"The Rush Hour Dance" & Trade Frequency

Anybody who has lived/commuted in a major city will be familiar with this phenomenon..lol.

You're rushing to get the train, tube etc (or just rushing for the sake of it as people tend to do in these environments!) Someone is walking in the opposite direction you're going in and your paths meet. You choose a direction, to avoid a collision. They choose the same. You both freeze for an instant, wondering who is going to navigate around who. Somehow, you both decide to move at the same time and in the same direction. Once again, an awkward moment where you both end up almost bumping into each other (the very act you were trying to avoid...you can see where I'm going with this)

This little jig can be seen in every chaotic, rush hour environment. It can go on for several seconds until one of the two decides to take a stand, even at the temporary resistance of the other person

This story captures the essence of one of my difficulties in trading. Backing off because I've had a good run/ had several winners in a row/lost several trades in a row- whatever the reason, only to find that I've missed my winning opportunities. So, naturally, I come back with more conviction at the very moment when the strategy is destined for a losing period.

This, too, can go on for quite some time- Repeatedly pushing when you should be pulling and vice versa until you choose a direction (strategy) and stick to it- even through the temporary resistance of the other person (market-induced drawdown)

The other issue is the frequency with which I trade. I've convinced myself that taking a given number of trades (all with the same expectancy) in a short period of time is somehow more risky than distributing that said number over a longer period of time.

Flip a coin 10 times today or 10 times over a month...the chances of getting a given result do not change as the coin doesn't "know" how long you've waited to get/avoid a given result....

Will be looking to up the frequency this week.

What A Difference A Pip Makes.

During the last 5 weeks of trading, I've taken 96 trades and made 24R in pure market movement. I stress that last part because, after commissions, I'm left with just 12 of those Rs.

So, I asked myself the obvious question. Why not avoid the extra cost with a broker who claims to offer "tight" spreads with zero commissions?? The answer is, of course, transparency.

The screenshot I've included with this post shows my TWS platform. The quotes for GBP/USD from a popular Spread Betting platform. A quick look shows that you lose 3 pips on every roundtrip trade using this particular SB platform and under these market conditions (I don't think I've ever seen anything above a 2-pip spread on cable during the European and US sessions on IB's platform). This quickly adds up to far more commissions than I'm paying with IB...

12R in commissions over those 96 trades means an average of 0.125R of every trade has gone towards commissions...with my average stop being approximately 10 pips, that means 1.25 pips (on average...lol) per trade. So now I'm thinking: What if I could consistently add a pip to my initial targets? How many (if any) of the winners would have become losers due to that extra pip? Would those losses be offset by the new target?

Of course this is all theoretical and difficult to put into pratice if you enter/exit the market using zones rather than fixed prices...but food for thought nonetheless.

This idea reminds me of a brilliant quote from one of the greatest films of all time.



Pressure and Time indeed.

Chop & Not- A Different Take On Support/Resistance.

During my time spent studying Technical Analysis, I've been taught/learned about many forms of S/R- Pivot, Congestion, Whole number, Moving Average, Gaps (or windows in Candlestick jargon)....but there's one type that I haven't seen much of, if at all, in any of the learning material I've gone through.

It's what I've called "chop & not"- when price changes structure at a given point. It may be from trend to chop or vice versa.

I've just randomly picked out a chart that demonstrates this type of S/R. You can see how price went from longer bars with little overlap to the reverse. It also decreased drastically in pace- it took 9 bars to travel 78 pips compared to the 150 pips travelled by the previous 4 bars. You can see further confirmation of the pivot point by the activity in the third blue circle, which is seperated from another period of chop created by the three small waves of downside out of that high.

There are many ways in which this technique can be incorporated into a trading approach.

The other chart, shows how one of today's trades played out. You can see how my exit was the beginning of a trending market after the chop. Confirmation of the support I had used as a target.

Self-Talk And Edge.

Excerpt from "Trading For A Living" (Dr Alexander Elder):

"Dr. Shapiro describes a test that shows how people conduct business involving a chance. First, a group of people are given a choice: a 75 percent chance to win $1000 with a 25 percent chance of getting nothing-or a sure $700. Four out of five subjects take the second choice, even after it is explained to them that the first choice leads to a $750 gain over time", (!?!...lol), "The majority makes the emotional decision and settles for a smaller gain."

