Monday, May 25, 2009

Trading Video

Thoughts on Trying Hard

I found this excerpt in Mark Douglas' book: Trading in the Zone. I believe these few lines point out something very essential in trading. In life, if you you don't succeed you don`t give up. You do it again and try harder the next time.

When it comes to trades, letting winners run, trying to force winners, it usually doesn`t work. Since a market is a mix of all the unknow participants` opinion of a price at every moment, it`s price action can not be perfectly calculated.

Many times, I did not agree with the price action, I felt impatient etc. My perspective was wrong. And these few lines helped me understand why.

"Traders who are consistently successful are consistent as a natural expression of who they are. They don't have to try to be consistent; they are consistent. This may seem like an abstract distinction, but it is vitally important that you understand the difference. Being consistent is not something you can try to be, because the very act of trying will negate your intent by mentally taking you out of the opportunity flow, making it less likely that you will win and more likely you will lose.
Your very best trades were easy and effortless. You didn't have to try to make them easy; they were easy. There was no struggle. You saw exactly what you needed to see, and you acted on what you saw. You were in the moment, a part of the opportunity flow. When you're in the flow, you don't have to try, because everything you know about the market is available to you. Nothing is being blocked or hidden from your awareness, and your actions seem effortless because there's no struggle or resistance.

On the other hand, having to try indicates that there is some degree of resistance or struggle. Otherwise, you would just be doing it and not have to try to be doing it. It also indicates that you're trying to get what you want from the market. While it seems natural to think this way, it's a perspective fraught with difficulties. The best traders stay in the flow because they don't try to get anything from the market; they simply make themselves available so they can take advantage of whatever the market is offering at any given moment. There's a huge difference between the two perspectives."

My Steps in Learning - Don`t Fight the Market

I had the problem of fighting the market and I believe lots of others do too. I felt that my profitable days occured when I sat down to my desk with the mindset: "I don`t know what is going to happen".

I was like many who read the news, listen to analysts, commentators saying that a correction was overdue and that market can`t really go up further, or the market gapped down and that is bearish etc.
Many times I had a bearish view because of the overnight news or the opening hour looked bearish. I tried to find a good position to get in short and I had to take a sequence of small losses. If I had just accepted that the market was going up, and went with it, I could have saved a lot of frustration, time and money
When somebody asks you what you think about the stock markets, you do have opinions. However in trading it is better to reply: I don`t know, I am not trying to figure it out or understand it. If I see the move I will get in and make myself available. If it goes, it goes, if not than not.

My Steps in Learning - Letting My Winners Run

Now this is a difficult one. It is all about finding the right ratio: "How much am I willing to risk for how much?".

The market is finally going my way, I want to bank my profits. I want to give them a chance to go further, but I definitely want to take a profit on it. The price flow will naturally hit resistance points. It will either break through or not. Since, I am in the trade, I err on the side of caution, I cut my position and see the market taking off and never come back

It is impossible to give a proper answer to this dilemma, I just want to share a little story with you. At the end of one day I was up relatively nicely, but not if we consider my roundtrip commisions. When I asked my mentor he said I had way too many 1 tick winners and that I should really learn how to let my winners run. I asked him, how? So, he sat me down and put on a random trade. He put a stop 5 ticks away and 3 stops the other way for the purpose of taking partial profits. One at 10, one at 15 and one at 20 ticks away. I was told I wasn`t allowed to stand up or click the mouse. I had to watch it and wait until the market went either direction, and all of my lots were taken out. It didn`t happen quickly for sure, but the market hit my first target. After a while it hit the second one. Later it almost hit the last, but the market slowly turned. Then luckily my mentor came over to me and said we have to leave the office now and so we closed the remaining last lot at a minor profit.

As a result of this trade, my P/L that day has doubled. This trade earned me the same amount of profits, that I earned myself during the previous 9 hours, putting on loads of trades, trying hard, fighting hard and generating lots of commissions. Now I think that I could watch the market move feeling stressed, or stand up, get out, have a lunch and come back to see what the market did. The actual result is the same. it is only me and my perception of the market's movement that is different, stressful or hard.

To me it was eye opening. I realized that it is not the market, but me who is limiting my profits. The market gives those opportunities, it is me who doesn`t find them or once found, unable to take advantage of them.

My Steps in Learning - Overtrading

A roundtrip is a trade basically. If I put on 1 trade clipping a 1 lot, then I have just made 1 roundtrip. Every roundtrip generates a certain cost in commission. Very often, I overtrade and even though I end the day up in terms of my P/L, my profits don`t make up for my roundtrip costs.

