Apologies, I had hoped to finish my post in the ongoing series on building trading systems, but I took quite a few trades today which need to be properly documented and reviewed before I stop for the day. Experience tells me that if I get behind I will quickly feel unmanageable and my trading performance will suffer. Sorry I have to put my own work first, and I want to make my post as complete as possible, omitting nothing.
Instead I have a quick point to make about the Stock Market. Yesterday we broke the high of the previous hammer candle, which should have attracted fresh buyers and seen us shooting to fresh highs. Instead we had total rejection of those highs and painted an Outside Period (down)/ Key Reversal or in IvanSpeak an OPd.
Typically this happens around 3 bars from a market turning point. Also, since the highest probability was for an upmove, when we have a low probability outcome you can expect a larger move. Therefore the highest probability is for some downside here
Looking at the weekly chart we are a low extreme on the VolStat (normalized ATR) which indicates an unsustainable low volatility and a potential turning point. The standard deviation of the recent weekly closes has already turned up, and this is a much more sensitive measure to an uptick in volatility. I would be very cautious here on swing positions, I think that we are near the upper zone of the channel and a significant retrace could be starting here.
Of course we remain in a strong and low volatility bull market so any downside is likely to be constrained by BTFD. If you are looking for a nice setup today this one is a beauty. Uptrend on daily weekly and monthly timeframes, a beautiful hammer candle in a strong uptrend, long on break of the high, stop at the lows.
Equally good is USDCHF, a daily shooting star candle after 2 days of sideways. Make sure you wait for a break of the lows
This is Scott, I’m filling in for Mole this week, and I’d like to help you start the process of building your trading systems. Over the next week or so I’ll be going through the exact process I use, most of which is adapted from the process Van Tharp and his students use which is outlined in great detail in his latest book, which I recommend. Today might seem a little wishy-washy. Don’t worry, very soon we will be down in the detail of how to come up with and generate entry techniques and optimize exits.
I see in the comment section of the previous post that people have posted some of their market beliefs. http://evilspeculator.com/?p=40769 This might seem a bit silly and I know some of you just want me to break out the entry techniques, but trust me, for a system to work for you it needs to be a very close fit with your psyche. Trading other peoples systems is emotionally fatiguing unless they are a close match.
What we are going to do is clear the mental decks of all the emotional baggage that comes with initial failed attempts at trading, beartardness, guru-itis, etc so that we can see that what is underneath is crystal clear and untouched. Then we are going to think about some trading goals. Then we are going to build a system to meet those goals. Then we are going to practice trading that system until we can do it mistake free. Then we are going to place a proper business plan around this trading system and put structure in place around monitoring ongoing performance. Then finally we are going to trade for small size, increasing position size as we prove we are capable of trading the system perfectly.
What we are trying to accomplish at this stage: We want to examine our beliefs in detail and decide if they are helpful or unhelpful to our goal of becoming a professional trader. We want to commit to our goals, and commit to the process of shedding unwanted emotional baggage. We want to spend significant (as opposed to insignificant) time developing realistic system goals.
What I’d like you to do is grab a pen and paper (or computer) some quiet contemplative time and ask yourselves the following questions about each belief in order. If you haven’t done the belief list, get cracking.
Question 1) Where did this belief come from?
Question 2) What does this belief get me in to?
Question 3) What does this belief get me out of?
So, for example if one of my own beliefs is that “I prefer simple charts to cluttered charts” the answers are 1) This belief was influenced by my mentor Ivan, who has such skill in tape reading that the visual aids of indicators and averages are unnecessary 2) It has given me a superior tape reading skill, I can read the story that the market is telling me at a very high level 3) It has made me exaggerate the importance of tape reading and chart analysis, which truthfully is not that important to being a world class trader. It has kept me from the use of indicators, which I instinctively distrust, especially price derived indicators. In system building visual aids like indicators and averages can be much more important than for chart reading.
So you can see that this core belief has a helpful and an unhelpful aspect. Most of your beliefs will have a helpful and an unhelpful aspect. If you have beliefs which are unhelpful you need to stop before you start building your system and decide to keep them, reframe them or let them go. Examples of unhelpful beliefs
I believe that when XYZ indicator is overbought the market will retrace; I believe that XXX YYY theory predicts prices in the future; I believe the market is manipulated; I believe the little guy can’t make a living in this market; I believe the banksters are ruining this country with QE.
I’ll save a special mention for those who are enamored with methods that claim prediction. These would be things like wave theory, T theory, Gann theory, astrological methods, all of which are magnetically attractive to beginning traders, because like most of the trading related scams they promise to save you from emotional pain by predicting the future. It is unhelpful and a waste of time to examine these methods and try and convince you they are incorrect (there is a germ of truth in all of them surrounded by a ball of shit). From a system design perspective you are not looking for a prediction but simply a low risk idea. Suppose my belief is that “Wave theory tells me where the market is going next” I might answer 1) This belief came from a period when I was beginning and trading badly losing money, and wave theory promised to stem the flow out of my account 2) It gets me into looking for long opportunities in impulsive movements 3) It makes me hesitant to take trades that are against the wave count which I believe. It means that I go long periods being out of sync with the markets which is very frustrating. Also wave theory is highly subjective and it makes my methods dependent on how well I am trading at this present moment and difficult to mechanize or automate. This is the perfect example of a belief we can reframe or eliminate. You might reframe the belief into “I believe wave theory can identify low risk opportunities at potential inflection points without predicting prices” (It can). Or you might decide to discard the belief, if you are emotionally unsuitable for discretionary trading wave theory is a weight around your neck that will drown you.
I’ll single out one belief that is the perfect example of an unhelpful belief which needs to be reframed before proper system development can take place. iBergamot was talking in the comment section about his theory that the components of the Dow and other indexes are manipulated inherently by survivorship bias to make in effect a ponzi scheme driving the market up. The truth or otherwise of this belief is TOTALLY IRRELEVANT. The important thing is “Is this belief helpful for trading”? This is the perfect example of a belief which exists just to make you feel smart, better, more in control of what is happening – when for trading well you want to feel humble and comfortable having no control and imperfect information. If you feel strong resistance to letting go of beliefs then that is a key indicator that there is a problem. Unhealthy beliefs, when you ask them to justify themselves, feel internally as though you are a 5 year old refusing to eat his broccoli “NO NO NO I WONT EAT IT! I WILL KEEP SUBSCRIBING TO THAT NEWSLETTER”. Helpful beliefs about the markets do not have the character where you feel like you have to defend them or prove them right.
