Trading Thoughts

There and Back Again

2007-10-30T23:33:00.000-04:00

How come I end up where I started?
How come I end up where I went wrong?
Won't take my eyes off the ball again . . .
-- Radiohead

What a long and strange trip this has been.

I cut my teeth in trading a decade ago as a "SOES bandit", where luck and a bubble market left me with a big head and no clue in the aftermath. Then I spent years in limbo trading futures: currencies, SIF's, bonds, metals, energy, etc., cycling extraordinary gains with even more dramatic blow-ups. I went to the edge this past year when I seriously questioned myself, whether or not I had learned anything of use over the years -- a trader who loses his confidence is a sorry sight indeed. But I suppose perseverance won out in the end, even though I'd be the first to admit that I continued forward because I really had no where else to go.

And now where am I? Back in stocks, trading prop of all things, where I guess I belong. I go home flat each day; no more "campaign" trading nor playing DIY hedge fund manager for this humble trader. I feel blessed enough to be excited every Monday morning for the start of each week. I get to even talk to other traders (like, real live people), and have my P/L pored over each day, instead of trading isolated at home, rationalizing god knows what in the dark. Most importantly, I'm glad to be able to say that all those years in front of the screen did not go to waste. Sure, I'm making one mistake after another as I plunge headlong back into the world of equities, but each time there's a calming familiarity, a lack of panic despite what goes wrong, like I've seen all this before. Discard the emotions, and the losses read like a textbook manual -- one page at a time. I'm optimistic.

A Fool's Tongue

2007-10-06T12:11:00.000-04:00

There is a fine line between dedicated and addicted. Just a single letter in fact.

But will you sacrifice the world to prove you are one and not the other?

When both means and end are binged as one, all shall taste bittersweet thereafter.

The king is dead.

Long live the king.

Eyes Wide Shut

2006-08-17T13:43:00.000-04:00

Why does it take so long for a trader to learn?

Like I've said before, I've seen as much so-called wisdom over the years that I've eventually learned to hold as inviolate truth, as that which should be thrown out with yesterday's garbage. Yet why does the eventual accumulation of pertinent knowledge translate so slowly into one's trading results? If we are capable of weeding out the good stuff from the bad, why doesn't the good stuff just take over and guide us directly towards success?

Aside from the fact that I might just be a dumbass, one thing I've figured out is that the distance between the brain and the finger might not be so close as you'd think -- if you're not careful. I know I'm not the only trader who has a tendency to repeat the usual mistakes, or variations of same, despite having berated myself 10 times in the previous week to make an effort not to do it again. My contention is that old habits die hard. Real hard. And only if you go out of your way to kill them outright.

Case in point: my stance towards major market moving news is that you have no reason to trade unless either a) you know what the report will be beforehand, and can accurately gauge the market reaction; or b) the risk/reward ratio is so skewed towards one direction that it's worth taking a chance. None of my setups are explicitly tailored for exploiting that generic spike in volatility. Yet why do I always find myself pumped up with adrenalin, finger on the trigger at 8:29 each and every first Friday morning of the month? Why am I always psyching myself up to do something -- anything -- just because I know there will a big move upcoming one way or another? I came to realize that this was a holdover from my stock trading days, when chasing volatility was the name of the game. But even as that game became extinct, I continued to instinctively adopt that "fight or flight" stance whenever potentially market moving events were impending, despite the fact that there was no justification for getting involved. By winding myself up into a mental and physical posture for spontaneous reaction in situations where nothing actually should be done, I was just begging to get myself into some sort of trouble. But until I took a step back (literally, way back) and saw how I was unconsciously placing myself in harms way for no good reason, that same bugaboo of "impulsive" trading just kept recurring with me none the wiser, nor richer.

Trader's Fortune Cookie

2006-06-14T13:21:00.000-04:00

To hope is to admit all faith is lost.

Uprooted

2006-06-09T06:41:00.000-04:00

Sorry for the lengthy absence since my last post, there's been alot more "shifting" going on than I ever expected, both in trading as well as personally. For one thing, I've relocated back into the Big Apple, where giving up the car in exchange for unlimited subway rides seems the best trade I've made so far this month. Although the floor space is half that of my prior apartment -- with my monitor currently sharing a small slice of the dining table -- it seems a waste to remain too long indoors no matter what the square footage, with the city just outside your doorstep. In fact, since the wife is in the market for a new laptop I'll be taking advantage of the increasing availability of wi-fi around various city parks -- it would be nice to get a change of scenery every once in a while even as I stare at the same quotes and charts each morning. Unlike my last stint in town where I relished my swanky digs but sadly ended up pretty much a hermit, I'm going to make it a point to get out and live beyond my "sleeping hole", and take advantage of what we're really paying for in terms of monthly rent.

I'm not sure as of yet, but I also believe this new atmosphere of "uprootedness" will give a fresh perspective to my relationship with trading and the markets. In this business, it's all too easy at times to let yourself become totally consumed by the "flickering ticks", and taking a step back once in a while to re-orient yourself never hurts. Already, the city has become this constant reminder that there's just so much more going on outside compared to the "drama" playing out on the screen and inside my head -- it's now just that much easier to power things down and set this crazy game aside when needed.

Shift

2006-03-30T23:00:00.000-05:00

Recently, a fundamental shift occurred in my concept of what comprised an edge. My approach to finding opportunities began to rely more on the situational logic of any given moment, and less upon blanket, "incidental" setups. In other words, instead of just scanning the market passively and waiting for some pre-defined "pattern match" for a point of execution, any opportunity would now have its basis upon my understanding of the present (read: unique) impetus for market movement, and an accurate anticipation of where/when the next source of demand or supply would come from. Changes in market psychology would now comprise the elements of the setup-pattern, rather than just their visual manifestations on the charts, which are often a step or two behind in providing an entry point. The most glaring difference in the before/after would be the primacy of context over any rigid, abstract interpretation of market action; pattern XYZ might denote a "buy" today, but could just as easily convey a "sell" tomorrow.

Putting discretion at the forefront of my trading was no easy task, but was a necessary move considering the markets I trade. Any "rinse and repeat" setup can only last so long before it disappears beneath a glut of competitive forces. But this shift was not only a way to sharpen my edge or deepen my understanding of the markets; in my opinion, it was an indispensable step for achieving longevity as a trader. I promised myself I would never repeat the mistake of letting the markets outdate me, and this is the first step to ensuring my edge always remains sharp.

Intermission

2006-02-03T15:33:00.000-05:00

When I look back on what I've posted here over the past year or so, I find as much that I still fervently believe in as that which I now completely reject. Some of the posts in the latter category simply leave me feeling sheepish; others elicit an urge for outright deletion. But to go back in effort to sift wheat from chaff feels dishonest in more ways than one. I really believe the false turns on a journey such as this are indistinguishable from the "correct" path; seeing the proper way is possible only when all the cul-de-sacs are methodically closed off after rigorous exploration and persistent cross-examination.

No short cuts here, not even in retrospect.

Bottoms Up

2006-01-09T21:24:00.000-05:00

Ever since I started trading, I've always aspired to one day playing the macro game. Currencies, bonds, commodities, and equities -- all pieces in the grand puzzle that challenges hedge fund managers and central bankers alike. But not surprisingly, trading alone in one's own living room doesn't exactly provide the ideal vantage point for learning how one takes part in that game, to put it mildly. Sure, part of the intellectual reward from trading is watching the pieces of the puzzle fall into place in real-time/dollars and seeing how the theory actually connects with reality; but let's face it, the vast majority of us cannot even be certain which of the pieces are in play to begin with. Although it's important to have at least some handle on the elements of a market the major players are currently focused upon, an individual trader has only one venue of feedback that he can reliably trust, and that's price. Whatever we might hypothesize about the impetus behind a market move can rarely if ever be proven; at best, explanations are revealed only in retrospect after the opportunity for profit has long gone cold. But the tape remains the one equalizer for all market players, and we can at least appreciate the fact that most of the time we're privy to hitting and lifting the same bids and offers as our bigger competitors in the know.

