Anthony Casa's List: Traderfeed

• Here is a worthwhile self-coaching exercise:
   
   Keep track of your best trading days or weeks.  Those may or may not be your most profitable periods, but they should be the periods in which you feel you have done your best trading.
   
   Each good day, keep notes on the following:
   
   *  How you prepared for the day/week:  What was your market preparation?  What research did you conduct or consume?  What did you read?  What conversations did you have, and with whom?  How did you eat?  Sleep?  Exercise?  Prepare yourself mentally?
   
   *  How you generated your trading ideas:  Where did the ideas come from?  What was the process that led to the ideas?  What made them good ideas?  What gave you "edges" in your trades?
   
   *  How you expressed your ideas:  What market(s) did you use to express your views?  What instruments?  How did your expressions provide you with superior risk/reward?  If you held multiple positions, how did you size them relative to each other and gauge their correlations?
   
   *  How you managed your positions:  What kind of trade planning did you do?  How did you size positions and gauge your risk taking?  How did you manage your risk?  What led you to scale into or out of your positions?
   
   *  How you managed your performance:  How did you review your performance?  What did you learn?  How did you use your learning to improve your future performance?  
   
   Imagine you kept these notes every period you traded well.  Eventually you would have a catalog of your own best practices.  You would come closer to understanding the drivers of your successful performance.
   
   Now imagine that you only kept notes of your trading mistakes and poor trading performances.  What would that reinforce in your mind?  Would such a negative catalog truly inform you of your strengths?
• Becoming great means identifying what you are doing greatly right now--and becoming more of the person you already are at your best.
• One of my favorite studies from this literature created a positive or negative mood in subjects and then showed them quick visual displays of information.  The subjects with the positive mood processed the visual information at the edges of their visual fields significantly better than the subjects with the negative mood.  When in a positive state, we literally broaden our perspectives and take in fresh information.  When we are stressed and distressed, we tend to become tunnel-visioned and miss information that is right in front of us.  How relevant is that to markets?
• It is common for traders to refer to the minute-by-minute movement of the market as "noise".  For those who understand the dynamics of price action, however, there can be important signals amidst the noise.  When we have low to average volume, we know that market makers are dominant and directional participants are relatively inactive.  When we have significantly expanded volume, we know that directional traders have taken the market reins and we can adjust expectations accordingly.  A meaningful shift in volume is often a nice tell for meaningful shifts in trading patterns.
• In Market Profile terms, we have rejected value in the prior range and now are trending to establish a fresh, lower value area.  The fact that the move out of the range occurred with significant, broad market participation is an indication that directional participants have taken control of the market.  As you know from the remainder of the day session, they did indeed take control and we closed near the lows of the day.
• A personal tradition is to start each morning with meaningful experiences as a way of setting the tone for the entire day.  Today I woke up around 3:30 AM--not an atypical start.  How did I start the day?  Not with looking at or trading markets, not with checking my mail, not with glancing at overnight news.  Eventually I get to all of those things.  But I started today by saying good morning to my four cats, who wake up with me.  They hang out together in our great room (see above) and each morning I pet them, greet them, feed them, fetch them fresh water, and clean their litter.  It is my way of welcoming the day by making an emotional connection and by tapping into a bit of servant leadership.  It is difficult to feel too important or too full of yourself when you are serving animals and cleaning their litter boxes.  But it's precisely connectedness and leading-by-serving that make me who I am as a psychologist and trading coach.  That gets me up and going early in the morning, fueling the day ahead; not any alarm clock.
• The wrong activities--being with the wrong people, engaging in meaningless routines--are poor fuel for the soul and ultimately fail to catalyze our best life efforts.
• Once you view drawdowns as information--not merely as failures or as stresses--the door opens to a deeper understanding of markets and ways in which we can take our trading to that proverbial next level.  The challenge is not simply to learn trading; it's also to unlearn and relearn it when markets present different, fresh opportunity sets.
  
• The point of this post is not that you shouldn't be a daytrader.  Rather, the point is that, if you're going to be a daytrader, you have to approach markets very differently from the herd.  You either need to be in non-crowded instruments that possess unique directional opportunities or you need to approach crowded markets in unique ways that find profitable opportunities in the reactions and overreactions of the herd.
• Daytrading indeed has become more challenging.  It is hard to imagine achieving unique results without a distinct informational edge.  All the coaching, discipline, and psychological insight in the world won't help a person trade the market if they don't see the market.

