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.