Finding Your Market - Honing Your Craft

Today I'm putting up a guest post by FuturesTrader71 (www.futurestrader71.com).

He answered a question over at BigMike's regarding finding the right market for you.  I've seen this question answered a few dozen times, but I thought that this was one of the best.  The gist of it is that there are certain factors in choosing a market that you need to fit to your personality and trading style, BUT you really need to find something and stick with it - master it.  Learn everything about it, and really get in tune with it.

Quoting his answer here:

"Product selection has many dimensions including account size, liquidity, trading hours for the underlying products, risk tolerance, tick size, fees/commissions as a ratio to range value, market conditions, etc. A whole lot depends on your temperament; are you ok sitting in something like the 10-yr notes where it might not move from the bid/offer prices you entered at for 15 minutes? Do you prefer the zip and power of the FDAX? Can your account afford the margin? Can you afford a $780 per contract move in the FDAX on a news in 12 seconds? 

I would only suggest a different time frame or instrument as a last resort really. The idea in trading, in my opinion, is not to treat the market like a casino where you can play Blackjack and then switch to nickle slots then quarter slots and then roulette or craps for entertainment and action. The market is more like the selection of a skilled craft to pursue. If you are going to be a master cabinet maker, then you wouldn't be advised to be a plummer just because your plummer friend is busy for 6 months and is making money. 

In my opinion, it is best to get REALLY, REALLY good at whatever you choose. What I see the most of is folks who dabble and spend a bunch of money to learn and then lose a bit. Then they dabble some more somewhere else. Then they fall for a promise of great returns and dabble again because some guy is doing a free trial of his chat room.  

This business is about committing a lot of energy for a one-pointed effort to master something specific. I believe that your ability to compete in this effort is based on having a structured approach, good record keeping and iron-clad risk management. This is what I'm focused on creating for traders now through the brokerage and new education material. 

Look at it this way, you wouldn't be paid highly as a surgeon if you repair tires full time on the weekend for income. You get paid highly because you have committed to the craft of being a surgeon and are better and more dedicated at it than others. 

Wouldn't you agree?"

As a matter of fact I would.


Happy Trading,

-IT7

Help me find the pattern?

Hey guys, 

I'm trying to find a pattern in CL (crude oil) price action over the past six trading days from 11:30CST until pit close at 13:30CST..... 

I could really use a sharp eye to help me see if there is any similarities... 

I've highlighted the time of day with a rectangle on each day's chart...


March 4th:

March 5th:

March 6th:

March 7th:

March 8th:

...and....Today...March 11th:

Interesting huh?

We'll see if the very act of noticing it causes it to vanish tomorrow!  I can guarantee you one thing, if I'm long heading into this timeframe (or during it) tomorrow, you can bet I won't be taking quick profit targets.

3D Trading

I've been a fan of three-dimensional trading for quite some time.  3D trading involves using three different timeframes such as the combination of 30min, 5min, and 1min charts.

There's a few ways to do it to suit your own style, but since I'm a Price Action guy... I'll show you how I do it.

I take a top down approach.  Start with the longest time frame.

Long term chart - 30 minute chart

This is the chart I use to look for significant levels in price.  It shows the history of the battles between bulls and bears.  It shows emotional inflection points where more people are likely involved.  Regardless of what the reason behind it may be, it shows support and resistance levels that I care about.

Here we can see CL action from today.  We'll make an example of what price did as it entered the support level that price had reacted to four times prevously (blue boxes).

Now we go to our main trading timeframe, the 5min chart.  

We're looking to see what price does as it enters this support level.  We can see that, on this timeframe, price forms a three-bar stall at the level.  There are also some longer wicks to the downside, which generally signal strong buying stepping in.  OK, we found a significant level on the higher timeframe, and we've confirmed that we're getting a stall here on our trading timeframe.  Let's look to the lower timeframe to get a microscopic view of the price action.

We're now viewing the lower timeframe (1 minute chart here). 

We first have a strong push down into and slightly past the level.  Buyers step in and price isn't able to maintain below.  The bears step in and again, and we get to see what they've got.  As you can see from the arrows, the second push down was super weak relative to the first, and price again came back up above the level.  You can choose an exact entry however you like; the precise entry is not even close to the most important thing when you get the analysis right.

