The Week That Was: UPDATE.

180 Trades, 12 weeks and a good dose of discipline later, my fear of this happening has yet to be realized!



Instead, I'm left wondering...




Guess I'll find out soon enough. In the meantime, here are the current headline stats...

E=0.1041
WR=0.3833
RR=1.8803

Art + Science= Genius.

There is a wealth of information hidden in this short snippet of an interview with the legendary, and highly intelligent, Bruce Lee.

The part which talks about systems and crystallization is, potentially, of particular use to a trader.

I've also noticed he has the three key attributes to success through management of self as taught in the book "EGOnomics" (see the education list on this blog).

Veracity- he mentions "honesty" several times in the interview.

Humility.

Curiosity.

The Week That Was.

I have been very quietly plugging away at my trading over the last couple of years. After taking an infinite number of notes on trading (even more on myself..), recording data from various approaches to trading the markets and keeping them in separate spreadsheets, one thing has become crystal clear...

....it isn't the method. It's me holding,umm, me back. I sorely underestimated the influence that mindset has on the outcome when using anything even remotely discretionary to navigate the markets. I am fixing that now.

I have three decent datasets whereby I did/tried to adhere to one way of doing things for a large number of trades. All three have very similar equity curves that ultimately finishes with losing in the "end" (we'd have to go to infinity to find the real end, but that's another post!). Adding more weight to the above assumption.

So here I am at dataset four. I got off to a stellar start and have got to the point where, historically,I usually stop working (because we KNOW that several differing systems producing the same results in any given trader's hands is almost certainly connected to the trader's behaviour and not the systems themselves).

I'm currently in what could be 1) a draw-down in a rising equity curve or 2) The beginning of the end!

But, in the past, I've often found myself literally discontinuing data-keeping after a period of bad trading as the extent of the losses made the idea of going on with the idea seem...well...pointless.

But herein lies the difference. I've just had a terrible week, nothing worked the way it was supposed to. The week was negative but the percentage of gains lost was tiny in relation to how bad the week felt. This type of week would have usually resulted in a new spreadsheet!

So I didn't need to make this week, along with it's trades, just disappear...it's just the week that was.

...Maybe this is what "1)" feels like...

The Flintstones

They were fortunate enough to have a car that was a) easily accessible for the whole family and b) able to run without an engine!(although they got really fit doing so!!)

...we have a three-door which just cost us a small fortune in repairs as, unlike the Flintstones' car, ours needs to have all the parts in full working order.

And so too does a trading strategy.

If we have numerous "nuts and bolts" to tighten (criteria of a trading strategy) we also have many potential points of weakness. Taking that idea one step further, the more parts in the car (strategies in the trading approach) the more things we have to learn to do effectively in order to harvest a profit.

It only takes a quarter-turn of each nut in the car to end up with a trading approach that's as uneffective as this....!

http://www.youtube.com/watch?v=LmeNy768qCo

So why not simplify, reduce- take away all those extra parts to the car - and just make sure the nuts and bolts are as tight as possible??

Cut & Paste.

"I skip trades. But, somehow, I skip more winners than losers".

A statement made regularly by struggling traders.

But how is that possible? If you were randomly skipping trades then you'd end up with the same Win Rate and, therefore, the same result over time right??

After reading a recent post by MBAGearhead, I started thinking about the effect that losing streaks can have on a traders psyche.

This "Streak Calculator" says that you'll almost certainly (99.2% probability) experience 4 losers in-a-row during your trading week if you take an average of 20 trades per day with a 45% WR. As the length of the streak increases, the chances of said streak happening goes down.

So what if you habitually skip trades after x losers in-a-row? Logic would suggest that the chance of you bumping into a winner increases drastically after a string of losers as the likelihood of said streak continuing decreases.

Maybe that's why otherwise uptrending equity curves end up looking like a cut 'n' paste job- all ranges and sell-offs with a few rallies left in for good measure...?

Pane In The Glass- Pace, Patience & Panic.

Was thinking about how important it is to acknowledge that s/r is flexible. It brought me back to this analogy that I referenced some time ago. There is no bigger pain in the ass than taking a trade in the right zone, but failing to account for the pace of price into said s/r zone...(that'd be the Bull/Bear running into the stuck-in-the-mud fence!)

The following quote written to myself in this post also came to mind:

" Plan to wait for the crazy activity that usually indicates the flush at the end of a trend move."

Having the patience to wait for the moment that feels most uncomfortable (the panic flush/stops...), then getting in anyway, is usually the best move.

"Space-Time"

This concept talks about the way time can be thought of as being a "fourth dimension"- time & space are distorted for an object, relative to an observer, as the speed of that object approaches the speed of light.

