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Last Updated: December 31, 2007
Know Where The Trading Is Concentrated
rs. Dec. 27, 2007
The two most important pieces of information for a trader are:
1) Determining where the bulk of trade occurs, be it day frame, week, etc.
2) Learning what happens when the market moves above or below that bulk of trade.
The reason is simple. Nobody wants to pay more than he has to for anything, and nobody wants to sell for less. If traders are willing to concede, they can enter any market at any time. If they ARE conceding, this is giving the trader a very important piece of information.
Note that last statement. A trader can enter a market at ANY time. If buyers or sellers begin to go to the market en masse, they will drive it in that direction until PRICE arrests the development, OR until TIME driven players of the opposite persuasion offset them. In other words, consolidation occurs when buyers and sellers essentially are equally conceding in that time frame. Back and forth trading can continue because each side is conceding or "meeting in the middle" (figuratively).
CCC...Sellers are here more driven by PRICE, Buyers here by TIME
CCC
CCC
CCC
CCC....Buyers are here more driven by PRICE, Sellers by TIME
Looking at the consolidation, the consolidation tells us that activity occurs here when buyers and sellers are equally conceding. At the top of consolidation are the traders IN THAT TIME FRAME who are responding to two driving forces. Sellers to PRICE, buyers to TIME.
At the bottom we find the same scenario only the buyers are driven by PRICE the sellers by TIME, again, IN THAT TIME FRAME.
Once consolidation occurs the market works back and forth in that consolidation. The mechanics to it are as listed above.
It is clear the reason a buyer would buy at the top of consolidation is he is driven more by TIME than the seller, as he is willing to "chase" the market just a bit to carry off his trade rather than wait. He goes to the market. The seller lets the market come to him. Of course the mechanics stay the same at the bottom of consolidation only that this time the buyer has the advantage of letting the market come to him.
In theory, this process should continue until TIME driven play is able to tip the applecart and move the market away in either direction from the consolidation. We know this is essentially TIME driven play as the players are buying above consolidation or selling below. In other words, they had all the opportunities to buy or sell IN consolidation, but did not. Therefore something has changed that has moved the buyers to chase, or sellers to press the market.
ONCE THAT MOVE AWAY FROM CONSOLIDATION OCCURS, the trader must watch for the response to it.
One of three things can happen, and only three.
1) The market continues moving away.
2) The market consolidates away from the previous consolidation
3) The move away is rejected and the market returns to the original consolidation.
In possibility 1, TIME driven play continues to pour in and the market move is fueled. A trader who goes with the market, in either direction this move might occur, is entering at the right TIME and will be richly rewarded.
In possibility 2, TIME driven play drives the original move, but the new level attracts PRICE response to arrest the move. A trader who goes with the market is going with it, but his reward is not as large. He has the luxury of being ahead if he goes at the start of the move and can exit with a small profit.
In possibility 3, the initial TIME driven play is rejected by PRICE and beaten back to consolidation. In this scenario the trader goes with the market and ends up taking a loss when he offsets the trade where he can.
Note that entering the trade with this knowledge gives a trader two possibilities to take a free shot at the trade.
1) He can enter at the right PRICE, or location
2) He can enter at the right TIME.
In other words, not all possible trades give advantage to the trader, only SOME do. Finding those and putting them on in the large sample size gives profits.
TIME and PRICE
rs. Dec. 26, 2007
I totally agree that no one can predict the markets. The reason is simple. ALL of the participants have free-will and therefore since I am not anyone else, I can not for certainty predict what another participant will do.
The statement that we cannot predict does not however mean that we cannot in the moment discern what is happening and therefore use this knowledge to participate with little to no exposure.
The reason is that at any given TIME certain PRICES are better than others. For example, if corn is trading higher today than all last week, we must conclude that TIME is a bigger driving factor behind buying than PRICE as the PRICE today is higher than last week. Therefore the seller has the advantage of letting the market come to him, whereas the buyer has had to go to the market. The seller has held the advantage in corn for the last 3 or so months.
Hence, to short corn at any point in the past 3 months offers no advantage, whereas going long offers a tremendous advantage.
The reason is simple. The moneyflow in corn is TIME driven buying. Buyers are disregarding PRICE. TIME and PRICE are the two and essentially only two driving forces to market participation. Being able to separate those participants allows a trader to focus on buying or selling at the right TIME or the right PRICE with little to no exposure.
TIME driven participation will continue until it reaches a PRICE that first arrests it, and then overwhelms it. This only makes sense because when a market becomes vastly TIME driven and one side is forced to go to the market at an excessive disadvantage, the opposing side must be equally driven by PRICE. In other words, the opposing forces in market action are NOT buyers and sellers, but rather TIME driven players versus PRICE driven players.
When a trader starts to see TIME driven players pushing or pressing a market in force, he can be quick to go with the action and disregard the PRICE. His exposure will be small as he can continue in this position until the market reveals the move either continues or is arrested. When he sees PRICE offsetting TIME driven action, he can go AGAINST the move with little exposure and wait to see if the market starts to work in his favor.
In EITHER case, the trader has virtually zero exposure and DOES NOT NEED to predict the future in order to make a profit.
This is VASTLY different to gambling as in gambling all the participants are on equal footing and suffer the same exposure. Gambling is essentially zero sum whereas the markets are NOT zero sum by ANY definition.
In Favor Of A Full-Service Broker
rs. Dec. 26, 2007
I use a full-service broker.
I pay a pretty good commission compared to many, but I believe it is well spent.
Here is why:
When I trade, I want to trade. When I want to execute a trade, I want to do it at the PRICE I want or the TIME I want. I want a broker who understands that and helps make it happen. I don't want to manage all the pennies and quarters in my account, check for errors or try and find out if I am in a trade or not.
When I listen to the nightmares of those with bad experiences, some of them even posted here, it usually is the result of a do-it-yourself type platform where a guy is trying to salvage a little money by chopping his commission. My own experience has taught me that is the last place to start. If I lose money, it is not because of the commission, it is because my trade was bad.
Think for a second. Do you think the great money movers in markets key in their own trades and get put on hold to talk to a human being when their account is messed up?
I can turn all of that over to my broker and he handles that. I am now free to make decisions about trading. Successful people let others they trust take care of the details for them, I have observed. I try to imitate their approach.
I highly recommend that a person serious about trading find a broker he can talk to, work with and be his assistant. That quest might take a while. But listening to what some of the brokers write here, this might be a good place to start. Once you find that, free your mind for what you started out doing: trading.
I know this is against the popular opinion right now, but I think that it is more important now than ever to have a good broker. There is just too much going on in markets and too many mistakes and stoppages being made at exchanges. I want someone who will take care of that end for me.
I make all my own trading decisions. But sometimes, because my broker knows me and because he also has some pretty good insight, in fact very good, he throws things back and forth with me and it helps iron out some wrinkles in my trades. That alone has saved me from putting on some bad trades. And it has alerted me to some things I had missed.
Is Inflation Of Any importance For Market Decisions?
rs. Dec. 20, 2007
No, I would not use inflation as a determining factor. Here is why:
Inflation is essentially a spread between a currency and a good. As the value of the good rises, then the spread opens and the currency becomes less valuable. Conversely, as the currency falls, the spread opens between the currency and the good. In either scenario, the end product is inflation.
Notice that a good need not rise in value for inflation or "the spread" to increase. Therefore if I buy a good, for example corn, as a hedge against inflation, I am only trading half of the spread.
At first appearance, it may appear that this is contradictory as for example I buy corn with US dollars I am essentially entering a spread: Buying a good, selling currency. However, I also need the currency for the purchase of OTHER goods to support myself, housing expenses, food, transportation, etc. They in fact may be increasing in value more rapidly than the good I invested in. In that scenario, trading against inflation would be a poor choice.
The better choice is to examine the markets in front of you and find the ones that are shifting value the most.
Gold for example ALREADY has shifted in value quite a bit. As has wheat. If I invested in these because of inflationary fears, I stand more of a chance they simply will keep pace with inflation in the best case scenario. Therefore, I do not stand to profit. If on the other hand I put my money in items that are shifting in value, or I actually am able to buy BELOW value, regardless of the inflationary picture, I stand to profit.
The Difference Between Exiting And Entering
rs. Dec. 1, 2007
There is a substantial difference between needing to participate and wanting to participate.
Putting a position on is usually the latter. A trader is wanting to be part of the action. The advantage here is that because he does not NEED to put the position on, he has the luxury of only participating when he gets the opportunity to his liking.
Think of it as being a baseball player at bat. If there was no such thing as a called strike, the batter could theoretically stand at the plate all day. If he hated curve balls, he would never have to know how to hit them because he could just keep waiting indefinitely until he had his pitch. In this position, he may not hit a home run, but there is little chance he will be fooled into chasing a bad pitch.
Putting on a position, a trader can wait for his opportunity. If he understands how markets function, he can find spots throughout the day in virtually any market that give him a free shot at a developing scenario.
The situation is entirely different for a trader NEEDING to trade. A trader with a position on is NEEDING to trade. Why? Obviously because he is going to need to offset his position at some point.
HIS approach is more like a ball player with strikes on him needing to guard the plate.
When TIME driven play drives a market to consolidation and finally to PRICE response in return, the PRICE responding players have the upper hand. Thus a market that is diving is said to be a buyer's market (Housing for example). A market increasing in value, a seller's market (Italian violins for example). That is in all markets outside of futures. Usually on commentary, the comments to rallies are that the buyers had the upper hand and on falling that the sellers had the upper hand. Never have understood that. The same setup applies to futures that applies to housing. If buyers are paying up and therefore the market is rising, the sellers have the advantage, therefore it is a seller's market.
