Tuesday, October 22, 2013

Review of SpreadTheTrend.com

In my prior post about Adventures in Autotrading Services, I discussed my overall experience to date with a handful of autotrading newsletter services.  And in conclusion, mentioned how one program has actually delivered solid results so far.  That service is SpreadTheTrend.com.

SpreadTheTrend is a iron condor/credit spread newsletter services run by Derek that trades the SPX index options.  Derek posts on Twitter under @spreadthetrend, doesn't have a chatroom, and communicates primarily by email, although he does publish a phone number which I've never tried. 

The website is in the process of being revamped, so the information below could become somewhat dated soon.
  • The non-member/public portion of the website has some helpful information including a very helpful FAQ's, how to get getting started, performance page, etc.
  • The members section contains a couple dozen or so tutorials diving into more details regarding trading credit spread options strategies.  There's a lot of useful information in there and it's not overly technical, so it's relatively easy for a beginner with some basic options knowledge to understand.  But since I'm autotrading, I admit I haven't studied these posts as much as I should.  Maybe it's time for me to revisit them.
  • The performance page format has changed starting this year.  However, you can still see the prior years in the older (and less detailed but easier to read) format.  I started with this program in Q1/2013, so I don't have actual performance results prior to that time.  But from what I have heard from others, the posted performance on the website going back a few years matches their actual account performance very closely.
As mentioned earlier, the primary source of communications is via email.  Since I subscribe to his autotrading program for hands free execution of his signals, my interaction with Derek has been very minimal, only via email.  His response time has been timely, usually within several hours or less during the weekday.

For those who manually execute his alerts, there are examples of how his alerts are emailed on his website.  Pretty straightforward.

He also sends out market commentary on a weekly basis, or more frequently as conditions change.  I admit, I was initially ignoring his market commentary emails since I was in autotrader mode and didn't really want to know what's behind his signals -- I just wanted results.

However, I now look forward to reading his market commentary.  His emails are far from dry and technical -- they often have a entertaining and sometimes quirky or snarky tone (I mean this in a positive way), ranging from rants regarding the "cabal" propping the markets, some subscribers getting too nervous about current positions (or complaining about being in cash too long), or whatever is the topic de jour.  But in the end, his commentaries consistently contain very valid insights and perspectives.

He often says he has no idea what the market is going to do, which might lead you to initially wonder whether he's the right guy to lead the ship across the ocean.  But read carefully and you'll see that his commentary is peppered with wise trading wisdom that can only come from years of trading experience.

For whatever reasons, Derek is yet another newsletter service proprietor who doesn't advertise or market himself very much in his communications.  You won't see "BOOM" or "nailed it!" type comments from him.  It's hard to tell from his Twitter posts that he even offers a successful alert service.  Maybe it's because he's content with his subscriber base, or maybe he'd rather grow based on referrals and focus on trading.  I'm finding that a lot of the good services are very low key, and they probably like it that way.

Ultimately, just look at his past performance and results speak for itself.  I often sense an interesting dichotomy between his market commentary vs. his timely trade executions, and believe it comes down to his unique and intuitive feel for the markets, which can change quickly due to market conditions.  His trading seems to be far from mechanical, and that's what I have come to appreciate about his trading style.

Here's a breakdown of my P&L based on the autotrading service:
  • $5,959.45 in profits net of commissions since starting in February 2013
  • About 24% net return year to date since late February, based on a $25k allocation
  • The net return does not factor in subscription and autotrading fees
  • I started with a decent drawdown, at one point unrealized losses were around 15-20%.  So right off the bat, I was able to see how Derek managed difficult conditions, and in hindsight, he handled the situation very well.  Many other similar services panicked and booked big losses.
    P&L curve generated by TraderVue.com
  • The report below indicates a 81% winning percentage
  • However, this is based on how I grouped the various legs of the trades together in Tradervue (which were grouped by expiration month)
  • But if you track the trades based on how they rolled (if applicable), the accuracy would be higher
  • The profit factor is a very respectable 2.50
  • And the probability of random chance is < 10%, meaning these results are not likely due to luck
Statistics report generated by TraderVue.com
SpreadTheTrend is a keeper, assuming the results remain within acceptable historical ranges, which I believe they most likely will.  Although my primary goal is to diversify with other autotrading programs, I will likely scale up my investment in this program next year.  So if you're looking for a solid program to begin autotrading credit spreads and iron condors, SpreadTheTrend would be a very good program to consider. 

Adventures in Autotrading Services

Currently, I have 3 ongoing trading initiatives:
  1. Discretionary:  Discretionary trading strategies -- primary swing trading stocks and stock options.
  2. Algo systems:  Develop and manage mechanical trading systems
  3. Autotrading:  Research and invest in autotrading newsletter services
One of my goals for this year was to explore "autotrading" services/newsletters.  Since "it" (auto trade, autotrading, automated trading, signal providers, trade copy, etc.) can mean different things to everyone, I'll define it as an alert newsletter service you subscribe to, which then executes their trade recommendations in your brokerage account automatically.

It's an interesting space -- somewhat between alert service and chatrooms on one end, vs. managed futures accounts and perhaps some types of hedge funds on the other end. 

NOTE: One key point -- like most chatrooms, autotrading services are usually not operated by registered investment advisors, so be aware of your risks (very high) and recourse options (very low).

One of the main reasons for investigating autotrading services is to try and diversify my trading "business" and to hopefully recapture more time for my family as well as non-trading goals.  We'll see if that's possible in such an all encompassing field such as trading, but I going to give it my best.

This year, I've participated in a handful of autotrading services in various asset classes, including index options, stock options, stocks, and futures.  This "experiment" was all conducted with actual live accounts, since ultimately, there's only one way to find out how a program performs.

The autotrading world is a much bigger business than I expected, and I've only scratched the surface.  But if you haven't yet explored it, here are a few ways to find out more.

I've found that the services are generally clustered around a particular asset class (such as stocks, options spreads, forex, etc.).  Here are some sources I've found useful for further research:
  • Google search "auto trade stocks" or "auto trade options" or "auto trade credit spread" or "iron condor newsletters" or whatever other keywords you can think of.  There will be tons of sites that come up.
  • Global-Autotrading.com - this company acts as the agent or middle man between the alert services/newsletters and your broker -- they take what the newsletter recommends, and executes the trade on your behalf at your broker.  You can see a list of all the newsletters they cover here.  For my autotrading program, I use this intermediary service linked with my brokerage account at Interactive Brokers (IB).
  • Dittotrade.com - this stock and stock options brokerage also acts as a autotrading agent.  See a list of newsletters and lead traders that you can follow on this webpage.  I have an account with Ditto, and have used the account with both a Ditto autotrade service, as well as a standalone brokerage account.
  • Pro-trading-profits.com - I'm not a member of this site, but they will take actual results from subscribers of newsletters, aggregate it, and provide that information to their subscribers.  You can see a list of what they track here.
  • Collective2.com - I have not used this site, although I know someone who has subscribed to some services they offer.  They are somewhat similar to global-autotrading.com, in which they act as the middleman between those who generate trading signals and your broker.  The autotrade section of the website is nicely designed, with the ability to quickly search for various systems and evaluate their performance.
  • Currensee.com - Another site which I have visited, but never utilized.  This site focuses on forex traders, and you can see the leaderboard here.
  • MyFxBook.com - Last but not least, this is another site focused on forex systems that appears to have recently offered a new autotrade service.  You can also see their most popular systems here.
  • Investimonials.com / forexpeacearmy.com - Many of the newsletter services you find above can be researched via these review sites.  I've actually contacted some people who posted comments on these sites and have gotten some great feedback.
Like many things, it was a somewhat of a fluke.  I accidentally received information about a iron condor credit spread newsletter late last year, and that made me recall learning about those strategies over a decade ago.