After thinking about that for a while, it occurred to me that a similar situation is often played out in trading, except that Space & Time are doing the distorting.

Distorting our emotions that is.

Time- If a losing trade occurred "a long time ago" (<- all relative!) then you're less likely to hesitate on that next trade than if it happened "recently". On the flip side, if you've made good gains "recently" you're more likely to "call it a (insert arbitrary time period)" than if it was "a long time ago"....

....AKA Recency Bias.

Space- If you have been stopped going long/short at a given price level/taken profits at said level, it's quite possible you'll modify your actions around that level as it has become an emotional place for you. You may treat it as s/r based on your experience(s) there when, in fact, it could mean nothing (unless it is a point of collective decision making, in which case it's actually s/r! Where we should be looking to trade...)

Even worse is when we have positive/negative experiences within the same place on the X as well as the Y axis.

It can be hard to accept the fact that equity increase/decrease is not correlated to Space OR Time. 6R can be made over a period of time and then lost in a fraction of that time, or vice versa. 20 pips of movement can make you money whilst an 100 pip trend can lose you money (especially if you're me!). It's all random.

Only the edge is constant.

"A Bird In The Hand Is ISN'T Worth Two In The Bush"

....that is, if you have a positive trading expectancy.

Way Of The Turtle is a MUST read for anyone who is struggling (who isn't?!) with the emotional/psychological aspects of trading.

Chapter 2, "Taming The Turtle Mind", has been useful to me...particularly this piece, found on page 16:-

"People who are affected by loss aversion have an absolute preference for avoiding losses rather than acquiring gains. For most people, losing $100 is not the same as not winning $100. However, from a rational point of view the two things are the same: They both represent a net negative change of $100. Research has suggested that losses can have as much as twice the psychological power of gains"

So THAT'S were mum got the title's saying from!

We are so tied up in avoiding losses from money we already have that we are prepared to lose (and it is losing!) money that we essentially do have in a future's present if we follow through with our edge-inclusive plan.

Feeling the losses twice as intensely as the gains (or future gains which have been "lost") creates a negative edge- you'll go out of your way twice as much to avoid losing what you've got and, in doing so, avoid future gains by the same factor.

I suppose the above could be viewed as a negative mental edge with a value of -2.

Which would obviously be detrimental for any positive trading edge.

The Power Of Recognizing Market States.

...this template attempts to capture my thoughts regarding the implications of the four market states on a micro and a macro timeframe.

Knowing which state you're trading in at any given time can help you to adjust your way of managing risk to better fit the present conditions and maximize your edge.

If I'm trading a nice "trending" and "quiet" market on the macro/anchor/larger timeframe, but the micro/trigger/smaller timeframe is "volatile" (but also "trending"...) I know I need to hold through some pullbacks in order to offset any losses. I know my wins need to be sufficiently larger than my losses as opportunity for entry will be limited compared to, say, a "stable" and "volatile" anchor chart. I know if I look to move my stop to break even too soon, I risk being left behind on an otherwise profitable idea.

During the aforementioned "stable" and "volatile" period, you'll find repeated opportunities for profit but less profit potential per trade as the market will be doubling back on itself a number of times during any give period- N goes up R:R goes down.

If the trigger chart is quiet, I can eliminate risk sooner (by moving stops to b/e)without adversely affecting results, If volatile, I can choose to accept a number of b/e trades to get to my goals or, hold through the pullbacks...accepting that some will be deep enough to take out stops.

And so the list goes on and on....the important thing for me is being able to identify the environment as quickly as possible so that I can formulate a sensible plan of attack!

News & Fractals.

For years I've heard various educators talking about "1-2-3" or "A-B-C" moves, especially around FOMC announcements. Now that I'm on my way to consistent results as a result of simplifying and relying on the law of big numbers, I've finally begun to be able to use this concept in my own trading.

It's usually the third wave out of news that brings home the bacon. That three-wave process then gets repeated on larger timeframes (shown in the charts). Assuming news brings volatility, which it almost always does (FOMC always does...)you can use this basic idea in conjunction with whatever you currently do to position yourself after the initial stops are taken out on either side of the potential trade.

Using strict risk management (ie simultaneous stop & order placement!)around these events can allow for a larger R:R ratio.

One Plus Two Equals....

Consistent use of this....




...with this...




....equals this!









Time to decide and follow through.

Banana Hunt!

My 12-year-old Niece introduced me to this game a little over a year ago...

"Drag the monkey to the location of the bananas and press 'Search'.

If you're in the right location you will find 10 bananas.

1 degree of error - 8 bananas
2 degrees of error - 6 bananas
3 degrees of error - 4 bananas
4 degrees of error - 2 bananas
5 degrees of error - 1 banana

How many bananas can you find in 10 searches?"