Given the above, I've come to adopt a certain philosophy behind looking for opportunities which can be summed up as follows: Shoot first, ask questions later -- if any. Rather than using a "top-down" approach of presuming a scenario and then looking for/forcing an entry in that direction, I now readily take any position in either direction whenever a satisfactory entry point presents itself, without any consideration for the whys or wherefores beforehand. The advantages behind the "blind" approach are twofold as one's flexibility becomes optimized: an increase in the number of available opportunities, and a much nimbler stance when it comes to the cutting of losses. Although the satisfaction of puzzle-solving will always be part of the allure of trading, I must embrace the fact that seeking the theoretical solution and making money are often conflicting endeavors when dealing with zero-sum discounting mechanisms.

Conviction

2005-11-14T16:45:00.000-05:00

One often hears about the necessity for having conviction in order to succeed in the markets. Successful trading often involves being contrarian and taking the road less traveled -- after all, each trade you place is a claim that the market is presently wrong, and it takes confidence and courage to be able to buy while the rest of the world is selling. But it's my belief that one should strive for complete conviction only in one's own abilities as a trader, while letting go of the notion when it comes to market opinions and analyses. The line between conviction in ourselves and conviction in our positions is a fine and easily blurred one; however, the implications when we cross that line are prodigious. Not only does putting complete faith in our positions serve as a liability in slowing us down if contary action is eventually required, but it could also be a sign of faltering faith in ourselves. In fact, I believe it makes sense to say there is a direct negative relationship between the the two: the lower our level of conviction in our abilities as traders, the more we tend to place our hopes in any given market position or trade.

Whenever I find myself unwilling to reconsider the arguments against my outlook and/or clearly define my "uncle point" on a position, it's likely that I've allowed myself to drift across that line. Placing my hopes with the market over having faith in myself in finding the next opportunity is the equivalent of throwing up my hands in resignation, a concession to laziness in not wanting to re-examine the possibility I could be dead wrong. By this point, a trader has clearly lost sight of the fact that each trade taken is but one in a long line of thousands, and it's no coincidence that we are most vulnerable to our own convictions after stumbling upon a string of losses, in rush to "get it back".

So what would be the proper mindset, if one is to refrain from fully aligning onself in the direction where capital is already at risk? Conviction implies a settled state of opinion and the inertia of a decision already made; this simply leads to a kind of prejudice towards one market direction or another. But let's face it: assumption is always the path of least effort. And when has the market ever rewarded the followers of that path? It's far better to strive to be continually skeptical and yet boldly decisive when the moment requires. The difference may seem limited to semantics, but I think the interaction between our perceptions and the market should be a continually active process, and that includes methodically denying ourselves the allure of false comforts that accompany an unyielding sentiment.

Learning To Breathe Pt.2

2005-10-21T16:24:00.000-04:00

Although the bottom was ugly, the actual experience was somehow detached, like watching a videotape in slow-motion. I knew what was coming, I'd seen this movie before, there was nothing I could do to prevent it. The funny thing was in the weeks prior to that event, I had already realized that I drastically needed to restructure my entire trading schema, if you will. How I viewed the markets, my capital, and how risk connected the two needed a complete reworking from the ground up. I had begun to actually sit down and investigate what my ideas on trading really boiled down to, to physically collect and collate the evidence (not just spreadsheet figures as before, but actual folders of printed charts and annotations -- modern-day charting by hand, I suppose). I began reordering my trading ideas under different criteria, focusing on the specific differences between each setup, as opposed to just categorizing for the sake of categorizing via mundane areas such as time frame or market. All of this was progress, but old habits die hard, and mine seemed determined to throw one last party before I could wipe the slate clean. So I let that part of me have its way in venting all the frustrations that had collected over the years, with as much capital to expend as needed, because I knew if I were to go on trading this vindictive child inside would have to go. For good.

I wasn't left with much capital to work with. I'd been desperately impatient to reclaim what I'd lost over the years even before this latest blowout; now the idea seemed completely impossible to even imagine. Yet wasn't that the point of the whole experience? Wiping the slate clean on all accounts seemed the only way I could build a new base from which to start over, to continue reconstruction of my entire perspective without the rubble of the past to impede me. I mentioned earlier that I didn't really want to retread this whole experience, but to tell the truth it was hard to get this second part out without really sitting down and thinking it over. And I'm glad I did, because it's quite clear to me now in retrospect.

It was all about releasing that which could never be restored, a forceful letting go, however painful and involuntary, and letting the dream die. The ultimate loss realized. For so long I'd been blindly focused on reclaiming some former glory that nothing short of complete redemption would suffice. I realize now that it was this self-inflicted pressure, this war cry of "all or nothing, all at once" that had become both the primary driving force behind all my efforts as well as the source of their complete undoing. I'd lost all sense of perspective in being obssessed with wasteful regretting, and this tainted my reasoning right down to each individual trade. A waste of time, time running out, got to get it all back now. These thoughts and impulses all shared a singular source. The entire time it was as if I'd envisioned myself running an entire marathon in a single breath, my impatience deluding me into the belief that there was no atmosphere to breathe, no oxygen to spare, when in fact there was plenty of air. Plenty of time. When the dust settled, it became clear there was really no race at all to begin with. The path was one I'd have all to myself, with no one to compete against. I could jog, I could walk. And I could breathe, at my own pace. Inhale. Exhale. Letting the pressure go.

Learning To Breathe Pt.1

2005-09-27T22:40:00.000-04:00

Hmmm, 2 months since the last post . . . are those crickets I hear chirping?

It would be nice to say that I've spent the past eight weeks blissfully enjoying the fruits of my trading, sipping iced tea on some sandy shore without a care for what the markets were doing. That would be nice indeed.

Instead, I must admit to a short but harrowing round-trip to hell and back again. I'll save you from the gorier details, but let's just say 'irrational' doesn't come close to describing the drama that was enacted. For a few ugly weeks, it seemed I could not give away my equity to the markets fast enough. The same old story, the same repeated mistakes. But this time, it bordered on deliberate. What's the classic Market Wizard quote? Everybody gets what they want out of the markets. So -- did I want "out of the markets", or what? Was there a hidden urge to push everything over the edge, and be done with this whole trading thing? For a while it certainly felt that way. Because the entire time as I sank deeper into my own self-made grave, suffering through one mini-blow up after the next, a single thought drummed through my brain endlessly, over and over: What a fucking waste of time.

A waste of time. It was a thought that frequently triggered simultaneously with my stops on the inevitable deterioration of any profitable position nursed too long. Even if no damage was done to closed equity, even if the risk in holding out for greater gains was coldly calculated beforehand, I'd still have an irresistible urge to take inventory of the time spent in constant indecision, the hours of emotions pulled high and low as the position surged and retraced. All that effort and energy expended -- for nothing. But now the thought encompassed more than just the previous trade; it was how I was starting to subconsciously regard the past seven years entirely. I'd driven my account to the very edge, another step from which there would be no going back. And pehaps that was exactly where I needed to be, if only to be able to answer the question right at the crossroads: Is the life of a trader really what I still wanted?

Well -- I'm still here trading. Still here writing. You may extrapolate what you will what mental resolutions were necessary in choosing to continue on; the details are not important. The essential point was: whether or not all of it was truly a waste of time was simply my choice to make.

To be continued . . .

PS -- I originally intended to call this post "The Abyss" and quote Lou Manheim from Oliver Stone's Wall Street. But honestly, I found I did not care much for reliving the lowest moment for the sake of putting it into words (I actually started writing this a week ago), which is why this first part kinda ends abruptly. Perhaps because weeks have elapsed since then, everything I remember about it comes back hazy and distant, almost dream-like. In fact, I still feel sort of sheepish about the whole episode in retrospect, if only because at times I feel like I'm repeating the same story over and over. But I guess that makes sense after all: it's actually just one story that stretches back over my entire experience as a trader, and by no means should you get the idea that some turning point can be reached in a matter of weeks. Each chapter in a trader's life overlaps with another, the lessons being years in the learning, the book years in the making. And with any luck, it will be years more before my story ends. But anyways, if you're wondering, the title of this post will make more sense after the next part, so hang in there a bit.

Trader's Fortune Cookie

2005-07-17T22:53:00.000-04:00

He who fears change should be afraid.

