Must Reads For Trading

  • Enhancing Trader Performance(Steenbarger)
  • Fooled By Randomness(Taleb)
  • Market Wizards(Schwager)
  • New Market Wizards (Schwager)
  • Pit Bull(Schwartz)
  • Reminiscences of a Stock Operator (Livermore)
  • The Black Swan (Taleb)
  • Trade For A Living(Dr. Elder)
  • Trading In The Zone (Mark Douglas)
  • Trading Rules That Work (Jankovsky)
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August 31, 2008

Emotional Trading

Teach yourself to trade without emotions, rigid expectations, or the need to be 'right', and the key to consistent profits will fall into your lap.

Honestly, discussion and debate are wonderful aspects of the human condition, but most traders need to stop worrying so much about something that they cannot and will not ever be able to know in regards to positions they take being right or wrong. I know how that sounds.

Stuuuuuuupiiiiiiid, right? Wrong.

Nothing could be more beneficial to your trading than realizing this simple fact about the market. ANYTHING CAN HAPPEN AT ANY TIME. How does one define that statement? In terms of probability, is how.

Probability is roughly defined as: "The likelihood that a given event will/will not occur in regards to the number of times a given event takes place." Translated, probability is simply a reflection of how likely one outcome is than another, given the amount of times a situation is allowed to play out. For example, with a coin flip made 10 times, the resulting number of times the coin lands on heads/tales could be very different than if the coin flip was made 100 times. Probability has a random distribution over the short-term, however, when 'EDGE' (that one probability has a slightly higher likelihood of occurring than another) is applied to the equation of probability over the long-term, this distribution of probable outcomes begin to show a certain amount of consistency.

Think about a casino and the game of black jack. Does the casino micro-manage each game, biting their nails at the site of a player who goes on a winning steak? NO WAY! But why?

It is very simple, and if a trader can apply this same methodology and psychological framework to his/her own trading, success will most definitely be the reward over the long term. The reason the casino does not freak out over each 'tick', as many traders do (causing them to get emotional, get shaken out of a trade, or take unnecessary risks)
If you try to predict a coin flip, are you pissed off when you are wrong. NO. Why would you be? Its random, after all.
Wellllll. So is trading, but so many people believe the opposite and continually attempt to find information that supports their point on view. Why? Because your point of view is based in beliefs, which are based in your emotions, which are based in your expectations, which IF NOT met will cause you tremendous emotional pain. But back to the coin flip....
Why wouldn't you be just as pissed if you tried to predict the coin flip? Because your beliefs, emotions, and expectations are not attached to a point of view! And they are not attached because you were taught LONG ago that coin flips are random in occurrence.

If you can control your emotions and fully accept the idea that trading outcome has a random distribution between wins and losses in the short-term, but instead begins to show consistent results over the long-term when applying your edge and taking EVERY trade that is signaled by your edge, the success will far outweigh the failure.

August 29, 2008

Market Breathing

Well, it was just too much too fast. Right before Labor Day, this is a perfect day to unload positions. Everyone comes back fresh and rested next week to start the real trading season off once again.

I made one trade this AM, and I am now done. I have a few OTM puts on the NDX 100 contract, that I will now hedge for a move higher on this current retrace we are in. The calm before the storm, IMO.

Trade Log:

1a) Buy to open: 1 contract, PUT NASD 100 IND SEP 1825CBOE 09/20 @16.60
1b) Sell to close: 1 contract, PUT NASD 100 IND SEP 1825CBOE 09/20 @17.80

8/28 trade log

I made two trades today. I entered the first a bit early, which was a mistake based on letting emotion get the best of me. NOT ALLOWED. I made my second trade after clearing my internal energy and accepting the risk of being wrong, and nailed it. I took profits in stages, first 5 and then the second 5. Ended the day with a healthy profit.

1a ) Buy to open: 5 NDX SEP-08 1825 PUTS (NDYUG) @ $16.80
1b) Sell to close: 5 NDX SEP-08 1825 PUTS (NDYUG) @ $16.00

2a) Buy to open: 5 NDX SEP-08 1825 PUTS (NDYUG) @ $13.60
2b) Sell to close: 5 NDX SEP-08 1825 PUTS (NDYUG) @ $15.50

August 28, 2008

Supply and Demand, Index Options, and "Gut Feel"

Supply and demand are often overlooked in regards to the extremely simple and straight forward impression that they give a trader of what exactly is happening within a particular market, during a particular time frame. Monthly, weekly, daily, hourly, minute, tick, it does not matter. Supply and demand operate as a input that constantly acts upon prices, volume, and momentum. A great deal more can be said about supply and demand, especially in regards to the specific influential effect that each has on the other, on markets, on prices, on theories, on actions, and most importantly on trading psychology.

The reason I bring this up today is that when it comes to my own personal trading psychology, being able to recognize days that the market is clearly offering me, my edge, and my strategy opportunities with acceptable risk/reward is of the utmost importance to not only keeping my money in my account, but hopefully adding to it. Days and in particular weeks like the one we are having right now, speak loudly in regards to the effects of supply and demand on a market place. I did not make one trade today, and there was a very good, yet simple reason. There were no setups. If there are no setups that fit my style, then no trading is necessary. I tend to observe market behavior on days like this instead of trading simply because they do not fit my strategy, but it became increasingly clear that what was taking place today, and in my opinion has been taking place over the span of this week is a classic case of no supply in tandem with very basic demand. What does this create? Well, in this case you get a market that seemingly 'floats higher' all day for no real reason, not to mention how much easier to accomplish this is when volume is light as well. People are paying up or paying down, hitting the bid, taking the offer, whatever side they want to be on. This scenario can be reversed as well with lots of supply and no demand where the market just floats lower, or a 'no bid' scenario. The keys are impulsion, volume, and in effect momentum. Right now it is difficult to make a real call on what is going on, because obviously the only people that do are liars, but what you can do is look at elements of the market such as supply and demand to help you find the right side of the trade to be on.

