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The Strategy Incubator

I had a good week of trading this week and overall, I am feeling on top of my game at the moment. I just need to keep reminding myself not to get overly confident but instead, simply continue doing more of the same.

This has also been a good week because I may have developed a new strategy that is showing a lot of promise. I am still back testing a few different scenarios but so far, it is looking very promising. For my impatient side, I am working on a scalping strategy that trades relatively conservatively but only targets a handful of ticks in a period of 3 minutes or less. 

Perhaps it would be interesting to share the rules behind the strategy on the blog to see if others could help me make it better and then we could all share in it's glory. The biggest downside to this would be the few who don't think for themselves and simply trade it blindly. I'm not a fan of that type of collaboration. Now that I think of it though, it would be interesting to share strategies with a small or even large group of traders with the purpose of developing strategies together; call it a strategy incubator. I have a few strategies that have hit a dead end but maybe a fresh perspective or two could add some tweaks to make them work out and then everyone could benefit by it. I'm sure many of us have partial ideas that could use some outside thinking so it could turn into a trading think tank for the purpose of creating a small portfolio of trading strategies. Maybe this could be done in a private blog to keep all the dead weight out? I don't know, just a random thought...

In the meantime, here is an equity curve for this week's trading:

 

Have a good weekend!

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I Miss My Blog

I am supposed to be in bed right now.  Before that, I was supposed to work out so I wouldn't get fat. Before that I was supposed to go over my trades so I could be a super trader and give quotes about my awesomeness to the Wall Street Journal and Stocks & Commodities Magazine.  Before that I was supposed to actually trade.  Before that, I can't really remember but I am sure there was something.

The point is, I miss my blog.

I keep saying I am going to get back to it but I obviously continue to wallow in the mire, as it were.  However I have noticed something, at certain times, blogging is a drag and it gets kind of old.  At other times, blogging is a fantastic motivational tool and it absolutely has had a positive impact on my trading. So...I need to stop spending so much time trying to figure out why my fantasy football team sucks so bad this year and instead come up with something meaningful to blog about; like how cool I am.

In other news, my wife and I had a baby this past weekend. Actually, she had the baby but I cut the chord whilst shooting footage and snapping pictures - I am multi-faceted like that. And don't worry, it is kid friendly footage that can be passed down for generations. 

We had a baby girl and I can now officially declare we are done!! The vasectomy will be scheduled soon since my massive deductible has now been met. So I have a good excuse for not trading the last couple of days; I've been changing diapers while wondering what the hell I've done...again...but she's too cute to complain.

Life is good but I still miss my blog.

I am going to bed now.

Even Professionals Need a Coach

I am a huge fan of MMA and last night I was at home watching The Ultimate Fighter and there was a scene in the show that made me think of trading.  The coaches on Team Rashad were frustrated with Roy Nelson, who is one of their team members. 

For the record I think Roy Nelson is a fat ass and I hope he gets his face beat in by Kimbo Slice next week but I digress.

Roy is already a quazi professional fighter and he thinks he already knows what he is doing so he wasn't taking any of the coaching he was getting very well. He clearly thought he knew enough to get by on his own and didn't need to hear what the other coaches were suggesting, which is ironic since Rashad Evans has certainly earned his stipes in the UFC but Big fat ass Country Roy Nelson hasn't.  Because he is fat and gross and simply deserves to bleed, especially after last night.

The point is, as I sat there watching I couldn't help but recognize that most professional athletes have coaches they work with on a continual basis. Those who don't probably have an attitude like fat Roy and as the result, fail to ever make it to the highest levels.

Peyton Manning (who I think is overrated) works with a quarter back coach every day; Kobe Bryant (who is arguably the best basketball player in the league) also works with a coach; Michael Phelps has a coach, professional fighters work with coaches and the list goes on.

Just because you are a professional and even an elite professional does not mean you are above coaching.  There is a huge benefit in having someone else watch you make your repetitions, help you tweak your moves, offer motivation, strategy and support.Many people think coaches are just for beginners or even unecessary all together. The fact of the matter is that a good coach can make all the difference.

So as traders, how do we find coaching to help us get to the next level? I personally do not work with a coach but it is something I would really like to do because I know it will have a positive impact on my performance. In the meantime however, I follow a lot of blogs and learn from other traders, I read books like Stock Market Wizards by Jack Schwaggar, I subscribe to all of the futurures magazines, I constantly review my own performance and try to find ways to improve and even replicate those things that I already do well. However I lack a coach.