Thus in a seller's market the one NEEDING to sell has the advantage. In a buyer's, those NEEDING to buy have the advantage.
If a trader identifies what sort of action he is seeing, he can go in favor of the TIME play when putting his position on, and offset his position when PRICE reins the action in.
This is why it is difficult at this time to make much money, say in corn or beans going short. Although periodically the opportunities DO pop up, but as of now, only on short time-frame.
Thus understanding this concept, a trader must see that his objective in putting his positon on favors him if he looks for the right spot or time to buy in a seller's market as the other participants would at some point drive the market to higher levels. He then will have the luxury of waiting for his PRICE, so to speak.
Obviously, in a seller's market, the one shorting has the advantage as he now, needing to participate on the buy side, has the luxury of letting the market come to him.
Herein lies the greatest difference between the entrance and exit of positions.
Whereas putting a trade on a trader can either buy/sell at the right TIME or the right PRICE and in either case have free exposure to making a profit, the ONLY way to maximize profit is to buy/sell at the right PRICE, not the right TIME when offsetting his position.
Thus when a trader has gone long corn, he now from necessity has become a SELLER as that is the next step he should be taking. To do this, he must be able to spot when PRICE is reining in the market and do his best to capitalize on it.
When activity shows the market is going against him, he thus must make sure to take advantage of the window of opportunity he has to offset his position where he can. If his original entry was one of free exposure, he can usually get out with a small profit or scratch, EVEN IF HE IS WRONG.
Because putting the trade on should be in a spot OR time that gives him a free shot, he must immediately begin looking for the market to show him where PRICE is beginning to dominate and exit. It is important that he does not predict where that is to be, but anticipate, allowing the market activity to illuminate this area for him. This he can do by first, looking at the history of his product to determine where PRICE had shown its dominance before. Then second, to the unfolding market action in real time.
Many traders put a trade on, get ahead on it and bask in the glory of the money they have on paper, only to forget they need to finish the trade off. Getting complacent, they add to their positions because they still see themselves as BUYErs when they are long, SELLErs when they are short, when in actuality they are SELLErs when they are long, and BUYErs when they are short.
T
T
T
T
T
T......TIME driven buyer can buy here
CCCT
CCCT
CCC
CCC
CCC
CCC.....PRICE driven buyer can buy here
Whereas in the above illustration, a buyer can enter in either spot or time and have free exposure, his exiting is best when accoplished this way:
X
X
XX
XX
XXX
XXXXX....Sell here or above in response to PRICE
XXXXX
XXXXX
XXXX
XXXX
XXXX
XXX
XX
XX
X
X
X
X
Re: What We Know That Just Ain’t So - Ramblings
rs. Nov. 29, 2007
Matt,
There are some people who are naturals at trading. They are like Tiger Woods. They have a talent and that is that.
I HAVE NEVER BEEN THAT! I have worked at trading for about 25 years, and it has been one hard struggle to become successful at it. I usually laugh at myself when I read posts like yours because I can identify with it.
If there is a lesson to be learned, I have done everything wrong that I could. I have yet to read a post of a "stupid" mistake a person here has done that I haven't.
The secret I have found that helped me continue is this: Develop a blackboard mind. Erase and start over. The things you want to remember, scratch into the slate with a pen knife, not chalk, and erase everything else.
You noted two things you have learned. If they cost you $20,000, you could not have learned them at Harvard, and Harvard would have cost you a lot more.
The two things you learned are vital. Repeat, VITAL to know if a person is to be successful. By successful, I mean happy where he is in life, trading being a part of his life.
In 1991 a trader passed this on to me. It helps me a lot. He said one of the best ways to overcome misplaced certainty, and certainty can kill if it is wrong, is to go the other way. In other words, when you are so sure corn is going higher, try putting the smallest position you can short, and see if you can make a go of it. Sometimes that will change your certainty, and sometimes it will make you feel more certain. Either way, it will force you to look at the other side.
I used to trade around other traders. Now I trade from my home. More or less I learned bits here and there, but THAT one has helped me alot these last 16 years.
It is scratched in my blackboard.
Best wishes
Opening Distributions and CH
rs. Nov. 28, 2007
Years ago, J. Peter Steidlmayer noted and published that the opening hour of trading usually established the range for the day of a market. He then used strategies to trade against those points, and identify markets that worked higher or lower than those points during the day.
His publications were exceptional, and anybody serious about trading should view his work as a must read.
Many traders using Market Profile, still follow those techniques. The problem is, market dynamics have changed dramatically since then.
Two different dynamics of great importance we see today are: Market hours are much longer, almost 24 hour in some instances. Traders are not bound by limited trading hours as much anymore. Therefore, the first hour of trade takes on less significance.
More importantly, though, is that much larger amounts of money are thrown at markets from outside sources today than ever before. Index funds, com funds are a very large source of activity in contrast to the old local activity that often dominated open auction trades of those times.
Two things that can help a trader in this regard. First, look for the longest intraday distributions during the day. Then compare these to other nearby distributions. Compare the volume. Usually the longest distributions contain the largest volume. The converse tends to be true. Find the time that tends towards the largest volume, and generally you will find the longest distributions.
For example. Monday the first 25 minutes saw a selling distribution of about a dime in CH. The outright volume was about 19000. Tuesday this same time period saw a much smaller distribution of about 2 1/2 cents. Volume about 11000. Today, about 2 cents, volume about like yesterday.
Usually the highest volume concentration in grains is about the first 20 minutes. The last 15 the the area usually with the second concentration.
When TIME driven action begins delivering less movement and more resistance, this usually is a sign that PRICE is reining in the action.
This causes me to think that my subjective view of corn, that it was going to start working higher again soon, is finding objective support. The downside potential does not appear to be there.
A Little More On The Molecular Level Of Trading
rs. Nov. 28, 2007
Something to expand on an earlier post.
Markets in Molecular Form:
Offer B: Trade accepted
Bid A
Offer C
Bid B: Trade accepted
In review of an earlier post, in the above analogy, in each scenario, price B is traded. Looking at a quote of B on the screen that is uneventful. Last trade: B.
In reality, each trade is vastly different. How? In the upper scenario, the offer is bought. This means the buyer is going to the market to trade. The seller is letting the market come to him. In the lower scenario, the seller is going to the market, the buyer is letting the market come to him. In other words, In the top scenario, the seller gets his PRICE, the buyer wanting to make the trade has to concede PRICE for TIME. In the top picture the seller is PRICE driven, the buyer TIME driven. In the bottom picture, the seller is TIME driven, the buyer PRICE driven.
Once I narrowed markets down to this rudimentary level, it was as if trading took on a whole new meaning to me. How so?
Each trade in a session is similar to the dot on a television. Only put together with all the other dots can we get a complete picture of what we are seeing. When TIME becomes important to one side, buy or sell, that side must concede more, IF they want to put on the trade. When repeatedly we see that happening, we can anticipate that the activity will continue until one of two things occurs. 1) TIME driven play comes in from the other side, reversing development. This is not that common, but does happen. Conflicting weather reports juxtaposed during the day can do this for example. The market is trading one piece of news when a second piece of news with the opposite effect hits the market.
Usually, however, 2) the market moves in one direction until arrested by PRICE. Once PRICE arrests it, consolidation occurs so that each side can carry out their activity.
Let's look at the analogy again. Suppose we have this:
Offer B: Trade accepted
Bid A
B is traded. Then traded again. Then again. Then again. What could we conclude? This: Buying at A is a BETTER deal than selling at B.
If one side is a better deal than the other, the market is out of balance and must work to a level where each side is equally conceding. That area will be revealed as follows:
Offer: B Trade accepted
Bid A:
B, B, B, B, (Some A's thrown in)B. Then,
Offer: C Trade accepted
Bid B
This pattern will continue until the sides balance one another. Only the market activity will reveal where this will be.
Suppose this pattern continues to E, then we see D then E,D,E,D,E etc. The market is now balanced with each side equally conceding. This balance will continue until TIME driven play enters the market in force again. This again can come from either side, but usually this is a continuation of the previous TIME driven direction and will continue until PRICE reins the action in and is the offsetting mechanism to TIME driven play.
In other words, the stronger the TIME driven play, the stronger the PRICE response must be.
Once I understood this mechanism in this fashion, I was then in a better position to capitalize on it.
The first thing is this. It is a 50/50 proposition to enter a position where each side is equally conceding. At that point, I stand just as much chance I will lose as win. Therefore I have no advantage if I buy or sell where or when each side is satisfied. THIS I learned from J. Peter Steidlmayer's work. I never fully understood the reason until I broke the market activity down to that simple a level: TIME play versus PRICE play.
The second is this. If we look at the real estate market, is it a buyer's market or a seller's market?
Clearly it is a buyer's market! If buyer's wait, they can find the house they want for a price they are (almost!) willing to pay.
Grains right now are a seller's market. A seller should wait until he sees PRICE restraining further pushing.
Using this insight, in a seller's market, a trader can buy at many good spots or times, but MUST exit for profit when PRICE reins the market in. He MUST let the market show him where that is happening.
I have applied the above principle to trading and have found it to be universal. It can be expanded to any time-frame and encompasses all kinds of activity.
Separating When From Where
rs. Nov. 21, 2007
Today's grain action aptly illustrates the value of understanding the difference between WHERE to put on a trade, versus WHEN to put it on.
If PRICE is important to market activity, then a trader wants to find the right SPOT to buy or sell. Today in SF, a trader could use yesterday's bulk of trade to determine WHERE to get in. Buying at the low of yesterday's bulk, 1081, he could then enter for a "free shot" at higher action. The reasoning is he is buying under most of yesterday's market. He then looks for more buying to develop with his "free seat" to the show. That indeed followed today, but with limited action. The advantage to this approach is that the trader then has a trade he is ahead on. This gives him the luxury of getting out virtually anytime during the day at a profit.