My knee-jerk reaction was to go with option 2...I made the same choice as the 80% majority! Of course, after I actually used my brain, it was obvious to me that option 1 would be most profitable over time (not made clear in the text, but I'm assuming that's what was meant).

So how do we avoid these edge-blunting, emotional decisions?? My answer is Positive Affirmations, specifically related to the ideas of edge, probabilities and trading in general.

Some of the leading questions I've been asking myself in the 2nd person (...all a bit weird!):

"Is the fear of allowing this profit to become a loss greater than the fear of skewing the risk to reward ratio by not staying in the trade until target?" (When considering emotion-based exits).

"Can you risk losing money when correct about the market direction if that puts the probabilities more firmly on your side over the long haul?" (When thinking it's safer to keep a wider stop, despite actually losing money by doing so)

"Do you have a statistically proven edge? If so, why would you get angry/upset about any influence luck has had on any series of trades??" (When getting stressed out over missed trades, being stopped to the tick etc)

One of my favourite general affirmations is:

"Fear of pulling the trigger is warranted when you don't have an edge...fear of NOT pulling the trigger is necessary when you have one"

These are examples of the crazy things I've been telling myself any time I consider deviating from the plan. They are tailor-made for my particular difficulties.

It's had an enormous affect on my results :D

Follow-Through.

Autumn (for everybody apart from UF, that's "Fall" *attempt at american accent* to you!) is here. With it comes the alleged volatility that makes successful traders more profitable and, I guess, the less successful even less so...

While going through my the past couple of weeks of data (not including this week), I'm noticing that my winners (always scaling out...all-in to begin with) are becoming smaller relative to the all-in, all-out distance that those winners run for. The average win divided by the average distance gives me 51%, meaning on a, say 6R market move I can expect to typically get 3R from it, using my method of scaling out at various s/r.

This week that's now become 39% (after 19 trades...same relative frequency of trades as prior weeks). I'm also seeing more small wins/losses with a Maximum Favourable Excursion,MAE's cousin, of 200%+...this tells me that the market, at least on the level I'm interacting with it, is choppy.

I'm struggling compared to last week but have made the necessary scaling out adjustments (taking off in thirds/more at the 1st target etc)to right the ship. Currently, I'm up for the week...

Most importantly, I am enjoying the opportunity to practice adapting myself and my strategy to the ever-changing ebbs and flows of the market.

"DayTrade"

8 days, 47 trades & +11.17R after my MAE- assisted light bulb moment, I thought I'd quickly share a few statistics and the possible implications these may have;

* 27 winners (35.91R), 20 losers (24.75R)
* The above means Avg winner= 1.33R, Avg loser= 1.2375R
* 57% (0.574468) win rate
* 0.2374466 expectancy.

First impressions are good. The only number that really matters to me is the expectancy...considering Roulette gives the house a 5.26% edge (0.0526 expectancy), I'll definitely settle for the above!

However, the other values can cause problems of adherence to/tolerance of the edge. One potential problem that was obvious to me was the effect of any decent drawdown. If the system is making a little more on it's winners than it's losing on the losers, then, (assuming a random distribution of wins and losses) would it be more likely to chop it's way up the Y axis, opening up the possibility for a pretty severe drawdown relative to the slow but consistent collection of R's??

As it goes, that question got answered on Tuesday 13th September :)- 6 wins, 10 losses (!), 6.23R down. 62.7% of the prior 5 trading days gain...(9.93R)

If that day's excluded, we have the following stats;

* 21 wins (29.92R), 10 losers (12.53R)
* Avg Win= 1.4248R, Avg loss= 1.253R
* 68% (0.6774193)win rate
* 0.5609936 Expectancy.

There's two main choices that I see: choose to ride out those ugly days or try to limit them. I've noticed that the other days huddle quite nicely around that 0.56R expectancy while that Tuesday is sitting all on it's own at the edge of the bell curve (-0.389R)

So I'm thinking, what if I apply the same concept of MAE to the WHOLE trading day, effectively treating it as a "trade"? Maybe below -XR my odds of making money are reduced enough to warrant cutting the "DayTrade" loose?

I'll continue to trade/collect data and see what picture it paints me...

MAE & Me- Using Data To Hone An Edge.

S0 after much struggle, it seems there could be light at the end of this particularly dark tunnel.

I've been trying to do something that I believe Know I can do. I just need to figure out the, umm, technicalities (ie how to do it...lol).

The chart shown demonstrates what I've always thought I could do but never had the conviction (or is that the data...?) to do. Even with a Sim account. This experiment came about by my study of the last 100 or so trades.