I know I can go and hire a coach who I can work with but I am already a consistently profitable trader and I don't want to pay to learn someone else's strategies when I already have my own that work well enough, though perhaps there are situations where that could make sense, so I remain open to it.  As an alternative, perhaps there is virtue in simply finding other like-minded traders to work with in somewhat of a cooperative fashion.  In this format we could simply help each other by acting as each others coach. I believe this format could work if all of the participants were already successful in their own right and were able to bring something unique to the table. That way you could learn something new from someone who has proven to be successful with the same idea, etc.

The bottom line is that having a great coach can make a huge difference and adding a coach to your personal trading team should be a priority to ensure you continue to get even better.

Please Play Music

Yes, it is almost that time again ladies and gentleman, I am preparing my resurgent hobby as a part-time, half-ass blogger. I can hardly wait. Can you?

I have effectively most assuredly lost any follower I ever had but that's OK, I would have broken up with me too.  But it's time to put your lipstick on again because the party is about to start...again.

I continue to trade and I continue to trade well, though I must admit, this summer was not fun for trading.  It stressed me out, gave me quite a few more grey hairs, made me question my strategy and manhood and ate up some uncomfortable portions of cash in the process.  But, I still have some left and more than what I started with for that matter so life is good. Having said that, I still drive this piece of crap Honda Accord that will not seem to quit on me and therefore allow me to fully justify buying something a lot cooler, yet cash depleting, and I still have this damn full-time job that I can't seem to shake -- like a one-night stand that won't seem to go away.  Except in this case, I've been one-nighting it for almost six years. But why walk away from a perfectly good cash flow if I don't have to but simply want to? I won't.

As for today, I am up almost 4 TF points and about to go buy some sushi.

In the meantime, start to expect some more blogging out of this corner of the blogosphere because the music is playing and I'm on my way to the cage (whatever that's supposed to mean).

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I'm Not Dead

Well. I've been gone from the blogosphere for weeks now and I have to say, it has been fantastic. Not that I haven't missed my three readers and all but the break from blogging has been stellar and I think I am actually going to continue it for a while. 

However first, I wanted to make sure that any passersby don't run off thinking that this blog is just another tombstone for a trader gone bust.  Not so. My trading has been going very well.  I've been making some fine-tuned adjustments to my strategy and I've been focusing hard on executing to plan. I have no doubts whatsoever about my longevity in this business.  Not because I'm a cocky S.O.B but because I've been growing a mustache and I know how successful traders with mustaches are. 

At any rate, trading is going just fine in my part of the Internets and I am excited for the future.

I have decided however that my break from blogging has been a good idea and has really helped me focus on my trading and not so much on what others might think of my trading.  I'll be back for sure, just not yet.

Hopefully my fellow traders/bloggers have been doing well.  I check in on many of you often and I am always happy to read about your experiences. Keep on keeping on.

Adieu.

My Approach to Trading

Disclaimer:  I HAVE NOT ARRIVED (but I'm getting closer! :) )

A few people have been asking about my trading strategy and while I've posted many charts in the past and talked about it here and there, I've never been extremely specific about how I approach the market. I am happy to share some insight but I am going to leave a few things left for the reader to figure out on their own for a few reasons:

1) My strategy is mine, it is still in development and it is designed to fit MY personality.  One size does not fit all...

2) I've greatly benefited from taking the time to figure out a strategy for myself rather than simply take somebody else's.  Doing the latter is "cutting a corner" and when someone does that, they lose out on the true benefit of doing the work themselves. In other words, take ideas and make them your own...

3) If I tell all, then I run the risk of losing my edge. Right?  I know, I doubt that my four followers (thanks everyone!!) will really impact the market if you even like my strategy in the first place but still, it makes me feel special.

As the disclaimer notes, I really am nothing special although my mother would say otherwise. One day soon, I will be the King of Trading but until then, I'm just another guy trying to get it all sorted out.

So, without further ado...here are a few ideas to consider:

1) I like to trade reversion to the mean, which takes some "ganas" but once you get the hang of it, it is a beautiful thing.

2) Once I determine the trend, using simple moving averages and basic trend lines, I enter as price is pulling away from the trend, e.g. entering on the dips or the bounces.

3) To time my trades I rely heavily on RSI (I currently use a 2 period though I've used a 3 and 7 period with equal success, it all depends on how long you like to hold ultimately...).  I also use the NYSE TICKS, which is an amazing tool if you know how to use it.  Now is not the time to explain how to do that but in general, if the overall trend of price is increasing look to enter when RSI and TICKs are in an oversold zone.  That zone on the TICKs is different every day so use brackets and a trend line to figure it out and be ready for the trend to change, just like price does during the day...