It usually happens when I overtrade. I either wasn`t patient enough to let my winners run, or I was jumping on too many `opportunities`, that weren`t real and did not give me the chance to run them long.

How I am trying to tackle this issue is by being more selective. There are certain hours, patterns, events, that I know I am good at. I try not to become the smartest person and win all my trades, I just wait for some easy looking ones to come into my way.

My Steps in Learning - Limiting My Downside

Another key lesson in trading for me was to limit my losses. Under no circumstances I am allowed to blow my account. I was told something that I can probably never forget. It sounded very scary and I immiediatly had goosebumps after hearing it. "Do not blow up! If you blow up, game is over. Your day is over, your week is over, maybe your entire career is over."

And true, no trade is worth such risk. Losing is okay, but you always want to keep yourself alive. Survive and live to fight another day. I also set myself a daily limit. If I reach it, then I am out. It usually happens when I struggle a lot and can`t get anywhere.

But now, I dont really feel so bad about those days. The next day I come in and usually make back my losses easily. Just after I started trading, it made no sense stopping. Being on the simulator, I just wanted to learn and trade as much as I could.

My Steps in Learning - Averaging and Cutting Losses 2.

In the beginning, there were times when I was caught offside, I averaged, the market went against me more, I averaged and the market kept going against me more. By that time I had huge losses, I already overcommited myself and I could not do anything anymore. I was paralyzed. I knew I should not have averaged, I should have gotten out, but I couldn`t force myself to do it..

My answer to the adverse move was to add and I could keep doing it till I was maxed out. But the market still kept going the wrong direction, I ran out of my lots and had to make the opposite reaction.

I tried justifying my action and lack of action in myself. The market can not do this. It is not a genuine move, or it is way overextended by now, or okay I was wrong, but I can not panic out at the worst point, I should wait for a retracement and then I will get out.

This feeling and making this mistake is maybe the worst I ever experienced in trading, being overcommited, proven wrong and can not do anything except admitting a painful loss.

Now, if the market goes against my position a certain ticks, I cut it. I dont try to fight it, or worry about why it happened.

My Steps in Learning - Averaging and Cutting Losses 1.

Averaging is a technique when you double up on a losing position. It is probably the Number 1. Sin in trading. The problem with this is that it works.

If the market went against you 10 ticks, it will have to go back 10 for you to break even. If you averaged and added another one, now your average price is better and the market has to come back only half, only 5 ticks for you to break even. Mathematically you have just greatly increased your probabilities.

Averaging does work most of the time, but when it doesn`t, it can really lose you a lot of ticks.

People do it because they are too stubborn to admit that their trade did not work out, or they call it scaling in.

I used to do it too, but this was not fun and I had to learn to stop myself from doing it.

My Reading List


General;
Jim Cramer - Sane Investing in an Insane World

Trading:
Alexander Elder - Come into my trsding room
Alexander Elder - Trading for a Living


Psychology:
Mark Douglas - Trading in the Zone

The Bund, The Boble and The Schatz

The above 3 are all German treasuries. The first one has the maturity of 10 years, the Bobl has 5, and the shortest is the Schatz with 1 year.

These goverment bonds trade on the Eurex market, and they all have their own characteristics. They are each different in terms of liquidity, speed, volatility, but they all tend to move in correlation, one leading the other 2.

This is a video I recorded and you might be able to see the slight differences they have.

From right to left, they are the Schatz, the Boble, and the Bund. The last two are the DAX and the S&P 500, thqat serve as a reference.


Trader Lingo: Spoof

There are basically 2 types of orders on the ladder at any time. Genuine and non-genuine.


In case of the first one, the buyer or seller is willing to buy or sell the amount at his bid or offer.
In the second case, the trader is usually posting a much higher quantity than he is actually willing to buy or sell. This quantity is usually so high, that it stands out on the ladder.


There are all sorts of games and tricks traders play on the ladder. Sometimes they spoof to create a false impression in other traders mind as to what the supply and demand is around a certain price level.


They spoof to scare people away or sometimes they do the same for the opposite reason. They want to attract the market to their order. People are curious and they bid the price up, or offer it down to the spoof so that they can see and test whether this order is genuine or just spoof and  removed immediately.


There are lots of algoritms as well, that are programmed to spoof, but it is never to easy to figure out, who is doing it and with what intention.

Trader Lingo: Grind


The expression refers to the grind like movement of mills. This phenomenon is a chain reaction incited by people covering their positions. It can appear basically anytime, even when the market is quiet and this occurrence can not really be predicted.