8 more annotations...

• If  trading as a mission is the only path to excellence, what about balance  with the rest of things in life such as quality downtime or giving full  attention to important others? Do these get sacrificed? If so are  there mental health concerns?
   
   I think these insightful questions reflect important concerns, but also misunderstandings.   
   
   What we know about creativity is that it is at least a two-step process consisting of:  1) a period of immersion in a domain, where people absorb all they can about the world; and 2) a period of stepping back, where people can reflect upon what they've learned and put their observations together into new views of the world.  
   
   It's a bit of a simplification, but I refer to the first process as analysis and the second as synthesis.  Creativity starts with a wealth of raw materials derived from intensive observation but doesn't blossom until there is an opportunity to synthesize what you've analyzed into a fresh perspective.
   
   If you don't do the deep dives, analyze the charts, study the companies, put in the screen time, observe markets, research patterns, etc, you won't have the raw materials for synthesis.  There's nothing to synthesize if you haven't made the initial observations.  It's the immersion in observation that enables us to see what others don't--that gives us the rare and valuable raw materials.
  
• But at some point people burn out if all they do is stare at a screen or conduct one deep dive after another.  It's the emergence from immersion that puts the mind in synthesis mode.  That's why so many of our choice insights come when we least expect them:  on walks, in the shower, or in dreams.
• While photographing a picture-perfect sunset, a startling idea came to me based on everything I had been analyzing.  The essence of the idea was that all technical indicators boil down to a handful of variables, such as momentum and volatility.  The key is to distill all chart patterns and indicators into the smallest possible set of non-correlated variables, find optimal expressions for those variables, and then identify which of the variables are driving price action during particular market regimes.
• So now let's revisit Mr. Ayer's challenging questions.  If you create a dichotomy between work and quality downtime, you'll always be a divided human being.  Creative productivity requires intensive work and quality downtime.  Indeed, from my perspective, one of the greatest performance problems traders face is both a lack of intensive, quality analysis time and a lack of quality downtime.  Traders stare at screens and flit from chat to chat without truly doing the deep analytic dives.  At the same time, they tell themselves that dedication to trading requires that they not take too much time away from markets.  As a result, their analyses and syntheses are lacking.
   
   Analysis without synthesis is drudgery.  Synthesis without analysis is empty theorizing.  It is the combination of passionate immersion in markets and quality experiences away from markets that brings out our creative best.  What is the quality of your market time?  What is the quality of your time away from markets?  How efficient are you as a creativity machine?  As a generator of inspiration?  We can only find the right answers if we ask the right questions.
  
• Over the course of his time with us, I became less interested in the magic and more interested in Blaine the person.  I spent time with his right hand assistant and asked plenty of questions.  When I asked how much time David spent in practice each day, the assistant looked at me quizzically.  "That is all he does," was the response.
• There it was:  the power of intense focused dedication to a craft, extensive deliberate practice, and continual performance-based learning.  The world-class traders I've known have been like David Blaine:  they treat trading as a performance activity and continually hone their craft.  What did you try out last week and what did you learn?  What will you be reviewing and practicing this weekend?  What are you going to be working on next week?  Those are the questions that capture not just a learning curve, but an expertise curve.
• And that's what I've learned over the years.  Average traders approach trading as a hobby or as a job; good traders tackle trading as a career.  But the great traders?  For them, trading is neither hobby nor career.  It is a mission.  When the trading day is done, like David Blaine they pack up after dinner and begin the quest anew.
  

5 more annotations...

• There it was.  It was like so many opportunities in life:  you don't find them; you stay open minded and open to experience and they find you.
  

• My review of expert performers in such fields as chess, military, athletics, and performing arts--as well as my research review of exemplary performers--suggests that success is not simply a function of qualities of the individual. Rather, it is the fit between the talents (inborn abilities), skills (acquired competencies), interests, and opportunities afforded by a field that creates accelerated development and eventual mastery.
• Many, many times, traders do not live up to their potential simply because they are trading markets and methods that do not draw upon their strengths. Without that fit, they are not absorbed in what they do; frustration replaces focus and learning suffers.
  
• What does this mean for trading?
  