Asymmetry

2005-06-30T01:03:00.000-04:00

A general principle in trading for me is that without thorough investigation, comprehension, and experimentation leading to full acceptance, no trading rule or system can be properly executed. If one cannot completely understand and embrace the reasoning behind some method or axiom, whether internally discovered or externally given, the reflex necessary to act without further thinking or doubt is fatally compromised -- the circuit between the eyes watching the screen and the finger on the trigger cannot afford even the slightest impedence.

One area in my trading which I've been struggling over has been the disparity between the success of my entries versus the failure of my exits on profitable trades. If I had the ability to accurately anticipate and identify the origins of a move, why were my attempts in capturing and keeping the bulk of the profits so horribly inept? Why was my timing in closing trades so blatantly pathetic in comparison with their openings, to the point where I would either consistently stop-out on the lows of retracements, or conversely wind up giving back the entire move if I tried to avoid getting shaken out. To deal with this I began devising systematic approaches to my exits to serve as patchwork fixes, but I knew such arbitrary remedies that had nothing to do with my entry methods could only be temporary at best. What I needed to answer for myself was the following question: shouldn't one's edge in reading and timing a market apply to both entry and exit equally by default? How could the gap between the two be so wide?

Sometimes it's the most obvious things that are easiest to overlook; although it did not take long to find the answer after committing some thought, many good profits had needed to be sacrificed before the right question had been asked. In any case, what I should have realized long ago was that there was a built-in asymmetry in the way that I traded that naturally skewed my perception of my entries versus my exits. First off, since I use extremely tight stops relative to my time frame in opening a position, any trade that survives that stop to reach a certain level of unrealized profitability would necessarily have a well-timed entry, as the typical volatility or "noise level" in any of the markets I trade would stop me out 95% of the time if I do not catch an immediate move in my favor. But more importantly, on a methodological level, the use of tight stops has forced me to become extremely selective in my trading setups, to the point where a number of coinciding events (technical, temporal, psychological) are required for me to pull the trigger. These syzygistic ($.50!) occasions are relatively rare, and a resulting trade that yields a significant open profit rarer still. What I failed to realize while holding on to those open positions was the fact that I was wrongly expecting the same alignment of stars (in mirror-image) to provide the perfect exit signal; whereas with entries I could wait patiently flat on the sidelines for optimal setups to materialize, I could not afford such a degree of exactitude while still holding a position. It's a given that I overlook or miss out on countless number of market moves in my time frame; therefore I should not expect to catch the perfect exit point at the conclusion of a move just because I happen to have nabbed a decent entry at its beginning. In fact, I believe I can make that leap to say that virtually 100% of my edge as it exists now applies to entries only, while on exits I probably can count on doing little better than random on any given trade until further investiation. To say the least, I think this realization counts as an important step in understanding my edge, as a heretofore unseen profile of my method has finally revealed itself to me (as I type these very words -- three cheers for blogging!), and a cloud of uncertainty lifted.

So what are the implications of what I have learned? The most immediate that comes to mind with coming to terms with asymmetry is an acceptance that my exit methodology may necessarily differ from my entry. I will most likely continue trying to align my philosophy for ending a trade as closely as possible with its opening impetus, but I will no longer have qualms in implementing "arbitrary" devices in the interim. Ironic as it seems, I've also discovered that having greater faith in one's fallibility may actually result in a diminishment of doubt in one's actions -- bonus.

Persona

2005-06-08T22:49:00.000-04:00

After identifying, analyzing, and classifying my edge, I thought it would be a simple thing to finally answer the question: What kind of trader am I? For to succeed in the markets, I needed to know exactly what I was bringing to the table each and every morning without question, in order to trade with confidence. Yet breaking down the elements of what constituted my edge revealed a contradiction that needed to be resolved before I could properly move forward.

As I noted in my previous post, I'd categorized my performance according to time frame, ranging from intraday setups to position trades lasting weeks at a time. Overall, I'd found that cumulatively my biggest source of losses came from spur of the moment trades, while the most profitable ones lasted at least a few days and were pre-planned relatively well in advance. So naturally I began shying away from pulling the trigger on any "Intraday" category trade, while concentrating my efforts on looking for the next "big" move. But as I shifted to a longer mindset and paid less attention to the tick-by-tick gyrations, I became increasingly aware of the pitfalls of the longer-term. Holding a position and having a pre-determined opinion colored my objectivity; although I was doing less trading on an intraday basis, there were still premium signals in the short-term that I would end up ignoring if the direction went counter to my overnight position. I was becoming slow and reluctant in acknowledging and incorporating information that contradicted my bias, and I found myself fighting the markets more and more often as they continued to move against "scenarios" I'd developed and grown attached to mentally -- a very costly habit!

I'd thought the longer term was the "correct" time frame for me, yet my results began to betray that assumption. I started to miss the mental freedom of being a purely short-term opportunist, not having to worry whether or not my stops would be hit overnight on some meaningless spike or bracing for how the next economic number would roil my account equity. But wasn't I right in refraining from trading off the short-term flickering ticks, given my past performance? Coming in flat every morning and looking for opportunities off the cuff made me "trigger-happy" as I tried to make each day count; the tendency became to push alot of trades yet each with little conviction, exposing myself to frequent second-guessing and trading for frustration's sake. In contrast, position trading taught me patience in both selectivity of trades as well as profit-taking, yet I'd sacrificed the objectivity needed for instantaneous reaction that is the advantage of having "no opinion".

This dilemma between two contrasting styles became my obsession over these past few weeks, as I became aware that the only thing I was certain of was the absolute need to resolve this question of trading persona. Both sides had their advantages and disadvantages in regards to my abilities and mental tendencies -- the more I racked my brain over it, the more impossible it became to decide. But something finally dawned on me as I pored over my trading results over the last several months. As I oscillated between the two poles in my trading, the further I swung towards one end, the more disproportionate the negatives of that approach would become. It suddenly became clear to me that this was not an either/or decision; instead, I realized the necessity in incorporating both approaches in order to capitalize on the advantages while simultaneously minimizing the disadvantages. I needed the sensitivity of the tape and a finger on the intraday pulse to properly glean the next major pivot and find the optimum entry point; I needed the longer term outlook to keep proper perspective in distinguishing day-to-day signal from noise, and to keep a higher level of selectivity on my short-term transactions. Most importantly, I had to maintain that freedom of opinion and quickness of action at all times, despite whatever I may be holding or have anticipated to occur, for having freedom from one's own opinion is the definition of the ideal market opportunist.

Taxonomy

2005-05-18T01:40:00.000-04:00

One of the more important changes I've made in recent weeks has been a newfound emphasis on accounting and accountability -- focusing not on the nominal peaks and valleys of equity, but rather the exact source of each profit and loss. Where an obsessiveness of the former (goalsetting and the like) has always been detrimental to my subsequent performance, the classification and post-mortem analysis of each trade is a basic process I've long been guilty of ignoring. But no surprise there -- a lack of desire or unwillingness to document, reflect, and dissect one's trading is a big symptom of having no edge. Optimistically, I hope this newfound interest in taxonomy serves as both expeditor and evidence of foward movement.

I've broken down all my trades into separate categories based upon origin of entry, ordered by time frame -- not so much the prospective length of each trade, but rather how much time prior to entry I first conceived the idea for the trade. On one end of the spectrum are multi-day setups which have explicit entries based upon a forthcoming trigger -- a chart line, news release, price point, etc; the opposite end is simply labeled "Intraday", for all trade ideas and executions made within the same session. By getting into the habit of classifying each and every trade, I now anticipate which category a trade will fit into even before I pull the trigger, and this helps greatly in determining how I perceive and manage the trade after entry. For example, the trades that fall within the longest time category in terms of planning are given the biggest allowances in terms of risk parameters, pyramiding, and profit targeting; decisions to add/subtract/exit will only be made on an hourly or daily time-frame, while tick-for-tick tape reading is to be avoided. In contrast, virtually all intraday trades will employ trailing stops with extreme aversion to sitting through pullbacks; they are also prohibited from having their profit targets subsequently expanded to accomodate a larger time frame.