They say something like 90% of options expire worthless, so why not be the one that sells/writes the options and keeps the premium with a 90% win rate?  But here's the catch -- if you write options, the only thing to be worried about is the 10% of the time when the trade goes against you, and your losses are theoretically limitless.

I didn't like the thought of unlimited losses.  But I liked the idea of having a steady "income" via writing options spreads such as iron condors, which at least limits the downside risk.  I wanted to move forward with this trading strategy, but didn't want to deal with having to execute and adjust/roll all those iron condor legs, which seemed like one big complicated hassle.

After deciding to move forward with autotrading, here are the steps I took:
  1. Subscribed to a credit spread/iron condor newsletter service
  2. Opened an account with Global-Autotrading.com
  3. Opened a brokerage account with Interactive Brokers 
  4. Requested Global to link the newsletter service and  brokerage
  5. Set the allocation per trade (i.e. % of portfolio or $ amount) for each trade
A big point of consideration are the overall costs.  Depending on your portfolio size, costs can be high as a % of assets and/or profits.  Here's a general ballpark cost structure for stock and options trading.
  • Newsletters range from $30-$150+/month
  • Global-Autotrading charges based on number of newsletters subscribed:
    • 1st newsletter = $70/month
    • 2nd newsletter = $30/month
    • 3+ newsletter = $10/month for each additional
  • Interactive Brokers doesn't charge any fees for autotrading.  But what's interesting is that because all the accounts managed by Global are aggregated under one adviser umbrella, you benefit from reduced commissions as volume tiers are exceeded within the calendar month.
  • Dittotrade doesn't have a monthly fee, but each of their newsletters/alert services have varying monthly fees.  And their commissions are middle/high end of the road, about $6/trade (and additional $.75/contract for options).
  • There are some options brokers which work directly with some credit spread newsletters and either don't charge any autotrade fees (tradingblock.com), or minimal $2/trade (eoptions.com). 
    • In those cases, you can avoid the global-autotrading service and monthly charges.  Their commissions can also be as low as $0.75/trade, with no ticket charges.  However, your fills may or may not be as reliable as using the Global-autotrading and IB combo, although it's hearsay and I have no firsthand evidence.
So depending on your portfolio size and/or returns, costs as a % profits can vary widely on a net return basis. For example:
  • Using the higher range ballpark cost figures above on a $5k portfolio, you would need to make a 40+% net profit in a year, just to break even on your autotrading related costs! 
  • Compare that to a $50k account, which would require a 4% net profit annually to break even.  Big difference.
Surprise!  Most autotrade programs I've tried just haven't delivered.  Maybe it was bad luck with the selection process, or maybe that's just the way it is with most autotrading services  Keep in mind my sample size of autotrading services is very small.  But the bottom line is I've lost several thousand $'s on "autotrading research." 

Yes, there has been one autotrading newsletter that ended up meeting/beating expectations, so I am considering scaling up my investment in that program.  I've posted a review of the performance to date on a separate blog post here.  

It has only been less than a year since I began this journey into autotrading services, so I'm still tracking the newsletters I'm subscribed to as well as continually evaluating other potential ones. 

I'm finding that this is not a process that can be accelerated very quickly, except perhaps from others who subscribed to other newsletters and are willing to share their real time results or experiences.

So if you're someone who is interesting in sharing autotrading newsletter results, it would be great hearing from you.  Like any other endeavor, there are some good opportunities out there, but only after working hard (or luck) at uncovering those few autotrading gems.

Moving forward, I will continue to research potential autotrading candidates, invest a small amount in promising candidates as a test, and if results are within an acceptable range, scale up.  Ultimately, I would like to diversify into 3 to 5 autotrading services across various assets classes and trading methodologies.

Stay tuned as this interesting journey continues.

Friday, October 18, 2013

Review of TheTradingWife.net

Now that enough time has passed and hindsight analysis becomes 20/20, it's clear that joining Danielle's TheTradingWife.net chatroom had a big impact on my overall swing trading performance, as discussed in my prior two blog posts here and here

This is my unsolicited review of her service.

I had been a follower of Danielle via @thetradingwife on Twitter for a while and knew she also had a credit spread options service.  So when I started exploring various credit spread services around the end of 2012 and contacted her for more details, I found out she was no longer at that website. 

She said she was planning on starting her own service, so I got on her trial when it opened up.  In hindsight, it was a good serendipitous series of events.

Since launching her service earlier this year, Danielle has been positively mentioned by @the_real_fly on his ibankcoin.com website back in February, as well as profiled in this month's (October) Active Trader magazine.

My belief is that there are no secrets with successful trading.  Everything you need to know is already out there in the public domain.  I believe one of the biggest challenges of successful trading is to "simply" discover what methodology works for you, as well as having the proper mental attitude.

One way to find out is to just keep trying various techniques and/or chatrooms in a methodological fashion until you find something that works -- but before you run out of financial and/or psychological capital.
I had studied many swing trading methods thru the years, so I am very much aware of the many different variations of trading.  However, I had yet to package up a method that I felt comfortable with, which also aligned with my personality and style and produced consistent results. 

After joining TheTradingWife.net and learning her overall process and methodology, I was surprised to learn how well her methodology resonated with me and with my own particular preferences I've picked up along the way.  And after nearly a year, my performance trading her method speaks for itself.  Note that my results are not based on her alerts -- I wanted to learn how to fish, not simply be given it.  As mentioned earlier, my actual results are here and here.

Will it work for you?  I have no idea.  And no one, except for yourself, will know for certain until you give this or any other trading methodology a fair shot.  If the overview below seems interesting to you, then it might be worth investigating.

You can see many blog posts and charts on TheTradingWife's website to give you an example of her swing trading method.  In a very simple nutshell, the swing setups are based on a combination of these criteria:
  • Going with the daily 8 ema trend.
  • Candlestick patterns such as left-right, belt hold.
  • Chart formations such as rounded bottoms, J-hooks, and frying pan bottoms.
  • Riding that trend until an appropriate signal appears to exit the trade.
  • "Trade small and often"
  • Position sizing no more than 10% of portfolio (sometimes half size), and generally, risk per trade much less than 1% of portfolio.
  • Importance of staying out of the market during unfavorable conditions.
  • Understanding emotional and psychological control when trading.
  • For example, she will pass on a trade if she feels "emotions" about a particular stock. The way she explains this as it happens really hits home with me.
This is not your typical chatroom full of emotional chest pumping daytraders shouting out boom at every opportunity.  So if you're looking for that kind of excitement where everyone is hi-fivein' and hootin' and hollerin' after "nailing" a few penny scalp, this is not the place for you.

TheTradingWife's chatroom is a much more relaxed and congenial place for those looking to learn how to trade for bigger % gains on a swing trading timeframe.  There's a good mix of content in the conversations -- heavy on trading obviously, but also open to current affairs, music, humor, etc. during slower periods.  It's like a friendly neighborhood pub.

  • First of all, access to Danielle in the chatroom throughout the trading day (and often into the night) regarding any question you may have.
  • In addition to live interaction via the chatroom, receiving realtime email alerts on stock entries and exits are great for those not glued to their computers.
  • On occasion, she'll launch a video chat so that you can view her charts and comments.
  • Great contributions from other members, but especially from the prolific and very knowledgeable "G.G.", who posts relevant and timely comments/charts throughout the day -- from very early morning to often late into the night. 
These days, I'm not around as much to monitor the chatroom in real time, but having a transcript to review is very valuable, especially since Danielle does a great job commenting the reasons why she took (or didn't take) a particular entry or exit.  If you take the time to study this the transcripts, there are usually some solid lessons.