It quickly became obvious that my entries were so accurate, my Maximum Adverse Exposure, MAE, so small- 90+ % of winning trades never going into the red before showing a profit- that I had an untapped resource which could hone, if not stand alone as, my edge. What I was looking for was hidden in randomness- stops that were too wide to harness the strength I have at pin pointing short market sprints from fairly accurate entries...

Another obstacle is the tendency to watch dollar amounts rather than return on risk. If further along the trading path, you might watch return on risk but artificially cap it rather take profits at logical points. I suffered from this in particular and am still working on it. Eg I'd take half off at a predetermined R/dollar amount because I "couldn't risk giving back so much"- whatever that means!

The above problems of "giving room" with stops for such trades, watching where you are in a trade rather than where the market is in a move, result in no edge (gambling!). Fixing the risk will also leave less to chance (but will aggrevate any tendencies to watch dollar amount rather than the chart)

Crutches, Crotches And Common Sense.

Do all traders need another source of income? I've been asking myself this question recently due to the slightly disturbing fact that I've always made money consistently in the markets whenever I've had a "normal" job (IE one where it's impossible to work all day and lose money!)This security has allowed me to be more bold in seeing my ideas through to resolution. Perhaps it also helped me to stay objective too...

On the flip side, I've found it difficult to sustain the same momentum whenever I've abandoned my job after several months of success which I felt proved my ability to provide for myself through trading. Some might argue, "why don't you just continue to build a nice account whilst working?", but that was never my intention.

"He's able to perform the most complex tasks but sometimes struggles with the simpler tasks which he tends to overlook" was the gist of one school report. That sentiment has resurfaced from time-to-time throughout various endeavours in my life. I know that I'm pushing a door that needs to be pulled...or devising a complicated way to clutch a stone in the palm of my hand, face down, instead of simply letting it sit there, palm up! *wink@UF*

Einstein's definition of madness: "Doing the same thing over and over and expecting a different outcome" (don't quote me word for word on that...but the meaning is the same)

A few fragmented thoughts at 02:30am.

"Beginner's Luck" & Technical Analysis.

Personally, I think the term "Beginner's Luck" is inaccurate. It suggests that the positive results that some traders achieve as soon as they begin their trading journey is some how a fluke, that, by chance, the market has just happened to give them an easy time. After all, newer traders know alot less about technical anaylsis than the more experienced trader...how else can they achieve such success?

More appropriate terms for this common occurrence might be "Beginner's Belief", "Beginner's Spirit" or maybe "Beginner's Ignorance".

Fresh out of the seminar/course or any other serious introduction to trading, the eager student follows the rules and reaps the benefits of successful trading. This is, of course, assuming they have the discipline to learn and follow the rules they've been taught.(let's also assume the rules/methodology stack the odds in your favour) What they've been taught isn't magic...it's just a way to identify an edge and use it. The irony is, the edge usually isn't anything special...it seems so effective because the trader hasn't experienced anything to instill doubt or knock confidence...yet!

When they do eventually bump into that excruciating, but completely normal, losing streak, their future as a trader will be determined by how they deal with it. If a trader starts looking for ways to improve their understanding of TA to try to prevent further losing streaks (exactly what I did some 20 months ago) their in for a long, painful journey. If one can recognise that the application of the skill of TA in a consistent and objective manner, regardless of what's happened recently or what one feels is going to happen, is far more important than the potency of the edge, they just might make it...

Jules highlights the value of spirit in a recent post....I know from personal experience that a faulty trading mindset will trash the highest probability edges and quickly turn what would be a nice modest earner into a way to slowly drain money from your account. Spirit is our most valuable resource for sure....

My Most Painful Winning Trade.

We all know how easy it can be to experience the deer-in-the-headlight syndrome. You know the one... where you don't have a stop on the books (for any number of reasons) and price moves violently against you?? Our instincts tell us to freeze, much like the infamous deer or the little bug that plays dead when you move it around, only to get up and run when you've turned your back (lol...if anyone else has actually tried that!)

That built in mechanism for survival served/serves us well in many situations in life, but can be incredibly harmful to our accounts (both the financial AND the all-important confidence account) in trading.

But what happens when we experience the same reaction whilst a trade is moving aggressively in our favour??, This is what I had to deal with today. I wasn't prepared.