Let me give you a personal example.
Belief ”I believe the Krastins patterns are a tradeable edge”. 1) This came from Ivan, who mentored me for a long time. 2) It gives me an effective toolbox with which to build systems 3) It gets me out of looking for entries which are different to these patterns, ie limit entries (since all Ivan’s entries are on a stop or stoplimit). I decided to reframe the belief into “I believe the Krastins patterns work very well in some market phases” which is a more helpful belief for me. Also, seeing how my core beliefs also kept me out of certain strategies is helpful. Ivan’s setups always wait until the market is moving in your favor, but in rangebound markets this leads you to buying the highs of a trading range and selling the lows.
Some of you may have adopted Mole’s market lens or his systems because you assume his is better than what you could come up with. Deep examination of where this came from will reveal that some of you don’t believe at a core level that you can build a high quality trading system. That needs to get cut out of you like a tumor before you proceed. It is highly unlikely you can build a system or trade someone else’s without close examination of this stuff.
So how do we go about fixing these unhelpful beliefs?
For a start it is unhelpful to call a belief wrong, and better to call it unhelpful, since all beliefs have origins in logic for our subconscious. For example if I am operating my trading account out of fear it makes perfect sense to have a guru to tell me what to buy and what to sell and where. Logical, but a deeper examination will reveal that if the belief is borne of fear and not acceptance (it could be either) it is being driven by our subconscious ego, which is never the right emotional place to trade from, and never the right way to build our trading systems.
The bottom line is that reasons borne of fear or greed or other base level emotions are childish reasons for doing anything. “I don’t like Janet Yellen because the Fed is evil” is really a childish thing to say or think. “They are bad” is a roundabout way of saying “I’m good” which reflects deep seated low self esteem and emotional insecurity. Virtually all traders who identify as “bears” have this crippled self esteem and in many cases sabotage their accounts as though their lives depended on it, because deep down their sense of worth is only “born to lose”.
There are various ways to modify or eliminate a belief depending on how deep or embedded it is. Sometimes all that is necessary is to articulate it on a written down piece of paper, and explicitly deciding to change that belief. An “out loud” or “written” commitment to change this may or may not help. This will probably be more effective if you take a few minutes to calm yourself, and notice the physical sensations going through your body. This is how I do it, which is a Vipassana Meditation which is highly effective, and I believe more effective for insight meditation than breath watching methods.
Get comfortable. You can recline on a couch, sit in a favorite chair, or if you are particularly excitable lie down with a pillow. The only requirement is don’t get sleepy.
1) Say, out loud (its easier to do out loud than mentally) which of the senses you are using right now. If the first thing that comes to mind is “seeing something out the window” that would be “seeing”. If you are hearing a car go past “hearing” “Feeling” is for sensations of the body like itching, rubbing, pressure, etc. If you have physical sensations with emotional content (like anxiety chest pains) just label them “feeling” and move one. If you are thinking just say the word “thinking” and don’t try and change it. Note every 1-3 seconds (3 seconds is a good place to start) and if you experience a strong desire to stop or a strong feeling that this is stupid then note “aversion” and stick with it.
2) After you are fluent with this process (may be 1-2 minutes may be longer) just add another layer of granularity. So instead of “feeling” you might say “itching”. Instead of “thinking” you might say “looping thought” or “scenario spinning thought” or “remembering thought” or “imaging thought”
By intensely focusing on the bare sensations that make up our experience, instead of the movie-loops and endless chatter of the mind, we begin to see things as they are and not as we would like them to be. I find this extremely useful for trading. You spend many hours in front of the screen, and spending those hours training the mind is a great use of that time instead of reloading evilspeculator! You might be about to place an order for a trade and feel anxious and worried if it is the right time to buy. Instead of letting your mind try and come up with reasons why it is right or wrong, just come back to the bare sensations making up your experience. You might note “tightness”, “chest pain”, “fear”, “aversion”, “anxiety” but the longer you keep doing this the more those unpleasant sensations will naturally pass without you mindfucking them away. You might see that the confusion you felt about the trade was just a manifestation of the fear your animal body is feeling about uncertainty or fear of loss. You wouldn’t bedgrudge your dog being scared of a thunderstorm, and it is perfectly natural for your equally animal body to be scared. Also, the endless chatter of the mind is just one more sense door for the non-existent I to experience. What I mean is that things you think are no more or less important than the things you see, hear or smell or taste. I like to conceptualize a thought as passing a billboard on a highway, interesting for a moment but gone in the blink of an eye.
What you think is NOT WHO YOU ARE! You are NOT your thoughts! Repeat as often as necessary until you get this fundamental truth about the nature of your existence
3) When, after a few minutes you can objectify your thoughts you will see that while you are labeling your thoughts it is very difficult to become “stuck” in them. If I have a looping thought that “this is stupid I need to do web research and find a better indicator”, then after labeling this “looping thought” several times you will see it becomes a little silly to continue identifying with it. It feels like someone else’s thought, which it is. At this point you can calmly conceptualize the belief you wish to examine. Go through the 3 steps of the belief examination paradigm clearly, without the useless chatter of the mind, and with the diamond clarity of your own market insight, which is perfect and always was. If you make a clear, adult decision to modify or eliminate beliefs in this state there is a much better chance of it sticking.
If you are interested in meditation I can highly recommend the excellent online resources at:
If you are looking for a teacher Kenneth Folk teaches live on popexpert.com and he is superbly knowledgeable and totally legit.
Also these two books are extremely useful.
I don’t want to meditate – I want to trade. I’m not a hippie goddammit let’s break out the trading stuff!
There are many ways to get a grip on who you are and why you think the way you do, and change the things you want to change. Trading is a mental game and working on your emotional “stuff” and training your mind is exactly the same as an athlete goes to the gym to get stronger.