Check out her closed P&L performance on her blog here.  And her open positions are listed on the top of her homepage.  I've watched enough of her trades in real time over many months to know these results are realistic.  She prides herself on transparency.

I'm not sure if many are even aware of the service she offers, since she doesn't really market or hard sell her chatroom -- it's just not her style to boast with tweet after tweet after booking a +30% trade, to join her room.  But maybe she should do just a little more self-promoting so that others could learn and benefit.

So if you're truly interested in working hard to learn how to swing trade based on her successful methods, she is a willing and capable mentor who will take the time to teach you in a congenial and supportive environment.  I'm just one of many who have had the privilege of benefiting from her mentorship.

Monday, October 14, 2013

The quest for consistency - Q3/2013 results

In my prior blog post almost 4 months ago, I commented at that time that I was profitable 6 out of the prior 7 months in my swing trading account.  Since that time, performance results have continued to remain consistent. 

Around that same time, I also made some changes to my swing trading.  I had a nearly forgotten IRA account at ETrade, and the account had been primarily in a money market fund making paltry < 1%/year.

But I was notified that the money market fund was shut down, thus leaving the account in all cash.  Well, at current money market yields where they are, being in all cash isn't much of a difference, but at least I was now "free" to trade in that account.

So I began actively swing trading my IRA account around the end of June. Here are some specifics of that account:
  1. Due to IRA status, it is a long only and cash based (no margin) account
  2. A steep $10/trade commissions. So that's $20/round trip, and even more when scaling out of a position.
  3. The starting balance was a little over $30k, so it larger than my prior swing trading account.
So how did I do swing trading that account, with a much less favorable commissions cost structure?  Given the conditions, respectable.  Here are my actual results:

Performance by month from Tradervue.com

June - October 2013 statistics from Tradervue.com

Trade distribution from Tradervue.com
From the trade and account risk management perspective, my risk management was even more conservative than with the prior account:
  1. Except for a few dividend yield plays, my risk per trade was generally around 0.2% to 0.5% of my total account, often on the lower end of the range
  2. Position sizing per trade was generally < 5% of the total portfolio
  3. Total position leverage was on average < 50% but maxed out at around 85% for a short period
  • This swing trading method has worked for me over the past 10+ months, and appears to be process with which I can remain consistent.
  • However, a one year performance is nothing in the world of trading.  And I'm always wondering if the markets will change enough to negatively impact my future performance.
  • How would I do in a overall downtrending market, since I'm in a long only account?
  • Had I used a less conservative position sizing and/or more aggressive risk per trade, my returns could have conceivably been 2x higher.
  • How much can I really size up my trading before I run into growth limitations?
  • Commissions accounted nearly 25% of my gross profits (!!!), especially since my positions were usually small, only just a few hundred shares.  Had I used IB or TradeStation, my net returns would have been significantly higher.
  • Even with swing trading, I still fight revenge/rogue trading at times, but it's very infrequent compared to daytrading.  I realize that this challenge will likely never go away.
  • Trading with small risk per trade has been key.  I simply trade the solid setups, and follow the rules with little emotions.
  • My greatest challenge now is to stay motivated and to remain consistent with following my overall swing trading process. 
As my discretionary trading continues to improve, my trading time continues to get squeezed due to increasing family commitments. 

My main goal now is to work hard now to diversify my trading business so that by doing so, I gain more time for non-trading activities in the future.  I'm continuing to explore autotrading services, as well as ways to trade other methodologies and products.  I've also reignited the development of mechanical trading systems with some promising results.
It's a very interesting and exciting time for the retail trader, with tools and services currently available that most (especially me) could not have possibly imagined even 10 year ago. 

Friday, June 21, 2013

Making The Turn / 2013 Trading Resolutions Revisited

I've winded down my trading for the month of June, since I'll be on vacation for most of next week.  And since we're at the halfway point of the year, it was a good time to do some reflecting and analyzing of my trading to date.

As of today (Friday, June 21st), I am up 15% for the month of June.  And based on the open positions I still have, it should not go down by more than a couple % points even if they are stopped.

On a longer timeframe, I have been profitable the past 6 out of 7 months.  Here is a chart of % returns based on closed trades (net of commissions) on my swing trading account for 2013.
My average number of trades have also consistently averaged around 22 trades a month.  No signs of overtrading.

I wrote the following resolutions back in March 2013.  More details here.
  1. Stop overtrading/revenge trading/daytrading
  2. Lower expectations of returns and trade small to help build solid trading habits
  3. Explore and implement other trading methods, products, and time horizons
  4. Start thinking of returns based on % risk (R), not $'s
1) Stop overtrading/revenge trading/daytrading: ON TRACK
Based on the chart above, there is no sign of overtrading.  I've only had a handful of daytrades, and it's usually because I get stopped out quickly, or had such a good winner I needed to take some off the table.

There have been a few rogue trades, but it's a small % of total trades.  And revenge trading is nearly non-existant, since I'm no longer in the daytrading mindset.  Every trade I take is with the expectations of holding overnight and for several days or more.

I have also deliberately kept my account below $25k, so that I am subject to pattern daytrading rules (PDT).  This has been one of my best decisions.  TradeStation prevents me from entering the final trade that would trigger my account to get flagged under PDT.  This helps to prevent me from overtrading, and to get into the habit of thinking carefully about each trade I enter.

2) Lower expectations of returns and trade small to help build solid trading habits: ON TRACK
Trade small and often, is something preached and practiced by @TheTradingWife.  I've also watched @TheLincolnList daytrading live and consistently profitable for over a year with generally a few hundred share sized trades.  And those crumbs add up to very impressive daily/weekly/monthly returns. 

Following their examples, I've established small position sizes as a % of my portfolio for each trade, and that easily allows me to sleep at night.  This helps me to follow my rules and let each trade properly play out without interference or sabotage.

Letting each trade properly play out means I'm building good habits.  That's huge.

In the past, I used to want to make 25-50%/month or whatever crazy expectations of returns.  But a funny thing happened when I stopped caring as much about P&L returns and started to really care about simply following my trading plan -- it resulted in being consistently profitable.

As those who play golf are well aware, when you really try and swing the club hard, the worse off the shot usually goes.

3) Explore and implement other trading methods, products, and time horizons: ON TRACK
This probably requires a separate post, but the autotrading experiment has been very interesting.  The goal was to diversify my trading via other traders/trading services.  Similar to how you can diversify long term investments between various types/styles of mutual funds.

My timing to start was unfortunate based on market conditions, so I'm currently down about -10% year to date in my autotrading account.  But I've learned a lot and still see great potential.  In fact, in addition to my Global Autotrading account, I'm also in the process of opening up an autotrading account with Ditto Trade.

Compared to even 5-10 years ago, the opportunities today to diversify your trading opportunities are amazing.  In essence, you can now outsource your trading and manage it like a business.  Simply hire and fire traders/services based on whatever criteria and business plan you setup.

Here's an analogy.  There are an amazing number of talented people out there, such as musicians, that in the past would never have been discovered.  But YouTube has created a distribution channel where you don't need to be "discovered and chosen" by the old school record industry establishment in order to reach a mass audience.

On a similar note, we're entering a new era for talented and dedicated traders who don't have the right connections or pedigree in order to gain employment at hedge funds or premier investment banks.  Platforms such as Ditto Trader are a game changer for those skilled traders who want greater exposure and opportunity.  This is just the beginning.