With detailed classification, it becomes much easier to break down performance over time and reveal the nature of holes that need plugging (Poker Tracker fans will yawn). So far, what I've discovered is that I've been far too tight in terms of profit management on my longest-term trades, while "Intraday" is on the fast-track for being re-christened "Potluck" or worse. I am now far more hesitant to pull the trigger on the spur of the moment, and am able to more quickly divest myself of any mental commitment to those sub-par setups.

Progress

2005-05-08T23:56:00.000-04:00

No matter how far a trader may think he's progressed in his education, the market has an uncanny way of exposing whatever weaknesses that remain, as a reminder of just how much further he needs to go. As relentless and withering such an education can be, I think we need to be grateful for how quickly our imperfections are brought to the surface through the process of trading, and to embrace the fact that until each and every hole in our game is plugged, any profits that we presently accrue should be considered only a temporary loan to be repaid upon delivery of future lessons. Sounds like some clever rationalization of a trader who's just about reached the limits of frustration, doesn't it? Perhaps, but I'll allow myself the liberty of such a notion because I also happen to believe it's the damned truth.

In review, there's no question I've made more progress these past few months than I have in the past 3 years as far as edge is concerned -- I believe I've finally achieved an understanding as to what constitutes an edge in today's markets, and have accepted and embraced that challenge and all it entails. When it comes to recognizing optimal opportunities in opening a position, I feel my initial entries are almost as good as they are going to get. As regards to recognizing when not to take a trade -- well, that part of the equation still needs alot of work *grin*. Logically, I just need to convince myself that premium setups, although rare, are all that are needed for continued success; until that is done, I will likely continue to bleed off what profits I may have bit by bit, here and there before I finally determine what exactly constitutes "premium", and decide once and for all to eschew anything else.

In terms of exits, losing positions thankfully don't have much of a shelf life anymore, and I've also gained some ground in the willingness to re-enter trades that I've just stopped out of a few moments earlier, so long as I feel the position is the correct one. As for managing and exiting profitable positions, I've only just realized how deficient I am in this arena, being relatively inexperienced with trading longer time-frames. Despite catching a number of major turns in several markets these past few months, my account equity has little to show for the effort due to extraordinarily sloppy trade management. Out of this frustration, I've finally concocted a framework of trailing stops which I'm eager to implement upon my next trade; it's a form of systemized compromise that I've deemed necessary for the health of both my account and mental well-being.

Finally, as for those "psychological" tendencies that have proved my undoing in the past, they still linger like a twitch in my bones, as if subcutaneous scars reminding me of past misdeeds. But their damage to my bottom line has been greatly minimized, mostly due to early recognition and short-circuiting of situations and emotional patterns which serve as all-too-familiar warning signs. A growing understanding and appreciation of patience has been the primary driver in my progress within this area, and the more I learn to embrace its virtues, the more optimistic I become about advancement in all other aspects of the game.

Know Thy Edge

2005-04-20T00:20:00.000-04:00

Am I harping on the word "edge"? Sure, why not? It's a functional, concise, and connotative term that distills just what this business of trading is all about. But as I mentioned before, it's a word that's been robbed of substance and swept under the rug, having been gently prodded into prosaic jargon -- an irony which I'd say is at the root of most aspiring traders' struggles. So I think it pays to take a moment and flesh out this ghost of a term, and return its original implications to the fore of our efforts.

Edge. From what lexical angle does the word enter the vocabulary of speculation? What does it imply? Cutting edge. Leading edge. By definition, having an edge means having the capability to be consistently ahead, in perception and in action. Ahead of what? Ahead of whom? Well ideally, everyone else -- i.e., the crowd. For who is the crowd but simply all who perceive and need to act after you: buy after you've already bought, sell after you've already sold. In other words, the very source of all your profits. From this implication, the primary objective of every trader in terms of edge is to seek one that maximizes the crowd behind him.

If that definition of edge comes across as somewhat obscure, perhaps we can be more specific about things which probably don't qualify as an edge in themselves. Take the myriad of assorted technical "indicators" and scanners that come pre-packaged with any data subscription, and which promise the power to quickly ferret out opportunities across thousands of securities -- will they alone suffice in achieving consistent gains? If one acknowledges that the vast majority of these indicators are only second-hand derivations on price, volume, and time, would it make sense to think they can somehow get you ahead of the crowd? Is there such a thing in this business as a "leading" indicator, beyond what's shown on the tape? Could it be that these bells and whistles give at best an illustrated "Reader's Digest" of a given market, and this poses as an edge simply because the trader does not have the time nor propensity to read each and every word of that security's proverbial history? Better than nothing perhaps, but not much more.

Understanding one's edge cannot be underestimated; a trader must know exactly what it is that supposedly puts him ahead of the field. Don't settle for simplistic regurgitations, nor shy away from complexity if that's what's required. For to find a true edge is nothing less than comprehension of the impetus behind the movement of markets.

Trader's Fortune Cookie

2005-04-19T00:10:00.000-04:00

Those that sell too soon risk only remorse; those that hold too long invite regret -- and the ticking of clocks.

The First Step

2005-03-28T00:14:00.000-05:00

I've convinced myself of the following: Every trader begins with, and is subsequently defined by, his or her edge. Sounds like some hackneyed cliche, right? Not surprising. No other word in this game gets thrown around, glossed over, or assumed a priori like the term "edge". It's the four-letter word of the business; yet unlike expletives of a scatalogical nature, uttering the word repeatedly at a genteel thousand-dollar-a-head seminar, or reading the word in every other paragraph of every other magazine and online article on trader psychology won't raise any eyebrows. Instead, it's the explicit details, the functional guts behind that inscrutable word which are to remain hush-hush and behind closed doors.

An entire industry of self-help books and seminars for traders is built upon this mystery remaining a mystery. With sleight-of-word misdirection those selling a dream will have the buyer lay blame where any struggling trader would promptly assume it would be: in the mind. After all, the "tools of the trade" are all readily available from any standard quotes provider and data backtester; with such an arsenal of market thermometers at hand, the failure to consistently profit must come from some inner place, right? How else could that MACD convergence-divergence cross confirmed with trebly-smoothed and doubly-offset stochastics fail to generate millions by now? Deftly swapping one apparent enigma for another more readily dissected, the "can't do, so teach" crowd behind the word processors have diverted their readers from figuring out the markets into figuring out their own heads.

Now when it comes to making progress as a trader, I'm not knocking mental introspection at all, far from it. What I do take issue with is the assumption that once those psychological problems are "settled", success in the markets should soon follow. I believe instances where psychological stumbling blocks prove to be the main obstacles that prevent one from achieving his trading goals are actually very rare, and almost never true of those who have yet to achieve any level of consistent profitability. For the great majority of rational beings attempting to make a living from the markets, it's the lack of any real edge to begin with which gives rise to those mental issues that may serve as temporary scapegoats but can only conceal the truth for so long. No amount of positive visualization, group empathy, inner "focusing", or even plain willpower can help the trader lacking a defined and applicable edge. Futhermore, these techniques can even serve to mislead and retard any real progress by postponing that crucial first step most struggling traders probably need to admit to and accept of themselves: that they have not yet found an edge at all. Trying to remedy the symptoms before perceiving or conceding to the cause of illness can only result in prolonged frustration.

Over the Edge

2005-03-20T19:25:00.000-05:00

I had long held the belief that once my psychological issues were resolved, I would finally become a consistently profitable trader. Instead, it was actually realizing just how wrong that belief was that pushed me through to the other side.

For years, I focused my attention on figuring out the "inner game" of trading. On the surface, I seemed capable of generating sizable returns over a short period of time -- figuring out the markets themselves didn't seem to be the issue at hand. The problem was the sharp collapse which would inevitably follow each parabolic rise; a chart of my account equity over this period in time would closely resemble a series of market "bubbles" strung together. This boom and bust happened with such regularity that I convinced myself the problem was somehow psychological in nature. There were a number of theories which sounded appealing at the time: subconscious sabotoge, fear of success, repressed traumas, the list goes on. I grappled with the hidden source of my angst for months on end, trying to decipher how a childhood humiliation could lead to me constantly pulling my stops at the last second or committing maximum buying power to the aussie right before an employment report. Was there really some connection there that could provide the answer? I searched to no avail.

