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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October 12, 2008

Uncharted Waters

Hello Traders-

I hope everyone was able to relax, get refreshed, and do some homework on personal finances as they apply to our current world-wide financial system collapse...This puppy is just getting started, and I personally do not like the sound of that. Global bank nationalization, a return to currencies backed by gold, and the continual printing of money by the Federal Reserve/Central Bank systems have my antennas on alert. I am in no way a tin-foil monetary conspiracy-conspirator (many have come out of the wood work lately to take credit for their doom/gloom predictions), but I do take this situation with the utmost of seriousness. Therefore, even if things do somehow unravel less than expected, and the world finds a safe and feasible way to maneuver out of this situation, I still have planned access to 5 years worth of funds needed to live. Everything else is available for market trading and other expenses. No matter the end game, it is always safe to have a plan. The same goes for trading.

October 7, 2008

Are you a RISK taker? Discipline, Risk aversion, and 'The Black Swan' (Taleb)

Do you consider yourself a taker of great risks? Not physical risks that could harm the body and or mind, but financial risks that come with the occupation of trading. Interestingly, most traders do not see themselves as risk takers, risk averse, or operating in ways that expose their capital and financial well being to events or situations that could cause serious damage. I find this to be very intriguing, and can admit that for the longest time I never saw myself as a risk taker. I was a disciplined, mechanical, thoughtful, and overly cautious trader who never did things out of order and never was the person to succumb to his or her emotional impulses, so of course there was NO WAY that I could be leaving myself exposed to serious financial risks, right? WRONG....

Although the aforementioned qualities I found within my trading were then, and still are today very important factors when it comes to my ability to be profitable over the long run, what I misunderstood for so long (learned the hard way, will expand further) was that risk simply comes with the profession of trading. There is no way to avoid the act of taking risks while being a trader. It is as simple as that. People may tell you that a computer model or some automated trading system has been tested and retested to show that there are zero risks, but you need only to hear such a thing to immediately know how incredibly false such a claim is. How could trading involve no risk? Even those with the utmost in discipline, the best knowledge, most professional strategies, and entire teams of researchers and trading psychologists to help gain edge (a trader's probability breakdown) have had experiences in the market that blew them up or caused such intense emotional trauma that their trading was never the same again. Probability and chance can be blamed for this, and nothing else. As the author Nassim Taleb writes in "The Black Swan" and "Fooled By Randomness", chance is the only true constant in the markets. The fact that anything can and will happen at any moment in time, should make a trader sit up straight in their chair, but instead ideas such as this are many times brushed off as "too rare for consideration". How could one be so incredibly naive, especially when money is on the line, to assume that their impression of wordly financial markets is somehow a safer bet than the undeniable fact that anything can happen to anyone at anytime? I really am not qualified to answer this question, but after reading Nassim Taleb, I believe he is definitely a great place to start. His books have offended many a great Wall St hedge funders, money managers, and big-time executives because most of these people have derived a great deal of pride and ego from the belief that their superior intelligence is the root cause of their financial success. In certain ways this is true, and should never be underestimated, but in other ways this can be fatalistic in that one can set themselves up for inevitable failure at any moment that the world decides to produce a chance outcome/probability expression that was not accounted for. After all, how can one account for the unaccountable? Simply put, you cannot; but just as simply, you can ensure that your trading takes place from the mental perspective that 'anything can happen at anytime to anyone'. Inherently, in my experiences and in my opinion, one's trading will quite mysteriously improve from this point forward. Do you need to still do the work required from a common sense perspective? Of course. Mechanical strategy, discipline, and emotional/psychological recognition and control are paramount in the search for consistent results.

October 2, 2008

Day Trading Series 2 of 5: Time Frame Trader

Aloha Traders-

What a market...Never a boring day, never a boring trade. We just need to get past the media ridiculousness over the 'bailout'. It's actually looking more and more like we are in such urgent need of passing this bill because foreign governments that own large amounts of U.S. debt (China, Saudi Arabia to name a few) have more or less refused to lend to us until we buy back massive amounts of toxic paper...But I digress, that discussion could take hours. Suffice it to say that whether or not our financial system is what pushes us over the edge, or foreign debt holders do, THIS IS A HORRIBLE STATE OF AFFAIRS...

So back to the topic at hand, our series on Day Trading. This will be the 2nd of 5, and today's focus is time-frame. The first piece of this series focused on position management and more specifically how your position status on the open and on the close effect your ability to be a successful day-trader.

Understanding and properly implementing the use of time frames in your trading, although only one cog in the wheel of successful speculation, can in many ways have the greatest effect on risk/reward. In my opinion, time frames and your exposure to 'time decay' in option premiums are really two of the most important aspects to look at. In my particular situation, my actual time spent 'in ownership' of whatever vehicle I am trading at the time is so small (5 hours or less) that the decay of option time value may not necessarily be effected unless we are very close to OptionExpiration, but the actual physical time frame in which I am executing the trades is of the utmost importance. I cannot stress how important it is to be able to use time frames on all levels in order to properly evaluate trade signals, macro trends, micro trends, etc, that may effect the direction of your open position. Even though I exclusively enter and exit all of my option trades on a 5 minute real-time chart, I am constantly evaluating potential daily ranges, open interest, and major support/resistance inflection levels that will come into play on weekly charts, daily charts, and sometimes hourly or 30 minute charts. When support/resistance inflection is used as a trading signal , or even a component of any system that is producing trading signals, looking at how these inflection levels come into play from a longer term perspective can be just as, if not more important to how my particular strike (price point of the option) is effected even within a 5 minute time-frame. Fibonacci Retracements (mathematical price flow fractal calculations) can also be used in any time-frame to help the trader judge a bit more objectively where prices may stall, advance, reverse, break-out, or break-down. Although I do not trade using Fibonacci Retracements in regards to entry/exit, I do overlay them onto my daily charts so as to have a structured view of major price levels, and the likely (NOT guaranteed in any way) retracements/advances that could come as a result of any catalyst. There is always the added benefit of many other traders looking at the same information when it comes to Fibonacci data, so while nothing is ever promised, a great deal of the scenarios put forth within this structure end up being 'self-fulfilling', so to speak. Still, I would never condone anyone making trades simply based upon these type or calculations.