4) Start thinking of returns based on % risk (R), not $'s: ON TRACK
There was a recent upgrade to TraderVue that has made it much easier to track performance based on R-Multiples.  I'm still in the lengthy process of updating my trade data to support the new reporting features based on R.  But once completed, this method of reviewing performance will provide a risk based return, rather than return alone.

I'm guilty of this, but it's so easy to say "I made a 2000% return on my options trade" without understanding the proper risk context.  Was your risk or position size of that trade 1% of your portfolio or was it 50%?  Because there's a BIG difference in the impact and risk of that 2000% return trade.

And as I've said many times before, thinking in % terms also helps make it easier to scale up.  Because over time, as I meet my goals, I plan on scaling up significantly.

It sure hasn't feel like a switch suddenly turned on, at least not yet.  However, I am feeling a much greater sense of clarity and confidence with regards to what works for me, and my results indicate likewise.

But the efficiency of my trades are far from optimal.  I still make sloppy mistakes, and my execution still has a lot of work necessary.  However, my upside feels limitless.

It has only been about a  half year of consistent profitability, so in the big scheme of things, that's not much.  But so far, this track record is a huge accomplishment for me and I feel proud.  I set a goal, I'm accomplishing it, and I will continue to meet my goals and raise the bar.

It has been almost 2 years since I wrote the post about The Moment.  My moment is still here.  And I remind myself, "How Bad Do You Want It?"

Sunday, May 19, 2013

Anti-market-topping analogs

On Friday, I tweeted a few chart based analogs.

Since this recent 24% or so move on the SPX over the past 6 months has been relatively unusual, I was able to find a few examples that seemed to fit relatively well.  I then used the historical outcome to overlay how the current market would appear if it followed the same path (on a % move basis).

I've reposted the charts below to make it easier to see in one place. But as is the case with any type of technical analysis, there are always caveats to any type of analysis and The Reformed Broker makes a few for chart based analogs.

Why did I do this?
One of the motivations for this was based partially on the "are tops a process?" post earlier, as well as my net short bear call spread positions in my autotrading account (which is taking a lot of heat).  I personally "feel" as though we are very overextended, but my logical side tells me that the trend is still strongly up.

So based on this current "overextended" move higher, I was surprised to see how much similar moves in the past continued to go higher.  Even the move that lead to the 1987 crash eventually recovered and finished higher after a 3-4 years.

As for where this exercise could lead me, @justcharts tweeted to me a few other comparison timeframes as well as other data that could be considered, such as ISEE sentiment and other put/call related data.  Her helpful tweet opened up some new interesting directions based on some limited research I've done so far.

My bottom line takeaway?
If we're truly topping here, there's usually some good signs and a few weeks to exit.  Or, as the charts below indicate, we could just be getting started on a move higher to levels we currently find difficult to even imagine.  Always keep an open mind, the market is always right.

2011-2013 vs. 1993-1995


2011-2013 vs. 1983-1986


Monday, May 13, 2013

Are tops really a process? Analyzing 25 years of $SPX topping patterns

Anytime we approach new significant highs in the stock market, the Twitterverse lights up with "This is THE top" calls.  Well, I'm somewhat guilty of this, too.  I'm sure it has much more to do with ego -- trying to prove how right you are.  However, I've learned the hard way that being right is far from being positively correlated with profitability.

So let's look at the data.  There's a saying that "tops are a process and bottoms are an event", so I've done a little hindsight-based-K.I.S.S.-back-of-napkin type analysis to take a closer look at stock market top formations.

There's a zillion different potential approaches that could have been taken to performance this analysis, and I just did something I felt comfortable with.  This is not a statistically significant analysis nor an actionable trading system, but for me, this homework helps me to get a "feel" for the data from my perspective and also generates some interesting takeaways.

Since "tops are a process" is often repeated as an trading axiom, does there really need to be a big rush to exit a long position (or to enter a short)?  And how much time do I realistically have to act on a topping pattern?

  1. Started with a 25 year monthly chart of the $SPX to identify key highs during an uptrend
  2. On the monthly chart, down arrows were placed at pivot swing highs based on a high that had 1) two preceding highs that were lower and 2) two succeeding highs that were lower
  3. The highs from the monthly chart were then identified and marked on the weekly chart with a down arrow
  4. On the weekly chart, starting from the pivot swing high arrow, the next pivot swing low was identified, and the retracement was measured
  5. If the retracement to retest the pivot high was greater than 50%, then that point was identified on the chart with a smaller down arrow
  6. The number of weeks between the "Potential Top" and the 50%+ retracement was identified
  7. And finally, the shape of the 3 legs of the swings, starting from the high, was also drawn on the chart
Here's the high level SPX monthly chart going back 25 years (January 1998 to May 2013), with each significant high marked with an arrow:
The following charts drill down to the WEEKLY charts, with each arrow corresponding to the arrow on the monthly chart above.

July 1998 - March 2001

 January 2004 - September 2006

October 2006 - August 2009

February 2011 - December 2012

July 2010 - Current (May 2013)
[Note: significant overlap with chart above]
Doesn't look like a topping process is forming yet.

  • After a "Potential Top" was established, ALL examples had a bounce from the succeeding pivot swing lows of at least 50% that retested the highs (based on weekly chart)
  • After "THE Top" (2000 and 2007) was been established, there was adequate time to exit on a retest bounce to highs (a 50+% retracement) within a 2 week period.
  • After a "Potential Top" was established (13 incidents), there was adequate time to exit on a retest bounce to the highs (a 50%+ retracement) within an average of 4.5 weeks
  • During the last 2 run ups to new all time highs (2000 and 2007), there were 6 significant swing highs (false tops) before the "THE Top" was established
  • For both the 2000 and 2007 tops, once the pivot swing low that preceded the high was broken, it potentially indicated "THE Top"
  • The 2000 pivot swing low was broken after about 8 months, and 7 months after "THE Top"
  • The 2007 pivot swing low was broken after about 5 months, and 3 months after "THE Top"

Long term investor:
Over the very long term perspective (i.e. years/decades) which is the timeframe for the long term investor, the stock market has an overall bias to go higher. 

So unless you have a highly accurate method of picking tops, just wait for some confirmation that the trend has changed before exiting.  Otherwise, you're likely to get many false signals until you get it right.

Something as simple as waiting for the pivot swing low that preceded the high to be broken (blue lines on the monthly chart), in conjunction with other signals seems to makes the most sense.  You get several months to make your decision.

So yes, don't need to rush to the exits.  Based on a longer term horizon based on monthly charts using the break of the pivot swing low criteria described above, the topping process lasts 3 to 7 months based on 2 incidents, over the past 25 years This is loosely identified as "Topping Formation" on the weekly charts.

Longer term trader:
If you're looking for a trade lasting up to a few weeks and don't really care about picking "THE Top", then every potential top had a bounce that exceeded 50%. 

That could be a good area to potentially exit long positions or even go short, with a reentry or max stop on short above the "Potential Top."  But all the losses from getting stopped out could likely negate the profits you gain from eventually catching "THE Top."

You can also keep an eye on the monthly/weekly charts to see whether a potential top is lining up so that it can give some bias to the daily chart timeframe.

In the case of the shorter term timeframe, the topping process, where a bounce up retests the 50+% mark to the highs on a weekly chart, lasts on average almost 4 weeks.

Day trader/Swing trader:
Don't even bother reading this, except for entertainment and cocktail party purposes.  (And yes, I essentially fit into this category).

Monday, May 6, 2013

2 Years of Trading - Lessons Learned (Part 3 of 3) - The Mental Game

This is a continuation of the prior posts in this series: 


Once you're fortunate to find a style that works for you, it's all mental
Perhaps it's human nature to want to deviate from something you know works.  Let's say you have a trading system that's right 95% of the time and generates 5:1 reward/risk.  You've found the holy grail! 