You could do some psychotherapy, and I have had great insights doing “inner child” therapy in particular. Ed Seykota is an advocate of holotropic breathwork, which he does with traders through his “trading tribe” program. Breathwork is a weird lsd like trance which I have found to be useful in working through emotional trading issues. Van Tharp recommends a bunch of self-help style stuff like the sedona method, a course in miracles, etc. I’ve tried the Sedona method for letting go of unwanted ideas and it seems ok.
Let’s answer a few questions before we think about the goals of the system. Do you want to trade stocks/etfs/FX/Futures? Do you want to sit at the screen all day, a few times a day at “rollover times” like Ivan does, at the start of the trading day, or at the end? How many trades do you expect to take each day/week/month?
In the context of those answers we need to spend some time generating system goals. The systems goals are NOT something to gloss over, they are something to spend a lot of time on, most likely several days. The system goals for Heisenberg were:
System to make 4R per week with no more than 3 losing trades in a row, taking on average 10 trades a week at .4R expectancy, with a 6R max drawdown at SQN greater than 3.2.
Your system goals might look something like “I want to make 30% per year compounding without more than a 6% drawdown trading only large cap ETF’s”
The Crazy Ivan (unfiltered) goals were: Make 40R per year at .2 expectancy with a max 15R drawdown.
I had the opportunity to review an excellent system with the following goals, which are articulated clearly.
There is something very strange about this process. I’ve personally experienced that the end result looks a LOT like the system goals, nearly every time. I’m fucked if I know why, since when I start designing a system I have no idea what sort of entry or exit techniques I will use.
So let’s all come up with realistic system goals. What are realistic system goals? For short term traders .2 expectancy is a viable system, and only the very best systems average above .5 expectancy in the long term. Automated systems rarely get above .25 expectancy (though I think Heisenberg will blow that away) I’d like you all to actually imagine the worst case drawdown and imagine how it would feel. Imagine taking it right at the start of trading a new system compared to taking it on the market’s money at the end of a great year. The last thing you want to do is tell yourself that a 30% drawdown is going to be acceptable when a 10% drawdown has you changing your pants.
This process is non-trivial, and it is unlikely anyone could finish it before the next post tomorrow (it takes me about a week). Flag this for later examination, tomorrow we move onto finding an edge and building an entry technique to exploit it.
This weekend I’ve got a very special treat for you. A good friend and colleague of mine Scott ‘the Convict’ Phillips is making a rare appearance here on Evil Speculator. Truth be told he has graciously agreed to cover for me for one week while I am fleeing the rambunctious madness of the Las Fallas festivities down here in beautiful Valencia, Spain. And not only that – it gets better. He has decided to start from scratch and teach all of you step by step how to get your game to the next level.
Now, IF you have been consistently banking coin for the past three/four years without major draw downs then move right along. Most likely you will not learn anything new this week. For the remaining 95% of you I strongly suggest you sharpen your pencils and pay attention all week. For the Mole will be back on the 17th and there will be tests!
This is Scott. I’m not back, I’m taking over from Mole for a week so he can take a break. The poor bastard does so much stuff for me, it is the least I can do. Since I decided to stop contributing here at Evilspeculator Mole and I have been working hard on our systems and my own trading, and I’ve been making huge leaps in performance, having glimpses of the kind of super performance which is possible. Last year I had the opportunity to meet several traders who I regard as genuinely expert, in different trading fields – I was able to observe and model the commonality between them and realized that I was personally some way short of the minimum level I would regard as acceptable in terms of trading competence.
Yes you heard that right. I realized I was WAY behind the level I needed to be to achieve my goals in all areas, and decided to start again, from a beginners mind perspective and work hard in a systematic fashion to get my trading to the next level. Nobody (yes nobody at all) here was doing the things I now believe are necessary for long term superperformance so my participation here on the blog became not only a waste of time, but a counterproductive sop to my ego.
Anyway, it seems that most of you are at least heading in the direction of
- Losing the directional bias
- Using setups consistently
- Using consistent money management, and campaign management (for example the Protect-R Ivan invented which Mole sometimes uses)
And I know most of you have made all the usual mistakes. Joining a team (the bear team or the bull team) , not using stops, listening to gurus (I actually subscribed to Prechter at one point), being stuck in a trade, being attracted to counter trend trades, letting a trade become an investment, revenge trading, trading options when you can’t trade stocks well, reading opinions which reinforce your own so you don’t have to face emotional pain…. it’s good you’ve got those all out of the way (I know I have).
This is good. This is enough to stem the worst of the bleeding in your account. However, sadly, it is not enough to prosper long term or achieve the kind of performance you should be aspiring to. Simply not being bear-biased like our friends at that other blog is nowhere near enough to survive and a long way from prospering. I know you are all patting yourselves on the back that you aren’t beartards anymore (but wouldn’t you just LOVE to see Bernanke burnt at the stake and it all come crashing down, go on – admit it) but that is truthfully just the start.
This week, instead of me telling you where the spoos are going (the odds favor a low volatility melt up as exciting as watching paint dry) I’d like to teach you something useful, and have you work through some stuff in the comment section with the aim of you all starting to build a trading system which suits you for a specific market type. I’m going to run through the whole process, start to finish. Edges, entry techniques, the pros and cons of different exit algos, campaign management optimization – the whole enchilada. Then we are going to finish it off with a framework for actual trading and measuring your performance, setting structure around what is adequate performance and what is bad performance, and how you should respond when your performance dips. I’m going to get you to practice your trading in a STRUCTURED PRACTICE framework with the aim of (what a radical concept) getting BETTER AT TRADING.
It might take 10,000 hours to achieve mastery, but a taxi driver with 10,000 hours will never be Schumacher. Most of you are wasting your time working at stuff you either cannot control or which will not improve your trading, rather than taking the opportunity to get better, a little every day.
This week, I’d like to go through the actual process of designing a high quality trading system that suits your personality, and I’d like to work through the preliminary stages of building a system around Mole’s 25/100 Bollingers, by way of example. I have been mentoring BobbyLow (who used to post here) for 6 months now, and I have observed him build an outstanding system using this framework, and practice trading it to the point of adequate performance, then put all the rest of his business plan together with his trading plan and he is banking some serious coin now. I would be astounded if he does not bank 200% in this coming year without a > 15% drawdown.