If TIME is important to the developing action, the trader wants to focus on WHEN he gets in and try to disregard the PRICE. WZ is an example. Yesterday's push above the bulk of trade was followed through today and the market never looked back. WHEN a trader bought this market determined how fast he was ahead on the trade.
Note EITHER approach is workable because it gives the trader a chance to enter a trade with very low exposure to losing. The secret means a trader can manage his risk first, knowing that over a large sampling of his trades, he will reap rewards.
This is an approach that works in putting trades on. Exiting requires an entirely different approach.
On the Random Walk Theory
rs. Oct. 10, 2007
Markets are impossible to predict because the participants decide to play or not. Because I am not the other guy, it is impossible for me to determine precisely what he is going to do.
The Random Walk Theory, while acknowledging the above principle, concludes erroneously, therefore, that all prices in a market are equal and that at any price, a market by happenstance will either go up or go down.
The logic behind that conclusion is flawed. Here is why: If I enter McDonald's to purchase a meal, if I do not purchase a Happy Meal, does this mean I must have purchased an Unhappy Meal? In other words, because I can not predict with certainty the behavior of a market, must I conclude that it is driven solely by chance because I cannot predict the chance roll of the dice either?
Proponents of Random Walk analysis have never applied their theory to any other market endeavor. On an everyday basis we certainly don't subscribe to that notion or we would not shop for the best deals, or wait to buy a car in January, or visit the beach in off-season.
To understand markets we have to understand the molecular level of the transactions. The two fundamental components of a transaction are: TIME and PRICE.
The most PRICE conscious driven player does not care when, how long he has to wait, he is not buying or selling unless he can get it for X amount or get X amount for his goods.
The most TIME conscious driven player does not care what he has to pay or how much he gets for it if selling, he only knows he needs to make the transaction NOW.
From that disection, we see that fundamentally, the two opposing forces, if you want to call it that, are not buyers and sellers, but TIME driven players and PRICE driven ones.
If ALL participants were driven by PRICE, almost no transactions would take place. As I type this, I see that ZCN0 closed today at 410. Right now the bid offer is bid 2@ 4012 ask 1@ 4194. The b/o is over 18 cents apart. Why? These guys bidding and offering do not care if they buy or sell or not, BUT IF THE RIGHT DEAL COMES ALONG... Needless to say, the volume on that option is 0. In other words, it is safe to say that PRICE is the only lure for those two guys.
On the other hand, if you start blending the two, PRICE and TIME players, their actions will be different. I might look to buy corn for example if it nears my price, but if I see it isn't going to get there, I start nudging up my bid. In other words, TIME is having some influence on my PRICE target.
I might need to buy today, but when I see what they are wanting me to pay, I back away. In this scenario PRICE is having influence on my TIME target.
The above shows what I look for in market action. I want to separate the TIME and PRICE driven players.
When I see a day like today in CZ7, I don't need to predict the activity tomorrow. Today's activity tells me in the moment what is happening. From this logic I can conclude through experience that I can anticipate a little move higher because the TIME driven selling was there, only not in force. It was benign.
This does not mean it WILL happen, it just is that If TIME driven sellers can not drive the market lower, what should I expect if TIME driven buyers enter the market? And because markets exist to bring buyers and sellers together, I know that some of them are driven by TIME more than PRICE.
I then look for a spot to put on the trade. I look at the levels TIME driven players took it, when PRICE started reining in the action.
From that I conclude there exists a good chance tomorrow that TIME driven buyers will at some point enter the market. If they do I would be tempted to sell where few last week were able to do so.
Just a thought.
Re: Don't Invest Is Best
rs. Oct. 1, 2007
Reality exists. Find where it is. That's the start.
Perceptions of Gnostics, Orwell, secret societies, or Hollywood, only cloud what your need is.
Traders have two choices.
1. Make a decision
2. Don't make a decision
If a trader applies point number 2 and does not make a decision, his decision will be made for him. That is ALWAYS bad!
That is it. Extraneous information is quite unessential
Once a trader chooses to make a decision, he only has three things to choose from. They are:
1. Buy
2. Sell
3. Stay put.
That is the molecular view of trading.
All other information smokescreens our goal.
It Takes Discipline and a Risk-taking Personality
met.mike. Sunday, July 8, 2007
"you can take a simple problem and sure do a lot of typing. Kinda like asking a guy for the time, and he tells you how to build a clock"
It probably wasn't intended to be a compliment but I'll take it as that.
More often than not my goal is to provide as much new info on weather and how it effects the markets. There's more to it than: hot/dry we go up, wet/cool and we go down.
I make a living trading and enjoy sharing my thoughts with you and everyone else here. My views are not always correct but you can bet they are right enough of the time to make my trading consistently profitable.
I wouldn't expect anyone to trade just like me(unless they have similar experiences and personality). That's one reason i usually don't post trades.
I do try to give valuable insight into what will make the market tick and this usually includes price direction. You can use it or take it with a grain of salt.
There's a lot of places that sell advice and make their living on the money people pay to subscribe to their service. You may have heard this before: Those that tell, don't know and those that know, don't tell.
This really is true about futures trading but there are a few exceptions. The trick is to recognize who is legit and who is full of hot air.
Last year around this time, in a response to Joe K., who questioned whether i could really make money trading just weather(and a challenge to Jim to give proof) I sent my account statement at the end of June 2006 to Alex.
This may not have been the smartest thing to do but it helps to establish my credibility as a trader on this forum. None of us here would bother to send all these messages if we thought nobody read them or cared about what we say.
This is just another long winded post by me and really doesn't have any profound wisdom or info on the markets but it helps define my reason for being here.
Before my discovering this place 6 years ago, I had very few people to talk trading with. Up until then, it was mainly those that wanted me to teach them to do the same thing(I'm always willing to tell folks what I know but my advice to most is that they should look at putting their hard earned money some other place).
It takes a disciplined person with a risk taking personality. Most important trait is having the ability to analyze accurately what makes a market trade and have a connection to fresh, reliable information that enables you to be ahead of the markets reaction.
This can take many forms. For me, the weather gets a lot of weight. For many, the weather just screws up/confuses their analysis because it's changing constantly. Others have non weather strategies that work well. Use whatever works for you and objectively evaluate your performance to eliminate things that don't work.
Synthetics and skews...and profit
SAJ - Friday, Jan. 12, 2007
Ready for a replay of the 2004-2005 feeders? It's coming up, unless I badly misunderstand things -- but this time it might become a two-fer.
The last mad cow scare occurred at Chistmas 2003, and the 2004 feeder contracts collapsed, with X04 losing upwards of $9/cwt in 4 trading days. What happened to the varioius 04 month puts? Their IVs went crazily higher, because the mkt was essentially locked limit offered for 2 straight days. The only way the longs could get any protection was by using a synthetic short, which meant there was a **lot** of put buying.
In fact, the put IVs became so far out of line that it was possible (and doable) to put on excellent put ratio-spreads. These are rare, as I mentioned to Joe K the other day, because, while call IVs not infrequently get wildly skewed (a necessary condition for my style of ratio-spreading), put IVs hardly ever do. It takes a full-fledged panic to accomplish this ... which is exactly what occurred in the feeders in December 2003.
Feeders were limit offered today, not too surprising given the spectacular action in corn & beans, but panic conditions aren't (yet) present. There's no skew in the feeder puts yet. But there is, as of today, a huge skew elsewhere.
Anyone check the corn calls today? I love limit moves, assuming of course I'm not fading the move at the time (cough...), because they **always** (write it down in big, black letters) skew the oppies.
And, the skew appears only just to be starting. Options' prices in Chicago are subject to the same limits as the underlying mkt, so the corn calls (I'm following July at this point) could only move up 20 cents, which they did. However, while the NTM 420 N call moved up 20 cents... the N 420 put was **unchanged**; the call, although 6 cents OOM, settled 11-7 higher than the 4-cent ITM N 420 put.
This is the absolute definitive case of a call skew.
And this, m'friends, is a money-machine waiting to happen. This skew is a dead lock to increase Tuesday, and likely enough through all next week. No bets on that, though; I've no idea how desperate the shorts are at this point.
So, how do we pick the shorts' pockets? We wait. Tuesday? Fuhgeddaboudit, don't even think of putting anything on. Wed-Thu? Maybe, but we're in no hurry at all. Here's when to start placing orders: the minute that there's a non-limit day and prices start any sort of a correction, 3 cents, 7 cents, whatever. Obviously, the non-limit condition implies that any orders entered will be near the close of the session, by which time there will be some degree of certitude that the mkt won't close limit bid again.
That's the ''when''. Here's the ''how''. Let the floor bid corn to whatever they like, then start correcting a bit, then let 'em have both barrels. We'll buy an OOM call and write 3 WTBOOM calls, in July, with a difference of about $0.90-1.20 in the strikes. Exactly which strikes? Don't know yet -- how high will the floor bid the corn? Right. Don't guess. Wait for it.
Now for the ''why''. First, skews always correct over time, and the nice thing here is that the correction can last for several months. In the feeder skew in 2004, it was very possible to hit FIVE different months ' contracts with a good put ratio spread. As it happened, I only got 3 of them, and a tiny bit of a fourth, but that's ok.
Second, we wait to get in for another reason. CBT are going to raise corn margins, sure as sunrise, and we'd much rather **know** what the higher figure is going to be rather than guess. This is called good capital management, and this is absolutely essential when trading against skews, even more so than it is generally.