Doesn't matter, our mind plays tricks on us.  It's easy to think we can do even better and get 100% accurate and/or generate a 10:1 reward/risk.  Or maybe the holy grail is a counter trend system but you like going with the trend and catching the big moves, so it doesn't quite fit your personality.  You tweak the system to the point where it's no longer the system that originally had an edge.

When we deviate from our system just that one time, the next rule break becomes just a little easier to do, and so on...  Your mental discipline starts to crack.  And if you don't watch out, it eventually snowballs into something very ugly. Yes, this has happened to me many times.

Even if you know you have a system that works and fits your personality, staying disciplined to consistently execute your trades, through the good times and bad, requires considerable psychological efforts.  This is especially true when you're not at your mental best due to lack of sleep, personal issues, illness, etc.  Awareness of the state of your mind and being able to act appropriately, is key criteria for success.

So once you've achieved a certain level of trading ability, managing your trading psychology becomes one of the biggest factors to successful trading. A great instructor of the mental aspects of trading is FuturesTrader71 (FT71) who is a part of Stage 5 Trading.  His webinar #3, available via a donation to charity, is something I consider a trading classic.  Recommended to all types of traders who have a solid understanding of trading fundamentals and want to get to the next level.

There are also a lot of great books about trading psychology available written by Brett Steenbarger, Mark Douglas, Ari Kiev, Ruth Barrons Roosevelt, Denise Shull, Steve Ward, to name a few.  But look in any other performance based field, such as golf, baseball, or even archery which I wrote about last year, and there are some real gems.

I have found the mental challenge of trading similar to dieting or exercise.  Once you find a type of diet or exercise program that works for you, it's a matter of "simply" sticking with the program, with slight tweaks along the way, day after day, week after week, and so on.  Much easier said than done!  I've accepted the fact that I will need to constantly work on my mental game in order help ensure my long term success.

"Successful" behavior in the corporate world, could lead to failure in trading
Those who cross over from the professional fields or corporate environments seem to have extra challenges with retail trading.  Those who have been successful in their respected fields are used to getting their ways by managing others to help accomplish your goals, always taking the initiative and action to make things happen, and knowing how to successfully politic (BS) and influence the origination.  When things go wrong, their ability to act and quickly do "something" gives the perception and aura of confidence and competency.

But utilize those behaviors within certain aspects of trading and it's good recipe for failure.  The market is always in charge, it's the ultimate boss, and it's never wrong.  You can't tell it what to do, you can only react and be submissive to it (price).  The market doesn't care how confident you appear to be, it just doesn't care about you, period.

If you constantly take the initiative to be in a trade so that it appears you're doing something (looking like you're working hard) instead of being patient waiting for your setup, it could mean you're overtrading or rogue trading.  And if you're "wrong" and lose money on a trade, then trying to take immediate action to fix the situation (without a plan) most likely means you're revenge trading.  We've seen this many times by politicians and corporate types as a "knee jerk" reaction to an event.  But do this to the markets, and it will most certainly punish you, if not this time, then later.

I come "brainwashed" from years in the corporate world, so I can now clearly see how many aspects of good corporate behavior can be so counter-intuitive to good trading behavior.  So the longer you've been successful in the corporate world, the longer it may take for you to truly change your behavior when you begin trading.  However, constantly being aware of your behavior is one step that could help shorten the learning curve.

Finding true mental breaks is important
Like most who are passionate (addicted?) about the markets, I find it tough to switch gears and focus on non-trading activities.  Without checks and balances, I could probably spend 16+ hours day, just about 7 days a week studying the markets (again, addicted?).  But I'm finding that having the ability to take a true mental break has been critical to create balance and prevent burnout (and prove to myself, I can stop anytime, unlike an addict, ha!).

Most have an activity they do regularly that will switch the focus of the mind from trading to something else.  If you're a daytrader, some traders find it helpful to have a diversion to help deal with the boredom of trading, or as a way to cool off after a bad losing streak.  Even a swing trader needs to help balance their days in order to stay sharp and ready for a setup.  Unlike a daytrader, swing setups happen much less often, so missing one could impact your overall performance with greater impact.

So what is a true mental break?  Examples I've heard include: meditation, listening to music, playing a musical instrument, triathlons, mountain bike racing, yoga, reading (non-trading) books, learning new languages, writing a blog, cleaning the house, yard work, etc.  The important part is that your mind gets completely engaged in some other activity completely devoid of anything trading related. In my case, also having a couple young kids most certainly helps to creates a break, whether I like it or not.

I've personally found that group exercise classes can be very motivating.  When you're in a kickboxing class with a few 60-70 year old grandma types demonstrating clearly that you don't want to get into a fight with them, it's quite the motivation to keep up and not look like a wimpy girly-man.  Consequently, unless you maintain maximum focus and get totally absorbed in the class, you will likely embarrass yourself.  So not only is it a great mental break, it's also great for your health.

A hobby I've had is to roast my own coffee, primarily for espresso shots.  Ever since moving away from the SF Bay Area where there were many amazing artisanal coffee roasters and cafes, I got spoiled and couldn't find the same level of quality and freshness in my current neighborhood.  Yes, I became a coffee snob.

So I started to roast coffee on my own and quickly realized that what seems so simple, is full of never ending complexity and nuances.  But most importantly, working on this hobby requires absolute concentration and focus, which for me, results in a complete mental break from trading.  Plus, having a great shot of espresso to get the day started is a huge positive benefit.

In the end, it's important that I take these true mental breaks so that I can maintain some semblance of a balanced life.  When that happens, my trading becomes more centered, clearer, and generally improves.  This also spills over throughout all aspects of my life in a very positive way.

Plan your breaks from trading...and DO IT
As mentioned above, I've learned that taking a true mental break throughout the day is important.  I seem to do better when I go exercise mid-morning, shortly after the market opens.  Since I'm primarily swing trading, this is not an issue, since I basically adjust my orders/positions shortly after the open.  However, even for daytraders, I believe it's very helpful to take a significant break during the lunch hour.

And more often than not, it's those days I do NOT feel like taking a break (because I'm feeling emotions about something market related), are the days when I truly need to force myself to get away.  Otherwise, I've become aware that I become too fixated about something, and lose sight of the bigger picture.

On a longer timeframe, such as every 2-3 months (or whatever works best for you), taking a week completely  away from trading seems essential for good mental health.  Otherwise, you'll be subject to burn out since trading (especially daytrading) can be so intense.  I find it's very hard to get completely away, but remind myself, the market will always be there. 

Explore, learn, push your boundaries...but know when to stop trying so hard.
It's no secret how some of the best players in the NBA (or any other sports) such as Kobe Bryant and Lebron James, have incredible work ethics.  At their elite levels, there's not much of a difference in physical abilities, so a lot of of their edge comes from honing their mental game through rigorous hard work and focused practice.

Growing up, I used to think that once someone became a superstar, they are simply so good that they can just kick back and continue to perform at peak levels.  Well, how wrong I was.  Being a superstar requires tremendous passion and dedication to never stop learning and pushing your boundaries, since everyone else is doing the same.  You have to keep pushing hard simply to maintain and/or improve, but it's so easy to let it all go.

Trading is similar.  When you first start learning, you need to constantly explore and learn everything you can so that you can eventually figure out what works for you (your strengths) and what doesn't.  It's OK to make mistakes, but for the sake of progress, you have to continue to focus hard on areas for improvement based on discovering your strengths and weaknesses gained through painful experience. 

I've gotten to a point where there's a certain style, timeframe, and setups that seem to work best for me.  However, I'm still lured at times to "chase success", although thank goodness it's no where near what it used to be.  In the past when I read about a successful trader, I wanted to quickly put aside what I was doing, and learn how to trade just them.