Usually, I'll watch the bid and ask for a sign of a slow down in the momentum (as I don't use tick charts) and exit that way. This has worked very well for me as I often find myself exiting very near the end of the move. Today, I haven't been trading with a relaxed state-of-mind and this cost me 60% of potential profits (I did open up a sell limit at .945- pretty much the high of the 08:00ET 1min candle- but failed to pull the trigger)

I left myself open to the very real possibility of breaking even on the trade as it dropped back to my entry before I eventually covered at .675.

As always, if I don't properly execute the first trade within a sequence of trades, I walk away as I know I won't objectively manage the subsequent trades.

Two consecutive mistakes tells me to call it a week.

(Note to self: Brush up on those trailing stop/limit orders! It'll help avoid situations like this.)

Only The Momo WHATEVER THE HELL WORKS!

Ok...lol... It was a romantic idea. Successfully trade the market with the one pattern. I know it can be done (cause I've done it consistently for the best part of 4 months), but that's not the point...

I mentioned several weeks ago that I was "throwing out the rule book", which I've well and truely done! All of my trades still stem from the same idea, however, some are more tenuously linked to the old pattern compared to others. It took me quite some effort to let go of what I had embraced for the best part of 15 months.

What did I discover? That, for me, it has almost nothing to do with my chosen method of analysis and EVERYTHING to do with management of myself which directly influences my management of a trade Case in point: I've been trading with no hard-and-fast rules and have managed to improve on the results I had been achieving in the months prior to the change.

Big thanks to UF from Longandwrong. Although uncomfortable at the time, our conversation that day got me thinking outside of my own set of beliefs and lead me to what is looking more like....well, I'm not gonna jinx myself!

All I'll say is, "Watch this space".

Cognitive Biases- It's all in your head!

The markets made up of many individuals, each with a tendency to fall into the trap of trading under the haze of these biases. They can appear one at a time or in a bunch, each working in sync with the others to make it even more difficult to see things objectively.

Some of my favourites are:

1) Sunk Cost Effect- Factoring in how much time, money etc you've committed to an idea when deciding whether to exit for a loss (or whether to hold on for larger gains) of course, effort isn't correlated with quality of an idea in the slightest.

2) Framing- Where the same thing is given different treatment dependent on how it's presented.

3) Anchoring- giving excessive weight to an irrelevant, but obvious, piece of information (Entries and Exits spring to mind)

There are many more, all very much linked to our perception of self (ego).

Those that are successful long term recognize these biases within themselves (something I'm very much able to do) AND are disciplined enough to work around them consistently (the part that I'm struggling with)

Back From Break.

A break was well overdue. My first self-imposed break from trading in close to 3 YEARS!. I've been on holiday a few times during that period but always had a peak at a chart here and there or was reading a book etc. This time I literally didn't open my platform for a week- no blogs, websites, e-mails or books. Nothing. If I went to a bank to change my dollars into euros, I'd have been as clueless as your average joe as to what the exchange rate was :) Strangely liberating....

Several things became apparent to me while away:

1) There's more to life than trading (even if I love doing it)
2) I trade because I choose to trade, not 'cause I have to- whenever I start feeling the latter, I need to take a break.
3) The only correct way to trade is the way that makes you money, and it has hardly anything to do with patterns, signals etc. No getting attached to one method!
4) There is a good chance that blogging, at least in detail, could be harmful to my trading.

That last one is important. I started blogging with the primary goal of tracking my progress (or lack thereof) by keeping an open diary- essentially talking to myself but with the real possibility of having others follow along too....keeping myself honest in the process.

But things may have changed. I find myself thinking about what others may think about what I'm doing/not doing instead of remaining true to the initial goal- record keeping. The record keeping in itself is questionable as it confines me within the bounds of my own thoughts and beliefs.

So I'm throwing out the rule book and keeping an open mind. The only rule I'm keeping is to have a plan....and TRADE IT!.

GBP USD- 12:01ET....Time To Think

What I'm doing isn't working for me anymore. A large part of that is emotional- how much is hard to tell as the system has a degree of discretion which can easily be affected by rampant emotions. Perhaps the market isn't favourable for this edge right now??

Whatever the mix, I need to have a think as to the next step as I'm not comfortable bleeding away anymore money. Managed to string together some 11 losses in a row, small size so the damage isn't bad but, all the same, serious food for thought.

One tiny consolation is many of the losses were stopped to the tick before reaching targets, others had the right idea but were just mis-timed....missed trades would have ended that losing streak too.