The required margin tonight on this trade as described is $536/394. It's going higher, perhaps to something like $1000/800 by Wednesday. Naturally, we'll allocate treble the actual figure when we enter the trade.
The third part of ''why'' is that -- believe it or not -- we won't need to stay in the trade until July. We can, certainly, but we'll almost surely make a better profit by exiting in 2-3 months rather than staying for the whole trip. Don't believe it? Watch.
Now, we can't (and don't want to) trade using tonight's prices, but even so they are instructive as to how the trade will tend to proceed.
July 430 41-4 .... July 520 17-0
Compare this to the May oppies, using strikes proportionately away in the May.
May 420 33-6 .... May 510 10-0 (IV estimated)
That's right. In two months' time, the trade will tend to go from a 9-4 cent credit to a 3-6 cent debit, 13-2 gross profit in hand, per line. In actual fact, the result will be tend VERY strongly to be better than this, because we're going to wait to enter until the skew in the calls' prices becomes even more pronounced.
We certainly won't be using these exact strikes, of course. I don't know about you, but, given today's action, I shouldn't be at all surprised to see corn 25-40 higher at some point next week. The higher it goes, the better for the trade's prospects when we do finally enter it.
Clearly, the only thing that can threaten the trade is a **continuing** huge bull mkt, and any planting problems that occur in the next 60 or so days **might** put a temporary dent in the wallet, but -- and, again, this is why we wait to enter -- a continuous bull mkt is a very difficult thing to maintain. It requires constant feeding in terms of yet more bullish news. More than this, once the initial explosive runup has passed, the mkt requires even a higher dose of bullish news to maintain its current levels and push higher. Might happen, too -- but I'll trade against it every single time once the option skew becomes gigantic. Even the slightest relaxation in the bullish tension of the mkt will put dollars into our pocket immediately.
Defense if the mkt keeps moving higher after next week's putative spurt? A snap. When the lower strike becomes ITM by about 30-40 cents, just buy 1 OOM call -- WITH the clear intent of throwing back instantly if corn starts weakening. Once in the trade, if anyone wants to know which call to use to defend, just ask, no problem.
*****
The even more interesting situation here is that it's entirely conceivable that a 50-75 runup in corn from here might very well produce a collapse situation in the feeders. Have to wait to see.
However, if we observe the feeder puts becoming skewed, there's no reason at all not to treat the situation just like Doublemint gum; double your pleasure with the put ratio-spread.
Good trading to all !
Re: Well, lets try it this way
Maroun -- Friday, Dec. 8, 2006
You hit the nail on the head when you said,
"But for "ME" it is."
Every trader who has cut his teeth in this business has tried countless "systems", methodologies, plans, rules etc...etc...etc...
The blatant truth is that there are MANY, different, viable approaches to trading and no one can say definitively that one is better than the other, to put it simply.
More importantly, every trader has their own, unique psychology, make-up, stress tolerance etc...., call it what you will that predisposes them to a style that suits them and the key is.....
...finding it.
I know successfujl traders (mostly stocks) who trade on MA's alone and others who have elaborate mechanical systems and they both do as well as the other. And there are an infinite number of ways to succeed in between the extremes.
Such a critical part of being a successful trader resides between your ears, almost undefinable in a sense and each trader has to discover what methodology, market(s) etc...suit their unique make-up and hone it from there.
After all, it's not rocket science here. The market can go up, down or stay unchanged. That being said, you basically have a 33% chance of making money every time you put on a trade (or a 67% chance of not LOSING money). In the final analysis, it comes down to winning the battle with your own demons and basically staying out of your own way.
So why do so many traders keep going to the till? Probability theory does not support a continuous loss of funds if say, you flipped a coin every time you had to decide to go long or short.
The defining intangibles that separate the winners from the losers are nothing more than conviction, discipline and knowledge of self.
To put it another way; I believe that a good trader can make money by letting the toss of a coin decide whether to go short or long every time they enter a trade.
Think about it.
REPLYING TO:
Well, lets try it this way
Joe K -- Dec. 7, 2006
Since I study all parameters of Technical trading, I find it hard to believe you think I only feel strongly about Volume alone.
What I feel strongly about ( in case something was misunderstood )
Price Action , Volume, Support and Resistance zones. These 3 animals are the core to all my trading, and the core to Wyckoff.
Those 3 things I can not trade effectively nor consistently without.
The Wyckoff Principles also stand as my core Trade Bible as well.
1) Cause vs Effect
2) Effort vs Result
3) Supply vs Demand
To any Wyckoff trader, those principles can not be argued. If they are compromised the Methodology does not work.
1) Take away Price, and volume (orders) are meaningless, nothing to place orders on without price.
2) Take away volume, Price has no fuel to feed a rally, break, or trend.
3) Take away Support and Resistance, Accumulation and Distribution Trading Ranges are no longer defined.
Nor can one measure Strength or Weakness as effectively, with any "one" of these core components to market price action missing. I assure you nothing about Wyckoff Methodology is obsolete. The Principles are tried and true, and have stood the test of time.
Stocks or Commoditites , methodology works the same way. If there is a chart, price, volume, and trading range, Wyckoff can be used to depict strength and weakness in market price action.
I am a fan of all Technical trading tools really. Though I think I'm still a student of the markets more than anything else. If One can find more edge with OI, or E-Wave, or Candles, or Wolfe, MACD, ADX, COT, ect.... whatever they prefer, I think they should use what works best for them.
I think you make some excellent comments:
" IMO, any experienced chart reader applies your Wychoff principals without knowing it, especially if he also applies more modern applications of OI changes, along with volume and price changes..."
Very very true.
I look at Opening Ranges, Hi, Lo, Close, Open, Cash, spreads, cycles, seasonals, Ma's,... all that as well, plus Patterns, Fibs, ect, too many things to name really.
I believe what you say is true about OI component. I just dont look at it as much myself. But know many many great traders who love it. Most would be far far more deadly with it than I.
Most avid students of classical Wyckoff use Point and Figure charts as well. I do not. I use more a what I call "Wyckoff Plus" style of approach. Where I utilize various other components to enhance or sharpen reads. Just as you comment about.
In closing, I hope I've made it more clear on what components I use personally.
Wyckoff classes are open to anyone. Live Trade Room is open to anyone. At any time. Anyone can go in meet the group, kick the tires.
Wyckoff is not for everyone. Many many traders enjoy success using many many different things. I don�t think Wyckoff is better than anything else at all.
But for "ME" it is.
Not for everyone else.
Traders have to find their own niche, what works best for them. What brings on successful consistency to their market operations.
The best chartist in the world will probably die a thousand times if he doesn�t understand good money management skills anyway.
So good successful trading takes a lot of solid work on many various fronts. I think many Technicians here, including yourself, can all do their fair share of damage, in whatever one prefers to use.
Good Traden !
S & R: Thought processes.......
Maroun - Tuesday, Jan. 10, 2006, at 1:53 AM
Support and Resistance (S&R) areas are the cornerstone of my trading methodology. Like any technical analysis tool, it takes a lot of practice to learn how to use them effectively.
Further, and more importantly, each individual market has inherent characteristics or catalysts unique to itself which one must understand in order to develop a "feel" for when the odds are in your favor when using S&R.
In the bean market for example, I will factor in "characteristics" such as time of year (seasonal tendencies), pre or post report sentiment (if applicable), recent volatility and even price behavior during the opening of a session or during the previous session to help me determine what I think is going to happen during the subsequent session. And that is naming but a few.
My point here is that S&R zones are definitely not cut in stone, but a solid understanding of what drives/affects/catalyzes the particular market you're trading will go a long way in helping you develop a feel for market turns using S&R.
An example in the beans:
If you pull up a 5 minute SH6 chart, you will see that the market put in the high of the day today at 5990 right off the open and then retested it a couple of times (5984) within about an hour of the close.
Conversely, the market initially traded down to 5924 and then with the exception of the end of the session, found support at the 5940 level for most of the day.
Visually, looking at the 5 min. chart, you can definitely see a trading range over the course of the day defined by these two extremes, ignoring the end of session plunge. More on the plunge and what it means later....
Looking at S&R numbers for tomorrow, the Pivot is at 594.17 and 598.83 is R1. It is not coincidence that these numbers work out so well with a visual of price action. This happens quite often and when it does, I usually pay attention. Other times, it's not so pretty but that's for another discussion.
Further, R2 comes in at 603.67 which is nicely defined on the 5 min. chart by the low put in during the early part of the session two Fridays ago.
R3 (613.17) is also nicely seen on the 5 min. just below the low of last Thursday's session as well as below the low put in two Tuesday's ago.
Another thing worth mentioning is that R2 and R3, in this example for tomorrow, are visually defined by the LOWER PRICE LIMIT of trading ranges. This tells me that they have a better chance of holding (as opposed to if the R2 or R3 number lined up in the middle or top of those ranges), if and when price gets to that level.
I'm concentrating on resistance levels here because right now I'm in a selling mode as far as daytrading goes and I'm not looking for buy signals. The 614 area has had my attention for a couple of weeks (I posted about it a couple of times) and now that we're below it, I'll be watching it closely if we get back up to it.
As far as support numbers go the only thing I'm interested in right now is the top of the gap from December 12th at 5910. We moved into the top today and just for kicks (of course), S1 comes in tomorrow at 589.33........
All I can say is that things happen for a reason and there is definitely some order to be found in all this apparent chaos. That thought too is a whole other discussion.......and more.
As traders, it's our job to sort through all the fluff and find something we can rely on to help us get an edge in our trading. S&R is one of the most important tools I use to try to get the big picture into focus on a daytrading basis.