But now that I'm finally figuring out what works for me after trying (and failing) so many different trading styles and methodologies, my focus has become more on maintaining the proper focus as well as refining a process so that I can replicate it every day.  Now when I read about a successful trader, I understand what type of trader they are, and accept the fact that I can/can't trade like them because I've already explored it in the past.

Now that I don't need to work as hard to figure out what works for me, I realize it's becoming more important to know when and what specific areas to back off from (or stop chasing).  Like stop trying so hard to be like or be influenced by someone else, or stop trying to force a trade in market conditions that isn't suited for my style, or stop trading simply out of boredom.  I consider this a sign that I need to continue to work hard on my mental discipline, and most likely, this work work will never end.

Golf is a good analogy.  Getting good at the fundamentals of golf takes years.  But after a while, you will realize what type of player you are, and whether you are the type that can drive the ball 300+ yards.  You may really want to be a long drive golfer, but may never get there -- it's just not your strength.  At some point, you will realize that to improve, you need to focus on different aspect of your game.  And along the way when you stop trying to swing so hard, you realize that the ball actually goes farther with greater consistency and accuracy!

In trading, I've learned that I need to always push hard in many areas, but then also realize that I need to back off in other areas.  Knowing which area to focus on and to back away from requires a lot of awareness. 

I'm still as passionate as ever about trading, but feeling more detached about every trade
Maybe it's the 1,000+ revenge and rogue trades I've taken over the past couple years that have finally gotten much of the overtrading out of my system.  After seeing time and time again how taking trades based on negative emotions results in a negative P&L, common sense might finally be making it through my thick skull. 

It's common to hear some say that you should not feel any emotions when you're trading.  I don't completely agree with that, since we're all different, and since we all react to situations in our own personal ways.  Have you ever watched how Paul Tudor Jones traded back in the '80s?   He's far from emotionless when he's trading, that's for certain!

Although I've always known, I have finally started to believe and accept that the outcome of each individual trade is essentially random.  We don't truly know how a particular trade will turn out, however, we have total control over whether we enter the trade, at what point the trade is wrong so that we exit with a loss, as well as where we exit if the trade is profitable.

Assuming we have a plan, there's simply not much else we can do after we're in a trade, other than to follow the trade plan.  When you first start trading, this is the most exciting part, being in the trade.  But these days, it's relatively boring, and that's good because being emotionally detached helps me to better ensure that I follow my plan.  And over time, it seems like I'm becoming both more detached as well as intuitive, which then helps me to follow my process and trade plan..

Here's another quirky way I've come to understand and accept this particular type of detachment.  After decades of making hundreds of boxes of mac & cheese in my life, I'm still as passionate as ever about it.  But unlike the first few exciting times I made it all by myself, carefully following the directions, I'm detached and unemotional when I'm preparing it now.  I don't even need to read the directions on the box anymore, the process is pretty much intuitive and on autopilot.  It just took a lot of time and experience to reach this stage.

Develop your sense of awareness, and more importantly, be able to act on it
Knowing when NOT to trade because you're not in the right frame of mind, AND most importantly, being able to take action to stop trading, is one of the most important risk management tools.  This was inspired by a video of Denise Shull, and I wrote a blog post about this last year. 

Recently, @thetradingwife said she passed up a good trade setup, simply because she felt emotions about that particular stock.  She recognized that due to a bad experience with the stock, she felt a level of emotion beyond her normal threshold, recognized it, and acted on it by making the decision not to take the trade.  It was simple and decisive.  For whatever reason, this was one of those defining moments that I'll always remember.

There have been so many times when I know I shouldn't trade, whether it's because I started the day with 2 losses in a row (a big daytrading revenge trigger for me), or because I'm sick, or my kids are causing trouble, or lack of sleep, or whatever.

Most of the time, I'm completely aware of my negative condition(s).  I tell myself exactly why I should not be trading.  However, in my mind, my mental chatter says, "I know I shouldn't take this trade, but screw it, I'm going to do it, I really don't care.  I'm going to make up my 3 previous losses with a huge winner.  So I'm going to do it.  [Click]"  That attitude is extremely toxic to trading.  Especially when your "screw it" attitude results in a winning trade, which further reinforces bad behavior.

Once those emotions are bubbling under the surface, that's a sign of danger to your P&L.  Having the awareness is one thing, but taking action so that you back off and actually stop trading is huge accomplishment.  To be able to stop trading means that means you have the ultimate risk management control over yourself.

Those with a I'M NOT A QUITTER attitude have an especially tough time, since taking this action of walking away feels like quitting.  I fall into that category and have had my fair share of P&L damaging revenge trades.  Roughly 25% of my 4,000+ trades in the past 2 years were revenge and/or rogue trades.  My statistics show that these were very poor trades.  Imagine if I had simply walked away from taking these trades. 

When under mental conditions of emotional distress where you've lost nearly all sense of self control (it's akin to driving drunk), backing away from trading is not quitting, it's protecting yourself (your capital) from harm's way. And protecting your capital is one of the most important goals of trading.

I have found that building awareness is key to gaining control of the mental game.  Awareness of: revenge triggers, strengths, trading style, best timeframe, any heightened emotions, when not to trade, and so on.  The ability to differentiate between impulse and revenge trades vs. intiutive trades is also a big milestone.  Initially, I thought there was a fine line between them.  In many ways, they are very similar, but factor in awareness, and there is a huge gap between them.

I've found that as I continue to become more aware of my own emotional triggers, and consequently more aware of the respective outcomes, a greater ability to take action based on my awareness is gained.  And because of that increased level of control over myself, I've become a lot more emotionally detached and accepting to many other aspects of trading.

The end result?  I've experienced improvement to my overall trading P&L and consistency.  But I still have a long journey ahead of me.  I'm looking forward the 3rd year. 

*  *  *  *  *

I'm looking forward to rereading these posts in 2 years and telling myself, "If I only knew back then what I know now."

Monday, April 29, 2013

2 Years of Trading - Lessons Learned (Part 2 of 3) - The Learning Process

[This is a continuation of the first blog post in the series:  LESSONS LEARNED (Part 1 of 3): TRADING FUNDAMENTALS]


I wish I had done a consistently better job at keeping a trading journal
Who knows where I'd be now if I had a journaling system such as Tradervue many years ago.  As I've written about many times before, Tradervue is a powerful online trade journal system that has made it a lot easier to journal and to analyze the statistics of my trading

Or what if years ago before the Internet, I consistently journaled in a simple paper notebook and more importantly, had the discipline to review and take corrective action on a regular basis?  Would I have been able identify my strengths and find my style more quickly?  Could I have discovered how to achieve mental control more effectively?

Keeping a journal is something most say you should do, but writing about and having to relive a really bad day can be difficult. In many ways, this blog has been somewhat of a trading journal at times, but it has been far from consistent.  A true journal is one of those tough nitty gritty tasks that most people don't take seriously, and so I keep in mind that most people are not consistently successful traders.

There are no right or wrong ways of keeping a journal, although there are some good guidelines and templates out there.  But in the end, you should be able to understand why you are not (or are) following your trading plan, focus on areas of improvement, understand what your strengths are, improve awareness to know when you should and should not trade, etc.

Especially during the early formative period when the learning curve is steep, I believe keeping a journal is not an option, it's a must do.  As time passes and experience is gained, the nature of the trading journal also begins to evolve.

Paper trading is good, but I believe betting very small is better
There is much debate on whether paper trading is useful or not.  Once again, everyone is different.  For me, I believe learning with real money, even if very it's a small risk, is better than paper trading via a SIM account.  There's nothing like having real money on the line.

