel comfortable with and seems to work. 

Assuming the trend is already up, I generally look for the swing low that preceded the HOD or a critical swing high, and if that swing low level is broken, then the trend will potentially change (possible chop zone), or the trend will change to down.  And as long as new highs are created along with higher swing lows, then the trend will remain up.  And vice versa for downtrends.

Here's an example of how I calculated the trend today:
So how does this fit in with my trading?
After reviewing my trades in the past, I've found that when I'm explicitly aware of the trend, AND I only look for quick scalp trades in the direction of the trend, I usually do well.

Fight the trend and my emotional and trading capital usual suffers.  If I do end up trading against the trend because of a strong signal, I'll usually be extra quick to take profits or to scratch the trade.  Very common sense -- this is not groundbreaking stuff by any means!

But it's so easy to get "stuck" or "out of sync" when trading a market that is trending strongly, especially if you've had success selling the highs and buying the lows during sideways or choppy markets.  I've had to snap myself out of trades recently -- exiting an against the trend trade early just to prepare myself for the next trade that goes with the trend.  Those with the trend trades usually end up with working better and more quickly, just the way I like it!

* * * * *
Monday, November 14
Total gross profits:  $337.50  +6.75/car
[SIM adjusted gross profits:  $162.50]  +3.25/car
Total trades:  11  [2 scratch, 2 loss]
Accuracy:  63.6%   [scratch counted as loss]
Contracts per trade: 1

NOTES:  I'm starting to think my SIM adjustments might be too penalizing, but I'd rather have it this way vs. being surprised with my results once I go live again.  In essence, the trades I adjust down to +2.00 ES points were +2.50 wins in SIM.  So I have total confidence that those trades would have been filled in real life.

Nearly all the trades today were prior to lunch.  I got Costco on my mind for whatever reason, and used that as an excuse to leave once the markets started looking choppy as we headed into the lunch hour.  However, I came back to see that there was quite a strong move higher while I was away.  

There was a +2 opportunity during the lunch hour that I missed, as well as another +2 opportunity in the afternoon where I brought in my stop a little too soon.  But all in all, today felt like a solid day mentally, and I believe having a lunch break helped me to maintain my patience in the afternoon.

The one full loss I had went against the trend, and not only that, it was initiated based on a level that wasn't quite as significant as I had originally thought.  But instead of scratching it or minimizing the loss once I discovered my error, I decided to let it stop me out.

Monday, November 14, 2011

Is it rogue or is it not?

As I learn a new system, my initial goal is to understand and trade it straight from the book.  But a funny thing usually happens along the way to trading system enlightenment -- especially if you have already spent years researching various systems, indicators, charts patterns, lunar cycles, tea leaves, etc. 

Everyone has some baggage
That's because there's always a certain amount of "baggage" (positive and negative) that never goes away -- you know, identifying certain chart patterns, drawing trend lines a particular way, an affinity to a certain indicator with your special parameters, etc. 

They all worked well in the past based on how you used them, and well, gosh darn it, they continue to work well for you now.  But the new system under study doesn't use them, so I really shouldn't use them, right?  But if I don't pay attention to "them", I'm sure they will continue to haunt me!

Is it rogue?
Today was a case in point.  I did my best to trade the DS system based on an aggressive style that seems to work well for my personality.  However, there were a few setups that utilized price levels that were not necessarily a part of the system. 

So does that mean the trade I took was a rogue or a non-strategy setup?  I was fully aware of what I was doing at the time, but the levels and setup were based on a something that I know has worked well in the past, and they just happen to mesh well with the DS system.  And just because the trades worked, does that mean it's OK?  But how would I had felt if the trades lost money?

Make it your own
And then I started to think about the whole concept of "make it your own."  I recall very clearly Renato telling me "...just make sure you know your own 'most comfortable' style" and then trade DS accordingly.  From what I have read, it seems as though nearly every trader continues to evolve their trading methodology through the years. 

Do you still trade the same way you did a year ago, 2 years ago, or even 5 years ago?  Chances are, you have evolved your methodology to adapt to the markets as well as your own personality.