Emotional Cycle - 7 phases

The seven phases of my trading:

1. (Day 1) I've got a great method of trading, let's be patient, focus on having a probabilities mindset, take these setups, and manage risk.

2. (Two days later) I am having good success with this.

3.  (7 days later) I am really on fire, I have been profitable for 9 sessions in a row.

4. (Next day) A breakeven day or two, I'll do better next session. Risk management is getting a bit inconsistent.

5. (Two days later) Daily loss limit hit, man, that sucked, I'll do better tomorrow.  This is only a temporary setback.

6. (Next day) Daily loss limit hit again, wow, what am I doing?  I've got to re-think this thing.  I've got to question my setups, question my analysis, question my exits, question the market I am trading, question the timeframe I am trading, etc.

7. (A day or two) Spend hours and hours and hours pouring through charts, trying to find the answers to prevent the losing sessions I have.  Find "the answer".

1. (Start at day 1) I've found it, I now have a great method of trading, let's be patient and take these setups, and manage risk properly.

------------

The truth is...the bottom line is that.... all of this is too emotional.

I need to focus more on simply executing my edge, which is in fact an edge... IF I execute the risk management methods that go along with it.  You see... even as I say that, I am admitting that there is a difference in my mind between my "edge" (hear setups) and "risk management" (hear exits).  There is no edge without both in place.

I must continually focus on keeping a probabilities mindset and executing my plan and processes.

I will admit that I am growing awfully tired of going through the 7 phases.  I'm still net profitable over the full cycle, but it's taking a toll on my emotionally.

Live Webcast 3-1-13 - Another daily loss limit hit

Here's today's recorded trading session.  It was another daily loss limit hit.  I know the main mistake I made today was a rookie mistake; allowing significant winning trades to turn into full stop outs.  Time for some self reflection and analysis into why I behaved this way.  Several people, including my girlfriend, are suggesting performance anxiety from trading in front of an audience.  May be some truth in it...

Bull-Bear Cycles in Crude Oil

This afternoon, I decided to take a look at the daily chart for CL.  I rarely ever look charts longer than the 1hour, but I must say, I was intrigued when I did.

I couldn't help but first notice the pattern of uptrends and downtrends with basic trendlines.  I marked these periods "bull" and "bear" respectively.

Then, I noticed that they seemed to be fairly consistent in regard to the time it took each cycle to complete.
The two completed bear cycles were 55 and 56 days.  The two bull cycles were 84 and 86 days.

The next thing I noticed was that each consecutive swing was less than the previous in terms of distance the price moved.  Over the 4 completed cycles in the picture (bear, bull, bear, bull) The distance of the swings were 27 points, 20 points, 16 points, and 13 points.

So there you have it for the current state.  It's a time of fairly evenly spaced bull moves, evenly spaced bear moves, and an overall declining volatility of major swings.

I don't have any particular plans to use this information in my day to day short-term trading, but it's certainly something to be aware of and do a daily check on.  I may add it to my pre-session routine.  The only drawback to doing this for a very short term trader such as myself, is getting an attachment to some kind of "view" that can filter what you see and cause you to be blinded by your own preconceived notions about the state of the market and what it "should do".

Trade well,

-IT7

Live Trading Webcast 2-28-13

Today's session was a losing one.  CL didn't provide any real continuations to short term moves during my session.  The 30 minute chart shows a tightening consolidation wedge, and the shorter moves surely acted the part.

Even though this is not an example of a great winning session, I think this video may be even more valuable of a learning tool for aspiring traders than the videos which show win after win.  I hope readers are able to see that losing days are absolutely inevitable and completely unavoidable.  It's how you handle them that matters.  I can hang my hat on the fact that I carried myself in a good way today, despite the frustrating conditions.  That's the lesson I hope to impart by this video.

Psychological Journal

Journaling as a trader is imperative.  I won't get on my soap-box here.  I'll cover journaling in a broad sense at a later time.

Today we're looking at a type of psychological journal entry.  I'll cover where I learned this, the basic idea, and how I personally applied it in my own journal today.

It's a journal entry that was inspired by something I read in Brett Steenbarger's book, "The Daily Trading Coach". The concept is from Lesson 14 - "Keep A Psychological Journal", and it's something I've found quite useful.