You can do that. And I’d like to start by saying that I don’t think any single person posting in the comments section now, doing what you are doing, will survive in the markets. That’s right, I don’t think ANY of you, unless you step it up, will survive. You are probably reading this thinking that I’m talking about all those other guys, but I’m not – I’m talking about you. Only the top 2% of traders will survive, and most of you are content to be “better than most” which is not nearly enough.
”Successful trading is 40% risk control and 60% self-control. In turn, the risk control portion is one half money management and one half market analysis? Thus, market analysis is only about 20% of successful trading. Yet most traders emphasize market analysis while avoiding self-control and de-emphasizing risk control. To become successful, traders need to invert their priorities. ” Van Tharp and Henry Pruden from the Ten Tasks of Top Trading.
Here at Evilspeculator we spend MOST of the time on market analysis. That’s the blogging game, and I know that Mole is looking to change that over time. Having had the opportunity to observe genuinely expert traders banking > 100% returns year after year I was able to notice something. In every case I was a better tape reader/analyst than them. So is Mole, and arguably a few of the senior participants on the comment section are as well. Tim Knight is a WAY better chartist than any of the traders I have met earning > 1 million/year. In fact, ALL of the traders I aspired to be like could read the tape, but it was like something that they learned when they were starting out, and that doesn’t have nearly as much importance, the better they got. Like a price of admittance to the game of trading, learning to read and analyze the tape is something to learn, absorb, then STOP THINKING ABOUT AND IN SOME CASES DISCARD.
This is a huge mistake, and the endgame of that mistake is being like the guys at that other blog. Better and better at chart reading and worse and worse at trading. In comparison to trading analysis is easy, comfortable, and you delude yourself into thinking you are way better than you are. I know I did. This path is a dead end, and I’d encourage you not to go all the way down there before reversing up. Chart reading and tape reading is kindergarten – and you just gotta grow up at some point.
LETS START FROM THE BEGINNING - I’m going to go through all of these, in detail, over the next week.
These are the components of a successful long term trading business. If you don’t do ALL of these you should take up cocaine and hookers instead of trading, you will at least have some fun getting to where you are currently going.
1) A lens for viewing the markets. Mole has a lens for viewing the markets, a GREAT LENS which provides all the context he needs to make trading decisions, the 25/100 Bollingers and daily/60 min timeframes.
This is a perfectly good example of a lens that gives him context for what he is seeing, and I know many of you have adopted it. It is quite arbitrary, however… I’ve never in my life seen another trader use the 100 period bollinger. However THAT DOESN’T MATTER. Essentially what Mole is doing is interpreting how price reacts to the elements of his framework, and using that to simplify the decision process. There is nothing magical about the 25 period SMA, and we could argue for hours about whether SMA or EMA is better, but none of that matters. He has a lens to view the markets and that lens is consistent. BOOM! Job done!
Do you really think that price “respects the 25 SMA”? No it doesn’t and it can’t, given that only a minority of market participants have ever heard of it. This equally applies to the MA’s I currently use equally. However that matters NOT ONE LITTLE BIT. We trade our BELIEFS about the market not the actual market, and if you believe that a squiggly line on a chart inspired an investor to invest at a certain price go ahead.
Let’s look at some other lenses – This one is from Ken Long (genuinely a trading genius) who doesn’t even have price on his charts! His idea is that a 2 period bollinger of price represents price better than the actual price! He is looking for how the market behaves at his inflection points (when price leaves the bollinger, when the regression lines cross over, and when price crosses the SMA and VWAP. See how this approach is identical to Mole’s, with different ingredients to the cake? (FYI you can youtube Ken Long for video’s on his systems, they are excellent)
This is an old lens of mine which I used to use for my daily e-mini systems.
And this is my current lens – which won’t make any sense to you at all unless you know my systems.
Ivan has a lens also, without indicators – and I used this successfully for a long time. Your lens could have elements of fundamentals in it (Most market professionals utilize fundamentals in some way, though I personally do not. It is childish to dismiss the methods of others because you prefer your own)
See where this is going? Work out how you want your charts and put up the minimum information you need to make the decisions you need to make. Stick to it. Don’t worry if it has stuff on it that someone else doesn’t believe in (personally I don’t think that MACD and RSI are an edge, but BobbyLow has designed a system using RSI which I think is great) If you believe in stuff which is twaddle then tomorrow we are going to go through a “belief examination paradigm” to examine your beliefs and discard the unhelpful ones.
2) A trading system with an edge for a specific market type – formulated specifically to achieve YOUR goals. No system will perform well in all markets – that is a fallacy (my current systems are about isolating trending markets on multiple timeframes and trading those markets only) If you are trading Crazy Ivan or Heisenberg you will most likely have to modify the number of trades or the exit methodology or the max drawdown/week or the maximum R per week (stop after making 2R for example) to suit your psychology. Otherwise trading someone else’s system will be emotionally intolerable. Don’t worry, we will get to exactly how you do that in a little bit. I’m also going to show you how to design your own entry techniques and measure if an edge is real.
3) A Business plan for trading that treats your trading as one component in the business of trading. You need to have business goals, like any business. You need to have set in stone plans around things like: Your broker going broke; A 2008 style bear porn event (when markets change character I guarantee your system will stop working); What do to if you reach x% drawdown (it’s no use having a system which is designed to have no more than 15% drawdown if you keep trading it when it is past that); What to do if you have personal trauma like divorce or serious illness or death in your family; What events trigger a compulsory holiday (for some people prolonged periods of success cause them to give it all back to the market because they don’t believe they deserve it); How many weeks/months a year you will trade (any system with any discretion at all is impossible to trade all the time without emotional fatigue. Beginning professional traders will by necessity need to take more time away from the market to be kinder to themselves emotionally); How you withdraw profits from the trading business to live on; What is your maximum daily/weekly/monthly drawdown before you stop trading; Structures in place preventing you from taking trades if you are in anything but the optimal emotional state (if you trade while angry or fearful you will attract bad trades like shit attracts flies)
4) Performance Monitoring and Mistake Monitoring. This is time set aside at the end of the week and end of the month for reviewing your trading performance and individual trades for mistakes and places you could improve. In my opinion this is the MOST IMPORTANT PART OF IMPROVING AS A TRADER. I know most of you don’t do this. Having a trading spreadsheet is good, but it is not enough. To actually improve you need to take the time every week to go through every trade and critique it honestly and openly. “I don’t have time” – you cry! Well make time! If you scalp 5 times a day then do this at the end of each day instead of the end of each week. Log your mistakes (a mistake is anything outside your rules – a missed trade, a suboptimal exit, an entry that was really stretching your definition of a good trade). All the really good traders I know talk about drawdowns happening when they get slack with these “top tasks of trading”. Also – printed out broker statements are NOT a trading log. A blog is NOT a trading log unless you revisit all the trades after they close and post the results. I’ve never seen anyone on this blog do that with the losing trades (myself included). A spreadsheet by itself is not a trading log. You need to be able to go through every trade while they are fresh in your mind for things you learned and things you could improve. These need to go in a separate journal. Make no mistake – you will have emotional resistance to doing this over the long term. It’s not fun to face your poor decisions, but it is cathartic, and it stops bad trading from becoming a habit. If there is one thing you take from this post this is it.