  It means that success will not be found in better indicators, improved self-help techniques, or any of the endless parade of chart patterns, wave formations, numerology schemes, or moving average arrays.
  
  Rather, success is achieved when we find markets and styles of trading that take maximum advantage of our skills and talents. That keeps us focused on markets and absorbed in them, enabling us--over time--to internalize their patterns.
• If my book accomplishes nothing else, I hope that it assists you in thinking about where your niche might lie, not just in trading, but in life. The days pass by quickly; life is too short to waste on anything that you're not passionate about and good at.

2 more annotations...

• I encourage traders to never stop exploring markets and strategies. There is always room to grow. Those who develop new opportunities are best positioned for those occasions in which current sources of edge start to go away. It is great to find a niche as a trader; even better is to continually develop fresh niches.
  .

• Trading the financial markets is among the most challenging of human endeavors.  At its best, trading is a celebration of the human mind's capacity to master complexity.  Rarely does any single activity so reward individual initiative and the exercise of the reasoning mind.  And yet, financial rewards are only part of the allure of trading.  In mastering the markets, we are called upon to exercise extraordinary self-mastery.  Like any noble undertaking, such as art, science, or athletics, trading is a means of self-development, fostering the ability to act intentionally, in the service of one's training and ideals.

• The Secret of Expert Performance

   

  What creates elite performance?  Is it inborn ability?  Developed skill?  

   

  One of the most significant conclusions from the research I reviewed for my book on performance was the work of Sandra Scarr, Ph.D.

   

  What she found was that genotypes shape phenotypes.  People with inborn characteristics seek out particular kinds of environments, which in turn cultivate those characteristics.

   

  Thus it is that children can be separated by only a small number of IQ points, but end up having very different developmental paths intellectually.  The brighter children seek out brighter peers, who in turn stimulate each other's intellectual growth.  The less bright children never seek out such social environments and thus increasingly lag their more gifted peers.

   

  So it is with trading talent.  We see young traders who pick up markets just a little faster, who are just a little more able to read market patterns.  These traders are more likely to be hired by elite trading firms; they're also assigned to more stimulating and successful trading environments within those firms.  As a result, these slightly more gifted traders receive far better mentorship and undergo exponential growth.

   

  The average trader never experiences stimulating environments and thus progresses at a relatively modest pace.

   

  It's not talent, and it's not environment: It's how talent brings you to superior environments that creates exponential learning curves and elite performance.

   

  This, I believe, is why the vast majority of traders cannot sustain a living from their work.

   

   
• 3)  I would try out many markets and time frames before settling on any one - I'm continually amazed by how traders who are mediocre performers in one market can blossom once they move to a different market.  I'm also impressed by the ways traders find time frames that work for their personal needs, capturing the right blend of market involvement and freedom from the screen.
• I would find just one or two setup patterns and master those - It's hard to imagine successfully trading multiple patterns and markets before mastering one.  By working on a specific setup, a trader can then focus attention on pattern recognition, execution skills, money management, and discipline: the skills that will be of help when it comes time to extend the trading reach.  It took many, many months of printing out and studying intraday charts for me to find the few patterns that I now trade.

• February 19, 2007

   

  Improving Trading Performance by Utilizing Volume Information

   

  I typically use volume to track the presence of large traders in the stock index futures markets.  This is because large traders control the stock indices; they account for a small percentage of all trades during an average day, but a large proportion of total volume.  For that reason, volume is highly correlated with price volatility.  In a recent post, I found that emini volume in the Euro FX futures also correlates quite highly with volatility.  That led me to conjecture that the emini Euro FX volume might be a "tell" for large, institutional volume in the much larger cash currency market.

   

  It's interesting to see how volume is distributed in the emini Euro FX market.  I took Friday, February 16th's morning market as an example.  We had 12,648 emini Euro FX trades that morning and a total contract volume of 80,728.  Fully one-third (N = 4390) of those trades were one lots.  About half of the trades were either one or two lots (N = 6015), accounting for 7640 contracts, or less than 10% of the total.  

   

  On the other hand, only 818 of the trades--about 1%--were 20 contracts or larger.  These accounted for 30,644 contracts, over a third of the total volume.  Trades of 10 contracts or higher accounted for only 2081 trades--about 2-1/2% of the total--but accounted for 48,149 contracts.  That's about 60% of the volume.