Re: S & R: Thought processes.......
bonjourmichael - Tuesday at 8:02 AM
Thanks and great post.
I see so many on boards like this who come out in the morning with the same old canned package, as if one or two technical methods work consistently in any market condition. Knowing how to use a tool is important, but knowing when to use what kind of tool is even more important.
For my day-to-day scalping operation (I prefer to think of it as market making), I do all kinds of back-test studies on 3-min, 5-min and 15-min bars to set my discount and premium policies, along with overall position management parameters. However, when the bell sounds I put my visual on a weekly chart! Why?
Because having the big picture in vision, even when trading on a micro basis, gives one an expansive and comfortable perspective. With a very wide angle view, the mind is free to adjust to conditions as they develop. With a very narrow angle view, one sets himself up for too much second-guessing and doubt. A sound pivot point methodology will work more often than not. However, many times your pre-determined pivot will be some cents away from the actual pivot point of the day. When I see the market cross back and forth over the same price several times, I will often adjust my pivot, zoom my lens out and perceive the sense of it without feeling like I betrayed my daily setup forecast. It's no big deal. What is, is.
Trading is work just like any other work. You plan your work and work your plan. You casually adjust your plan as conditions change, you trade where the market is and know the seas in which you swim.
Re: S & R: Thought processes.......
Maroun - Tuesday at 9:05 AM
You bring up a very good point bonjourmichael in that the pivot, S and R numbers derived from the previous days price action will sometimes/usually end up being "some" cents or ticks away from what actually transpires in the following session.
Down those lines, I will usually try to enter the market on a limit order slightly above (if I'm buying) or slightly below (if I'm selling) the actual price I'm working with. How much above or below depends on what's going on at that particular time and what the other tools I use for confirmation are telling me.
Another great point you bring up is that it is always a good practice to zoom in and out frequently to cross check and compare across different time frames. The more these different "visuals" are in accordance, the better your chances for success.
I generally use a 15 min. chart to get my macro view for daytrading. I use a 5 min. chart to look more closely at price behaviour as the market works towards the areas I'm interested in. When it comes down to pulling the trigger though, I use a 2 minute chart for entry or exit 90% of the time for my daytrading. Finally, the daily chart helps me determine what I think the following session will bring in a general sense.
Have a good one, M
SAJ on Options Expirations
Sept Crude Options
krash Wednesday, Aug. 17, 2005 at 2:36 PM
Sept Crude Options expired today.
Was that at the open or at the close of today�s trading session??
thanks,
Re: Sept Crude Options
cdowis � Wednesday, Aug. 17, 2005 at 5:38 PM
Expired at close today. 64 put really moved from 6 to 75.
CL option expiration...not what you think
SAJ � Wednesday, Aug. 17, 2005 at at 7:40 PM
Krash -- Be careful in NYMEX energy oppies at expiration. Sure, all the usual reasons, but there's one more here: it ain't over 'til it's over.
In the context of energy options, Yogi's famous phrase means that the options **stop trading** at the close, but they are still exercisable until 5pm NY time. However, the ACCESS session opens before that time, correct?
So, a trader holding (short, typically, but it works either way) very NTM oppies will have them nominally ''expire worthless'' on occasion, only to see the ACCESS price go into-the-money before 5pm.
If you're short in this deal, here's a question for you -- Have your oppies been exercised, and have you been assigned, or did the option owner, seeing the close, simply abandon the oppies?
Guess what -- short of your specifically calling your clearing firm's backroom operation, **you won't know if you have a position in the mkt OR NOT!**. How d'ya like THEM apples, mate? And the timing of the call has to be near-perfect. When the back office finishes matching up the exercise and assignment notices, they're off to the pub ee-freakin-mediately. In short, it's odds-against your even being able to find out if you've been assigned or not.
In plain English, if you're short (particularly) a NYMEX energy option near-the-money on expiration day, BUY IT BACK 5 minutes before the close. Don't let yourself get into the position of NOT KNOWING if you even HAVE a position!
Good trading to you!
Markets that run on fear
SAJ � June 27, 2005
T.T. -- There is practically no mkt that is more dangerous to trade than one that is running on 100-octane fear. Aside from the huge swings that occur in such a mkt, swings that many times make a mockery of usually-valid technical signals and chart points, the trader is at a second enormous disadvantage.
The trader has absolutely no way of determining how long that fear will continue to be the dominant force in this mkt.
The only thing worse, from a trading standpoint, than trading a mkt whose underlying mechanism is wildly distorted, is attempting to pick a top in said mkt. Trying to pick tops (which you are doing if you're short HO) in a mkt as described is a one-way ticket to a destroyed account balance.
HO might go anywhere, **anywhere**, you care to name, up hugely, down hugely, w/in the next 6 months. There is no percentage in trading such a mkt, except possibly trading it against another, related mkt, perhaps HU or CL. Crack spreads are very much worth trading at times, provided one is familiar with their typical price behaviour when energy is strongly trended, as now.
Good trading to you!
(SAJ was responding to this message from T.T., �When is the heating oil ho going to go down? Or is it not maybe is the question. Do you think it has any low left? Any input would be highly appreciated.)
TT -- 100% straight goods, mate
SAJ, Friday, June 24, 2005
We all of us occasionally find ourselves in a position that's going wrong and we can't figure why. EVERY one of us, and I've been there more times than I can remember or care to name.
All right. If you find yourself in such a position, esp. if the position is a simple futures long or short trade, then the answer to your Q, while unpleasant, is very simple.
GET THE HELL OUT OF DODGE CITY.
Liquidate, take your loss, and stick around to play another day.
Futures positions are, as you must know, highly leveraged, and the new or newish trader particularly does not necessarily appreciate in full just HOW bad things can become in a trade due to high leverage.
You can easily improve on this advice, too, but you want to think in advance of entering a trade just WHAT might go wrong and to WHAT EXTENT it might do so. In plain English, **ALWAYS** and every time set, in your own mind at least, w/ or w/o a formal stop loss order, the absolute maximum loss you will tolerate in any given trade. And hold to your view here; don't give me any of this crap about, ''Well, the mkt's gotta turn, it's just gotta''. That attitude, m'friend, is THE SINGLE FINEST INVITATION TO BANKRUPTCY that you have ever seen, or ever will see.
Stick to your disciplined loss level, period, unless events simply overwhelm the trade suddenly-- in which case, you must exit and do the best you can. I've been there; our colleague here, ''Local'' (who is an excellent trader in his own right, btw), among others, can tell you about the day that several trading accounts I was running lost, in toto, about $270K...in that single day. That's what I mean by ''overwhelmed'', ok?
Easier said than done. Gap openings, lock-limit moves, and such are simply part of the game, and even the most disciplined trader you might name has been cost some dollars in such events.
A smaller or smallish account MUST take into consideration the possibility of a sudden, staggering move against the position. In pure futures trading, such a move is very difficult to compensate for.
Which is why, purely and simply, I tend to trade options; if a disastrous move occurs in a mkt, I have some choices other than simply accepting passively a loss.
However, SAJ does not necessarily view the mkts in the same fashion as the majority of (particularly new) futures traders. You can't say (and I won't) that one view is correct and all others incorrect; that's nonsense. What you can and must do, contrarily, is to find a risk-limiting, profit-enhancing strategy or set of strategies, and apply it or them to your trading.
HO might go up from here. Equally, it might go down. Given that condition, and whether you are long or short, do you consider that you have an objective advantage in the position you now hold? If not, get out NOW, RIGHT BLOODY NOW. If so, you might consider waiting around a bit...but this is a tactically inferior idea if you are looking at a sizeable open loss. Open loss, esp. one larger than you intended when you entered the trade?
One more time: GET THE HELL OUT OF DODGE.
In a book I wrote a few years ago, I remarked, ''To my observation, the successful trader over time tends to be a professional coward.''.
Make of that what you will, ... but I meant and still mean every word of it.
Good trading to you!
(SAJ's post was in response to a poster named TT who was trading Heating Oil futures)
What Am I Not Seeing? What Am I Not Looking At?
Stimpy, Monday, May 23, 2005
Everything you experience as a human being is subjected to a highly complex set of internal filters which define that experience. Once that experience is defined, you will then proceed to make judgments, and ultimately decisions which will bring you into a new experience. This repetition is how the continuity of your life is maintained, or disrupted, as the case may be at any given point.
These filters are necessary because the amount of information available in your environment is roughly infinite, but your ability to process and make sense of it is not. Thus, reality is generally never experienced as it happens, only a subjective interpretation of reality based on what your pre-established filters let in, and what they blocked out or altered in some meaningful way.
The dominant filter is what the shrinks call the deletion filter. In essence, this filter takes x amount of information right off the top of whatever you experience. What's left gets fed through the subfilters to create the warped image you hold as, roughly defined, "now". Later, you might recount your experience of "now" to somebody else. I'm sure you've had the experience of your "now" not looking anything like somebody else's rendition of "now". It has all been filtered down to something you can understand, based largely if not entirely on your past. Not insignificantly, the deletion filter is in full effect when recalling your own past history to make judgments about "now" as well.
What is available in our mind after the deletion filter has lobbed off most of the experience, we can usually look at from a few different points of view and come up with a vague assessment of what is really happening. What has been deleted, however, is not available at all because even though it happened, we didn't allow ourselves to experience it.
The most current example I have at the moment is the latest forum resignee (forgive me if I'm inaccurate here, I am not really paying much attention but it's a common occurrence). See, most of the posters here are completely dissociated from themselves, myself included. I have an alias and I know that what I write here will most likely not reflect on me anywhere else in 'my' world. If I posted with my full name, phone number and address, I'd be a lot more careful about what I said. Or maybe I wouldn't, it all disappears in a couple weeks anyways. My filters tell me it isn't important what I say here because my experience has confirmed it.