Fast foward to my previous post, where things suddenly seemed to fall into place from out of nowhere. What was different this time around? Did the accumulation of all my past self-analyses finally breakthrough without my knowing it? I thought long and hard over this mysterious turning point, and when I finally hit upon the answer, that became the true "gestalt moment" for me. It all starts with the edge. I had the whole thing backwards all along. The moment I was capable of defining my edge was the moment I realized I'd been trading without one for so long, and that lack of edge was the real source of nearly all those mental issues that plagued me. With the clarity of that realization, a vision of progress crystallized hard and clear, and confidence returned anew. I think this subject is worth a few more entries, so bear with me if the posts seem to flow like molasses -- my muse be a fickle one.

Epiphany

2005-03-01T19:36:00.000-05:00

For the longest time, I've imagined that the solution to my trading struggles would present itself as nothing less than epiphany: a bolt of white lightning, an earth-shattering realization, a blinding, mind-bending revelation. And who could blame me for this fantasy? What else could possibly snap me out of years of repeating the same mistakes over and over, despite having a very explicit list of trading "rules" right in front of me, gleaned from countless hours in front of the market screen? What else could it be, having pored over endless pages of published trading "wisdom", only to find those words which sounded so sensible, so practical, just somehow couldn't translate into consistent action? My issues defied logical reckoning for so long that I was left with only blind faith in the eventuality that these demons would be exorcised at some point in my future -- a vague and desperate hope at best, yet I had no choice but to believe, for I had no other reason to perservere.

But looking back now from the other side, I have to admit that for me, there was no magic moment, no flash of enlightenment that chased away the shadows, nothing at all that remotely resembled any climactic turning point of realization. I can't really recall when the necessary changes were finally decided upon and implemented, but the one aspect I can identify that made things different was that the impetus for those changes came entirely from within. The force that finally had the power to put principle into action was instinctual in nature, as opposed to adaptive in respect to some external source, or merely reactive as backlash against my past transgressions. I wasn't blindly following some guru's Practical Guide to Trading, nor did I need to make the mistakes first before I knew how to anticipate and prevent them. The changes just fell into place, step by step, as things that I knew I needed to do to achieve my goals; they were nothing novel nor especially noteworthy, and endless variations of them can be found in any of the "classic" trading manuals. But this time they finally made sense to me, perhaps only because I came to the same conclusions in my own way.

So what could it have been that finally turned the whole damned ship around? I'm not absolutely sure yet, but the more I think about it, the closer I think I'm getting to figuring out the exact source. But I'll save that for another post.

Trader's Fortune Cookie

2005-02-17T18:36:00.000-05:00

There is no motivator for progress as concise as loss.

Alter Ego

2005-02-04T01:04:00.000-05:00

You got me in a vendetta kind of mood . . .
-- Vincenzo Coccotti, True Romance

I've suffered through a number of account blow-ups over the span of several years, and the root cause of each occasion without exception was the allowance of a few small losses snowball into catastrophe. I had tried any number of methods in an attempt to prevent future relapse, both tactical and psychological in nature, and although I made great strides in employing certain checkpoints to minimize the damage, the possibility of a meltdown continued to loom over each trading session. However, things began to change when I stumbled upon a realization about the nature of my fatal flaw that clarified the cycle by which everything would fall to shit, and at the same time offered a very neat solution to ending that vicious circle.

A losing trade triggers something inside me. A loss wakes me up, like a splash of cold water on the face, and gets my blood circulating like nothing else can while staring at a screen of flickering numbers. Hand me a string of losing trades, and a sudden appetite for risk, a "gung-ho" attitude you might say, overwhelms the usual performance butterflies, and at that point I fear nothing, am ready for anything. Unfortunately, by the time I've reached the point of looking for trouble, it's usually standing right behind me with its fist already stuck comfortably up my ass. Combine a fresh, hefty drawdown with a newfound lack of respect for further hazard -- well, let's just say it gets me from fist to elbow in a jiffy, sans lube. But what struck me one day was not the knee-jerk clockwork of my emotional buttons, nor the likely impossibility of ever eradicating them. It was instead the recognition that this fearless alter ego, which inevitably spelled utter disaster when allowed to take the reins in desperate circumstances, was exactly the kind of trader I've always aspired to be when all the odds were in my favor. This was the guy I needed to take the helm when the best opportunities arose, when the edge would cut sharpest and where bold and brash worked towards maximizing my advantage. My goal became (and remains today) to transplant this other persona out from a mere instinctual gut-reaction to hostile circumstances, and into an environment polar-opposite to its native one: positive, confident, and proactive. But no matter how clear this was to me in theory, there was no other way to break the habit but continual effort and repetition; reversing years of automatic response and re-directing my aggression to its proper place was not going to be easy.

Personally, it helped to accept my natural reaction to losses for what it really was: an almost childish need to "hit back" at my tormentor the market, and exact revenge for the pain I "suffered". It also helped to realize that however silly the idea of revenge was, I may never be able to truly rid myself of this response, no matter what the textbooks encourage. But if that's the case, then why let all those years of building a grudge go to waste? Only now, instead of flailing back in the heat of the moment, I just needed practice in swallowing my pride and waiting patiently, ever-vigilantly, for the proper chance to extract maximum satisfaction -- best served cold, so they say.

Panacea

2005-01-23T22:50:00.000-05:00

It's time I had some time alone.
-- R.E.M.

More often than not, time spent away from the market is involuntary for the full-time trader, and typically yields nothing more than mild irritation and/or wistful regret at the opportunities missed. Yet for the independent trader, the ability to step away from the screen at will is an easily overlooked and underdeveloped skill that is vital for career longevity. Time off for a trader can be considered the ultimate panacea: it's simple to implement, exceedingly cost-effective, and unequaled in its ability to provide relief from a number of trading-related ailments we're all familiar with. But in order to truly benefit from this palliative, a trader must believe in time off as a consistently "good thing", with a corresponding disposition to use it whenever necessary, for it's the voluntary aspect of this self-serve medication which really empowers both pill and patient -- kinda turns the term placebo effect on its head, doesn't it? Employing time-off as remedy for suboptimal concentration or performance turns any respite into an active expression of patience not to be underestimated.

Trading axioms that apply to all traders on all occasions are few and far between, but the following I can posit without any reservations: Always trade with the belief that one can always walk away from the screen and return after a period of rest, whether it be the next hour, the next day, the next week, or the next month. Whatever one's time frame, there can be no such thing as time wasted on the sidelines. Beware the occasions when a series of setbacks will have us believe otherwise, luring us into that desperate corner where we start to fret anxiously over finding the next trade that in our minds must succeed-- and which by then, sadly, is already moot. The market is ever-patient when it comes to the taking of a trader's equity; he must be equally enduring if he is to stand a chance.

New Year

2005-01-11T13:29:00.000-05:00

Happy new year to you all! It took me a while to ease myself back into a trader's mindset (and a bit longer before I could muster up the focus for this post), but frankly I enjoyed the time away from the screens, and look forward to the coming trading year with fresh enthusiasm and optimism.

What's new besides the calendar turn? For starters, I will be shifting my focus from my personal account into a larger account of pooled funds. I've handled a mixed account before, and it's all coming from close family, so there won't be any external pressures on performance that typically comes from trading "opm". Instead, the biggest differences for me psychologically and strategically will come from having capital preservation as a priority over the maximization of gains. I will be using less leverage with each trade, but more importantly, I will also be executing far fewer trades than before. A major impetus for this change came from realizing that my short-term signals were more valuable in risk/reward as indicators for a time frame beyond intraday; thus I will be taking one step back in terms of market perspective, but still incorporating my prior system directly into my analysis/evaluation for longer-term entries.

So all in all, alot of changes that frankly will take some time and experimentation to grow comfortable with. But I've never been one to look before leaping, and I believe that direct real-time testing in the market is always the best (if not the most painless) way to craft and fine-tune one's trading ideas.