Of course it is a problem only for those who got caught offside and are reluctant to cover their positions at market.


It usually happens like this:

The market starts going against the bulls or the bears, the trader wants to get out, but not at the "worst price", the market price, but one tick lower. Since the market moves with retracements most of the time, it is completely probable. This is why people are reluctant to hit market.

Say some longs get out and it drives the market 1 tick higher, the trader now has to hit 1 price higher to get out. Some other people cover, which drives the market 1 tick higher which forces some more people to get out, which drives the market again 1 tick higher. This is a chain reaction, the market is not fast, but the trader sees this move and he wants to get out. He clicks higher and higher, but the market still hasn`t given him a downtick. Unless this chain reaction is over or he accepts to hit market, he will have to stay in the grind and lose several ticks.


There have been extreme examples of grinds, when the algorithms started a chain reaction by covering their positions and the whole move stopped 150 ticks away.

Trader Lingo: Blip

A blip is a big sudden jump in price. It means that the price does not move in a nice continuous flow, with small pushes and retracements to another price level, but gets there immediately without touching or going through the prices in between.

Some markets that are liquid because of their volume usually don`t blip. The thinner markets like the Footsie blip more often.

Some traders deliberately create blips, by not buying or selling at the market or close to it, but several ticks away from it. They do it by mistake or because they can profit from it.

On possible trick to do this for example is when the market is making new highs or new lows. The highs and lows are usually strongly defended and the market has to apply a lot of pressure to these prices to break through. Sometimes the momentum is so strong, that there is not much resistance at the highs or lows, but that is usually not the case. The market has to demonstrate sufficient power to break through. So, what some traders do is when the market is siegeing these levels is they are willing to take an immediate loss, by buying several ticks above or below the old extremes.

One example is when the market is making new highs. Since it may cost more lots to drive the market up there and take out the sellers their offers, it could make sense for this trader to apply this technique and buy several ticks higher than he otherwise could. If he does it, the reaction is something like this:

The defending algorithms and human traders see that the market had a transaction several ticks above them and they panic. They don`t know what happened, who did it and how many lost went through, but they know they have to get out immediately. The algorithms are the first one. They know that their positions are offside, so they have to get out and buy in order to cover their shorts. Then humans make the same reaction. This will cause the sellers to become buyers and for a few seconds there are essentially no sellers anymore, everyone is a buyer. Now the entire market is up at the level, where the first trader created this blip or maybe even higher, depending on the momentum this small panic has caused. Our trader now can decide to take profits here or wait for the momentum to drive the market even higher.

My Ladder

The ladder is the single most important tool in my trading. If I did not know what market I was trading, did not have news sources or even a chart, I could still trade.

What I do every day is watch the price movement on the ladder. Where it moves, how much and how fast. Where the momentum speeds up, slows down, meets a resistance, bounces off, how the price reacts at certain levels.

This is a picture of my ladder and it shows several things. The prices are fixed in the middle, the bid side with blue and the offer with red are in constant motion all the time. I can also see my positions in the market and my orders queuing on the sides.

On the left side I can change my clip size, or put in stop market and stop limit orders.

This tool basically allows people to see how the fight for every tick happens and in more general how goods are priced in a free market system.

About my Tools

MD Trader from Trading Technologies
CQG and TT XStudy charting software
Reuters
R.A.N. Squawk
Capital Daily Newsletters, R.A.N. Squawk Calendar

As for news, I usually check the ft.com every morning and the Bloomberg website. They have a nice calendar, that I think is quite handy. It helps me get a good picture of what is expected in terms of economic figure announcements. It shows little graps for the trend in the figure and gives reliable figures for the expectations` range and median.

More from here: http://www.bloomberg.com/markets/ecalendar/index.html

About the Eurostoxx 50

The Eurostoxx 50 is a paneuropean stock market index. It is composed of 50 european blue chips of 12 Eurozone states. Total, Siemens, Allianz, Aegon, Nokia, AXA, Danone, Telecom Italia and so on.

The sectors with the heaviest weight in this index are financials, insurers, utilities and telecommunication.

The contracts are traded through the Eurex market.

Eurostoxx futures opens at 7.00 in the morning and closes at 21.00 in the evening.
Eurostoxx cash opens at 8.00 and closes at 16.30. I trade the futures.

The tick value is 10 euro on a one lot contract.

More information here:

http://www.stoxx.com/indices/download.html?symbol=SX5E