Choosing the 'right' Time-Frame for YOU

I am a professional day-trader, but this does not mean that I can make consistent profits trading any vehicle, in any time-frame, under any set of circumstances, while using any strategy. This is just not possible in my opinion. There are a great many people out there who claim that any and all successful professional traders could assimilate to using any strategy and still have success, simply based upon their emotional/psychological mastery of that ever-fleeting 'thing' that makes consistent traders consistent, and inconsistent traders inconsistent. I do agree with aspects of this thinking, but I for one know that although my results show me to be a 'consistent professional trader', there is absolutely NO WAY that I could ever assimilate to someone else's strategy, trading style, and most importantly their time-frame, and become successful at it just because I have developed an ability to control/understand my emotions/psychology as they pertain to my individual trading. The ability to do these two things would definitely help me at having a better chance, and you know what, there probably are certain strategies that I could do this with, however it is my opinion that this ability would have a lot more to do with the ways in which my personal emotional and psychological make-up (consider it static, although through time they are mailable) mix with whatever strategy or methodology it is that I am trying to assimilate to. Many people believe that it is the ability to control your emotions and understand your psychology that all owes you to assimilate, however, in my view of things (and definitely in my own experiences) I must create systems, strategies, methodologies, and money management principles that are based off of my emotional/psychological make-up, not the other way around. So, in other words, I see it as almost impossible to change your emotional/psychological make-up so that they fit into the workings of any strategy or systems while I view the path of least resistance in regards to the effects one's emotional/psychological make-up upon their trading as one in which the trader much build their own trading environment AROUND these pre-existing realities. I hope that makes sense, email me if not. Anyways....The point of this paragraph is that because I personally believe systems must be created because of who you are, and not that you can become whatever you need in order to trade any system, I also believe that choosing a time-frame in which to trade is probably the most important aspect for having long-term success in the markets. To be more specific, I am speaking exactly about the time-frame one uses to enter and exit trades, not the ones in which you view the market place as a whole in regards to Marco trends or themes. Many people think I am nuts for trading a 5 minute chart, and I as well think they are nuts for trading an hourly chart. How could someone expose their capital to all of the unknowns taking place on every time frame under that hourly chart, and still succeed!!?? It is very simple, because in my trading world, it all comes down to personality, emotional make-up, and psychological structure. If your personality is more aligned with trading an hourly chart, than this is a naturally occurring alignment, and it not only should be respected, but taken advantage of. As Timothy Sykes (timothysykes.com) would say, "I have the patience of a ferret on crack". I am not that panic-stricken, but I must say, I have an incredibly short time-frame when it comes to entries and exits because this is just a naturally aligned fit with my personality, emotional make-up, and psychological structure. Now, I am not a psychologist, doctor, or therapist, but I know myself, as you should know yourself, too. We, as traders, are our best allies and worst enemies. If you see a friend or another trader using a certain time-frame or strategy that makes them consistently successful, it could be very enticing to piggy-back on what they do, yet the results are most likely going to be atypical to what your friend accomplishes, only increasing your confusion. There will always be exceptions to this rule, but as a standard, I never trade any time-frame outside of what I have objectively (hard to be objective about one's self) evaluated (open, honest evaluation is a must) as the one/ones that work for me and only me. Just like every trader who can stay in the game long enough to find a path towards positive consistent results; emotional pain, confusion, and frustration tend to define the period of experiences prior to this point in many trading careers. In Jack D. Schwager's "Market Wizards", in which he interviews some of the most successful and interesting traders of modern times, it is quite apparent that there is a common theme amongst their individual and unique roads to achievement, that being consistent failure in the beginning. However, just as common to each and every one of these interviewed traders is the fact that they have developed individual styles largely derived out of individual time-frames that in turn help to create strategies, disciplines, and methodologies. The interesting part of this, and perhaps as well that which proves the ultimate importance of choosing a time-frame that works for you and only you, is that upon reading Schwager's work or any other book about successful traders, the reader can almost instantaneously describe what time-frame is being used by a trader because, in my opinion, time-frames are similar to personality types in regards to what information one can derive simply from having that single piece of information. If you know that a person is a type-A personality, you may not be able to exactly describe who they are as a person, but you most definitely would have a good chance of describing what types of behaviors and emotions they experience as a result of certain situations. Equally, when a trader describes what style of trading works for them, the receiver of these facts can easily begin to derive time-frame information that is likely to in fact be what is used when it comes to that person's specific style. This is obvious for many reasons, but my point is that the fact that time-frames are obvious once someone has described their style, shows how universally important and ubiquitous time-frames are to the profession of trading. Time-frames have to be custom fit to the trader, not the other way around, in my opinion. Understanding this idea, and implementing it into your path towards success will undoubtedly open many doors to you as a trader. Please feel free to contact me with questions or requests for help in developing a time-frame and strategy based on the time-frame that works for you. Remember, there are no 'right' or 'wrong' time-frame when it comes to what works for you, and only you.