Hiatus

2004-12-07T14:50:00.000-05:00

Once again, it's December. Having been raised within a family retail business environment, my memories of Christmas in the traditional sense end somewhere around the sixth-grade. Over the years since I began helping out at the "store", my associations with the holiday season grew increasingly commercial as yuletide tradition transformed into a literal marathon of selling that kicks off the day after Thanksgiving and concludes with a quiet day of rest and sleep recovery on the 25th. It's definitely an alternative take on gift-giving, doing time with family, and all around good-cheer; but nowadays, I can't imagine spending the holidays any other way. In any case, the Marathon is in full swing now, so the trading will take a back seat to earning an "honest buck" behind the counters for the rest of the year. But I'll still try to drop a post now and then when I get the chance, including some interesting developments which may hopefully come to fruition by the time we ring in the new year.

Quicksand

2004-11-29T18:39:00.000-05:00

A lack of confidence creates the most vicious of circles. As the pressure to perform begins to override our patience, effort becomes a sinister trap. Pushing a trade for no reason other than satisfying the need to do "something" can serve only to exacerbate our situation and worsen the need for action, any action. We sink deeper into the quicksand of desperation by our very struggle to escape it; the more we push and flail in an attempt to resurface, the faster we plummet towards the point of no return. When all seems on the verge of final catastrophe (and we may act as such, even when there is hardly any evidence for it), it's not easy to see beyond our self-made froth and realize that stillness will be the key to extricating ourselves out of the quagmire. Contradictory as the image may be, we must anchor ourselves and stabilize if we are to remain buoyant; the downward pull is an entirely synthetic gravity generated from our own exertion, while deliverance lies in our willingness to just let go and float.

Happy Thanksgiving

2004-11-25T15:23:00.000-05:00

Today happens to be the wife's birthday as well so we're going into town for some free-range yakitori and a movie, perhaps a second round of midnight ramen if the mood beckons. Yesterday night was peking duck with sis and the rents, this afternoon dim sum with the extended -- who needs turkey?!

Wishing everyone a happy and safe holiday.

Disclaimer

2004-11-23T23:13:00.000-05:00

I want to set the record straight with everyone who has taken the time to read what's written on this site (I owe you all at least that much): I do not consider myself a successful trader, not at the present moment. Whatever tone some of these posts may take, please be aware that more often than not, I am preaching to myself from an alter-ego standpoint, in a voice which I am striving to make my own but presently is still quite some distance removed. This blog is basically my attempt to help stamp certain ideas down in my brain by externalizing them into a reference of sorts, so please don't get the idea that I'm preaching at you from a hilltop. Yes, I do have a number of years trading under my belt; and yes, I managed to extract a decent livelihood from the markets for a better part of that period. But for the past year or so it's been nothing less than a struggle, and as a result I've managed to lose something that no amount of capital can repurchase, and no trader can succeed without: confidence. I am by no means overly self-critical or pessimistic, and I'm always ready to give myself credit when it's due. But there's simply no excuse for my recent performance; for an individual trader, independence must be balanced by absolute self-restraint, as one must be able to hold himself accountable -- there is no one else. My failure in this respect cost me my faith in myself, and to rebuild this faith will be an arduous task. Self-betrayal is never easily forgiven, but nothing less than that is my goal, so set an example and forgive me this little unburdening.

Winner's Blues

2004-11-17T19:19:00.000-05:00

Sometimes you win, sometimes you lose
Sometimes you got still the blues for me
-- Sonic Youth

Have you ever found it difficult to take a good profit? Ironically, it may be a symptom of impatience operating under the guise of "letting our winners run". We're all familiar with the two basic emotional sabateurs of trading, fear and greed, but I think when it comes down to pulling the trigger, there is only fear holding us back: either the fear of losing, or the fear of losing out. This second fear usually appears when some sort of clock starts ticking inside the head, when some cold streak has worn thin our patience and our visibility narrows down to no further than the very next trade. On my worst days, I would be reluctant to take even a partial profit on any good trade, harboring it as if it were the last of its kind -- a blatant act of desperation. That may be at the extreme end of the spectrum, but any discomfort with ringing the register may be a sign of some external pressures having manifested themselves in your being overly committed emotionally to any one position. Best to take a few steps back from the monitor, splash some cold water on the face and remind yourself that any trade is but one out of thousands ahead of you.

Checklist

2004-11-14T22:56:00.000-05:00

Since the great majority of my trades are intraday, I wipe the mental slate clean each morning to ensure I maintain a uniformity of attitude throughout the next session. The goal: consistent minimization of the unexpected through the complement of adopting an open attitude towards any and all possible outcomes. My greatest weakness as a trader is the sudden deterioration of a sound and patient mindset that can occur at any moment throughout the trading day, so here is my checklist that I use to remind myself each morning of the elements most important for my performance.

1. Attitude: Are you optimistically patient? Can you picture yourself not trading at all today if no opportunities arise? Are you Little Orphan Annie or Agent Jack Bauer when it comes to the word Tomorrow?

2. Preparation: System implementation and account management. Have you noted any possible setups forthcoming for optimal entry and the actions entailed? Have you noted your max drawdown limit for the day and the willingness to honor it?

3. Balance of Concentration: Trading is as much anticipation of changes in your mentality as it is the market. Don't let yourself get completely absorbed by the "flickering ticks" and stay equally grounded on both sides of the monitor.

4. Equanimity: Concentrate on staying collected under fire, no matter how wild the market or how quickly losses come in succession -- keep the ship upright.

5. Visualization: Visualize each of the following:
-- Seeing a system signal, and entering the trade without further thought
-- A stop-loss triggered almost instantly, and just as quickly forgotten.
-- Waiting for the market to come to you before entering.
-- Adding to a trade that goes your way immediately, pushing when odds are in your favor.
-- Shutting down without hesitation when maximum daily limits are reached.

In each of these there's a keyword or image that literally rings a bell in my mind that helps to crystallize the intent behind that particular checkpoint and provides a mental shortcut. I think this helps in eventually making the run-through of the entire checklist an automatic process, a routine that hopefully embeds certain actions and attitudes within that same part of the brain that operates other habitual motor processes such as typing or driving.

Empowerment

2004-11-09T23:23:00.000-05:00

When it comes to making mistakes, do you see the glass as half-empty, or half-full? Think back to the last time you were stopped out at the low tick of the day, or missed out on the big move of the week because you traded "not to lose", or bought when your indicators said sell, or spent an entire session calling the top on a market that closed on the highs -- how did you feel afterwards? Frustrated? Angry? Despondent? Does your mind keep replaying the past over and over like a tongue probing a loose tooth as you agonize over what could have been, should have been?

Now, imagine if instead of feeling distraught over your trading "mistakes", you actually felt encouraged, inspired, more determined? It's possible, once you accept the fact that every error in judgement holds a lesson to be learned, an opportunity to become better prepared for the next occasion when similar circumstances arise. Acknowledgement of an error is the first step of course, yet those that tend towards berating themselves over the past never get beyond this point, and waste not only their time and energy but also squander the chance for progress. The fact is, learning which actions result in consistent losses will simultaneously teach you which actions result in consistent profits; the lessons are one and the same, as is teacher and pupil. So don't let those mistakes go to waste, for when you become convinced that profits and losses are just opposite sides of the same coin, the reward goes far beyond just the academic possibilities. Having and maintaining a positive perspective on the mistakes that you've made, along with those you know you'll make in the future, equals nothing less than empowerment -- for what harm can the market inflict on you psychologically if you own your losses, and truly believe they can only make you stronger?

Trader's Fortune Cookie

2004-11-04T14:41:00.000-05:00

Discipline trumps all convictions -- especially the conviction that one is a great trader.

Behind the Rules

2004-11-03T22:20:00.000-05:00

Say you're a trader that has a tendency to have big blow-up days. You've got a decent edge that makes you profitable for most trading sessions, but that one time you lose the handle you'll end up giving back much more than just your recent profits. This is a cycle that seems to repeat itself far too often, and out of sheer frustration you've decided once and for all to get past this problem and begin investigating ways to go about doing that.

