Quotes and Thoughts - Inspired by Mark Minervini

With the limited time I've had this weekend due to non-trading obligations, I still found these great quotes by Mark Minervini, a trader who is featured in the Stock Market Wizards book.  As a developing trader, here are a few quotes that really stood out for me:

• From his blog:  "Remember, the top three priorities in trading: First, is preservation of capital. Next is consistency in executing your plan. When you have these two things mastered, you can then pursue the third, which is superior performance."
• From his tweet:  "To be a master trader you MUST face and realize your own destructive capacity... through this realization you attain longevity"

And here are my thoughts on these key points:

• Preservation of capital...or lack thereof
  
• I have been both unfortunate and fortunate regarding my ability to preserve capital
• Unfortunate - in that I am down over a quarter of my initial trading capital.  I've heard from some that this is a normal part of a developing trader and that it's to be expected.  But for me, this is not acceptable, and shows the lack of risk management discipline I've had in limiting my losses during the early stages of my learning curve.
• Fortunate - that the absolute dollar amount is not significant.  I started my account with an amount very well below my means, so this is not something that will impact my lifestyle.  And to think of it another way, a semester of college would have been much more expensive (and less learned)!
  
• My consistency of executing my plan...has been inconsistent
• Perhaps I have not yet settled on a trading style that works best for me. I'm still 5 months into my trading career, so I have not even been able to consistently execute a plan over the long term. 
  
• There are times when I wonder if I even have the discipline to follow a trading plan.
• However, I believe the first bullet point is generally correct.  Given a specific goal for a week, I have been able to successfully follow a trading plan.  And I know through review of my actual trades that I can see and take good quality trades...I just need to avoid taking the sub-par setups.  The true test is to be able to follow a plan consistently over the long term.
• I believe when my discovery process is over, I will eventually settle on a trading style and plan that works best for me.  At that stage, I will likely have that "been there and done that" frame of mind, so I will be less likely to consider other trading styles.
• Superior performance...will be achieved in time
• I am far from there, but I am getting closer.  My goal is by the time the Fall season is over, I will have settled on a trading style and plan that fits my personality, have demonstrated considerable discipline following that plan, and at a minimum, be a consistently breakeven trader.
• At that point, I will have the ability to start focusing on mastering my particular trading style to become a consistently profitable trader.
• Only then will I be able to get on the path of becoming an elite trader.
  
• Destructive capacity...where do I begin?
  
• All traders possess some sort of destructive capacity that you must find a way to keep under control. I have skeletons in my closet that like to come out all too often to spoil the profit party. So I've recently placed some highly secure locks and doors to the closet so they stay locked up.  We'll see how well they are contained.
  
• Through careful research of my prior trades, what has been destructive to my profits have been trading in choppy markets, revenge trading (especially after first couple trades are losses, or when my stop is too close and I'm stopped out by a tick), and rogue/non-plan/sub-par quality setups.  This usually leads to overtrading, which I define as taking more trades than what your trading plan defines.  Nothing new with regards to challenges other traders face.
• However, I believe the most potentially destructive capacity I have is right now is trading beyond my daily account loss limit.  There have been many instances when I have traded my way back to breakeven or profits (although there have been a few times when it has ended terribly).  This may have engrained a bad habit that may very well come back to haunt me.  I will monitor this situation very closely to determine if I need to make some further adjustments to my trading plan.

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Speaking of overtrading and going beyond my daily limit down, I was once again nearly limit down on my losses for the day on Friday, Sept 9th.  And once again, a key trigger was a loss from a decent quality setup.

But for whatever reason, I chose to make a foray back into TNA & TZA (the lure of fast profits?) and unlike the last time, I was able to scalp my way to a small net profit.  I didn't take 103 trades as the prior attempt, but took less than 40 (still a lot), so it wasn't efficient trading by any means -- my commissions ended up being nearly 20 times my profit.  Once again, TradeStation should be sending me some customer appreciation award.

And this time around, I was better prepared to deal with the cadence and rhythm of TNA & TZA, which at times seems akin to dealing with an angry swarm of bees.  There were times when I could "feel" when the price rotations were about to take place, and/or when prices were going to move in my favor (or not).  However, this style is trading is very mentally exhausting and it's something that I don't think I could do on a daily basis (although I won't say never, you just never know).

Chalk this up to another trading day where on the one hand, I was successful, but on the other hand, the day could be considered a dismal failure since I went on an unplanned tangent.  But in the end, the discovery process continues and I am a bit wiser, confident, and knowledgeable.