Let me say it very clearly: You will NEVER be a long term successful trader unless you set aside regular (at least every week) time for monitoring your own performance. If you aren’t doing this now, then you are NOT a profitable trader, and you aren’t fooling anyone. This is a total deal breaker.
When we get to this step, I will lead the way, going through in detail, my recent trading mistakes and what I have learned from them. I hope to illustrate how much improvement there is to be had from this.
5) Daily routine. Everyone knows that psychology is important to trading. Van Tharp talks about a type of guy who says “Oh yeah trading psychology is super important. Its lucky I have awesome psychology after making all those beginner mistakes”. Trading psychology is NOT something you learn and then it’s done. It is a one-day-at-a-time proposition. I’ll say this again very clearly.
If you aren’t doing something to alter and monitor your emotional well being every time you trade then your trading psychology sucks. A 40 year veteran like Ivan is just as capable as the newest newb of becoming biased or deluded, without a strong framework for monitoring this stuff (and Ivan does have a strong framework for this) You might think that you will just either automate or generate a full mechanical trading system with absolutely zero discretion, or trade someone else’s system (lie mine for example) I’ve done all of these to try and minimize psychology issues, but trading 100% mechanical systems changes the impact of psychology rather than lessens it and the emotional hammer blows remain, you just don’t have trading as an outlet (which is good) In a technical competence sense the best trader to come out of evilspeculator was Dudeplunger, who spent 2 years with Ivan and built his own systems which he is able to trade with truly remarkable levels of efficiency (much better than me). Ignoring the psychological aspect took a tremendous toll on him and he has stopped trading and switched careers. I will show you my routine for getting in an acceptable trading state, and how I monitor if I am ready to trade on any given day, and what to do when you are not in the zone.
6) A spiritual program for self-improvement. Trading is a hard game, and a metaphor for life. You improve your trading by improving yourself, and there are many ways to do this. You need to pick one or more of the following type of things: Psychotherapy (highly recommended); 12 Step programs like gambler’s anonymous or alcoholics anonymous (Alexander Elder first mentioned this and it is excellent); Buddhist meditation or serious yoga practice; Joining and being involved with a church (sounds weird and it’s not for me, but I have personally observed that being more God-centered and less self centered is a miracle cure for trading problems); New age self help stuff like “A course in miracles”, “the power of now”, “the sedona method”; Community service and altruistic motive efforts which Ivan and I both believe help reverse the self centeredness inherent in the pursuit of wealth. I know this stuff sounds weird and to some extent it is, but our trading is generally a reflection of our internal world and the less chaotic and unmanageable we can make our internal lives, the easier trading will be. Ignore this at your peril.
Let’s take a quick look at the market at the monthly chart level. I’ve put up the VolStat indicator, which is ATR (one measure of volatility) reduced to a percentage of price and plotted with a 100 period SMA and 100 period Bollingers. Using this measure we can say in an objective, historical statistics based sense how high or low the volatility is. Volatility is IMPORTANT . Market methods that work in low volatility times fall apart reliably during high volatility times. One of the key components of low volatility markets is that counter trend setups that usually have decent odds have a very low chance of working. Also, an increase in volatility from a low extreme is a canary in the coal-mine for a change of market direction – this is true on all timeframes.
What we can see is that the recent pullback only lasted one bar, and the shorts who got positioned at a short setup with a reasonable chance of working have all been stopped out. I know bears will be hanging their hat on a double top or a failed breakout, but these are very low probability outcomes. We have a market moving up with low volatility without the EXTREME low that would signify caution. The odds favor small ranges and new highs. How much longer could it go? We are nowhere near the extremes of 2007, but you can see that the uptick back then was the canary in the coal-mine for the change of market type. When markets change from Bull Quiet to something else – the something else is nearly always BEAR VOLATILE. The odds are high that the next stock market phase will be 2008ish, but we are nowhere near the extreme levels which would indicate overwhelming caution.
You can see on a weekly basis we have had upticks in volatility from a low base that represented potential turning points which were not powerful enough to change the overall trend. This indicator is, by definition slightly lagging so it is perhaps only useful for longer term thinking.
We are at upper bollinger resistance, so we should expect a choppy mess in equities this week. The bulls are firmly in control but expect sideways choppy, hard to trade markets with lots of doji candles. Expect pattern based entries (Inside Bars, retests, fakeouts) with the exception of hammers to have lower than usual odds of success this week.
Which is fortunate for those who must trade because we do have a setup, a Hammer candle which I would be long on a break of the highs in market hours only. This, it must be said, is a less than ideal setup but given the weakness of the bears (having all just been stopped out) in context I believe it has betting odds.
One setup I really like is the weekly retest long setup on USDCAD. This has everything going for it and is a far more interesting market that equities this week.
Anyway, you have me for a week, and before I disappear again (I’m not coming back) I would like to make some real improvements for those who are willing.
You have HOMEWORK! Post in the comment section below a list of your beliefs about the market. These could be as esoteric as “I believe sunspots have an influence on market behavior” (I don’t believe this) or as practical as “I believe a rising 200 SMA is a good simple measure of market trend” or “I believe that RSI is a useful indicator with an edge”. I will lead the way with my own list of beliefs.
Trust me, this is an important step in developing your own trading method. Once you articulate your beliefs, you can work out which ones you want to keep, and then start thinking about your system goals.
If nobody is interested, however, I’lll just post a few setups.