How about sweeping out any profits you have at the end of each week, so you won't be able to give it back when D-Day comes? This is probably your worst choice, for it does nothing but side-step the issue. Worse yet, you've practically set the clock ticking down to your next blow-up day by resigning yourself to its impending arrival, only this time you'll have even less equity in your account afterwards. In any case, it's probably a safe bet to say that your profits aren't the cause of the problem to begin with.

What about setting a daily loss limit? An X-percent drawdown for the day, and it's time to shut off the monitor and take a long walk. This is better than the first idea, but considered in isolation may be nothing more than a band-aid to cover up a deep wound. You may be able to mechanically obey this rule without question, and in doing so temporarily save yourself from your worst self, but from personal experience this method does not hold up on its own; if one is to truly believe in the independence of each trade, why should one ever arbitrarily stop trading if he sees an opportunity ahead? The market has no clue how many losing trades you're coming off of, so what difference does it make if the past is past? How do you reconcile the apparent need for limiting one's trading with the fact that one's losses should have no bearing whatsoever on the next opportunity?

Ultimately, we must ask ourselves this question: what is the line that differentiates sensible risk management and arbitrary, patchwork rule-making? I think the difference comes down to understanding and trusting why certain rules are put into place and how they exist as expressions of positive intentions, rather than viewing them as mere restrictions or boundaries that cannot be crossed. For every preventative rule that we think we need to place over our actions, there exists a correlating positive belief that if we truly embraced without question, would render that preventative rule almost unnecessary. Consider the simple placement of a stop-loss order: if we really believed in the possibility that we could always be wrong in any trade, we could do without the stop and just trust ourselves to exit the trade when the situation dictated. Yet what happens when we truly embrace the idea that "we can always be wrong" is that the stop order ceases to be simply an emergency fail-safe that takes responsibility out of our hands; it actually serves as a short-hand extension of the conviction that any trade can go wrong. Getting back to the problem of blow-up sessions, if you're constantly overtrading in an attempt to reclaim losses, simply restricting the number of trades you can place is just a perfunctory response to the symptoms; the real issue behind the problem is whether or not you are truly convinced that innumberable opportunities for profit will offer themselves tomorrow, the next day, and the day after that. If you embrace this idea, then having a maximum cut-off point for daily losses becomes more than just some handcuff; it's a natural expression of a proper trading attitude that you consistently strive for.

In short, concentrating your energies on the positive beliefs and princples behind your goals will make the job of creating and applying trading rules much easier. The proof of this will come when you suddenly find yourself pre-emptively dealing with the issues before the rules ever need to be enforced.

Road Warrior

2004-11-01T23:22:00.000-05:00

On those mornings when I've managed to accumulate a nice string of losses well before lunchtime, I can't help but picture myself as The Road Warrior, barreling down some desert highway while countless baddies methodically tear away at the battlements of my tanker-truck-turned-fortress-on-wheels. My mission: to keep moving forwards at all costs, remaining objective in my search for the next opportunity, even while bits and pieces of my account peel away tumbling behind me. Yes, I realize each trade is independent from the last; and no, the market is not concerned with my plight and certainly not "out to get me". But honestly, I'll be the first to admit that for most losing days, each piece that drops away does nothing to lighten the load but instead seems to slow me down and make the road ahead appear more precarious, as if my eyes were frozen on the rear-view mirror and seeing only the scattered carnage in my wake. To this day, my biggest struggle continues to be convincing myself that the wreckage is already behind me and getting farther away with every passing second, and that there's nothing else to do but hunker down, hold my head up straight, keep eyes foward and focused on the open road ahead, and continue driving on.

System Revisited 10/25-10/29

2004-10-30T23:25:00.000-04:00

(Apologies for the scarcity of posts this week, my original goal of one per day seems to be much more difficult than I first imagined. In the future, I think I'll shoot for a bit more spontaneity and less artifice than the previous bunch, for the sake of freshness if anything.)

One thing I've noticed about the list of rules that make up my system is that a large number of them start with "Don't"s or "Never"s. Seems like many of the rules I've accumulated over the years were intended to suppress impulsiveness and inspire guilt upon their violation. This is no flaw in itself; as noted in a comment below, the less visible function behind using a system is preventing one from trading when no proven opportunity exists. But having an almost Puritanical impetus behind a system's creation may be counter-productive in the long run -- in fact, it may even backfire if elements of the system attempt to address psychological deficiencies, as opposed to just defining trade entries. If the majority of one's system exists to restrain one's actions and impulses, he may in fact make the issues even worse by trying to avoid them altogether -- a lesson recovering agoraphobiacs can teach us.

Somewhat coincidentally, I've also just picked up Mark Douglas's Trading in the Zone which I would highly recommend to all traders. In developing a trading system, I've primarily treated both strategic and psychological issues empirically, dealing with problems on an symptomatic basis using trial-and-error experimentation. In contrast, Douglas's book goes directly into analyzing our mental attitudes and emotional structures that lurk behind the more apparent obstacles to successful trading, a top-down assessment of how we develop and/or undermine our perceptions of the market over time. It's inspired me to dig deep and not only re-evaluate each of the rules that I've set down for myself, but also to see if I can somehow tie together all those negative reinforcements I've collected like scabs over the years and search for a positive reworking/rewording of their intentions.

Soundtrack

2004-10-26T17:27:00.000-04:00

Music can be a useful aid in gauging our emotional balance in real time during the trading day. For most screen-based traders, virtually all information pertinent to the markets arrives visually; sound plays little if any role in our decision-making process. Hence, the ears provide an alternate channel into our psyche distinct from the rational/logical, tapping directly into our "mood centers" which may subtly (or not so subtly -- keyboard smashers of the world unite!) color our perception of market information. Manhattan, Goodfellas, Trainspotting: the great film soundtracks go beyond complementing the action on screen -- they capture the spirit behind the director's motivations and distill the essence of a film to song. Along the same lines, ideally you'd want the "soundtrack" of your trading day to capture and maintain your emotional mindset at its most proficient state: objective, dynamic, equanimous. Any divergence in your mood from this ideal state will create a jarring sensation that will stand out easily against the backdrop of your favorite playlist -- the music acts as a continual acid test of your emotional condition. At any moment you find yourself having difficulty enjoying a song from your all-time favorite band, then it's likely you'll have similar trouble maintaining your objectivity while making trading decisions. Stand up, take a few deep breaths, and give yourself a break from the screen -- don't go back until you're capable of singing along with the chorus of the next track.

Movement 10/18-10/23

2004-10-24T23:28:00.000-04:00

Something definitely shifted a bit this week internally, and I'm not sure if I can put it down in words that make any sense as of yet, but here goes. In several posts, I've referred to a system with a capital "S", as if to emphasize the sanctity of that concept in terms of my trading. You might imagine "The System" as a plaque cleverly etched with gold leaf and invisibly framed on the wall above my monitor, the gilded words revealed only under a certain angle of light that would strike for mere seconds each day to unveil its wisdom, ala pulp-Umberto Eco. Well, at least that's the spirit with which I'd originally imagined writing about my system, with oblique reverence and hushed tones to impart some sense of inviolate mystery -- surely for a system to be properly implemented, one needs to have at least a notion of what is "sacred" to be able to follow through. But I think a part of me is struggling to accept and wanting to deflate this notion of system, and re-examine the whole thing under a less divine light. Not even two weeks into this, and I'm already questioning what I've written earlier -- progress or confusion? To be continued . . .

Recipe

2004-10-21T23:27:00.000-04:00

Recipe for catching a reversal:

Ingredients: For this recipe you will need one (1) well-known or "classic" technical chart pattern on a daily time frame, preferably near the high or low of the mid-term price range. When your pattern of choice has been observed, you will then need to collect at least two (2) or more instances of public expressions of sentiment which confirm the prognostication of said pattern: pre- or post-market media bytes, business news website headlines, confident/fearful declarations on your favorite trading forum, or any other variety of before-the-fact assumption.

Preparation: When the above ingredients have been secured, wait for a daily close which would confirm "ripeness" of the pattern. Next morning, enter a stop order at the confirmation price in the opposite direction of pattern breakout to initiate position. If stop is triggered, immediately enter protective stop at prior low/high.