There have been times when I absolutely got killed on a % of account basis trading the ES E-mini.  Due to the tick size and average movement (rotations) in the ES, it's easy to go on tilt and lose over $1k trading only one contract.  Yes, been there a few times.  On another note, I always wonder why I never went on tilt and made over $1k trading one contract.

Other "trade small" solutions is to trade the spot forex, where you can trade in a "micro" size where each pip = about $1.  With some of the volatility recently in certain forex pairs, such as EUR/JPY, the movements are equivalent to the E-mini ES daily range of 30 to 50 points or more! 

Since I try to think in % terms, I've had sleepless nights swing trading spot forex, where my absolute dollar risk was only $30, but it was considered a big % risk based on my trading plan.  Conversely, in my longer term accounts, I could be risking many dozens of times more $'s and not lose a wink of sleep since it was a small % of risk relative to portfolio size.  Having those sleepless nights was when I knew that even betting small was much more realistic than trading on SIM.

Another option is to trade the E-micro EUR/USD (M6E) futures that trade on the CME.  Each tick is only $1.25, but the prices track the same as the big contract (6E).  For charting, you can still use the big 6E where the data isn't spotty like the M6E.  But by trading the micro contract, you'll still be able to trade with a small account, not worry about pattern day trading (PDT) as with stocks, and still have the ability to scale out of your positions by trading multiple contracts.

I wish a brokerage like Stage 5 Trading existed when I first started trading
I believe one of the best opportunities now, especially if you trade futures, is to open your account and start trading at Stage 5 Trading.  The core team at Stage 5 was previously with Vankar Trading, but have now started their own brokerage firm.  Full disclosure -- I'm not currently daytrading nor am I trading futures at this time, but I feel very strongly about the people at Stage 5 based on my experience with them.  They have earned my loyalty for when I one day return back to futures.

At Stage 5, you get access to FuturesTrader71 who is a master ES E-mini trader and is also a tireless and passionate educator.  One of the primary reasons why he became a broker was so that he can work more closely with his students and to be able to monitor their actual trades.

I've always wondered why FT71 gave so much, with what doesn't seem like much in return.  Wondered when the bait and switch would finally happen where he would monetize his followers?  What's the catch?  But the more I listened to him, it finally started to make sense that he has some deeply set values and beliefs about helping others, locked in the core of his being.  I've found this type of dedication rare, especially within the trading industry.

And right now, you'll be able to watch him as he is re-learning how to trade the E-Micro EUR/USD (M6E) futures through his active chatroom as well as weekly webinars.  He's relearning the Euro after many years, so this is a great opportunity to watch and understand how a master trader approaches a new product to trade.

He realizes that for those just learning to trade, the M6E is a great step up from SIM trading.  This is primarily due to the small $ per tick size and margin requirements.  Although his trading method is primarily volume profile based, his education transcends the trading methodology used, and a great deal of his focus (and his strength) is on the psychological side of trading.

Except for you to open your account and trade through Stage 5, there are no addition costs for the chatroom and webinars.  This is probably one of the best educational deals out there to learn from a highly respected trader and educator, while also getting some of the best service in the futures brokerage industry lead by Anthony Giacomin.  It's a no brainer. 

If I had to start now, I would do my best to learn on a physical trading floor surrounded by successful traders
Who wouldn't want that kind of opportunity?  I know this is much easier said than done.  But I'm confident that learning how to trade surrounded by successful prop traders who are great and willing mentors would accelerate and increase the odds of longer term success.

I'm not familiar with anyone who has joined the SMB training program and whether it's good or not, but something similar to that would have been very interesting for me when I was first starting.  Even if it didn't end up being a good fit, understanding what a trading environment is like and seeing successful traders in action would have been a valuable experience.

Back in the days before I had a family, if I had spent those 6-18 hour work days being surrounded and learning from the best in the business, where would I be now?  I'll never know and it's not my nature to dwell much on the past.

But looking forward, we now live in a world with zillions of chat rooms, newsletters, advisory services, blogs, and Twitter where you can learn independently or with others in a virtual setting.  Although you may have to look and research hard, there are a few great traders who are also great teachers (as mentioned earlier about FuturesTrader71).

So participating in a chatroom or joining forces with other traders in the virtual world is the next best thing to being on a physical trading floor.

Trade and learn with others
Being an independent retail trader from home can be quite the lonely business.  Back during my early attempts to be a trader, telephone calls were the only way to communicate with other traders.  And this was back in the days when long distance calls were $0.20+/minute on a land line.  When I started getting rates of $0.10/minute, I thought that was a steal.  Oh how times have changed.

Compared to even 10 years ago, our options to work, learn, and trade with others is amazing.  Webinar and screen sharing services, chatrooms, Skype, instant messaging, etc.  We may be physically isolated, but we have never been more close to others in the virtual world.

Through this blog, Twitter, and the various services and chatrooms that I have participated in over the past couple years, I have been very fortunate to have met some amazing people from all over the world.  Many have become great friends that I communicate with on a regular basis, constantly learning and sharing ideas about the markets. 

For me, surrounded by like minded traders have made the good times even better and the bad times not quite as bad.  And as physically isolated as I may be, being a part of a community has never made me feel as if I were alone.  Trading is a tough endeavor, even tougher when going through the unavoidable slumps, so having that support network to trade, learn and just be there for others is vital for growth and survival.

Twitter is a "double edged sword"
As of this post, Twitter is "only" about 7 years old, but the impact it has had on trading and investing is enormous.  When I first learned about trading, I had to go to the library at the university to checkout books and read back issues of Commodities (now Futures) Magazine on microfiche.  I still recall the old books by Stanley Kroll wrote as some of my favorites.

Today, who needs the library (hurts me to say that) since the Internet has changed this all.  Recently, Twitter has become an amazing source of real time trading information that has truly changed the landscape of trading.  But a potential downside to Twitter is that it's like drinking from a fire hose.  It can become so overwhelming and conflicting that it becomes noise and impedes our ability to learn.

Here are some random tidbits I've learned through Twitter over the past couple years:
  1. Big # of followers ≠ a great follow.  Some of the best follows are up and coming with surprisingly few followers
  2. When someone usually active stops tweeting, they're likely losing
  3. Observed trend: Get a big Twitter following, start a subscription service, then cash in.  Get 100 (or more) subs at $100 (or more) a month and that's some decent money -- easier than trading!
  4. There are some that just can't use Twitter and trade effectively due to excessive noise 
  5. Twitter wars (arguments) prove that some of us never quite grow up.  
For those moving ahead with leveraging Twitter, if used methodically with the proper filters and context, it can be an incredible way to learn about trading.  Managing your following list often is essential to provide focus based on what you're trying to learn or monitor without going overboard.  And you should also monitor to what level of effort you are able to write tweets, without impacting your primary job as a trader.

Great talking head Great trader ≠ Great teacher

Staying along the topic of Twitter, someone who produces great tweets breaking down and analyzing the markets does not necessarily mean they are a great trader or a great teacher.  There are many who call the markets accurately, but when it comes to executing their plans, their trading leaves much to be desired. 

I have a strong suspicion that most of the elite traders don't tweet much, if at all.  And those on Twitter may not be very active or tweet only non-trading related topics, or simply don't want to be known.  Many might even be a someone who is a terrible teacher or poor communicator.  Even if you find a great trader who actively communicates and makes great returns a year, they might not even trade similar to your style.

And except for entertainment purposes (which Twitter is great for) I'm not quite sure how actionable following a great talking head (such as those that appear on CNBC regularly) are for a trader.  Many of those who sound great with an impressive pedigree and/or ivory tower vibes followed by 10's of thousands on Twitter don't ever seem to be wrong, just like economists!