Seems easy enough. Random guessing won't do because, even if you're content to find just one banana, you only have a 3.06% (0.0305555) chance of doing so [(5+5+1)/360].

But we have tools that create an edge over random!

Avoiding the obvious protractor route, we have the knowledge that north=90, east=180, south=270 and west=360/0 (those numbers never appear...)we can use these landmarks to get us in the vicinity of the location we're looking for. While it's impossible to guarantee finding 10 bananas, or even ensuring that we find ANY bananas on any given search, we DO significantly increase our odds of leaving with some bananas in hand.

Settling on one method for finding the bananas will make it easier to have an idea as to the amount you may find in any 10-search-session. Maybe you prefer to visualize 45% as 1.5x 30% away from "west", instead of half way between "west" and "north". The important thing is to stick to your method through thick and thin.

Throw in a couple of targets that involve "winning" and "losing" (any arbitrary target that challenges you) and the game takes on a whole new meaning.

After a poor start to a search session, you may find yourself trying to improve/optimize your method for finding the bananas in the midst of the search. This always results in finding less bananas as you're not proficient in that approach. Conversely, you may take your foot off the accelerator when things are going well and quickly ruin any advantage you previously had. Sound familiar?? :)

I suppose we can draw many parallels between various games and trading. This one is personally helping me with the notion that we must act consistently in the face of uncertainty, remaining actively neutral from an emotional standpoint.

Borrowing & Lending VS Ownership.

Even ownership is just borrowing over a long enough timeframe, dependent on any given person's point of view. When we start thinking of things as "ours" rather than temporarily "in our possession" we inevitably behave differently.

Applied to my trading (and, I'm guessing, trading in general) this means that if I think of profits as "mine", I'm more likely to operate from an emotional standpoint, creating a glass ceiling of profit potential (ie whatever goes from being a cushion to make more, to "profits earned")

The humility to just do your best with whatever edge you think you have, because you can only be sure of an edge over a given period of time, accepting what comes your way, will probably increase the likelihood that the trend of borrowing more than you lend will continue...

....the only thing I'm interested in owning is the confidence to follow through.

A cryptic end to 4-months of blog silence, but needed to get that off my chest!

You Can Be The House IF....

....you can subscribe to one major assumption- That the market has identifiable traits, that it does something with consistency (even if only consistently probable) , therefore making it a constant.

The House Edge in a game of American Roulette is 5.26%- for every million that is invested in payouts to the lucky players, the Casino can expect to make back that million plus 52,000.

The odds are fixed, the process just has to be repeated (ie getting as many people as possible to play the game. This is the reason for the attractive lights in all Casino hotels, not to mention some spreadbetting platforms!)

Same thing with the frequently used coin-flip analogy. If offered $1.01 when you win, let's say when it lands on heads, and you lose $1.00 when it lands on tails, you have edge (E=0.01) as long as the laws of physics remain constant.

Unfortunately, as traders, we have to rely on testing over time as our "constant" which is why I say "major assumption".

After that, it's down to working the edge in a disciplined fashion....accepting the often haphazard journey to profits, taking those SIX losers in a row on the same day that you also took three in a row, stopped to the tick, missing targets by a tick etc. Using the 2:1 (or larger) Reward to Risk structure on every trade but still only making a fraction of your risk per trade on average, assuming E is less than 1 (If yours is higher, please let me know! we'll talk...lol)

Between the aforementioned assumption and the confidence and mental fortitude required to trade the edge with conviction I have only three words:

TRADING IS HARD!

Two Variables, One Constant & A Chart.

The title has nothing to do with the chart...it's just what I've been thinking when it comes to my view on what trading is about.

The aim is to:

1) watch the ever-changing market (variable 1) with some kind of understanding as to the behaviour of price- and, therefore, the behaviour of crowds- with some 'if-this-then-that' scenarios.

2) Couple this with you (variable 2). This variable is also ever-changing. But we can control this one if we choose to. Knowing enough about 1) allows us to use 2) to act consistently (not to be confused with identically...2) is always changing) in order to come up with...

3) An Edge- (constant)

The chart:

Original idea was short, which was exited for 0.64R into the close. After 17:15ET, I noticed an inverse Head & Shoulders, with the pace within the pattern supporting the likelihood of an upside move. Breaking out of 30min resistance. Entry xx445.5,

First target D-1's gap between the 17:00-17:15ET break, mid morning (ET) resistance and H&S target-xx462.5. Final target at xx487...a measured move.

I got out at xx459.5 and xx479 respectively. Both areas confirmed themselves as 'levels'.

Trying to build trust again. 3.4R.