Parboiling: If market moves quickly in your favor, take profits on at least a partial portion; mentally "set aside" closed profit for re-entry if market pulls back towards initial entry price with next few days. If pullback manages to hold above prior high/low, re-enter full position at your discretion.

Cooking: Set protective stop for entire position at breakeven and let sit undisturbed for a few days or more if possible.

Presentation: Dish is ready when "failure" point of pattern is breached; serve at market or with trailing stop, whichever you prefer.

Anhedonia

2004-10-20T20:33:00.000-04:00

anhedonia n. -- A psychological condition characterized by inability to experience pleasure in normally pleasurable acts.

Throughout my years of trading, I've always suffered the biggest hits to my account after a series of winning trades -- the bigger the win streak, the larger the subsequent drawdown that would inevitably strike. Of course, the explanation goes beyond a statistical return to the norm. When we're hot, some of us are prone to nurturing the idea that such gains will be routine for the remainder of our trading days; operating under such a mindset, it takes a surprisingly meager number of round trips for the market remind us of the absurdity of such a notion.

So this lesson I took to heart, to such a point that I think I've severed any connection between successful trading and the pleasure center in my brain. I've never been one to boast of any accomplishment, least of all in this line of work, but my attitude towards success in the markets borders on paranoia. I've come to accept and learn from the mistakes I make, but have difficulty in allowing my achievements to provide anything more than brief affirmation. My progress as a trader seems almost entirely driven by negative reinforcement; if only the pains and frustrations were equally quarantined from my cortex, this trade-off might be deemed fair enough, if somewhat piteous. But this relationship cannot endure, for what ultimate purpose lies in an occupation whose very fruits cannot be relished, much less the process by which they are harvested? I've only begun to rethink my relationship with system, success, and progress, and have nothing yet concrete beyond an awareness that a change must be made.

Mirage

2004-10-19T23:48:00.000-04:00

Profits resulting from the violation of one's own system or methodology constitute the most treacherous mirage of success. We've all been tempted at one time or another to suspend our collection of pre-defined rules (so painstakingly accumulated, yet so easily put aside) for the possibility that for this one particular moment, distinguished from all others, things might be different. And perhaps we were right -- this time -- and the register rung. Yet for those of us who have chosen the way of the System, the momentary suspension of discipline is a transgression beyond profit or loss. For no matter the what the outcome of the trade executed, the damage has already been done -- any gains secured in such a manner will only serve as future tuition until that particular lesson is learned. This must be understood before forward progress can occur, for unless process takes precedence over result, the cycle repeats ad infinitum.

Sip of Lethe

2004-10-18T22:11:00.000-04:00

In Greek mythology, the River Lethe was one of five rivers which ran through Hades, the Underworld. The dead who drank from this particular river instantly forgot their former lives on the surface and would cease to mourn their past.

Now imagine having a flask of this stuff at your side during market hours -- very handy indeed! Instant objectivity in a bottle, always at arms length when needed. Did a particularly opinionated Fed official drop the 10-yr half a handle at lunch hour with some overly explicit syllogism, leaving your stop-limit twisting in the wind? A perfect moment to spike your Big Gulp with a jigger of Lethe once you've exited at market. Those jokers at the Nymex shake you out by a tick before ramming the price up to record highs? A few drops of undiluted L. on the tongue and voila! You were never long. Better yet, you don't have a clue what CL stands for.

Adjust dosage as necessary.

Weekly Review 10/11-10/15

2004-10-17T22:37:00.000-04:00

Like the prior week, the System identified very few entry possibilities, and of those virtually all resulted in scratches. The perception of an extended lack of opportunities can make us stretch for results, and falling prey to this impatience is an open invitation to disaster -- this week being a perfect example. As with any System which remains a work in progress, experiencing a dry spell of unprecendented length can slowly eat away at one's belief in the System's ultimate merit; by Friday I had already exectued several trades outside its parameters, and came into that morning with overnight baggage. Having stops secured at breakeven on each of them, I felt confident that I would be able to manage my holdings and still objectively focus on the any forthcoming System signals.

Not! By the end of the day, in addition to missing 2 exceptional setups which would have more than made up for the meager harvest of the last few weeks, I managed to press onto my prior night's holdings out of frustration, which conveniently allowed me to cancel my preset stops for "recalculation". . . need I continue? Let's just say I notched a new high on the vomit bucket for a single day's retchings. Those open profits I carried into the morning not only gave me a false sense of security, the positions behind them provided that fraction-of-a-second hesitation en route to a "statistical catastrophe" (Slansky again), and left me flailing. All in all, a pathetic way to end the week.

Tuition

2004-10-15T19:09:00.000-04:00

For the trader still early along the learning curve, coping with the concept of market tuition can be frustrating to say the least. In essence, a pupil of speculation is forced to pay, quite begrudgingly and usually when least expected, an instructor in absentia for lessons as yet to be revealed. He may make a series of down payments without ever realizing what exactly he is to be taught, nor have any inkling of the remaining balance owed, for the final cost of tutelage is not determined until the course itself has been passed.

How do we minimize the cost of tuition for so amorphous a lesson? A way to begin is to distinguish those losses which may provide some insight to ourselves from those that are just part and parcel to any trading plan. Was the trade itself an expression of our methodology, or done on impulse? Did the loss occur at a point in time and/or price that specifically invalidated the reason for the trade? Was the magnitude of the loss predetermined before the trade was executed, or the result of some arbitrary threshold of pain? Is there a pattern emerging from past trades that we can identify? The list goes on.

The bottom line is not to let our losses go to waste; vivisect them while they're still fresh in the spinal cord, look into the impetus behind the trades and try to glean the nature of their source, whether technical/external or psychological/internal. We need not dwell on our mistakes excessively, but to relegate them to bad luck or sweep them under the rug of "revenge" profits is to squander a pre-paid opportunity for progress. Maximize the value of your tuition, or end up maximizing the total cost of education.

Objectivity and The Fundamental Theorem of Poker

2004-10-14T14:23:00.000-04:00

From David Sklansky's The Theory of Poker:

Every time you play a hand differently from the way you would have played it if you could see all your opponents' cards, you lose; and every time you play your hand the same way you would have played it if you could see their cards, they lose.

An analogy in trading can be made concerning objectivity while holding a position:

Every time you execute a trade that you would not have executed had you been flat, you lose; additionally, every time you refrain from executing a trade that you would have executed had you been flat, you lose.

As always there are exceptions; one may argue entries and exits are not entirely symmetrical. But generally, the goal in objectivity is to prevent your current position from interfering with future opportunities. Taken a step further, try to pay extra attention to scenarios that run counter to any inclinations you may have stemming from current holdings -- seek to minimize the time it takes to reverse your mindset from long to short and vice versa if circumstances require.

Reversi

2004-10-13T16:02:00.000-04:00

Wild day. Here is an intraday of the euro, bearing much resemblance to the action in bonds as well as crude, which rebounded to close at record highs. Stock indices lost their morning gaps, while copper and other base metals gave the sharp stick in the eye to anyone riding the skyward trend.

Moves of such extremes, by session's end, generally elicit sighs of relief and howls of frustration in equal parts. A day like this teaches us the following: a) to dispense with stops, as faith alone shall suffice in our salvation; and b) not to be such greedy motherfuckers. *wink*

System

2004-10-13T09:27:00.000-04:00

The first rule for any trading system: Trade only the system.

This rule would be much easier to follow if one always incurred losses when trading outside the system. Somehow, the gains from these outlier trades always seem to be of an order greater than the gains typically achieved when playing by the book; hence, the tendency to stray. One can only hope for a series of excruciating drawdowns to realign his journey on the proper path.

10/12/04

2004-10-12T23:58:00.000-04:00

Hello world.

What follows here will be a day-to-day journal of my trading life from a psychological angle, a record of what passes through my mind at any given moment with respect to the markets and my connection to them.

It will be my attempt to clarify my own thoughts, inclinations, musings, doubts, ambitions, sufferings.

I will strive towards honesty, while veering from tedium. Or was it the other way around? Whichever you prefer, I am nothing if not accommodating.

It's midnight and I'm tired and going to bed.