Looking back on their calls, most don't seem to be that much more accurate beyond random chance.  But the bravado and confidence at which they make their predictions makes for good entertainment.  There's a lot of ego out there in Twitter-land.  So those who regularly admit to trades that ended up as losses are to be respected.

Therefore, I believe it's most important to try and find people that you can learn from -- on or off Twitter.  What matters is that they possess some knowledge that is valuable to you, and whether they are a good teacher by communicating in a way that resonates with you.

Learning is a process that should never stop
In order to remain successful, I believe it's important to establish some process that helps us to learn most effectively and then always strive to learn more.  If we ever reach the point where we truly believe we think know all we can about something (like trading), then that's when we have essentially quit -- the game is over and we will begin to fail.  By making the process of learning a regular and continuous part of our lives (not just trading), we will help put success on our side.

The next post in this series is:  LESSONS LEARNED (Part 3 of 3): THE MENTAL GAME

Friday, April 26, 2013

2 Years of Trading - Lessons Learned (Part 1 of 3)

It has been about 2 years and well over 4,000 trades since I started trading full time in Q2 2011.  Over the past 20+ years, I've been involved with the markets on and off in one way or another.  But when I decided to return full time, I tried my best to be as humble and open with myself to start with a blank slate, just like a rookie or a freshman. 

Even though I wanted to restart as if I didn't know anything, when I first started learning about trading long ago, I could have told you nearly each of the lessons learned in these posts very confidently. 

I was like a teenager who "knows it all" only to realize decades later that the older you get, you really didn't know.  Experience has a way of doing that.  It's one thing to know, but it's another thing to truly understand and believe the words.

You will find nothing groundbreaking here in these mostly well known trading aphorisms, just views from yet another developing trader who has come to the realization that there are no secrets to trading -- except for passion, desire, hard work, and some luck. 

For readability, this post has been broken into 3 parts.


The concept of trading is simple
Trading is simple, just like golf.  Hit the ball with a golf club into the hole with the least number of strokes.  Conceptually easy, but as we all know who have tried, there's a lot of complexity involved with the details and execution.

Trading is similar.  However, there are many people trying to sell you a system or algo or model or "holy grail" with many bells and whistles, full of "proprietary" indicators, based on impressive statistical and mathematical formulas that can only be interpreted by ivory tower PhD's. 

But to goal for trading is to simply this:  Buy low and sell high.  Sell high and buy low.  Easy!  Right?

The entry method for most retail traders is based on 1) choosing a timeframe, 2) go with trend or counter trend, and 3) enter on a breakout or on a pullback.  Once you're on board, your trading plan should give you an idea of where you decide to take profit, or when to get out when you're wrong according to your risk and trade management parameters. 

For the most part, all systems are essentially a variation of the criteria above.  Learning the basics of trading is relatively easy.  There is no "holy grail" trading system, although I'm confident through my own analysis that there are certain trading setups that have enough edge for retail traders to make a very good living.  And when finding setups with edge, the point K.I.S.S. (keep it simple stupid) is also applicable.  This K.I.S.S. point is also something that makes more and more sense as time goes on.

However, I've realized that once you do achieve a basic nuts and bolts level of trading, the deciding factor between success and failure shifts drastically to your biggest trading obstacle -- your mind.

There is no right or best way of trading
When you follow or read many of the "trading gurus", many express the notion that their way is the best and only way.  That is completely, unequivocally false.  There are trading strategies and timeframes that work best for you.  We're all different.  I believe Dr. Brett Steenbarger's books explained it best.

Whether you're a macro / Fibonacci / chartist / volume profile / Market profile / volatility breakout / Elliot wave / DeMark / trend follower / channel trader / scalper / swing trader / or whatever type of model / system / indicator / methodology you prefer, successful traders have a certain setup that resonates for them (i.e. aligns with their strengths).  

I've found that the successful traders tend to have a way to "tell a story" about the market based on the construct that works best for them.  And more importantly, they have the discipline to execute their methodology consistently over the long term.

Finding your "style" is key, it's only a matter of time and/or luck
As rare as it is, some are fortunate to meet and marry their high school sweetheart and live happily together for the rest of their lives.  Some will be unfortunate to never find their better half.  Many think they found their soulmate, only to eventually get divorced.  I found this analogy similar to trading success stories.  The Market Wizards book series gives great examples of how successful traders all took different paths and approaches to become successful traders.

There are a very lucky few who find a trading method that suits them from nearly the beginning of their careers, and end up as successful traders for the rest of their lives.  Most do not (or can not) continue to put in the enormous effort hitting brick wall after brick wall, trying to find that trading strategy which ultimately suits their personality.  They end up as part of the 90+%, quitting before they find what works for them, with enormous psychological and/or financial deficits.

I've been there, chasing success by looking for one trading method after another, seeking a shortcut to a hot streak of winning trades that will finally help me get out of the psychological and financial hole, to vindicate me as not just another loser, but that as a fleeting winner.  This gambling mentality is not the best approach to long term success. 

However, this experience of chasing methods has exposed me to many trading systems and methodologies.  And this has helped me to learn what works for me and what doesn't, as well as gaining more knowledge about trading.  On a good note, it has considerably reduced my "upgrade-itis" desires to look for that brand new and shiny trading system.  Every time I look into something "new", it's like I've been there, done that.  I've become somewhat jaded of systems, which is good.

I've always known that the "holy grail" system of trading doesn't exist.  But after overturning so many rocks, I finally believe that it doesn't exist in the form we all seek.  There's a big difference between knowing and believing.

So the ability to pace yourself, so that you don't lose all your money or your psychological capital before finding your style, is critical to success.  However, how quickly you find "your system" that fits "your style" and personality can involve some luck.

Managing and exiting a trade is arguably more important than entry setups
Most new (and experienced) traders find it much more exciting to hear about a great system / model / indicator / methodology / holy grail that gets you long at the lows and short at the highs.  So how exciting is it to learn about where to put your stop losses, or how to scale out?  When you're starting off, you don't really think of how much you can lose, only how much you can win.  And scaling out?  Doesn't that mean you don't make as much money when you are right? 

Well, FuturesTrader71 promotes a coin toss SIM exercise where you enter long or short trade based on a coin toss, and then manage your trade according to predefined stop loss and profit scale outs.  He makes the point that the focus on entry setups are overrated.

As you adjust the stop and profit targets over various iterations of your experiment, you will become enlightened to the powers of what trade management can do to your bottom line results vs. an all-in all-out type management, even if the entries are based on a random coin toss. 

If you're not yet a consistently profitable trader, don't be surprised if you find that the coin toss experiment generates better results vs. your current trading.  Sad but true (don't as me how I learned, haha). 

You'll also see that trade management of your stops and profit targets are just as important (or more so) vs. your entry signals.

Risk management is key
For the beginning trader, discussing risk management is a BUZZ KILL.  The last thing you want to do when you're starting to trade is to limit your risk, because that will get in the way your huge profits!  But as time goes on, we all learn that this is mindset is the wrong approach for long term success.

If you don't have an edge, like gambling at a casino, they the best strategy is to bet all you have for just one play.  Then quit, because the more you play, the odds will eventually work against you.

But if you have a trading strategy with an edge, risk smaller per trade so that you can stick around around for the long haul.  Because even high probability strategies can have several losses in a row.  Therefore, if your per trade risk as % of portfolio is too high, you could eventually suffer a business ending drawdown, even with a solid high accuracy trading system.

The next post in this series is:  LESSONS LEARNED (Part 2 of 3): THE LEARNING PROCESS