So here we have puddlejumper (the aforementioned forum resignee, Editor), which I assume is an alias for some similarly dissociated soul out in the world, one of about a billion with internet access. He could be my cousin tommy or he could be my neighbor but he's probably some gimmal out in the midwest who I'll never see in real life.
My comment last week was pointing out that a trader with a 23/24 track record, or in an offhand post was suggesting a 23/24 track record (I've read maybe 3 of his posts ever so I don't know) is deleting some significant information from his own experience. Not because it cannot be done, but when it is done, external approval is not that meaningful and he wouldn't be looking for it here. Confirmation in my own mind, trading 6 corn contracts doesn't scream confidence in one's abilities or past performance, nor does it scream overwhelming financial success that should accompany such a track record. Deletion here hit the information regarding all the times it didn't work, probably all the months before January if that is where the track record started. I'm not saying that was the conscious motive, just that's what came out. We are going to ignore reality by deleting x amount of information to put forth a false reality that we can accept. System sellers do this consciously, it's called backfitting.
Stepping down from there, we have the secondary example of the deletion filter. If I saw correctly, puddlejumper took a 'vote' of all his dissociated peers to see who 'felt' that his contributions were being appreciated. What probably happened is a bunch of posters said they appreciated his contributions. Then some unmitigated jerk had to come along and ask an uncomfortable question or make some shallow comment. What happened in puddlejumper's mind (or the person's mind behind the assumed identity, more correctly)?
Deletion.
Deletion of all positive feedback for the exaggerated effect of a few fact oriented malcontents. The conclusive experience for puddlejumper being "I'm unappreciated here". And if I had to venture a guess, I'd say that's puddlejumper's mantra out there in the real world somewhere, unbeknownst to him, he's a slave to his deletion filter that is removing all the positive feedback from his experiences so that he can continue to reinforce his belief that he's unappreciated. Of course, there's no such person as puddlejumper so it's all academic and I don't feel bad making the observation. And of course, it has nothing to do with stimpy, or whoever, so much as his mom, or his 3rd grade class or whoever, he doesn't even know so how could I. Those with a similar pattern embedded in their own filters will "feel his pain", those of us with a slightly less warped deletion process will see it as dissociated role playing and suggest couseling to overcome that false perception. Soon.
Is it possible that understanding this mental process has A HELL OF A LOT to do with successful trading? Hey, I don't know. If you don't KNOW what information you are deleting before you can even assess it and then act on it, might you be painting a very inaccurate picture of your own reality? Is YOUR DECISION MAKING PROCESS the single most important factor in your trading? Who am I to say? If your favorite guru is dead nuts wrong for 2 years and then gets right for 3 hours, do you take his next trade or let it influence your own positions? If your system has a 50% track record over time have you figured out how to believe it will do better from here on out? Does your stop ALWAYS get hit when you trade conservatively or did all the times it didn't just disappear like puddlejumper's fan club and his pre-january track record? To borrow from Carl's post last week- Can you remember right this moment which months in the last 6 you have turned a profit, and if you can't remember, do you believe that is not important, and if it important, why can't you remember it? If you've lost money for 10 years or more do you still tell the same tired story of the week you made 20 grand whenever the subject comes up?
Everyone's different, for being pretty much the same that is. And seeing what you aren't seeing is a bit of conundrum, I know. But you have to ask the question to begin- what am I not seeing, what am I not looking at? If you ask, you'll start to see a change in your deletion filter, just by asking. A mantra of my own these days...."most of you never will". But since you asked, that's my short answer.
Rain stopped here, I'm done...
good tradin'
Trading now and then
Gunter K , May 12, 2005
Puddlejumper brought up an interesting topic.. trading today, as compared to trading in the "old days".
I remember sitting in my broker�s office when I first started out, asking him to place a limit order to buy xyz commodity. He wrote the ticket and placed it on a conveyor belt... the ticket would then slowly make it's way across the large board room, until it disappeared in a hole in the wall. Behind the hole in the wall was the "order room". There, it went on the bottom of a stack of other waiting orders. When its time came, the order was sent by telex to a central order place in Chicago (or NY?), and from there it was arbitraged by phone to the applicable exchange.
We weren't allowed to cancel an order 15 min before the close.
Charts and indicators? We received our charts in the mail.. every weekend. The only indicator I remember was the moving average and Granville's OBV indicator. We had to do these by hand, on a piece of paper.... you better used a 10-day m.a., because it was the easiest to calculate (dividing the sum of 10 numbers by 10).
Later on, I discovered that intraday action also created a chartable picture. Intraday charts? Hah! The real fanatics (that's me, and a few others) kept their own intraday charts by hand on graph paper. You can imagine, it takes a lot of effort to maintain a 5-min chart by hand.
How did we ever manage to survive then? Not very well.... statistics showed a terrible 85% of the traders were losing... only 15% did well.
TODAY, things are much much better! Order transmission time to the computerized exchange is measured in nanoseconds, and our charting software comes with 150 standard indicators and the capability to program your own super-secret tools.
Finally, we have arrived at a point where everybody can easily and quickly make a fortune on his computer..
Ooooops.... the CFTC is watching me.... the truth is, 85% are still losing in this game.. that hasn't changed... but, we do it faster now!!!
Actually, records have shown that in some of the NASDAQ (Level II) daytrading companies the fatality rate of their clients is above 95%.
As we all know, technology alone does not make a person a good trader. To be a good trader takes a whole lot more... mental attitude, understanding crowd behavior, proper money management, etc etc.
All this technology at our finger tips entices us to get too complicated, too many wiggly lines on our charts, too much information, too many things to think about.
I know quite a few excellent traders who trade the market successfully, using only very basic and simplistic technical analysis. They are successful, because they do right in all the other areas, risk management, proper attitude.. discipline following their plan.
And that's what I always recommend to my clients, should they ask. stay with simple things.
All this is not do say that I don't use all this technology myself. I wouldn't want to be without it anymore. But, let's face it... trading is an art, not a science.
AVOIDING TRADING ERRORS
Gunter K , October 16, 2004
Dealing with errors, a subject that is rarely talked about. Yet, errors do play an important role in the overall success of many traders.
This brief discussion needs to be broken into two parts: online trading and conventional trading. Actually three parts, if discount brokerage firms are included.
ONLINE TRADING
Some traders can truthfully boast that they rarely make errors. But many of our online clients have admitted that errors have played a costly role in their trading.
The most common error is placing a "buy" vs a "sell", The consequences are obvious. In a fast moving market, the loss can grow quickly.
The next most common error is an incorrect price for a limit order. Take for example XYZ commodity trading at 400. You want to buy at 396. Buy mistake, you type in 496. In a pit-traded commodity, this order would be rejected by the floor as "bad price". Not so in an electronic environment. You will be filled at 400, not what you wanted.
A very similar error is forgetting to designate a stop order as a "stop". The order will then hit the system as a "limit" order. Similar to the example above, you will be filled instantaneously. (one such error on 3 S&Ps cost me $3500 within a few minutes, a few years ago).
A rarer error is number of contracts. A few years ago I typed "22" for a two lot client order, in a thinly traded AD market. Loss: $1800 out of my pocket.
Errors don't have to happen. They are VERY easy to avoid: check your order very carefully before you push the transmit button.
Of course, that's easier said than done. Sometimes a trader is a state of mild panic. His position is losing, the market is moving quickly. that's when things are done in a rush. It takes a bit of discipline and self control to slow down and make your routine checks and doublechecks, even when the world around you seems to be falling apart, or even more so, when the world seems to be falling apart.
It is also important to check your portfolio EVERY morning. You may have made a mistake the day before and not be aware of it. A very typical mistake would be to close down your computer at the end of your trading day. The next morning you see an unknown position on the books. It was an order that you had forgotten, an order that was still "live" after you turned off the computer and was filled late that day.
CONVENTIONAL ACCOUNT WITH A DISCOUNT BROKER
In such an account, you place your order by phone, rather than online. This eliminates the typical �typo� errors described above. But it opens the door for other errors.
Please be aware, that the person on the other end is strictly an order taker who handles the orders of 100s or 1000s of the firm�s clients. He does not know your account personally and doesn�t know what your positions are.
As above, be sure to define buy/sell, number of contracts, contract month, commodity, etc, precisely. It can easily happen that the order clerk writes down something slightly different from what you said (or, maybe, you didn�t say it correctly). The order clerk will read back the order to you. This read-back is very critical to your order avoidance. Listen carefully! Many times, you may be watching the screen while the clerk reads back your order, and you will not pay full attention and miss an error in the readback.
To avoid errors, speak clearly. Repeat important parts.. �buy 5 Dec Gold at the market, buying five�. It also helps to say �December, Christmas, silver� or �September, Laborday silver� if the environment is noisy.
You may not notice an error until you get a re-cap of the day�s trading. You need to contact the brokerage firm immediately. They will listen to the voice recording and determine whether the error was made by you (then the discussion is over) or by the floor broker. If the error is made by the floor broker, they will correct and adjust. But you must inform the brokerage firm before the opening the next day. You can�t come back 60 days later and say you discovered an error and expect everybody to be very cooperative. It�s your job to make sure your account is in order.
It can happen that another trader�s transaction shows up in your account, because of a mistakenly placed account number. If you see something like this, call your brokerage firm immediately, even if this trade is a profit. Under no circumstances try to liquidate on your own. Most likely, the error has already been detected by the other side and will be corrected. But DO call them about� just in case!
FULL SERVICE BROKERAGE
For new traders it�s always recommended to start out with a full-service broker� not to get buy and sell recommendations, but get guidance and mentoring.