At first a psychological journal is simply a tool for recognizing our own patterns as traders.  These patterns can be:

• Behavioral - A tendency to act a certain way in given situations
• Emotional - A tendency to get in a certain mood/state in reaction to certain events
• Cognitive - A tendency to a specific thinking pattern/frame of mind in the face of personal or market related situations

Why repeat patterns when we're aware of the consequences?  Steenbarger says, and Mark Douglas would agree, that we're using strategies from earlier phases of life; one that helped in prior situations.  The problem is... these don't help in trading.

The first step is to simply begin to notice our patterns, ways of thinking, feeling, and acting that interfere with sound trading decision making.  Write down these observances at the end of the day as you review your session.  Steenbarger suggests to write down what happend, how you felt/acted, and then the consequences of that thought/emotional/action pattern.  He says, "When we clearly link maladaptive patterns to negative consequences, we develop and sustain the motivation to change those patterns." and I believe him.

So, how did I apply this in my own journal today?  For those of you that have been on some of the live webcasts of my trading sessions, I've gotten shaken out of several good trades for no good reason over the past two days.  I made a journal entry today that pointed out the occurrences when I scratched the trade for no good reason, and then linked that pattern to the negative consequence of how far the market ran immediately in my favor after I exited too soon.  Eventually, with this type of focus and light-shedding, the desire to actually book those profits will outweigh the desire to scratch a trade early because of fear of a loss.

Here's the actual entry (sorry it's not neater, I hadn't planned on sharing it when I wrote it!)

Happy trading,

-IT7

Live Trading Webcast 2-27-13

Here is the recording of today's trading session.  It was a rough day in the crude oil market today, with prices whipsawing all over the place without much continuation.  I managed to be practically breakeven for the day (-1 tick actually).  It's probably more of a positive thing than anything else to just survive days like this.  While frustrating at times, I had fun!

How good do you have to be exactly?

Today we're looking at a tool that can be used by great traders, and aspiring great traders alike.  It can determine overall level of profitability, as well as drifts in our performance.

So what does it take to get over the hump?  What required to cross into profitability?  How can I gauge my performance on a day to day, trade to trade basis?

The truth is in the cold hard numbers.  Regardless of your methods for entering trades (hopefully you are consistent in your approach).  We have to look at what we are producing, and if you want more meaningful information, this look goes deeper than a simple P/L statement or equity curve.

Many traders have some ambiguous view of what it takes to be profitable.  They typically have nothing attaching them to the truth; nothing grounding them in facts.  Know the truth, and the truth will set you free right?  Most new traders I talk to are searching for some optimal "setup".  Searching for some perfect way to enter into trades.  That will never be found.

Looking deeper brings us to the analysis two key stats for traders: win% and our win:loss ratio.

"win %" is the percentage of total trades that are winning trades.

"win:loss" ratio is the size of your average winner divided by the size of your average loser.

If we take a look at these measures together, we find there is an optimal combination of the two that takes the trader across the threshold of losing into winning territory.  Let's see it graphically.

This is an x-y plot of the two measures we're looking into.  The red line represents the threshold of profitability.  If your combination of win% and win:loss plots you directly on the line, you are breaking even for your trades.  If you are anywhere to the left/below of the red line, you are, unfortunately, losing money by trading.  If you cross over to the right/above, you're making money.

Now, once we understand and create the basic graph in excel.  We'll want to add our trading data.  You can use a variety of ways to calculate your win% and win:loss ratio; I personally use a rolling 20 or 30 trade average of both win% and win:loss.  This shows me some things we'll talk about shortly.  You can adjust this to whatever you like, and what information you're wanting to gather.  You could use a rolling 20-session period, or even an annual figure.  The point is you can make it fit your style and method.

Here's two examples of how we can drill down beyond the basic info of profitable/not profitable:

Example one:

Our rolling average starts at the green dot, and ends where we are presently at the orange dot.

This trader is drifting to the left on the plot.  What does that mean?  This trader held their win:loss ratio constant, but their win% is declining.  This screams, "Selectivity!" to me.  When I see this drift, I am not being patient enough and waiting for optimal, high probability setups.  Time to be more selective and drift back to the right.

