"The moment, you own it, you better never let it go"

Look, if you had one shot, or one opportunity
To seize everything you ever wanted in one moment
Would you capture it or just let it slip?

"Lose Yourself" - Eminem

Hard to believe it has been nearly 10 years since "Lose Yourself" came out, but this song still has a way of firing up my soul.  I appreciate good music and lyrics from all genre, and I believe Eminem is a gifted genius who uses music as a way to help guide his tormented soul.

Along the same lines, I'm using this blog on trading as a way to help guide both my heart and mind via writing, as I make my way thorough these difficult times climbing up a learning curve I can't imagine any more steep than it already is.  But as difficult and frustrating as learning to trade can be, I love it, and don't consider it work at all.

I've been following the markets long enough to know that we're in some extraordinary times with regards to market conditions.  Bella wrote a post the other day titled "You need to make more right now", and that kept me awake and thinking last night.

The markets are pitching hanging curveballs all over the place -- and I should be hitting them out of the park.  It's like I'm getting dealt 2 aces with the dealer showing a 6 nearly one after another (and well aware there are many 10's still left in the deck).  And the best part of trading vs. blackjack is that I can make my bet AFTER I see the cards.  Then why am I continuing to play (trade) lousy hands (setups)?  It's sad when I know I have better discipline at the casino vs. the markets.  This will change.

Bella ends his post with:

A close friend who is twice as smart as me started in 02, a market a new trader could not succeed in, and now practices law again. Luck plays a part in whether you make it as a trader or not. Again congratulations to all the new and developing traders in the world. You caught the best break from the trading gods with this market. But you now have an obligation to maximize this chance. You need to make more right now.

This passage is what made me recall the song "Lose Yourself" -- a song about how you are given very few moments in life where you have an opportunity that can change everything.  So when that moment comes, you better take it and run.  I'm currently in a very fortunate and unique position in my life where I have time to give almost everything I can into becoming a successful trader, but this moment won't last forever.

So I'm not letting this opportunity slip, I chose to seize the moment.

The moment, you own it, you better never let it go  

You only get one shot, do not miss your chance to blow  

This opportunity comes once in a lifetime

Preliminary trading journal analysis

[Edit: 8/15/2011 - Greg from Tradervue.com has just added the feature to allow searches by multiple tags, so the "Reports filter one tag at a time" section is not longer accurate. Big kudos to Greg for being very receptive to his user community!]

[Edit: 8/17/2011 - Once again, Greg has made my "Grouping of Trades and Tags" section below obsolete.  Please see the comments section below or his blog post here!] 
------------------

I finally completed updating the tags of all my historical trades in the free online trading journal at Tradervue.com last week.  I went back over 4 months of trades since I started day trading the beginning of April 2011, and am now in the process of cleaning up the tags.  With nearly 700 journal entries accounting for over 1000 trades, I know there is likely some tedious cleanup work remaining.

However, there's a point of diminishing returns and based on my requirements, I don't intend to or need to have perfect data.  Just something good enough for relative comparisons and insights.  It's not like I'm using this data to file my taxes.  My primary job is a trader, not a statistician.

Some caveats on the data and results

• Data quality - garbage in/garbage out?  My data is not perfect as described above, but I believe it's more than good enough to provide useful and valuable information.  To any other trader, my database is likely of very limited value, since it's not a reflection of who they are and their actions.  But to me, this data is priceless, it is me.

• Selection bias in the data.  In other words, this database is a reflection of my real life ability to see and execute the setups, for better or for worse.  So the accuracy or average profit of a particular setup in my journal does not reflect the optimal outcome of that setup -- again, only my ability to see and execute it properly (which hasn't been consistently great).  In the future as I improve, the nature of this dynamic database will shift and grow with me.