   

  What we find in the emini Euro FX futures, it seems, is very similar to what we find in the stock index futures:  a small proportion of trades from large traders account for a large amount of the total volume and for much of the market's movement.  Knowing how the large traders are trading--whether they're participating in market rises or declines; entering or fading breakouts--is crucial to understanding the action in the Euro currency market. 

   

  My strong impression is that this same dynamic applies to trading in individual stocks as well.  It's the large traders that move the markets, and ferreting out their behavior provides a meaningful edge for the active trader.

   

   

• February 11, 2007

   

  Thoughts About Best Practices

   

  Today I posted a proposal for using the TraderFeed blog to share the best practices of traders:  methods that have helped them master markets--and themselves.  The idea is to create a repository of what works:  a collection of ways of looking at markets and trading that can sustain continuing learning and development.  Hospitals commonly track the best practices of physicians to help make health care more efficient and effective; manufacturing firms identify best practices in the search for quality improvement and cost control.  Best practices can be considered as a kind of evolutionary process, in which further growth and development by emphasizing what works.

   

  One of the great obstacles to developing such a framework for the trading world is our set of beliefs.  What we believe defines our limits and, all too often, narrows our field of possibilities.  In particular, three beliefs run contrary to the best practices paradigm:

   

  1)  The belief that expertise resides outside of us - It is all too easy to divide the world into gurus and followers.  Placing the locus of expertise outside of us keeps us dependent on others, many of whom are pretenders to guru status.  Each of us has experience, and each of us has learned.  In sharing our expertise across a wide network, we magnify learning, absorbing lessons from others that would take years of experience on our own.

   

  2)  The belief that ideas will lose their power if shared - We often hear the fear that, if we share an idea, then everyone will use the idea and it will no longer provide an edge.  But once you're connected to a network of creative individuals, your edge is not dependent on any single idea.  Your edge comes from the ability to continually generate new and better ideas.  It only makes sense to hoard ideas if you begin with the premise of scarcity.  That premise keeps us isolated from learning from others.

   

  3)  The belief that we should not imitate others - Yes, it's true that, in the long run, we must develop our own, individual trading styles.  The same, however, is true of artists and scientists: they must find their own niche, but usually begin their learning by absorbing lessons from others with more experience.  Our style will be an amalgamation of what we pick up from others; the more input we get, the richer our synthesis can be.  There is no contradiction between depending on others for ideas and developing one's independence.  In learning from others, we acquire the building blocks that we will assemble into our own unique structures. 

   

  Imagine if you had a group of just 100 hard-working, dedicated traders who decided to view themselves as teachers, not just as students.  If each of those traders shared just one valuable trading lesson, the entire group would have two excellent pieces of learning every week for a  year.  All it takes is a shift of belief, a willingness to look inside and find your own strengths and the experience you have to share.  In that group of 100 dedicated traders, sharing one's ideas doesn't mean losing an edge: it means you'll have the opportunity to acquire 99 more.

• A Schematic of My Trading

   

  In recent posts, I outlined how I trade, setting price targets and handicapping the odds of reaching those based upon measures of sentiment and volume.  In this post, I'd like to pull together some of those ideas and lay out the steps I take in developing and executing trade ideas.

   

  The first step comes prior to the market open and involves research to identify a directional edge to the next day's trade.  My recent article on market reversals and implementation of that research in early morning trade the next day is a nice example of that.  Many times, the research examines the momentum, participation, and sentiment of the recent market and identifies the odds of hitting key price levels, such as the prior day's high, low, or average trading price.  If I have strong odds on a trade, I will be open to using my maximum size if intraday setups align with my research.  If I don't have strong odds, my maximum permissible size is automatically cut in half and I may not trade at all that day.  The idea is to align position sizing and opportunity.

   

  Immediately prior to the market open--for at least 90 minutes prior--I am watching to see how overseas markets are trading and I am watching to see how economic reports impact the index futures.  Many of my initial ideas about trading ranges and breakouts from those ranges come from noting the overnight range and the action of the European bourses.  I'm also watching how fixed income, oil, and the dollar are trading to see if global/macro forces may be at work.  My goal is to identify lead-lag relationships that might be at work in the recent markets, such as stocks following bonds or the DAX leading the ES.  Noting a breakout in a leading market may lead me to entertain trade ideas in my (lagging) market, especially if that move is in the direction of my prior research.