Scott ‘The Convict’ Phillips
Yesterday Tim Knight over at the Slope wrote a candid post marking the fifth anniversary of the ongoing bull market. Actually to be more precise he not so surprisingly called it ‘this insane, interminable, agonizing bull market‘. Now given my reputation for dishing out generous servings of tough love you may expect me to post a scathing retort criticizing him for clinging to his bearish stance all through what I believe will be remembered as the most significant bull market in our lifetime. Well, yes and no.
Yes, because just looking at the chart above drives home the lesson that directional bias can be extremely lethal to both investors and traders. And no, because after having run an active trading blog for five and half years and counting I have had the benefit of holding a permanent ring side seat to the trials and tribulations of the average retail trader. So instead let’s talk about some of the lessons learned and how my approach and personality has evolved over the past half decade.
Let’s go back to the inception of Evil Speculator. Some of you may remember that I used to be pretty active on the Slope. Back then Tim and I were conversing quite regularly and we even met once down in Orange County near Disney Land. Our charts were pretty much in sync starting in early 2008 – they all pointed down, way down! Back then we both also shared a keen interest in Elliott Wave theory and not surprisingly our own work was influenced by a certain Robert P., who I am sure you are all familiar with (for better or for worse). Now being bearish back in 2007 or 2008 was not exactly a popular stance – sure, those were different times when the bulls had to actually drive prices higher on their own without the helping hand (or should I say helping printing presses) of the Federal Reserve.
I also used to post a lot on a site called OptionAddict run by a really sharp fellow called Jeff Kohler. Very talented and technically excellent – a bit street smart as well – you know the type. Back then his site was at least as busy as the Slope – things were hopping and everyone was banking coin. Now here shows up this guy called Mole, who nobody had ever heard of before really, and he starts to post these super bearish charts! SPX at 800 or below – etc. – equities are going to fall off the cliff – not unlike what Tim was saying back in those days. You know the theme.
And after a few weeks of me doing that I actually started to ruffle quite a lot of feathers over there at OptionAddict. Up to the point where some of his readers and clients started to complain and wanted me gone. So Jeff wrote me an email and to be honest he was actually very cool about it. He actually wound up offering me a special section in his site where I could post all those insanely bearish charts. As you can imagine I was a bit surprised about that but I laughed it off and just told him thanks but no thanks. Instead I spent a weekend slinging some WordPress PHP code and the following Monday I announced my own blog, and that was the inception of evilspeculator.com, sometime in early August 2008.
When I started out I never envisioned it to be a long term commitment. Actually I simply wanted my work to be seen by people and for me personally it also served as my trading log. Which as you all know is a key component in becoming a successful trader. It keeps you honest and it allows you to re-visit your old campaigns and hopefully learn from them. As luck would have it however (and for some mysterious reason) Tim Knight really loved my new blog and by talking about my work he sent a ton of traffic my way. So here I was getting a ton of hits just a month or two after having started my new site. I was very lucky to say the least and I thank Tim for his support to this day.
It goes without saying that we had a lot of fun in 2008 – I was posting my bearish charts and my audience grew by leaps and bounds. The tape certainly was going by the script but I must confess that I was horribly naive about it all. As I’ve mused before – it’s one thing to prepare for a bear market – it’s another to trade through it and come out in one piece. One infamous day that will remain burned in my memory for the rest of my life is that of September 17th, 2008. I was shorter than a pygmy in a limbo contest and out of the blue Chris Cox over at the so ever helpful SEC announced out of the blue to temporarily ban the practice of naked short selling. My wife came running into my office as I was sweating bullets and cursing like an angry sailor whilst trying to close out my long list of short positions during a relentless short squeeze. Let’s just say that I lost over 50% of my account that day.
That was just one out of many occasions when I was forced the embrace and adjust to brutal reality of trading a bear market. Some of you may still be looking forward to one but be careful what you wish for, you may just get it. Fact is that 90% of market participants are against you and much more importantly – so is your own government. That was another miscalculation I am sure many of us are guilty of – we completely underestimated the power and resourcefulness of the White House, Congress, the SEC, and especially that of the Federal Reserve. For all of them are being judged by the health of the economy (rightly so or not) and they will do whatever it takes to preserve the status quo.
March 6th 2009 passed like any other day for me – I was getting a bit nervous about any remaining downside potential but I was still sitting on a generous amounts of puts. The days and weeks that followed slowly relieved me of any remaining short positions as the tape started to continue higher. This didn’t affect the traffic on my blog very much – as a matter of fact all we welcomed the ongoing rally as an opportunity to short equities again from higher up. How foolish and how arrogant in retrospect. Any retracement that followed was relatively shallow up until April 2010 when equities started to descend lower again. Of course we were all convinced that this was the onset of the next wave down – P3 if you will (I was still wave wanking then). Tim wrote me and we were both very excited about the expected repeat of 2008.
Of course that didn’t happen. What did happen was that the SPX 1000 remained intact and just kept clawing its way higher. Week by week and then month by month – which eventually turned into years. All the way through that the main question on our mind was when the next phase of the bear market would transpire. We were getting rather antsy.
By late 2010 I was pretty disgusted with it all and then one day I suddenly had a bit of an epiphany. I’m not sure where exactly it came from but within a week’s time I completely changed direction on my blog as I increasingly began to entertain the notion of this being more than just a mere correction within a bear market. I realized that counting waves was not only not helping me but instead had served to impair my trading. I actually had done much better before when instead of predicting market direction I was simply looking for entry opportunities. Why not simply go back to the type of technical analysis that allowed me to balance both bullish and bearish views? And bank coin in the process?
So I reverted back to more basic technical analysis and completely cut ties with Elliott Wave International. And strangely enough I started to experience the inverse of what had happened back on Kohler’s blog – people got upset about about my now more bullish and especially my ambivalent charts. What happened to P3 Mole? Why are you suddenly becoming more bullish? As a matter of fact I started to lose a bit of traffic. This was in some part based on my new approach to things but also due to me having little tolerance for what I perceived nonsense or mental masturbation in the comment section. I wanted to shift things to a more productive level – exchange charts, analysis and solely focus on banking coin. What I didn’t want was to run a social club where people just hung around to chat and talk about their pets and respective hobbies. I knew I would surely lose traffic that way but I frankly didn’t care. So I changed. Some people didn’t enjoy the new Mole and left for more greener (and perhaps more bearish) pastures. My trading and my bottom line however improved significantly.