Example two:

Again, we started at the green dot, and ended up at the orange.  This trader drifted straight down.  What does this mean?  The trader is doing a good job with trade selectivity because the win % is holding constant. The problem is in the old saying, "Cut your losers short and let your winners run".  This trader is taking profits too quickly and/or allowing losing trades to go too far.

Based on your own trading style and method, you'll start to find where your "sweet spot" is on this graph.  When you see a directional drift away from it, you'll know where to focus on improving your trading plan.

If you're not yet profitable, you can apply these same analysis tools to work your way across that line!  

Happy trading everyone.

-IT7

Live Trading Webcast 2-26-13

Here is the recorded session from today's live webcast.  If you want you can skip to the start of each trade using the "next" button below the video.


+32 ticks (average ticks per contract traded) today.  Nice entries, but could have done a better job once or twice on trade management.  Those mistakes are just part of the nature of a totally discretionary trader.

Daily sit down with IT7 - MAE and MFE - Actual risk reward vs hypothetical/planned

First a primer on MAE and MFE for the newbies.  If you already know, pick up later on in the article after the pretty picture.

MAE stands for "Maximum Adverse Excursion" and it represents the maximum distance a trade goes against you over your holding time.

 MFE is the "Maximum Favorable Excursion" and it shows the maximum distance a trade ever went in your favor during the trade.

 A trade example: You buy crude oil at 97.00; it trades down to 96.80, then runs up to 97.40 , then falls down to 97.20 and you exit your trade there.

 Here's the anatomy of that trade visually, the way most of us traders like to see it:







Your MAE would be -20, the 20 ticks the market traded against you at the worst point. At the red circle.



Your MFE would be +40, the 40 ticks that the market went the most in your favor.  At the blue circle.





Ok, we get the concept, thanks for over-simplifying that IT7.  How do we apply it?  How do we become better, more knowledgeable traders from it?

There are several ways, but unfortunately some manual labor is usually involved for my favorite.  Don't all traders love excel??

My favorite way of using MAE and MFE together is something I recently heard talked about in a webinar, it is a great overall trading webinar btw and should be checked out futurestrader71 on risk and probabilities  Here's my takeaway and how I am applying it:

Create an excel chart to show MAE, MFE and P/L for each trade you want to include.  See how to create the spreadsheet here.

Now, what we want to look for is... you guessed it... risk to reward in our trades!  It's one thing to have hypothetical risk:reward when we enter a trade, but it is another to actually, consistently apply it and have it show up in this analysis.

This is really the key here.  We're simply adding a tool to monitor that we are keeping in line with ACTUAL risk and reward parameters that you set out to accomplish with your individual trading methodology and plan.

Here is mine plotted from today's CL (crude oil) trades I took on the live webcast:

I started out the day with my first five trades consisting of four losing trades, and one breakeven.  A few things I gather from this MAE/MFE graph:

a) I was getting just as much upside movement as I was getting downside movement on those first five struggling trades.  This is good to know that my timing wasn't totally wrong, and I'm seeing nearly a 10 tick push in my favor when entering trades.  I have a good bead on short term orderflow.

b) I can start to pay myself on a small portion of my position when I get those 10 ticks to help offset risk.

c) I am managing downside risk well, in accordance with my trade plan and method.

d) My last three trades were simply timed beautifully.  I hardly had any price movement against my position.  I was in nice sync with the flow and rhythm of the market.

I hope this article has been helpful.


Other, more traditional, ways to use MAE/MFE:

The most common way I see these used are with a MAE and P/L graph.  You can see where your trades tend to hit a "point of no return" and the odds of them coming back to profitable are getting quite slim.  This is a good area to consider having your stops placed.  If I know most trades that ever went more than 12 ticks against me are rarely profitable, I should probably be exiting trades that get to the -12 tick point in a hurry.  No hoping for a turnaround!

You can use the common graphs which plot MFE with your P/L to give you a good idea where you can safely add to positions.  You may see a point where collectively, if your trades get to X amount of profits, they tend to have a good chance of continuing to X+Y.  I don't personally use this, but it can be useful.

Live webcast 2-25-13

You can click the "next" button at the bottom to skip to each of the 7 trades.