   

  Once the market opens, I continue the search for lead-lag relationships.  This time, however, I'm scanning for leading market sectors, such as small caps, semiconductors, or value stocks.  If  I see a leading sector breaking out of a range, I will not trade my market in the opposite direction.  I can't tell you how many bad trades that single principle has kept me out of.

   

  Also early in market action, I'm watching the NYSE TICK, the volume at bid vs. offer in ES, and five-minute volume in ES to gauge if there is a directional bias to the market (more activity at bid vs. offer) and if there is heavy participation in the market (above average volume).  From these readings, I formulate my ideas as to whether or not we're likely to be in a range bound market, a trending market, a volatile market, a slow market, etc.  

   

  My first trade almost always occurs in the first 30 minutes of the trading session.  Very often it's a trade with a very concrete near-term price target, such as a breakout from the overnight range, a test of the prior day's average trading price, etc.  On average, I'll hold such a trade for 20 minutes, and I generally have a tight stop on the trade.  For instance, if we bounce off the overnight high and start to see some selling, I'll be quick to join the selling, with a stop just above that overnight high.  Once again, my size on such initial trades will be modest unless the move I'm expecting is strongly supported by my research.  If the latter, I put on max size right away.  

   

  As I mentioned in my recent research, the vast majority of market days and weeks take out either the prior day's/week's high or low.  My core trade is a trade to test and break that prior high or low, using my volume and sentiment data to handicap the odds of hitting that point.  Once we break the price target on an extreme NYSE TICK reading, I get out and take my profit.  Very often that ends my trading day.  It is rare that I trade beyond mid-morning, simply because I have other pursuits to attend to.  I average one or two trades per morning; very rarely do I make large sums or lose large sums.  The idea is to be consistent in my approach and make steady profits, gradually ramping up my size as I progress.

   

  At this juncture, I do put on occasional swing trades, but that's a somewhat different process that I'll cover another time.  The important thing about my daily trading is not so much the specific methods I use, but rather the structure I impose.  Each trade risks a very small portion of my total capital, and each trade has to be justified by my data.  I limit the number of trades I make each day and I adjust my position size for the opportunity at hand.  The trading is not mechanical--I make many discretionary judgments each day--but it is rule-governed.  Every trade has a rationale, a price target, and a stop.  My risk:reward on each trade has to be at least 2:1, which means I sell after I spot a candidate high and buy after I spot a candidate low.  I don't try to predict tops and bottoms.

• December 15, 2006

   

  Developing Trading Ideas

   

  One of the things I've noticed about successful traders is that they're always on the hunt for an edge.  The one-trick ponies don't last in markets that are ever-changing.  The traders who approach their work as a true career make it a priority to stay one step ahead of those market changes.

   

  One way that I'm developing trading ideas is by looking at the widening universe of ETFs coming to the market.  My key questions when I see a new instrument are:  1) How is this related to my market? and 2) Who is trading this instrument?

   

  With respect to the first, I'm looking for historical patterns in which one instrument might have a predictive relationship with respect to my market.  For example, I'm currently researching EFA, the EAFE ETF that covers most of the major equity markets outside the U.S.  Do moves in EFA lead moves in the U.S. equity markets?  When I hear of a trading instrument such as EFA, that's one of the first questions that comes to mind.  Well over three-quarters of the time, there will be no reliable relationship to bank on.  It's those few that do pan out, however, that can lead to excellent opportunities.

   

  The second question arises because some instruments are dominated more by small, inexperienced traders than by seasoned professionals.  Sometimes, the trading patterns in these instruments can form the basis for a fade.  For instance, in the Weblog entry for Dec. 16th, I show how it can be worthwhile to fade the equity put-call ratio when the market is at a 20-day high.  I've learned over time, with analysis, that it is worthwhile fading equity option traders when they're leaning strongly one way or another.

   

  I also like to look at the technical patterns that a large number of traders emphasize.  Those especially include support/resistance areas.  When you see an obvious support area and you also see large traders hitting bids and pushing the market lower, you know that the locals, at the very least, will gun for the support area and take out the stops placed by relatively naive traders.  I'll get short with those large traders and, when the stops are hit, cover my position.  