• For example, there are instances where I took a setup that was grade "B" and would be considered profitable based on backtesting.  But in real life, I totally chased it, executed it poorly, and possibly lost money.  So that particular B grade trade will show up and be calculated on my reports as if it was a losing setup.  It's not the fault of the setup, I just botched it.  As my execution improves, this will become less of a factor.  
• Grouping of trades and tags. Tradervue currently groups trades together into a single record if they occur within a certain timeframe.  Therefore, if you're scalping (or in my case, overtrading) a stock, it's likely that you'll have multiple trade pairs in one journal record.  As a result, the tags in that one particular journal record might contain tags of multiple setups, grades, outcomes, etc. 
• This is not a problem if I'm just reading my journal entries, but when I query tags for certain statistics, I will not be getting the most accurate results.  A query for A grade trades might also include D grade trades, and the average P&L outcome of all the trades in the group will be included in both queries.  However, these calculations seem to wash out as the sample size grows.
• Reports filter one tag at a time.  The ability to query tags on Tradervue is currently setup to filter based on one tag at a time.  So there are some instances where I will bring the data into Excel or Access for more sophisticated queries.  In those instances, there may be some results I discuss that you may not be able to easily reproduce from Tradervue alone, at least at this time.  Let me know if you would like to know more details on how I do this and I can write a future post.
• Gross P&L only.  Although this might change in the future, the figures from Tradervue are currently gross profit/loss, and therefore exclude commissions.  For longer term traders with a minimal number of trades, this is not a big deal.  However, I have over 1000 trades over 4 months.  And I am essentially a scratch trader according to gross P&L (-2R), but include commissions and all I can say about my net P&L is...OUCH!
  

Based on R-Multiples

In order to keep everything on a relative basis, I have converted the figures into R-Multiples.  Trader Mike posted an article on R-Multiples back in 2006, and this concept works best for me as a day trader.  I'm currently risking a very conservative 25 to 40 basis points (.25% to .40%) of my portfolio per trade, since the current name of the game is to survival while I learn.  So I'll use a weighted average of 30 basis points in my calculations as my current R.  In other words:

R = .003 * my portfolio value

As I become more consistently profitable in the future, I will raise the R-Multiple and balance it with the level of draw down I will eventually be comfortable with.  And I will likely consider incorporating tiers, so that if my level of conviction is high for a particular trade (e.g. A+ setups), then I will establish the trade with something like a 2R risk.  

The shocking...but really, not so shocking results

Reminder, see caveats earlier regarding the data...think relative not absolute regarding these results.  Based on how I tagged my trades in Tradervue, here are the results to date:

   GRADE  # RECORDS  % PROFITABLE   TOTAL R   AVG R PER TRADE

     A        24          92%         +61R       +2.54R 

     B       182          63%        +167R        +.91R 

     C       206          33%         -32R        -.16R 

     D       483          16%        -141R        -.89R 

     F       171          25%         -70R       -1.42R

Note: As mentioned in the caveats, a trading record may contain more than one paired trade, and therefore more than one "grade." So the sum of all records, as well as the sum total R, will not square with my actual figures to date.

   TYPE     # RECORDS  % PROFITABLE   TOTAL R   AVG R PER TRADE

   Revenge      475         20%        -136R       -1.12R

   Rogue         87         22%         -68R        -.78R

   (non-strategy)

I could likely just stop here with my "no-duh" analysis to become a consistently profitable trader -- simply take only A and B setups.  Only taking those trades would have resulted in 206 trades (~12 trades/week) being 65% accurate with +228R gross profits over 4 months.  Very respectable.  With better trade selection and execution, I have no doubt taking only A and B setups in the future will result in 70+% accuracy with even greater average profits (and risk/reward) per trade.

Taking C, D and F setups combined resulted in -243R.  Now this part, I admit, I did find shocking.  Taking these setups actually lost more than setups A and B combined.  And if commissions were included, then the gap is even greater.  I have to remember that taking lower quality setups, even if I risk "only" 30 basis points, are toxic to my P&L.  Death by a million paper cuts.

Summary

• When reviewing my A & B trades, it's really quite a confidence booster.  There's no question I have the ability to find good setups and to execute properly....
  
• ....then why the heck am I taking all those C, and especially D and F trades?!?  I've got some serious work to do.  I'm upset by this, and I'm going to channel these emotions to further fuel positive change.
• Only taking A & B quality setups are truly good to your P&L's health
• Taking C, D and F setups produce losses greater than profits from A and B combined
• Revenge trades don't work.  Surprise...Not!  But I am surprised at the level of punishment these trades had on my P&L
• Rouge trades (trades that are not part of my defined strategy) don't work as an aggregate.  Surprise...Not!
• Everything seems to rank order well, so my initial grade assignments worked relatively well
• However, the ranking of C setups might need adjusting.  I was expecting about 40-50% accuracy and breakeven gross profits.  Therefore, perhaps some grade C trades should actually be rated D.
• I was disgusted with nearly all D and F trades, so I wasn't as careful grading between them.
• My risk management is solid.  I don't mess with my stops nor do I risk too much on any one trade.  But I do have a problem with stops being too close when I adjust them.