In such a relationship, communication is more relaxed. Your broker knows your positions and your trading style. �Sell my short position� (meant to �liquidate my short�) will immediately be understood to be a �buy� order by your broker. Plain English words will do, such as �get me out�. He will also know how many contracts you have, when it�s time to exit in a hurry.
You can also give him complex orders that would be totally unacceptable by discount firms and online platforms� such as �when the Dow hits 10000, sell my S&P options.�
If you cannot monitor the markets all day, give your broker instructions to follow the market with a trailing stop, and he will be glad to do so.
Quite obviously, such an environment eliminates most of the errors described above. The broker will also check your trades and your positions at the end of the day, or before the opening the next morning, to make sure all is in order.
It also a very important practice to check your list of working good-till-cancelled orders. Too often, a position trader liquidates his position and forgets to cancel an old protective stop. If this goes undetected, you may find yourself with an unwanted new position some day. Again, a good full-service broker will watch out for such things.
As I said earlier, some traders manage to avoid errors, but many others do not. One lousy error can ruin your whole month. Make error avoidance an important part of your trading discipline.
WHY TRADERS LOSE
Beaners, Saturday, Oct. 9, 2004 at 4:10 PM
I have made all the rookie mistakes:
I added to losers
I traded on emotions - fear, greedy, excitement, anxiousness
I failed to use stops
I used poorly placed stops
I misjudged vig, risk, reward, slippage
I picked tops and bottoms
I overtraded
I traded too many contracts at a time
I tried to scalp 1, 2 points but end up losing 5
I used poor money management
I traded on whims, hunches, boredom
I had big winners that ultimately became big losers, small losers or small winners
I tried to exact revenge on a market
I was NOT objective
The trend was RARELY my friend only because I failed to welcome it and offer it a drink.
We ALL make mistakes. Some of us readily admit them. Some of us hide them in the deep recesses of our mind. Some of us TRULY forget them. From losing comes victory! So long as you learn from your mistakes. I've convinced myself of that.
(Excerpts from a longer post)
WHICH INDICATOR WORKS BEST?
Gunter K - Saturday, Oct. 9, 2004, at 9:41 PM
A newer trader recently asked, which technical indicator was best. A simple question.... but there is no simple answer.
All indicators are basically mathematical contraptions calculated from past price history. Some of them are based on average price movement of the past, others look at statistical deviations from the average, and others yet are indicators of momentum.
What makes a discussion more complex is the fact that each single indicator's output greatly depends on the parameters that go into it. Take, for example, a 10-bar RSI, a 20-bar RSI and a 30-bar RSI, and you have three distinctly different curves.
The longer the look-back period, the smoother the curve, and the greater the lag.
So, which indicator is the holy grail?
One thing is for sure... none of these indicators give you a 100% reliability.
Which indicator is best? That's very much in the eye of the beholder.
I have seen various great traders at work, and they each seem to use a different indicator. One did great with an RSI, another did great with MACD, another with the CCI, etc etc etc.
What I have noticed on all these good traders is the fact that they seem to be able to weed out the bad signals of their indicators (and ALL indicators will give you bad signals, from time to time) and thusly improve their performance record.
They do so by becoming sooo familiar with the wiggly lines of what ever indicator they are using, that they are able to interpret very subtle nuances of these lines... so much so that it often seems like intuition.
What does all this mean to you? You have to experiment with a number of these gadgets and find one of them that "speaks" to YOU. What works for Jim or Jack may not be right for you.
Also, don't forget that a plain chart by itself (no indicators) can also be the tool that "speaks" to you.
While you experiment with indicators, you will quickly realize that some work best in range bound markets, others work best in trending markets. While using these indicators, you must then be keenly aware of shifts in market behavior.
While you experiment with various indicators, you will also sooner or later come to the conclusion that two indicators are better than one.... three are better than two... and four are better than three. Let one indicator confirm the signal of the other, and you will feel much more confident. There may be a certain truth to this principle, but eventually this path will lead you to 'analysis paralysis'.
In closing, it also needs to be pointed out that NO indicator and NO trading approach will work, if there isn't a good money management (risk control) mechanism in place.
Gunter K
SAGE TRADING POINTERS FROM MAROUN
June 3, 2004
I think Bill hit the nail on the head when he advised finding a strategy that YOU are comfortable with. I can't think of any better advice.
I, like most traders that do make money, paid my dues years ago and only started making good, consistent money when three things fell into place.
1) Become as much of an expert as you can in ONE market . I found the one market (beans) that I discovered I had a better than average feel for and concentrated my efforts in that ONE market. This included learning all I could about the fundamentals that drive the bean market and very importantly, learned how to read sentiment and how it can/will/does effect price movement.
More importantly, in terms of fundamentals, I learned to filter out most of the excessive data "overload" available and narrowed it down to what I felt would ultimately give me an edge in terms of trading success. This concept is related and leads to number two.
2) Developing a simple strategy. Fundamentally, you can drown in the available information out there for just about any market you wish to trade. The same goes for the technical analysis aspect of trading.
My strategy uses simple, moving averages (9,18,40), trendlines and support and resistance zones. I also analyze different time-frame charts simultaneously (1, 5, 15, daily, weekly, monthly). From a technical standpoint, that's it, that's all.
The rest of my strategy is based on intuition and feel regarding sentiment. I don't have unbendable rules I follow that say to take or not to take a trade. If it feels right, I pull the trigger knowing that my analysis has put the odds in my favor and once I decide to enter/exit, I never hesitate. That simple.
For these reasons, I would say that I utilize a "strategy" rather than a "system" as it is most definitely a flexible approach. The word system implies no human imput. That approach doesn't work for me.
Finally, (arguably) most importantly, number three.
3) Risk management. Again, I do not have an inflexible approach but certain things are a given.
For position trading, always have an initial stop in place. If a trade moves in my favor initially (which it does quite often) I move it to break-even. Moving stops is an art and takes practice and the only way to learn it is to trade. I can't put it any other way. Moving my stop to break-even was the hardest thing for me to come to terms with but the bottom line is, if you get stopped out at break-even, you still have all your $$$ and there is ALWAYS going to be another opportunity. I can't stress that enough.
For position trading, I give the market PLENTY of room and rarely ever move my break even stop even if the market has moved a hundred points in my favor. Rather, I have mental stops which are constantly adjusted in my head dependent upon changing market conditions.
For day-trading, I always use an initial stop and usually am out of the trade before I even have a chance to move it. In other words, I take the money often using support and resistance zones and consequently, very often leave a lot on the table. However, since I started day-trading in this manner, I do very well. Trying to trail a stop while daytrading, in my experience, usually gets me stopped out. I would rather concentrate on my exit using limit orders. I prefer to use target objectives. Others will argue this saying you have to let your profits run but I whole-heartedly disagree (for daytrading) and do what works for me.
All in all, preserve your capital and always remember that the market will always be there for you to get in again. This sounds simple, but it took me a long time to REALLY understand that.
Hope this helps and good luck to you.
M
MORE SAGE POINTERS, THIS TIME FROM LOU
June 4, 2004 at 12:56 AM
I also have to agree that the best advice is to identify a strategy/approach that YOU are comfortable with. Whatever approach you settle on, YOU have to KNOW that an it will achieve superior results.
It can take a lot of time to win consistently. It took me over 20 years to reach that level. I think I won money my first two years trading, and then had consecutive losing years from years 3 to 9 ... with a bone crusher in the 84 lumber market that ended my "retirement" at age 23. I always had a dollar amount ... like 2 or 3 K ... that if I ever drew down more than ... would close the account for the rest of the year. Trading a small account successfully takes extraordinary skill.
My approach evolved considerably over the years. Early years focused on identifying the "system" that if rigorously applied would make profits. Of course it had to be computer proven. Now I wing it. I trust my intuition exclusively. Always within certain money management parameters and trading rules that keep ME in control. I'm different from most of the previous posters in that I track just about ALL the markets. That enables me to trade only the very best set-ups. Be discriminating. Also, once you truly understand inter-market relationships, you can be far more accurate with specific markets.
My number one and best rule is to put space (time)between losses. I gladly take losses less than $200. No penalty there. If I take a loss greater than $200, I penalize myself by not entering any new trades for a week. Also pick a day of the week (I use Wednesday). If I have been in a trade more than four days and show a loss greater than $200 on Wednesday ... I take it ... and wait a week. These rules condition you to take profits and prevent you from falling in love with a losing position that can grow into a real problem. I took a $600 loss in cocoa today which ended a 21 trade winning streak. And I am not talking about scalp trades. But trades that are averaging about 50% of initial margin in 3 to 7 days. Also closed a July Crude short from 4208 for a tidy profit ... but I focus on the loser ... and will take a 7 day trading break from initiating new positions. Trading breaks are important. (Still long Dec Cotton from 5705 and short Oct Sugar from 735 if your interested).
Know, understand, and improve yourself. Maintain your humility. Be a genuinely good person. The big fella brings good things to good people.
I also have mixed feelings about using stops. Sometimes I'll use them. But its far better to use money management techniques coupled with your feeling about your position. If ever you don't like it ... get out ... regardless from where you entered.
I could go on forever ... but I have to get some sleep.
Good Luck !
Lou
MANAGING IS EVERYTHING
June 11, 2000
My Comfort and Account Management
ac_ro -- Sunday at 8:03 am
To danimal: It helps to pick the market right. The one rule I mentioned is not my only rule or even the main rule of how I manage my money. Yes, I trade one bean for each 3 grand. But I also don't usually trade beans when they have this kind of volatility. I stick to corn and wheat, and just for the reasons you stated. When the volatility gets this high, you do need to allocate more capital to cover that, and then its just tying up capital "just in case" that could be better used in other markets.