4) I don't use stops in the traditional sense.  I know, 'GASP' but seriously, how many times have you traded in the right direction only to have the damn stop take you out early?! Early on I realized that my stops were killing me and I spent a lot of time trying to figure out how to place them...use a % of the ATR, trail it based on a previous high/low, base it on the risk/reward aspect of the trade. I say that's all garbage!! Why, because it's all made up.  Price doesn't give a rats ass what your desired risk/reward ratio needs to be, etc.  I say, think differently...

In essence, I base my exits on what the technical indicators are telling me.  Think about it, this is how you are likely entering a trade in the first place...your indicator is telling you that now is a good time to enter the market.  Why not wait until that same indicator or another one suggests that now is a good time to be getting out of the market, whether for gain or loss?  That seems much more logical to me so that's how I manage my trades.  Early on, I didn't do this very well and that's why many people saw me take big losses...that was simply me learning by trial and error. I still haven't figured out the perfect strategy but I can tell you this, basing your exits on a technical indicator(s) is MUCH BETTER than basing it on some subjective, made up, stop-loss area that really is nothing more than a dart blindly thrown at a board. Tell me I have no idea what I'm talking about if you dare but the reality is, this makes sense. I could go on but in short, that is my strategy for dealing with stops - I use an indicator instead of a "random" stop level.  And just to make sure it is clear, I do know in advance when I will be getting out of a trade, I just don't necessarily know where...

5) I base all decisions on the close or open and I use limit orders.  This keeps me from chasing the market, buying on emotion, getting bad fills, etc. It also confirms what I am seeing on the charts. For example, you may be looking for a new low to enter a short position (going along with the herd, eh? Have fun!) so as price makes a new low you enter but it wasn't on the close.  So just after you enter, price bounces back up and ends up forming a hammer pattern and goes on to make a new high a while later.  Shit! I bet you wouldn't have entered short on a hammer pattern but at the time you entered, it wasn't a hammer.  Moral of the story: wait for the close or open.  Of course, it is only relevant depending on the time period you are using but it's still a good strategy in my opinion, especially if you've timed it with an indicator. Waiting for the close/opn will also dramatically decrease the risk of over-trading.  It requires patience and discipline...two very good things.

6) I primarily use two time periods: 3 minute and 15 minute.  This simply works for me.  I've found that by tracking too many time periods it over complicated things and made me second-guess too much.  Avoid analysis paralysis, as they say. In reality, I could watch just a 3 minute chart and trade fine. I'm not suggesting that using multiple time frames is a bad idea, I'm simply suggesting to keep it simple. 

The 15 minute chart is my big picture.  I put the pivot points on that chart and I use it to help me signal or confirm trend changes or continuation, respectively. I simply reference it on occasion but I don't necessarily base any final decisions on it.  I also avoid the shorter time frames although I do reference a 233 tick chart, which can be helpful in terms of providing a short-term heads up but again, I could survive without it. I decided to stay away from the shorter time frames for a few reasons, namely, a 3 minute chart fits my strategy perfectly and secondly, short time frames are often guilty of "whipsawing" you to death. The one minte chart is of the deveel in my opinion...

7) Use the pivots! Pivot points are very simple and extremely effective. Again, I keep them on my 15 minute chart and when I see price making an effort to get to a certain level, I wait anxiously for a pull back and then I hop on the wave and try to ride it as long as I can.  Often times I end up getting off early because my indicators signal an exit but often it's just because price is consolidating a little before continuing on to the next pivot level. I should be adding to my position at that time but I currently struggle with that at the moment, plus I try to keep leverage in-check and would rather take contracts off, rather than put them on.  At least until my account grows some more.

8) In the Market Wizards book, Schwagar mentions how one of the traits successful traders have is that they do not do the comfortable thing.  This concept really resonates with me. Doing the comfortable thing in my opinion, is like entering long on new highs or as the market is climbing to new highs.  Here you are simply joining the herd and the herd is usually wrong.  The uncomfortable thing is entering long on a short-term low, e.g. a pull back and then staying with it long enough for price to come back and continue on its way.  In short, this is what I'm doing and it's been working for me.

On a final note, I will also mention that I do have a very specific strategy and plan with exact entry and exit conditions that I follow. Having a plan is critical and if you don't have one, you are only setting yourself up to fail.  Along these lines, I will also offer opinion that if you can't explain your strategy to a computer then you really don't have a strategy, at least a viable one.  Furthermore, in this case you probably haven't back-tested it either or at least with any degree of reliability because how on earth do you go back in history to test a strategy you can't even explain?! I've seen example of people stating that their strategy requires (choose your indicator) to "bend a little" or for something to have an upward slope, etc...how do you explicitly define that to a computer? If you can't then I say it is nearly impossible to follow it yourself.  Make it easy. Make it obvious and you'll do yourself a favor.