Next Steps

I really need to understand those setups that feel nearly effortless and produce great results, then really focus on them.  I also need to learn to avoid, or at least minimize, all the others.  In other words, really focus on my strengths, and let them completely overpower my weaknesses.

And perhaps I also need to better understand why I occasionally fall into the overtrading/rogue mode, learn to lookout for those triggers, then smash those patterns.  Or who knows, maybe I should embrace this by evaluating other trading strategies and methods that better fit with my natural tendencies and strengths? 

In the days and weeks ahead, while making sure I avoid the analysis paralysis trap, I'll continue to dig into the data for more advanced insights, and especially determine which setups have worked best for me.  My work has only just begun.

End of week review

A recap of week ending 8/12/2011.

• Very volatile week, but I was actually doing pretty well, that is, until today.
• Monday, Tuesday, and Wednesday were profitable days, with selective trades and good returns.  I was up about 19R post commissions (R=my average $ risked per trade), with about 65% accuracy.  
• My overall portfolio as of close on Wednesday was up nearly 4%, while risking less than 20 basis points (.2%) per trade.  My execution and stock selection wasn't necessarily great, either, so the figures could have been even better.  
• However, Thursday the cracks started to show and due to some overtrading, losses erased all of Wednesday's gains.
• Friday, the morning was a scratch, but the rest of the day turned into a chopfest in a choppy market.  A touch more than my entire profits made earlier in the week was gone.
• Ended up scratching/slightly down for the week

Should have known better...
What's most disappointing is not the actual loss for the week, which is really nothing considering how much worse it could have been during this unusual week.  But the fact that I should have known better, (especially after going through hundreds of my previous trades this past week) that trading in choppy markets can be a disaster for me.  I'm so disappointed and demoralized with myself, but I'm very lucky that I didn't end up with a significant loss!

Is overtrading bad?
I hear and use the term, "overtrading", quite often, usually in a negative context.  However, if your trading style is that of a scalper, profitably averaging hundreds of trades a day, is that a sign of overtrading?  One consideration is that maybe I need to learn how to scalp trade.  The techniques are quite different than the standard Trader-X methods, so perhaps this is a sign that I need to make the efforts to discover whether this is something that could be a strength. 

What changed starting Thursday?
Up through Wednesday, I was holding a profitable EURCHF forex swing trade position.  For some reason, it could be that knowing I had something profitable on the table took some of the anxiety away from having to "get in the market."  I would glance at the profit from the forex trade, and that helped me to stay out of anything less than a B rated setup.  I'll need to work on changing that mindset.

Positives?
I continue to do well controlling my actual $'s risk.  A stop might get adjusted a few cents, but never have I ignored a stop loss, or let a loss of trade get out of control.  This is a strength that I am certain I possess, and my performance has proved it.  Another positive is that for the first few days this week, I took some good setups, and managed many of the trades very well.  And finally, I have finally completed the updating of my trading journal on tradervue.com. 

Warning signs -- overconfidence?
After Wednesday's close, I was actually feel quite confident and excited about my potential for trading.  But maybe I let a little too much confidence make me sloppy.  So I'm going to take all of this in over the weekend, and prepare myself for new week with much better results!

Recap: NWSA

See this trade on my tradervue.com trading journal.

NWSA 5min
A nice beyond the opening range high setup -- buy above 14th setup bar. This particular variation of the setup [pb-btorh] hasn't worked as well in the recent past (sharp and shallow pullback to the opening range high), but it also had a unique pattern that I call the "3 bar reversal" [3br]. So I ranked it a B grade and took it.

CONCERNS:
One concern was the steep retracement of the 2nd swing that went below .618 level, although that was supported by the 5ema. Another concern was that the pullback just prior to the setup bar was shallow.