I pick highs and lows, (I know they say don't do that, but I do it for a living so I'm pretty comfortable with what I am doing) so I only worry about the move against me from that high where I put my short on. For example, at 570 I sold beans. My forecast is for 515. So I am only worried about it if beans go to 610. Higher than that would force me out of the trade. In my opinion, it was a very low risk trade. (In actuality, I didn't wait for the whole profit, I got out after 20 cents profit and turned to wheat.)
The events you refer to probably have a very very low frequency. (2 limit closes in a row in the same direction). That is the worst case scenario, and I am not very concerned with planning for that event that occurs once a decade. I am planning for and generally trading for the mid range more likely scenario.
Also, since I don't ONLY trade beans, and I apply the same rules to all commodities I trade, I am trading too conservatively in other markets. So the "excess" capital I have allocated in other corners of the portfolio can cover the single day volatility anomalies in beans that may occur with such low frequency.
If somebody has a 15 grand account, they should NOT be trading just 5 beans, imo. Especially between the months of March and Oct.
I also don't have any arbitrary 10% drawdown rules of the entire account equity. I trade each trade as its own. I worry about the 40 cents against me in the bean trade, not the bottom line of my account.
I actually only even consider the bottom line about once a week. If it�s getting lower and lower, I'll look at my overall portfolio of trades and figure out what�s happening and how well capitalized I am over all. But I would never get out of a trade because the bottom line in my total account was 11% down. Like you say, I can get those kinds of swings trading beans, in a day. But then I can get up 20% in a day too. And if I make 20 percent in wheat and lose 10 in beans, I still am up 10 percent.
I am concerned with the portfolio numbers on a weekly, monthly and annual basis. For example, my personal fiscal year begins on Aug 15 for this account. At one point this year, at my worst, it was down 33 percent. Due in a large part to a trade I made in the #14 market that was just plain stupid. But as of Friday it�s up 27 percent for the year. These kinds of swings don't bother me since on the average, I tend to double my account value each fiscal year. I think how you do the math should be directly related to your comfort levels, and not just be arbitrary finance numbers that you try to adjust your comfort levels to. I am comfortable with a single trade swinging 10 percent against me (4 cents in beans on a 40 cent allowable). I am not as comfortable if that is the only trade I have on, and I am loaded up with it. I am not comfortable with the volatility of beans in the summer. And I like to have a few low volatility trades on that are making money slowly over several months as often as possible. Like holding sugar for 7 months last year...as it slowly cranked out the profits each week.
BUBA�S NOTES ON GREENMAN�S TRADING STYLE
buba � January 2002
Anyone who has been reading Greenmans� posts and who has two braincells left to rub together knows that Greenman has assimilated the essence of good trading practices and habits and has put them to very good use. Better yet, he shares his wins and losses with us to learn from. He is a master trader in my mind, and I�m sure in many others.
I don�t want to steal his thunder because he has been more than gracious in sharing with us. Happy Birthday Greenman! It seems this forum is in a mood lately to reflect on trading practices and habits. The good and the bad. I think Greenman has helped this forum, and certainly myself, look into ourselves to find the traders we want to be.
It was evident early that luck does not play a role in Greenman�s trading (although some luck never hurts). These are some of the elements of good trading I have gleamed from the postings of Greenman, some are reconfirmations, and some that I want to more fully implement in my own trading, in no particular order.
1. Greenman uses a system/method: Greenman has expressed he uses a system/method, swing trading, and he sticks to it. It really doesn�t matter here what the method is. I have never read a post where Greenman shoots from the hip or takes a position based on something other than the system he uses. In a recent post Greenman stated his system would not allow him to chase the silver market and he would wait until his system gave him a signal. Greenman has found a system that works for him. He knows its limitations and is comfortable with the method.
I have never read Greenman say it is the very best system in the whole world or even recommend it to anyone in the forum. I believe there are many trading systems that work, if the proper discipline is applied. To each his own. The point is Greenman uses a system/method of trading that is right for him.
2. Greenman keeps it simple. I have never read the reason Greenman put on a trade, and not be able to understand it. No wild concoctions of exotic indicators and obscure fundamentals. Very straightforward, honest trading. Greenman shows how really simple trading is, but not easy. He posts as though writing in a trade journal. In a few posts with simple sentences, he explains, executes and exits trades with poise and confidence. Simple maybe, but if it were easy, we would all be making posts like Greenman.
3. Greenman uses supplemental information: Greenman is not fixsated on one indicator or one specific fundamental. Greenman uses supplemental information such as chart patterns to help him anticipate a trade or determine the validity of a trade. An example is the recent long wheat trade where Greenman noted the triangle and that price in the later stages of the move were hitting the top of the triangle more than the bottom, and indication price may penetrate the top of the triangle. It was simple and straightforward.
4. Use of money management: The use of money management is in almost every Greenman post. It has become second nature for him. He sometimes indicates the percent risk he is willing to take, and that percentage is always small. He uses trailing stops and moves them on a consistent basis. I have never read of him adding to a losing position. He knows where he wants to add in a winning trade and has posted many times of doing so. Probably most important, he cuts his losses short, automatically, as in I believe in the recent coffee trade.
5. Emotion: I have never read Greenman express great joy or frustration over any trade. Words like awesome, best, or terms like "no brainer", "trade of the decade", "can't miss" are not found in his posts. He takes the winners and losers in stride. No fretting over a losing trade or boasting over a winner. He has taken the "self" out of trading (something else also posted this thought) and almost trades humanless. Yet, he has shown just how human he is, a rare trait.
6. Home runs: I have not seen Greenman post of a homerun. His wins are consistent and profits are taken where possible. This is not to say profits are taken prematurely. Greenman typically posts his price target based on a measured move. His price targets appear reasonable and doable for the market. There is no "beans in the teens" and I�m retiring on this trade mentality.
7. Need to be right: There has been some other posts here tonight on this subject. Greenman posts his losses just as his wins. I must admit, I was slightly surprised when Greenman posted his losses as easily as his winners. The posts are straightforward, no fluff, no sensitivity, no apparent strain on the ego, and best of all, no coverup or excuses.
8. Trades several markets: Greenman is not tied to one market. He does not try to make a trade in a market where there is not one. I have read his posts for silver, cocoa, wheat, copper, coffee and others. There's always opportunity out there somewhere. Greenmans� method does not limit his options. As a side note, Greenman does not admit he knows much fundamentally about any market he trades. The technical setup he looks for is there and he takes the trade. It could be chopped liver he�s trading. I don't think it matters much to Greenman.
9. Picking tops and bottoms: I have not read where Greenman tries to pick a top or bottom, one of my more posted foibles. His system most likely doesn�t let him take those trades. I believe I read one Greenman post that stated in effect the market would have to prove it had made a low before he would take a cetain trade. I�m not sure which market and it doesn�t really matter. Point is, Greenman doesn�t try to pick tops or bottoms. Simple.
10. Experience, Adversity, Perseverance, Discipline: I read where Greenman started trading in or around 1983 and traded poorly throughout the 1980s. I�m sure this period of trading was a strain to say the least. It could break emotionally a lesser person. Greenman said essentially he owed his success to perseverance and finding balance, in trading and life. I believe Greenman searched for the demon inside and conquered the fear that kept him from truly succeeding in trading for those years. I certainly still have my own demon(s)I deal with. This is perhaps his greatest achievement, and as a result, has allowed Greenman to trade as only some of us dream.
Sorry for the long post. I didn't hesitate to write this, but did hesitate to place it into the forum. I apologize in advance if this post has offended fellow posters, especially Greenman. I wrote this post as much for myself to learn from Greenman. So much more of Greenman's abilities could be said. I apologize if my analyses of Greenmans' trading appears out of place. It�s not meant to be a critique or a movie review. But a big two thumbs up anyways. I hold Greenman�s trading abilities and his sharing with us in high admiration. I trust Greenman will be with us a long time.
As Greenman would say, and so appropriately,
Prosperity
AND GREENMAN ON SWING TRADING
how to trade successfully
greenman - Thursday at 12:15 PM
after many years of trading i have acquired a successful form which works for me. as you may know from my posts i am a swing trader. in other words i look for markets which have been in a swing for a few days, then after finding a hard number (sign of reversal - gap and failure, outside days, shooting stars, hammers, and various other analytical techniques) i take a position in opposition to the preceding wave, trying to catch the turn.
i use a stop just beyond the perceived reversal point. usually the risk is very small because i'm entering very close to the extreme of the preceding wave. this means i often get stopped out because the preceding wave continues. a losing trade may last only a few minutes.
however, occasionally i catch the turn. if the trade starts to move in the anticipated direction, i add quickly adjusting my stop closer to keep risk in proper order. then i watch the trade carefully adding more as the new wave accelerates and finally exiting when the new wave shows signs of reversal. in the case of a good trade this will usually happens in about 3-4 days. a good winning trade will return about 5 - 7 times the initial risk. i will often have more losing trades than winners but come out ahead because the winners are much larger.
very important to keeping discipline is making sure the initial risk is small enough that taking the loss is not a psychological problem. in other words if the risk is too big when it comes time to take the loss i may refrain because i don't want to lose that much, so i might have an urge to let it ride and "hope" it comes back. this phenomena of not wanting to take the loss is the cause of ruin for most traders. therefore, i usually risk less than 3% of my account on any one trade, i find if i risk more its difficult to remain true to proper form.
i'm posting this because i want to solidify this style for myself. whenever, i trade in this manner i am successful, sometimes very. conversely, whenever i've gotten in trouble its because i got away from this style.
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