Anyway, I hope someone finds this interesting and maybe even a little helpful.

Go. Fight. Win.

Where to Now?

Where in the hell is price going to go? For the love of dirty kids and lemonade, find a direction!

Today price on the mini Russell crossed the 200 period moving average eight times (watching the 3 min), which is only one short of the number of times Ferris Beuller missed class - nine times.  That's a lot! But seriously, what the hell?!

The good news is that I am learning from past mistakes and it made a big difference today. I am also still a bit scared of my own shadow but that probably helped more than it hurt today.  Had I still been swinging at the fences I would have lost my shorts in today's tapes for sure. My strategy performed horribly overall but I stayed on my toes and avoided trades that seemed suspect and got out of others that didn't feel right.

At the end of the day, I finished down net $142 on five trades. I experienced some major slippage on one of my trades and instead of taking out two points, I broke-even. I've never experienced that before and perhaps that should have been a sign to come back another day.

Prior to this post, I took a quick surf of the Internets and found that many traders had a tough go with today's market action - even Lord Miller. This brings me comfort because I don't want to be the only loser out there! :)

In my opinion, it looks like the bulls are losing steam. I thought that it would have happened a while ago given all the bad news and certain technical indicators at the time but I clearly underestimated the strength of this move. However it seems like now may be the time for some type of a correction.

Today's open and close mark the third inside day from April 9th's strong upward trading day (on the Russell). We are getting lower highs with lower lows right now, price is coming off the Bollinger Bands, Stochastics and RSI are both in a tight coil with strong resistance levels, and ADX has dropped below 20.  All of which are signs of a pending reversal in my opinion, but when?

Thursday and Friday could prove pivotal in terms of setting a direction for next week's trade. As for me and my trading, I might head back to the sim for a session or two for some more practice while I protect my capital from any crazy market moves that might be pending.

Moral of the story: Be on guard peeps, the market loves to steal cash!

On a final note. I have a hypothesis that suggests another big bear run might be pending. Even though some news is starting to improve, I still feel like the overall economic outlook seems bleak; it certainly feels that way on the ground. I don't trust all the big news outlets that continue to suggest perhaps we've hit the bottom and the worst is behind us. I'm not so sure. It seems to me that during the last few sessions the big money has been taking gains and all the dumb money has been rushing in so as not to miss the bottom. If in fact all the retail ("dumb") people are rushing in, this will make for a great time for funds to create some liquidity, which could drive markets lower in a big way, especially once all the retail people realize they just got punked. I'm just saying. I've learned that once the masses start to do something, you should probably do the opposite and I'm starting to hear a lot of talk about "great buying opportunities" at these levels and I'm just not so sure, especially given the technical picture I just mentioned above.

What do you all think?

No Trades Today

I need to man up to the plate and take a few swings but my psychology is a bit challenged although only temporarily.  My goal going into today's session was to trade carefully. Not to rush into anything and to simply trade those set-ups I felt were really in my favor. Perhaps I was a bit too selective but that's OK for now.

I must say, trading is a very fascinating psychological journey and I love it. It pushes me from a personal development standpoint more than anything else I've experienced.  I truly believe that successful trading requires a holistic approach to life and this is just one of the many reasons I love to trade and why I want to trade full time.

Because I refuse to give up, not matter what challenges I am faced with, I am absolutely confident that I will make a long career as a trader. This is my passion. But a positive attitude isn't enough.  A solid strategy and the discipline to follow it is also crucial.

I am confident in my strategy, especially now that I've tweaked it a bit more to suit my personality, not to mention my now measly account balance. I am also confident in my ability to follow the rules.  I've suffered through a couple of big draw-downs but I've tried my best to learn from them and adjust accordingly.  I feel like I've done just that and while I still don't have a perfect system, I feel like it is getting better every day.

So this is all I have to say about that. Today I proved that I have sufficient discipline to take the time to choose signals that I am comfortable with. I will do it again tomorrow and hopefully it will be enough to turn a profit.

Happy Trading!

Tweaking My Strategy

As I head into a new week tomorrow, I am planning to tweak my strategy a little. Even though I just closed out a losing week, my first in a while, I still have a lot of confidence in my plan and I am not going to abandon it. I very well could have ended another strong week if I had managed my trades differently so I just need to make a few adjustments and move on.

To be totally transparent, my daily goal is to book between 3-5 points on the mini Russell (TF). I will not take extra risk to hit my targets, instead I am going to rely on smooth trading in "the zone" to get there. I've already proven to myself that I can take out over 10 points on a given day so this is certainly possible and just two weeks ago I consistently averaged over 5 points a day so again, I know I can do this because I already have.