THE 3 BAR REVERSAL:
But the reason why this worked well is due to what I call a textbook "3 bar reversal." Trader-X had briefly mentioned liking to see failed bars similar to this in his archives.
a) 1st bar is a red shooting star/inverse hammer candle at swing high
b) Shorts enter below break the low of that 1st bar
c) 2nd bar is a green hammer, and makes the shorts nervous
d) 3rd bar breaks above the high of the 2nd bar. Shorts exit and longs enter

Note how the 3rd bar also ended up being a green hammer, confirming that this trade has a good probability of working.

EXIT:
Scaled out when it got nearly to the FE 1.168 level, as well as the last half when it broke beyond that level and came back. However, I left some money behind by not letting the trade run. It took nearly a couple hours of chop and consolidation to get to 16.50, so I'm not sure if it would have been worth the wait.

NOTES:
Trader-X took an earlier trade in NWS today and posted it on his website.

EURCHF - swing trade example

A big challenge for me while in a trade is knowing when to hold 'em, and when to fold 'em.  Sure, if you have your set targets and stops in place, it should be easy, right?  But how often have you tightened up your stop, just to lock in a little profit or reduce your risk exposure...only to have it hit your stop the penny, and then resume going back in the right direction?

Swing trading as an exercise to let go
So one of the "exercises" I'm working on is to learn how to let a trade ride, until it tells me to get out.  Let the trade shake, rattle, and roll all it wants, that is, until a key level breaks, a reversal pattern shows up, or it hits my stop and/or profit target.  For me, swing trading helps me to let go of the second by second "details" that's required in day trading.

Why forex?
Back in the early '90s, I spent a little time trading the Swiss Franc futures when they were quite active on the CME, so I have an affinity for the Franc.  I've barely kept an eye on the Forex charts on and off for a few years, but it's only recently that I've had the time to revisit the currencies.  But more importantly, by trading the forex, I'm separating those trades from my equity trades, so there's greater mental segregation.

Some general observations on forex vs. stocks

• In general, Fib levels and trend lines still work well (just the way they always have)
• The 15 min charts are a good compromise to filter out noise
• Some elements of the Trader-X methods work (Fibs & candlesticks), but I've had to make some adjustments
• Unlike stocks, there's one indicator I use which is the fast stochastics (8, 3, 3).
• You can trade very big size

The trade
The EURCHF came up on the daily charts as having broken some critical trendlines.  I was stopped out of a couple earlier trade earlier with small losses, but this one more than made up for it.  Here's what the daily charts looks like:

 Entered on 8/4/11 based on the following conditions:

• On daily chart, there was a breakdown below the lower trendline (see chart above)
• On 15 min chart, descending trendline acted as resistance, price failed at this level
• 5ema crossed below 100ma
• Stochastics hooked over
• Red candle formed
• Stop was above the high of the trigger bar

EURCHF - 15m - at time of entry on 8/4/2011

Exited on 8/11/11 based on the following conditions

• Prior day high was broken
• Descending trendline of highs over past 4 days was broken
• The .618 retracement of the last swing on 60 min chart was broken
• 5ema crossed over the 100ema on 15 min chart earlier in the day (potential trend reversal)
• Multiple high swing highs and lows were in place

EURCHF- 60 min 8/11/2011 partial day

EURCHF - 15 min 8/11/2011 partial day

What I could have done better

• When it hit near parity 1.00 (panic low) on 8/9, I should have considered scaling out partial
• My stop should have been closer to the point of breakout (I wanted to give it a lot of room, perhaps it was too much)
• Even better, my gut was telling me an hour before getting stopped out that a reversal is taking place, and that I should be long. But I didn't want to do a stop and reverse for the purposes of this exercise.

Summary
Each mini-contract required a little less than $300, and at the peak, I was up over $1300 per contract, and I eventually closed out a little less than half of that.  A reminder to me that there is HUGE leverage in forex, and you really need to focus on risk.

It's interesting to go through an exercise such as this, since it's different in many ways from the usual day trade, and obviously quite different when compared to long term investments.  I am at the stage of trying to experience various types of trading styles and conditions in order to grow as a trader, so from that perspective, mission accomplished.  I've also realized that if necessary, I can be disciplined to hold a position over various bumpy rides for a week. 

But from this exercise, I realize that there's still A LOT more I need to learn about myself before I can become a consistently profitable trader.