Ooops, I overtraded again

After doing so well being focused averaging a handful or less trades per day for the month of September, I got on the overtrading bandwagon again yesterday (Sept 7).  No, it wasn't like the day when I deliberately scalped TNA with 103 trades. 

But I know I lost some trading discipline yesterday and there were a few items that were particularly disconcerting:

• Since I over traded (at least according to my definition of it) that means that I didn't follow my plan.  Upon reflection, one factor that may have contributed yesterday was because I missed out on my pre-market preparation and visualization.  I need to make sure that my mind is properly focused prior to trading.
• In the big scheme of things, over trading is not bad if all I'm doing is taking "A" grade trades one after another.  But this was not the case.  Many trades I took were "D" grade that had small losses, and as you can see below, all those small losses add up quickly.
• Sept 7 trades by grade (gross figures):
  A & B grade:  +7.3R
  C grade:      +4.2R
  D grade:      -9.9R
• Once commissions were applied, my gross profits ended up being net negative.  Yes, more than all of my gross profits were eaten up by commissions.
• I ended up just below my limit down figure on my account (1% per day), but what is a big concern is that I let it get to be nearly 3% down before recovering nearly 2/3rds of my loss. Although my risk management plan for each individual trade is very solid, my account risk management plan was not followed.  This is a critical breach of my trading plan.

In a day not to be very proud of, there were a few positives:

• I was able to regain my focus after lunch, and was able to increase my accuracy and recover nearly 2/3rds of my losses.  This demonstrated my resilience and ability to fight my way back without being careless.  There were some cases when I could have exited my positions when my account was at break even, but I was trading for bigger moves according to my trading plan.
• There was a time when I would over trade and my gross loss would be very negative in addition to my net loss.  But now when I over trade, it seems as though I have a gross profit, but net loss is negative due to commissions.  At least it's trending in the right direction.

So what next from here?  I need to revisit my pre-market preparation and take an even closer look into my trading diary.  One of the worst ways for me to start the trading day is to take the first 2 trades as losses.  This usually evokes a "I'm not going to lose to you" attitude against the market, which then begets more rogue and revenge trading activities. 

It's time to take back control of my discipline.  I can already see in my mind that September will be one of my best months to date, and my primary focus for the rest of this month will be to take only excellent quality setups.  Easier said than done, but I'm up for the challenge.

Recap: $TRI - pb2rz and contra trade

One of my favorite trades is the contra trade, aka gap fade, reversal, etc.  I started to write a "recipe" on how to trade these setups, but I started to realize that I still need some more time for research.  However, there is one variation of the contra setup that seems to work well, which I call the [vlco].

VLCO (vwap line cross over) setup.  The high level definition of this contra setup is to wait until the 5ema crosses over the vwap line, wait 4 bars before entry, and start looking for a clean pullback or a consolidation break out.  You are looking to enter the trade in the opposite (contra) direction of the gap opening.  In essence, you will be very happy if the price fills the gap.  More details in the future.

Today in TRI, there was both a "Pullback to the Retracement Zone" [pb2rz] as well as a contra trade.  Here are the trades I took:

TRI - 5min chart, Fibs over opening 25 min range, vwap, 5ema

1. Sell below 9th bar - [pb2rz] setup, sold at 15th bar for scratch.
   I thought this setup would make a good run, but it didn't even make it to the lows of the day.
2. Buy above 21st green hammer - [vlco] setup, sold on 24th (11:25) bar.  Exited too early, jumped the gun when a solid red bar appeared on the 24th bar.  However, it didn't even break below the low of the prior bar, so this exit was premature.
3. Buy above 28th bar - the prior 27th bar was a green hammer, but I missed it.  So when the next bar was a doji and was still a narrow range bar, I entered on the break above the high.  At the time, the high of the day was several cents above $29, so I exited when prices approached that whole number.

TRI 5min 09-06-2011

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Although there were a couple or so trades I took today which I would now consider more of a C grade, I was generally satisfied with my execution today even though I only netted a few dollars in profits.  There were some issues with stock selection (e.g. I need to stay out of choppy stocks), but these are the types of days that I will need to work on finding a way to patiently grind it, or just sit it out. 

Ultimately, one of my trading goals is to be able to quickly identify the type of trading day early in the session, and then utilize the trading methods that best suit that particular market condition.  But first, I need to crawl before I run, so I will need to master a few setups first as I identified in my trading plan a couple weeks ago. 