A great framework
What I'm starting to realize is that Renato's Diamond Setups has provided a solid framework upon which to refine a trading methodology, that especially fits me.  Although you can take it out of the box and trade by the textbook very successfully, it can also be adapted to various timeframes and levels of aggressiveness.  The ways to determine and trade key support and resistance areas, are surprisingly robust. 

Therefore, I believe embracing some of my past experiences and incorporating them into this framework is something that seems to make sense and seems to feels right.  However, I need to remember -- learn how to crawl before I walk, and that changes to the trading methodology needs to be done in a very calculated and methodological  manner.

* * * * *
Monday, November 14
Total gross profits:  $462.50 
[SIM adjusted gross profits:  $287.50] 
Total trades:  9  [1 scratch, 1 loss]
Accuracy:  78%
Contracts per trade: 1

NOTES:  Today was another experimentation day, although I'm starting to tighten up the rules.

The market gaped down today, and the gap never filled.  My bias until the last hour was to short, so any buy setups were scratched promptly in the event they didn't move relatively quickly in my favor. 

Since I believe recognizing the trend and trying to trade with the trend helps to save you emotional capital, I spent a lot more time today identifying and tracking the key swing highs and lows that determine a trend change.  This was a key process change vs. prior days.  This activity meshed well with the DS system, and I believe it helped me to achieve the performance that I did today. 

Nearly all my trades took place prior to noon.  I took detailed notes today during the trading day, which will help create a record of the positive and clear mindset I maintained throughout the morning.  This day is a good example of how I traded to my strengths, and I will use this as a template for future trading days.

Another change was that I left the computer and went out to lunch, since my wife had the day off.  The only unfortunate part was that I ate so much, I had food coma for the rest of the afternoon and missed or chickened out of a couple +2.00 trades.

Sunday, November 13, 2011

"Transform Adversity Into Challenge"

So far, lots of great strategies (chapters) in the book I'm currently reading to improve my mental game, titled High Performance Trading by Steve Ward.  There was one chapter from the book that seems timely given the recent posts, and is called "Transform Adversity Into Challenge."

The key to success is failure
This chapter starts off with a story about the Olympic triathlete Hamish Carter who said, "The key to success is failure."  His failure in Sydney was critical.  It gave him the mental toughness and the drive to make changes that resulted in him winning the 2004 Athens games.

The author later goes on to explain an assignment he had to work with some traders in Chicago.  They were having difficulties and he discovered that they were all focusing specifically on two items:
  • Their P&L
  • What was going wrong or not working
Oh, well doesn't that sound very familiar to the readers of this blog?

"Triangle of Strength"
So what he taught these traders is to start focusing on the following dimensions, which should also look familiar based on the theme of the past few posts on this blog.

Here's an excerpt from that chapter:

1) Positives - What is going well?
It is so easy, when you are having a tough time, to become overly focused on what is not working.  And if, in some respects, we get what we focus on, then this leads to you just getting more of what you are already getting – and don’t want!  A shift in focus to looking for what is going well, and what is working, is not easy. But it is doable; and it is a skill that needs to be developed as a part of tough thinking.

2) Strengths - What are your strengths and how can you best utilize them to help you in this situation?

...all traders have particular strengths, and these ought especially to be called on times of difficulty or weakness.  They could be strengths in the areas of knowledge, execution skills, trading ability, resilience, motivation and persistence, staying focused, work ethic, composure, strategy development – what have you.  These are critical resources.

3) Controllables

In difficult times, when the pressure is on, it can become easy to focus too much on factors that are outside of your control, particularly, in trading terms, the market.  Blaming and complaining about market conditions does nothing to improve your performance – it might only help in the short-term in you having a quick moan and feeling better!  Performance is always enhanced when focus is on a well-designed process and the process is controllable.  This is no different when times are tough.  You need to create your processes, identify what is controllable and then focus on those aspects of your performance.
His exercises are generally a series of straightforward questions revolving around a particular "strategy" under discussion, but it will require considerable time and focus to address properly.  I believe this can be done effectively only by writing not by "thinking it through" as I read. 

There are so many relevant exercises and practical strategies I can incorporate from the book into my trading, but I know it will take time.  The journey to consistent profitability marches on...