When trading options as I do, especially on the indices, you will find many times that small moves in one direction greatly effect prices, while similar or even greater moves in the opposite direction have little to no effect whatsoever. This is a function of several dynamic effects. The first is that in every trade there is ALWAYS a side with edge/bias in its favor and there is ALWAYS a side with edge/bias out of favor. Simply put, one side is making money while the other side is losing it. Obvious enough. But why? Well, again we come to the effects of supply and demand, which illustrate groups of traders believing something should go higher and another group of traders believing something should go lower. If something is in great demand, most likely if not always, there will be a lack of supply that makes the 'market value' of that 'something' appreciate. The inverse is true as well on the downside, where it is supply that is great and demand that is weak. Index options move with the market in regards to their appreciation/depreciation, but there are a great many mathematical influences as well which I really want to stay away from for the sake of this discussion. Generally, these influences involve the effects of gama, delta, vega, etc. When I am trading, I can often 'feel' for lack of a better word the premium bias as these strikes trade so that it becomes ever-so-obvious that my reasons for taking the trade are validated, or rather invalidated in the case that the premiums respond to market movement in ways that do not seem equal and opposite to what takes place in the premium of the opposite position, same strike. This could be a bit confusing, but it is rather straight forward and can be seen clearly after trading index options for a while. It is most obvious right as an overwhelming large group of market participants have gathered on one side of the trade or another. This tool of perception can be used as a function of the right side of your brain, the creative side, to give the trader that 'gut feeling' about whether a trade is working, will work, or should be exited immediately.

Happy Trading!

August 27, 2008

GSE hype, Treasury denials, August volume, and an interview with TraderInterviews.com

A quick note, anyone that wishes to hear my interview with traderinterviews.com can just click the title of this post, it will direct you automatically. Otherwise, click the link found in the text below.....

And so we march on......

Well, well, well, it was a day full of 'CNBS' hype, as usual, no surprise there. CNBS actually was so busy pumping the markets that they forgot to mention that the U.S Treasury categorically denied the GSE bailout rumor. They did end up featuring a Treasury official, who reiterated that no plan is in the works to 'bailout' or A.K.A stiff the tax payer for billions if not trillions of dollars so that high level officials and greedy Wall St. types can continue to live in the Dream Land known as the Financial Industry. HOT damn I love not being a bear or a bull, but instead an index inflectin scalper who trades the tape as it is, unadultered, pure inflection scalping. The beauty of this style traders is that you no longer need to 'care' what the market does, you only need to analize what side of the trade you need to be on. Alas, I digress to a bit more bitching... (you can find my daily trade log for today's session at the bottom of this post)

I really dislike market chit-chat, analyzing news stories, and anything like that which attempts to confuse my centered Trading Zen Zone. I swear, the LESS news I focus on, the less stories I try to understand, and the more I just focus on the volume, price, and emotional inflection points of the index options I trade, the better off everything ends up.

August 26, 2008

Index Indecision

I didnt make a single trade today, outside of picking up a few contracts on the close for tomorrow. The market was acting a bit indecisive, and appears ready to make a directional decision here in the next couple of days to a week. Since I trade the NDX 100 options for a living, I need excellent entries with limited risk and a clear "I'm wrong" point. Didn't find that at all today, and I missed a few early possible entries only to be glad that they were not taken since a lot of whipsaw action took place.

Not much doing today in regards to the overall market, but this is not surprise. Slow day, as expected all this week, with little in the way of 'big boy' volume since everyone is still out in the Hamptons or the Jersey Shore. Things should really drop off in regards to market action over the next couple of days, however, next week will bring a great deal of 'sizing the market up' type of action from the participants that have been on vacation all summer. Personally, I expect that being defensive and not committing a great deal of risk capital to any one thesis, position, or sector would be a great idea at this point. Since I always try to remain as flat as possible at the close of each trading day, I will continue on as always, but if something does happen to come along that points to a bit of momentum, whatever the direction, I will hop on with a tight stop. 1260 on the S&P 500 is still a major inflection point going forward, and it is hard to see any continued downside without an impulsive break of this level on volume. That said, a test of the July lows does seem increasingly likely. The beauty of my strategy is that I couldn't care less, just give me momentum setups at key support and resistance levels and I can eat.

Currently I have several 'lotto' position plays in the options market, but these are less stratgey based than they are purely taking advantage of Very, very, very cheap plays that give me insurance if and when the market decides to fall off a cliff to test the July lows. In total, these cost me less than $600, and in an ideal situation could produce upwards 10x return. QQQQ's 43 puts, and $NDX 1650 puts.

Unless something great comes along this week, which is not likey due to the historical lack of participation at this time of the year, I recommend keeping your powder dry on initiating new positions or trades until next week. However, as I always do myself, keeping risk capital exposure to only a day trading time frame when the market is lacking full-participation, can save a lot of time, energy, and stress. It's the last push of summer, enjoy it. The Big Boys are back in town next week, and with their return will comes big moves in the market.