   

  By studying different instruments and intermarket relationships--and by constantly asking yourself who is going to have to disgorge their positions if the market moves up or down--you can often frame longer-term and day timeframe trading ideas.  Discipline keeps traders in the game, but careers are built out of creative, flexible thinking.

• September 24, 2006

   

  Learning to Profile Markets

    

  I just finished reviewing the book Markets in Profile, a long-awaited follow-up to the very successful and enlightening Mind Over Markets.  The new book reflects author Jim Dalton's many years of applying Market Profile principles to a variety of markets and timeframes.  What I like most about it is that it offers a framework for thinking about market behavior and making sense out of the patterns that we observe each day.

    

  Early on in their education, medical students and psychologists learn diagnostic systems for classifying various disorders.  Without such systems, health care professionals would be faced with a bewildering array of symptoms and complaints.  By clustering these together in a fashion that reflects their underlying pathology, doctors can rapidly make sense out of presenting problems and triage effectively.

    

  It is much the same for traders.  Markets consist of a bewildering array of movements and chart formations.  Auction theory provides a conceptual framework for thinking about what buyers and sellers are doing and what their actions mean.  By organizing market data into meaningful categories such as "value", "attempted direction", and "excess", auction theory enables traders to diagnose market action as it's occurring.

    

  There's a very nice statement in Chapter Seven of Markets in Profile:  "...perhaps the most important skill you must master to become a successful trader is the ability to distinguish 'price' from 'value.'"  Value, in auction terms, is the range of prices at which most transactions have occurred.  Price is either within that value range or outside it.  Once we depart from value, one of two possibilities present themselves:  the auction will either fail to facilitate trade at the divergent prices and the market will revert to its value area or the auction will generate acceptance of a new definition of value and we'll get a trending movement.

    

  That is the question you need to answer to be a successful trader: When is a market that is away from value failing to facilitate trade and when is it facilitating trade?  Or, stated otherwise: When are we in a bracketing, range bound market and when are we in a trending one?  

    

  There are very few sources of guidance for this crucial question.  Markets in Profile, I believe, is one of them.  The book is scheduled for February publication.    

• July  23, 2006

   

  A while back I posted on the topic of the "minimum data set" needed to make accurate trading decisions.  My goal was to distill all the market information (but nothing more) that I need so that everything could fit onto a single computer screen.

   

  Since returning to regular trading, I have found that maintaining a higher degree of concentration and focus with respect to fewer market variables is more effective than trying to keep up with multiple screens and a large number of indicators, indices, news items, etc.

   

  I also find that, when I've done my homework prior to the market open, I know which variables are moving the market (e.g., interest rates, oil), which allows me to focus on only the most relevant markets while my market is trading.

   

  Everyone trades differently, so what I look at may not be relevant to those who operate in other markets and timeframes.  But here's what I've found most helpful with respect to the intraday trading of the ES (S&P 500 Index) market:

   <!--mstheme--><!--msthemelist-->  <!--msthemelist-->  <!--msthemelist-->  <!--msthemelist-->  <!--msthemelist--> <!--msthemelist-->

  	<!--mstheme-->Historical Patterns - I conduct historical studies, such as  those in TraderFeed to see  if there is a bullish or bearish edge to the coming market day.  These  studies also include assessments of recent marketing trending and strength,  as documented in the Weblog and studies of which  markets or sectors are tending to lead my market.<!--mstheme--><!--msthemelist-->
  	<!--mstheme-->Price Levels - There are certain ranges that short-term  traders--especially those dealing in size--tend to look at.  These  include the range of the previous day, the overnight session, and the  market's opening range.  Many times, I'm looking for a breakout or  reversal near the edge of one of these ranges based on the patterns above.<!--mstheme--><!--msthemelist-->
  	<!--mstheme-->Activity of the Market's Largest Traders - I use the Market  Delta program to track large trades coming into the market and whether  or not they're dominantly on the buy or sell side.  I want to follow  the activity of the market's largest participants, per my  recent post.<!--mstheme--><!--msthemelist-->
  	<!--mstheme-->Participation - I am much more likely to fade market  movement if relatively few individual stocks participate in that movement,  and I'm more likely to go with a trend if there's broad participation among  equities.  The NYSE TICK is my shortest-term measure of participation;  I also track the number of issues/sectors making new highs/new lows over  varying time frames.<!--mstheme--><!--msthemelist-->