1.You are your own worst enemy.
The most important lesson I learned was that you need to be in touch with yourself and be realistic about your pain threshold as well as your personal abilities. But more importantly, recognize that it is you who is the problem. As the saying goes, we have met the enemy and it is us! Not the market, not Bernanke or Yellen, not anyone on the outside. If you expect certain things to happen and then they don’t it’s no use to get upset or resort to sardonic remarks to make yourself feel better about your own losses. Just mosey over to ZeroHedge for a great example of highly intelligent folks who continue to have their butts handed to them in the market. Do you really want this to be you?
2. There is no justice.
Yes, I know that’s a rather tall order to swallow. See my musings above about the government and how it will fight the bears every step on the way. I am not going to waste your time regurgitating the state of the country, our economy, our financial system, our society as whole. How the books were cooked, how the money printing continues to this day, how banks basically got off the hook free and clear. And not only that – they were rewarded instead and continue to profit handsomely from gaming the entire financial system. Tim and others have been rather prolific in belaboring that fact but despite the fact that the lower 95% of the population asked for justice you can count the people who were actually punished (kind of) on one hand. That should tell you all you need to know about justice in the financial system.
3. You cannot affect things outside of your control
This one ties into the prior point – getting upset about things or events outside your immediately control only serves to instill unneeded stress and frustrations. Both of which lead to the express elevator to the woodshed. Once I stopped caring about the inside dealings and games rampant in the financial markets I suddenly was able to think a lot more clearly. Trading is difficult enough – there’s no reason to get emotionally involved. I know, easier said than done. But it’s possible and without becoming a complete cynic – quite on the contrary. You can still care outside of trading but once you walk into your office all that matters is your next trade.
4. Maintain a strict information diet.
But I didn’t stop there. In the past few years I have greatly reduced the amount of information I ingest on a daily basis. In 2012 I actually wrote a post on the subject and I hope you will find it interesting. To make a long story short, when it comes to information more is not necessarily better. Actually on the contrary – the more information you ingest the more difficult it will be for you to maintain an objective stance. At this point I don’t care if I’m trading crude, the E-Mini, wheat, or the EUR/USD. It’s all just a symbol to me and I simply follow what my charts are telling me. And of course I always fade the paper.
5. Relinquish any outcome bias.
In the past few years I have completely detached myself from what is commonly referred to as outcome bias. That actually has deeper implications. Not only don’t I care about where the market swings – up or down – it’s all the same to me. I do not believe that bear markets are any more ‘socially just’ than bull markets. Yes, I am aware that it’s all built with smog and mirrors but according to rule #3 there’s nothing I can do about any of that. On a more hands-on level I also do my best to not care whether or not a trade is successful. Yes, you heard that right – as long as it was a ‘good trade’ I am happy. Why? Because I have spent a lot of time creating various systems with a demonstrable long term edge. If I follow my own rules and remain disciplined it will result in profits. Which brings me to my next point:
6. Have a system!
That of course deserves an entire post itself and I’ll have to limit myself to a few general thoughts on this. If you trade without a system you will be trading the one that has being issued to you at birth: LOSING! I don’t want to over dramatize this but trading without entry rules, campaign management rules, stop loss rules, capital commitment guidelines, etc. will sooner or later result in you getting wiped out. Trading is a tough game and it requires clear rules that tell you when you are wrong and when you should be taking profits. They can be very complicated or as easy as a moving average crossing system. It doesn’t matter as long as they clearly promise an edge over time.
Now you have two options – 1. you can develop one yourself – or 2. you can buy or steal one. In either case – make sure you first sit down and write down your beliefs and your personal requirements. Why? Because we all are special snowflakes and as such we have a different threshold for pain and greed. Also, you may enjoy trading certain symbols, certain markets, or certain timeframes. Trend trading for instance works for some people and it clearly has an edge but most people do not have the mental fortitude to actually follow trending systems. It doesn’t matter if a system has a good edge if you are unable to follow it. I have written about this quite exhaustively on my blog and will probably do so again. Don’t think that system trading will solve all of your problems. You just exchanged one bag of problems for another one. You will have to learn to follow your own system, no matter what – otherwise you will probably wind up losing more than by simply following your whims.
7. Predicting prices has little to do with successful trading.
I already mentioned that I gave up on Elliott Wave International a few years back but that was only the tip of the iceberg. I realized that I needed to be very cautious about being influenced by others around me. That may include other bloggers, fellow traders, the news, the daily rumors, my own family, etc. There is no problem with embracing good trading principles and with consuming charts that objectively give you the opportunity of getting positioned. But when I see someone offering predictions I usually run the other way. Fact is – nobody really knows what lies ahead.
Most traders analyze the market in order to predict prices. But predicting prices has little to do with successful trading. What is important is determining when the risk is overwhelmingly in your favor and then controlling that risk. If you simply produce charts to predict markets you are simply engaging in an academic exercise without real world consequences (i.e. profits or losses).
8. The market does not owe you anything!
Most importantly – realize that nobody owes you anything. If you decide to trade the markets then you need to embrace everything that comes with it – the good and the bad. Don’t try to turn this into a personal vendetta or try to prove to yourself or others that you were right all along. We are all in this to make money and as such that is all you should care about. The only thing that matters is the size of your account – and hopefully you will be able to see it grow week after week, month after month, year after year. That should be your core mission – nothing else matters. Don’t get distracted, don’t take it personal, and don’t blame anyone but yourself.
Since I have started to incorporate these rules into my trading life I not only have become more successful and profitable, I also have become a much happier human being. I’m still an edgy and mostly evil Mole of course but in general I wake up with a smile each morning and look forward to my work – both the blogging and trading end. I don’t stress over open trades anymore and I sure as hell don’t lose any sleep over them. And that’s a much better way to live your life, wouldn’t you agree?
Enjoy your weekend!
Welcome to our morning briefing. Here we are reviewing short term setups ahead of the NYSE opening bell. If you are a scalper or swing trader then these setups may be of interest to you. As usual keep in mind that these are short term setups although they could be used as early entries for more longer term positions.