The difference between wild success and absolute failure is small....

AUD JPY- 9:04ET

EUR USD- 07:42ET

Playing off the same resistance shown in the larger timeframe of yesterday's last trade.

Not liking the way my orders are being filled at the moment! Slippage in a market that's turning your way is usually rare (at least with the futures market) not sure spot forex will be able to work long term with what I'm attempting to do.

EUR USD 14:25ET

CAD CHF- 10:26ET

GBP CHF- 06:29ET

Stubborn sums up this one...I was unwilling to re-position myself which cost me the full stop.

AUD USD- 16:08ET

USD CHF- 12:42ET

AUD USD- 05:45ET

EUR USD- 13:33ET & GBP AUD 13:39ET

NQ 10:37ET

Decent trade but kept the stop slightly too tight. 4 tick loss....

My priority right now is avoiding trigger lock so I can get used to seeing my equity moving, regardless of direction. Making money can come second until I'm completely free to follow through on trades.

AUD USD- 07:35ET

6 pip gain with a 10 pip stop. Multiple entries on this one too but I took just the one.

Need to set the stop where it belongs with the appropriate size or will eventually get myself into trouble.

EUR USD- 05:39ET-Bad Trade

4.7 pip gain on a 10 pip stop.

Missed the first entry in the sequence. That influenced my decisions in the second entry...good entry slightly too wide with the stop, taking the size of a 10 pip stop but immediately trailing it up to 8. The error came in trying to take gains according to ratios between 1) My entry and stop and 2) unrealized profits rather than my entry and suitable stop for the setup-which hit the target as it regularly does- vs unrealized profits.

So really should have been taking gains as the momentum slowed rather than waiting for the market to excuse my poor size management and give me more than my risk.

One positive is that I didn't wait in the hope that it'd continue (which it did, but the outcome is irrelevant..)

AUD JPY- 12:13ET. Objectives.

8.5 pip gain with a 15 pip stop.

Still not quite maximizing my potential for nailing those entries compared to my usual margin of error. I know when this happens I need to take profits as if I had entered at highs/lows, which I did on this trade.

One thing which I've noticed myself doing is position sizing according to a certain stop and then using a tighter stop- not a bad thing if the reason is genuinely based on the chart. In this particular trade, I'm not sure that was the case...it could just be my subconscious telling me that I'm trading with too much risk.

May need to drop back to last week's level of risk for next week's trading.

GBP AUD-06:28ET.

Not a bad trade. One area for improvement is agility- being able to scratch/take less than the target with a view to getting back in for the "real" move. This needs absolute objectivity...the two polar forces of fear and greed need to be kept in check.

I've learnt that a good trade (for me) is never succumbing to feelings of hope, regret or the aforementioned emotions. I call that being at the mercy of the market which is basically being at the mercy of yourself. I allowed this during part of the trade where the market made it's first attempt at the stronger move that was likely to follow. It ran out of momentum and I refused to exit and reposition myself at my original entry knowing full well that it could take out my stop and had to hope for those few seconds. After that, I took control of the situation again and exited at my target zone.

A combination of spread and less than optimal entry meant I gained less than I should have on this move.

21 pips gain with a 20 pip stop

GBP CAD- 11:04ET

Either I'm not working (probable) or the edge isn't working (possible) either way, have to reduce the damage and call it a day...

Slippage is a concern too. 3.4 pips on this one for a 23.4 pip loss

GBP USD- 08:33ET & AUD CHF- 09:26ET

1 1/2 pips of slippage on the first one for an 11 pip loss....AUD CHF had a 9.2 pip gain with a 15.8 pip max stop.

Feel an element of discipline returning once again. Pleased with the way I followed the chart not my P n L.

We'll see.

GBP AUD- 03:41ET Emotional Trading Once Again

You can be so right yet painfully wrong. Stopped to the tick again! Target was then hit with the solid move up that I was looking for. Had my opportunity to exit with a smaller loss/scratch but didn't take it.

When completely objective, I'd have opted to cut my loss shorter than my maximum stop (as I've done at least once last week). When there's emotions clouding my judgement, I let the stop protect me. However, lately, my stops have been taken out literally at highs/lows before price often shoots off in my direction. I can almost feel that I'm one of the stuck shorts/longs and it's clear my position is being covered at the extreme of panic/fear.

Extremely frustrated. I've become part of the crowd!

The reason is clear too- the increase in risk. Still going to finish the week at this level though.