I want to learn to identify and act instinctively on a few key setups so that I can literally trade them in my sleep.When a solid setup occurs, I don't ever want to be in a situation where I freeze and not take the trade.  Even if I'm down for the day near my daily account limit down, or perhaps there are some very unusual market activities taking place, if a good setup presents itself, I will quickly and swiftly execute the order.

EURCHF - unprecedented move!

As I woke up to see that the EURCHF pair was up over 900 pips, I thought it was a misprint.  Then I knew it must have been some big news related move -- which ended up being the case.  The Swiss National Bank (SNB) pegged the Swiss Franc to the Euro at 1.2000 - they didn't want their currency to become a safe haven and thus potentially harm their economy.

So until another Soros comes by and breaks the SNB...goodbye EURCHF as a great trading vehicle.

Unprecedented move

In a span of about 15 minutes, the pair moved nearly 1000 pips, overshooting the peg by almost 200 pips, before finally settling down around the peg level of 1.2000.  In short, it was literally an unprecedented move.  Back on October 24, 2008 during the financial crisis, there was a 450 pip move that took place over a period of a couple hours, but in comparison, today's move took place in only minutes and was well over twice as large.

Trade Summary

I was very comfortable with the entry I had as well as how this trade was progressing.  But in the end, I exited this trade with a net 30 pip loss. After being up nearly 800 pips, it really highlights the importance of 1) having stop loss in place for these unexpected events, and 2) especially having the stop loss at the proper level to lock in profits.

I let this one "breath" a little too much, unlike many of my equity day trades where I'm stopped out by 1 tick.  I had a dream last night that I should have lowered my stop just above the break of 2 key resistance areas, as shown in the chart below.  Perhaps I would have slept better if I had done that!

EURCHF - 60 min - 9/6/2011

What did I learn?

• Proper stop placement prior overnight is essential. These European currency pairs usually start moving during the 3:00 AM Eastern time hour since that's the start of business in Europe.  I got sloppy, and didn't bring down my stop last night.  This cost me at least 400-500 pips of profits, depending on slippage.  I didn't think this pair could move 500 pips overnight, but I was obviously wrong!
• Scaling out ended up helping more than expected.  Since I took profits on 1/2 of my position at 100 pips and brought down my stop loss to "lock in" about 25 pips of profits, even with the slippage I received on my remaining position, I still nearly broke even on this trade. When I was up 600 pips, I had a thought about how nice it would have been to not have scaled out, but that's no longer the case!
• Forex slippage can be huge.  My stop was placed at 1.1660 but my fill was 1.1810, a slippage of 150 pips.  Under ordinary conditions, the spread for this pair is about 5 pips, and slippage for adverse fills might be double or triple that. 

Moving on
On a more psychological note, when I saw that the EURCHF was up over 900 pips this morning after waking up, I didn't really feel very disappointed or shocked that I left a lot of money on the table.  I was more interested in what had happened and how I could have traded this better.  I knew my stop loss was in place (although not at the optimal place), and so I had some profits locked in (although in reality, the slippage ended up generating a small net loss).

At this time in my development as a trader, I am much more interested in going through as many adverse and unusual conditions as possible.  This way, I can experience how I handle the situation (i.e. how well I stick to my plan) and then most importantly, learn from the experience.  I want true battle situations -- let the markets try and knock me out.  Give me the battle scars, because this will only make me stronger and more resilient.  The next time this situation comes up, I will be prepared.

Now that I've written all I can about this trade, it's time to move on to the next opportunity.  Next!

A couple charts / still holding EURCHF

Although I didn't expect to, I did end up taking some trades today.  Perhaps the employment numbers shook up the markets a bit and woke them up.  I broke even today, although I should have had a relatively decent day.  Bottom line, my stops were too close on a few trades and I got chopped around.

Not much time for in depth writing tonight, but here are few trades with annotated charts:

PBR - Used the trendline to help time the 2nd trade (2nd red down arrow).  First trade was stopped out, it was not a good setup.  This stock also had a strange high volume move around 3:00 PM.

PBR 5min - 9/2/2011

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MTL - Used the trendline again to help time the trade, but was a much cleaner setup than PBR.
Also shared on Tradervue.com:  http://www.tradervue.com/shared/trades/25373

MTL 5min - 9/2/2011

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EURCHF - Still in the trade since 8/31, up nearly 500 pips, and holding on over the weekend.  This afternoon provided the first signs that the downtrend might be nearing the end.  However, we'll see how this pair opens up Sunday afternoon.  If it breaks and closes above the downtrend line over the past few days, then I will likely exit. 

EURCHF 15min 9/2/2011

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Have a great and safe weekend!