To get there however, I have made some tweaks. First of all, I am going to continue to trade a mean reversion strategy where I will target pull-backs from the intra-day trend on the 3 minute chart. I am going to trade selectively, taking only those set-ups that I feel look more oversold as per readings on the Bollinger Bands and RSI. Nothing different there other than a little more patience. What I am really going to adjust is my exit strategy and I am going to set three conditions that will take me out of a trade and I will take what ever comes first, even if it ultimately prevents me from more gains.

My exits will be based on any of the following: 1) once price trades into the mean on the Bollinger Bands (20 period ma), 2) once price closes opposite the 5 period moving average, 3) once price reaches the opposite extreme on RSI.

I have typically waited for price to either trade into the opposite side of the BB and/or the opposite extreme of RSI (7 period) and while that has worked on many occasions, when price failed to get there quickly enough I ended up losing the most money and this is what I have got to avoid going forward if possible.

Larry Connors from TradingMarkets.com has mentioned the 5 period ma and 2-period RSI strategy on his website and in his book, Short Term Trading Strategies That Work (read my review here), and he suggests they are both great exit triggers. I've actually always used a 4-period ma and a 7-period RSI but I haven't implemented them as strict exit rules, though they have guided decisions at times. Going forward, I am going to try the 5-period ma with the 2-period RSI as exit rules. I've done some back-testing and they do look good, and definitely more conservative than my previous system, which is just what I need. Furthermore, if I had been applying these rules last week, I would have exited my losing sequences early enough to actually turn a profit while preventing a bunch of anxiety; also just what I need!

Of course, no system is perfect but I am planning to implement these tweaks in an effort to better protect my account while increasing my equity. I am anxious to see how it works in practice and of course, I'll show my trading charts regardless of the outcome.

Until then...Go Utes!

This Rally Is a Castle Made of Sand

I may be totally wrong or simply tuned in with reality: The bears are just grabbing some water before the next stampede.

I like trading with the bears and they like me. Screw the bulls. I need the economy to rebound as much as the next guy but so long as I am making a pretty penny while the bears are in control, that's what I prefer.

This corrective rally is nonsense. Companies are still laying off herds of people (mine just downsized by 20% yesterday), many big companies are at serious risk of default, real estate prices are tanking, consumer confidence sucks, no one has any money to spend, life as we know it generally sucks right now. And the markets are in a "rally" albeit short-term.  Some people are calling this perhaps the bottom. Those people are retarded. I say, we are in for some more shorting and until then, I can barely take going long because at any minute, it feels like this market could reverse.

We are in a bear market and until things really change, I am sticking to my short bias and any longs I happen to take will be few and far between. Furthermore, I am not going to test the shorts on a day like yesterday when the market wasn't quite sure of itself. Patience will pay off in the long run.

With that aside, I placed two trades today, and ironically, both were longs. Though I pulled out 3.1 points in profits and I am now done. It is 11:30 MST and I don't trust the tapes for a minute. The 15 minute chart is so "overbought" it is ridiculous. Price hasn't taken a breather for hours and it is only a matter of time before the bottom falls out from this little love-fest.

As our man Jimi said, "A castle made of sand falls into the sea eventually." This rally is just that and will do just that.  As such, I'm not going to trade it anymore (I just watched two profitable long set-ups come and go). Today I brought my account back up to $9,064 (yesterday's high was just over $11K) and I am not going to press my chances. I am simply going to be more careful and that's how I will last in this business. There just isn't any sense in getting impatient so I won't.

In the meantime however, here are two interesting quotes I came across today, both of which I found fitting relative to my experience from yesterday and in days past:

"If you do not have the stones to suffer temporary set-backs, take your money out of the market and go wash dishes for a living." The Fly

Indeed. Yesterday's loss was and is just a temporary set-back. I learned from it and I am planning to adjust accordingly. I do not have any regrets about how I traded yesterday; I simply got caught up in a tough trade and I didn't take myself out early enough but in the moment, I did the best I could.

"Courage is not defined by those who fought and did not fail, but those who fought, fell, and rose again." Unknown

This last quote really resonates with me. It is hard to want to trade again after having experienced a big draw down but I argue that it's from those moments we grow the most. If we simply quit when the going gets tough, we will never achieve our dreams and furthermore, we will completely stifle our personal development. I will never quit. I may suffer temporary set-backs but as the saying goes, "where there's a will, there's a way" and we have to keep finding our way and eventually we will get to wherever it is we want to go.

Good day.