Folks, I have an inkling we’re going to see some movement today – everything is lining up for a big move. Equities first – the 25-hour has been carrying nicely and overnight we haven’t even touched. Pretty bullish – also given that it slipped across the 25-day we are now pushing into bullish territory. Yes, still possible that this is a LKGB but the bears would have to stomp on this post haste – the odds for that scenario are now diminishing rapidly with each tick higher.
The YM and the NQ are looking pretty much identical – the big laggard has been the TF but it’s now pushing above its two converging SMAs. That’s looking solid so far – now let’s see if the 25-hour can provide some traction higher.
The bonds – boy, I what a nice chart – it’s falling in a very orderly fashion and if you manage to grab a touch of that 25-hour then I suggest you be short with a stop a few ticks above it.
But we are just getting warmed up – I literally have a plethora of setups today. If you decide to follow me into this abyss then I suggest you cut your exposure to 1/2 or 1/3 R each as you otherwise may become over exposed. Correlation risk on the Forex side is a very real problem.
AUD/JPY is looking very very juicy here – I want to be long with a stop below 91.13’9.
CAD/CHF – it looks like it really wants to climb higher but that SMA is blocking the way. Well, if it gives way I’ll be long with a stop below that NLBL.
Many more goodies below – Forex is simply off the hook this morning – please join me in the lair:
More charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don't waste time and sign up here. And if you are a Zero subscriber you get free access to all Gold posts, which gives you double the bang for your buck!
Jobs report at 8:30am in the morning – will produce gyrations.
Emotions are a very powerful force especially when paired with recency bias. Plus we are extremely good at worrying about things we have very little control over. If it rains a lot we worry about possible flooding – if there’s a long draught we worry about not having any rain. Very few folks think about the possibility of droughts during a wet winter (when you could prepare for it) – or floods during a dry one as the one some of you guys are experiencing in California right now. That’s how we’re wired and surprisingly it seems to works pretty well in the natural world – you really can’t argue the lessons of Darwinism.
When it comes to trading however all our basic instincts run orthogonal to what we should be doing. If you’re trapped long right now then all you can think of is about the possibility of a bounce. You want out out out – as soon as possible. Why is there no bounce? Will there be one soon? Finding ways to perhaps leverage the current move or objectively analyzing what may lay ahead based on the current odds and technical evidence is probably not on the forefront of your priorities. But that’s exactly what you should be doing. If you got trapped long then you lost – simple – it’s done. If you were clever then you got stopped out a long time ago – never ever let your losers run. And if you were really really smart then you listened to me three weeks ago and didn’t touch equities with a ten foot pole.
Once again I’m seeing a lot of high-fiving by a few folks who simply cannot help themselves but engage in making forward predictions. Yes, of course a big move was on the horizon after being trapped in a trading range for weeks on end. But that release could have gone either way and it could have happened last week or next week or perhaps in February. I know you just can’t help yourself – you really want to be able to predict the future and even if you try ten times and finally get it right the eleventh or fifteenth time it will only reinforce the illusion of your mental super powers.
This is all completely useless and you are wasting your time. If I come to you and say ‘we’re going to get a BIG move’ then the next thing I’m going to ask you is ‘when exactly and in what direction’. And where the frill is your compelling evidence. And finally – what is your track record making these predictions? Otherwise it’s absolutely negligible from a trading perspective. I’ve seen folks repeatedly trade themselves into ruin waiting for those big moves that they hope will double their accounts overnight. After having burned through their own assets several times over waiting for Godot.
But if there’s any prediction I am willing to offer then it’s that retail will never ever change – after all it’s what keeps feeding the big machine. I can try to keep some select out of trouble and sometimes I do succeed. But sadly most of you guys will read this, scratch your heads, and then continue to do the very same thing next Monday. Which is fine by me – we need suckers on the other side of our trades.
So let’s see where we are. In ugly central hitting every branch on the way down – that’s where. And I would not recommend attempting to be long here until we see some price action suggesting the possibility of a bounce. Until we have that we have no evidence and are operating in the dark. On the weekly panel the spoos will most likely close below a NLBL and that’s a reversal – so the bulls are officially on notice.
Even uglier picture over on the YM – the first support I see there is near the 100-day SMA or perhaps that weekly NLBL near 15610 – quite a few handles to go.
NYSE breadth thus far is also congruent – which means that this sell off is still real and has the potential to continue.
However there are two momo chart that suggests early signs of profit taking – please step into the lair:
More charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don't waste time and sign up here. And if you are a Zero subscriber you get free access to all Gold posts, which gives you double the bang for your buck!
If you had a bad week then console yourself with the fact that it could have been a lot worse. That’s right – you could have been long the HKD expecting mean reversion. Keep this chart next time you expect platykurtosis (i.e. mean reversion) over in Forex. Just look at the second or third white candle after the breach and then ask yourself if you may have expected a reversal there. Funny how everything always makes so much sense in hindsight – isn’t it?
Ponder about that why you crack open a cold one. And then try to enjoy your weekend – life is short
Welcome to our morning briefing. Here we are reviewing short term setups ahead of the NYSE opening bell. If you are a scalper or swing trader then these setups may be of interest to you. As usual keep in mind that these are short term setups although they could be used as early entries for more longer term positions.
The pullback has continued overnight and habitual dip buying monkeys may wake up to a disappointing morning. The weekly NLBL at 1809 was touched and so was the lower 25-day BB. No real support levels here which is why I’m watching the GBP/JPY for early signs of a bounce.
The real show has been on the Forex side where a positive European manufacturing report threw a curve ball into the ongoing GBP/JPY carry trade, which has recently taken over from the AUD/JPY. As you can see, pretty tight correlation there and the bad news is that I don’t see much in terms of support on the GBP/JPY either.
There is the 100-month SMA which may offer some support – we also have a cluster of weekly NLSLs starting at 167.51. I recommend you watch this pair as well as the spoos as I expect them to move in unison.
On the setup side it’s pretty meager out there – as I mentioned Forex has made big moves but they don’t seem complete just yet and it’s dangerous trying to anticipate. Instead of fretting about ‘having missed a big move’ I would concentrate on collecting information. The tape will tell us when it’s time to jump back in – either to the up or downside. See you guys in a few hours.
It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.