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.

Mind The Gap!

Yes...a visit to London is long overdue, hence the use of the above title and the nod to the "Tube" in the last post...

However, the gaps that I'm referring to have nothing to do with the sometimes huge gaps found between train and platform.

One is the gap between knowledge and acting on that "knowledge" (because what do we really "know" for sure?). This stretches much further than the realms of trading, so I'll leave it up to interested parties to google "Tony Robbins"! lol!

The other is the gap between Stop and Limit- a world of confusion and opportunity for edge-blunting/edge-hiding emotional reactions exists between those too places. It's quite ironic that the desire for freedom that brought most of us into this venture is the very thing that hinders many of us from ever attaining it, as we exit before our targets or stop ourselves out prematurely.

We're free to do anything but we must do something consistently in order to survive, let alone profit in any marketplace.

Better to just follow the advice and, "MIND THE GAP!"

"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.