  <!--mstheme--> 

  All that being said, I'm finding several aspects of execution to be as important to my success as what I'm looking at:

   <!--mstheme--><!--msthemelist-->  <!--msthemelist-->  <!--msthemelist-->  <!--msthemelist--> <!--msthemelist-->

  	<!--mstheme-->Defining Firm Exit Points - Every trade has a target price  based on price levels, historical patterns, and market  volume/volatility.  I hold the trade until the target is hit as long as  large traders are going my way, and I exit after that target is hit as soon  as large traders stop going my way.<!--mstheme--><!--msthemelist-->
  	<!--mstheme-->Exiting Positions Quickly - I have been framing my trades by  timeframe as well as by anticipated movement.  In other words, I will  use my historical studies to assess the odds that the market will reach a  target price within a particular period of time.  If time passes and  we're not getting the movement, I'm likely to exit the position and move on  rather than wait for a stop loss point to get hit.<!--mstheme--><!--msthemelist-->
  	<!--mstheme-->Only Trading When Volume is Above Average - Volume  correlates very well with volatility.  When volume dies out, I stop for  the day.  I don't widen my timeframe.  In practice, this leads me  to trade active morning hours and then move on, which also keeps me from  getting fatigued or bored.<!--mstheme--><!--msthemelist-->

  <!--mstheme--> 

  In practice, this has me trading a couple of high probability patterns each morning.  Less is more, I'm finding, if that means you concentrate harder on the things that matter.

   

   

• July  8, 2006

   

  Potpourri of performance topics today:

   

  I met a very successful trader a while back; someone with superior research, long experience, and a track record of years of success.  Between 50 and 60% of the trader's trades made money and the size of the losing trades was about two-thirds the size of the winners.  But the trader was consistent and compounded money year after year, sticking with carefully researched ideas.  Perhaps most interestingly, the trader only traded about once a week.  It's been a while since I met with that trader (who, BTW, still is making money), but after hearing another breathless claim of 100%+ annual returns and huge winning percentages for a mechanical trading system, I had the thought: If a hugely successful trader with superior research can only succeed a little over half of the time and only finds superior opportunity once a week, what are the odds of sustaining success with these curve-fit systems?  

   

  ***

   

  Someone I respect told me that trading psychology was a dying field, as professional trading is increasingly conducted algorithmically by computers.  I actually agree.  The idea that sustaining market success is a function of objective talent and superior information/research is threatening to both traders and trading coaches who lack access to data.  So they implicitly collude in the insistence that success is predominantly a function of mindframe, although that is not the case in any other human performance field.

   

  ***

   

  My research finds the greatest edges in holding trades several days.  My trading results show the greatest profits in trading short-term ES patterns in the morning.  I find myself increasingly using explicit research for context and implicit knowing for execution.  The best trades have been occurring when the implicit and explicit come together.  

   

  ***

   

  Exits are the hardest for me.  I'm good about setting targets for trades based on the research, but gauging how long to wait to let a trade work itself out is still more art than science.  I'm definitely at my least successful when I let pain take me out of trades.  At those times, the risk of losing possible good trades exceeds the risk of being in a bad trade.  I trade best when I'm loose enough to let possible good trades go and instead limit myself to great trades.  I'm also at my best when I take what has been discretionary (exits) and make it more rule-governed.  It's so easy to get taken out by noise if those rules aren't top-of-the-mind.  There's something to be said for augmenting the implicit with the explicit.

   

  ***

   

  What you see is what you get.  I've seen a lot more morning markets over the years than midday or afternoon markets because much of my trading has had to be part time in mornings, when I haven't had other work obligations.  As a result, I've built up a much larger set of pattern-recognition experience with morning markets than later ones.  Lately I've been trading like a relief pitcher: I come in for a couple of innings (hours), make my good trade(s), and then leave the mound for the day.  There was a funny experience on Friday afternoon, however, in which the late day trade picked up and became more morning-like.  Almost immediately, I started picking up the patterns.  The implicit learning seems to be specific to particular levels of volume/volatility.  How many traders have I met who make money during the day but can't keep it, precisely because they keep trading during market periods that no longer capture the patterns they've internalized?

8 more annotations...