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Ten Trading Rules For Avoiding Extinction
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Ten Trading Rules For Avoiding Extinction

by The MoleSeptember 26, 2016

Over the weekend I had a bit of time to reflect on the past year or two, and in particular how increasing randomness and intra-day volatility has affected market sentiment as well as participation right here on the blog. Quite obviously the comment section has become noticeably quieter with less active participants and more sporadic discourse, especially compared with just a few years ago. Which in my mind is a clear sign that more and more retail traders have been relegated to the sidelines; either by their own choice or by being forced out.

A Market In Flux

As a financial blogger I have the dubious pleasure of talking to quite a few traders across the gamut on a daily basis – from the fledgling retail field mouse spotting a humble $10k account all the way to the professional fund manager responsible for hundreds of millions. And I can assure you that they all have one thing in common right now: They are complaining that almost nothing on their end is working and that they’ve never worked harder for less money.

So what’s going on? In my mind we are facing an an mix of issues right now. There are the sideways rangebound churns which are confusing, without any apparent direction, leaving many of us without entry opportunities for weeks on end. Then there are times when markets across the board start flowing within known parameters and entries according to established system rules are once again possible. Everything proceeds nicely until suddenly the fuel gauge signals empty out of the blue and everything begins to head in the opposite direction. There have been countless examples for that over the past year but let’s focus on the most recent examples.

2016-09-26_spoos

Our long entry on the E-Mini over a week ago was well timed near the diagonal on the hourly panel above. From there everything looked like we were heading into a break out pattern but then suddenly right at the most crucial moment the mojo was gone and buyers completely disappeared. We got out with about 2R of profits but a year or two ago this type of setup would most likely have turned into a massive runner.

2016-09-26_weekly_spoos

The wall that is now forming on the weekly panel is becoming ever more formidable with every failure to breach it. Once again we find ourself in a sideways range which, without doubt, will eventually resolve itself explosively. And that right there describes the difficulties that most traders I talk to have been complaining about. We now seem to be stuck in a repeating sequence of sideways churn and elevated intra-day volatility followed by sudden resolutions to either the up or down side. In most cases said resolutions are triggered by central bank announcements, terrorist attacks or macro economic data apparently do little to affect market sentiment these days.

2016-09-26_silver

Here’s another example. Silver was one of the juiciest entries we had taken in recent weeks and by anyone’s definition had the makings of a bona fide trending pattern. Until suddenly it turned on a dime and proceeded to head lower. Once again we got out with a few R in profit but in a ‘traditional’ market environment (if there is such a thing) we would be trailing this campaign all the way into 21 or 22.

2016-09-26_gold

Gold fared a little better but still makes the list as it managed to snag my (conservative) trailing stop at -1R MFE earlier last night. I have little doubt it’ll proceed higher from here but once again my profit potential was cut short by a sudden turn that came out of nowhere.

Better To Be Lucky Than Good

Now one thing you probably noticed about the campaigns shown is that we got extremely lucky with our entries. Strike it up to skill or simple dumb luck – the problem here is that a less fortune or delayed entry would have further limited our ability to profit. A late entry also affects your campaign management. Consider that I could still be in those campaigns with my ISL where I originally had it. Just last week I pointed out that trailing too early would have taken us out of the game across the board on the first or second day with very little profits.

Protocols For Surviving Extreme Volatility

We don’t know how much longer these conditions will prevail. Perhaps it’ll resolve itself one way or the other in a few weeks and we finally find ourselves in a more manageable period. But that’s something I could have easily proposed over a year ago and we still seem to be holding the tiger by the tail. It’s quite possible that this is the status quo until something finally gives and we are seeing a major market dislocation tantamount to a big reset.

So in order to maintain both our sanity and our trading accounts in the interim I thought it a good idea to post a few protocols aimed at maximizing our chances of surviving an obviously extremely difficult trading environment or whatever the market may throw at us next:

  1. Pick your entries carefully/meticulously. For trend traders the highest probability for success appears to be around major inflection points where potentially large explosive moves are possible. For mean reversion traders this means waiting for extreme signals followed by price confirmation. Everyone has a different lens and we trade different types of systems. What we all share is that our entries need to occur when the odds are clearly on our side. Do not make excuses and be patient. Let the tape come to you.
  2. Stick with your initial stop loss – no exceptions. I think that’s a very basic one but it bodes repeating.
  3. Keep your stops wider than usual. I recommend > 1.2 x daily ATR(14). So if the daily ATR is 20 ticks then your stop should be at minimum 24 ticks away. Obviously this rule is meaningless if you’re a ST swing trader but at minimum multiply your previous system stop loss by 1.5 or more.
  4. Keep your position sizes smaller than usual. I recommend 0.5% of your assets per campaign or less. The advantage of volatile markets is that they can move fast and far, thus even a smaller position should pay off well. You should already understand how R works and that larger stops affect your position sizing [1][2]. For example if you see a crude entry and you have insufficient assets for a single contract then you may want to trade an ETF instead.
  5. Do not trail too early. This mostly affects trend traders or people who trade break out patterns. I could draft an entire article about this but in a nutshell you should under no circumstances start trailing until your campaign touches 2R+ MFE. If you want to know why then just look at the campaigns above and you’ll understand. The odds for a final whipsaw before take off are high and I am seeing stop runs ahead of trending moves all the time now. You should also not be too quick about moving your ISL to break-even. Personally I am skipping my b/e rule at this point and will keep my ISL until 2R MFE. If you insist on locking in your entry wait at minimum until 1R MFE.
  6. Take partial profits after 3R. This is not something I usually enjoy doing this early. But in the current environment and until we see a reduction in intra-day volatility I believe that taking partial profits after 3R MFE is necessary. How much you take off the table is up to you but I personally cash out 50% of my positions now.
  7. Take every single entry. The other side of the coin. There is no problem in being extra picky with your entries. But write down your entry rules and stick to them. Taking one campaign which results in a loss should not keep you from entering again tomorrow if the same conditions represent themselves. Don’t fall for recency bias.
  8. Keep a trading log and monitor your activity on a daily basis. Part of that is to also maintain an equity curve which clearly delineates where your pain threshold is and when you should stop trading.
  9. If you stop trading keep trading on paper. There is only one way to know whether your system is in a drawdown or if it is permanently broken. You need to keep trading it, even if it is on paper. So keep taking entries in your demo account and record the P&L. As soon as the system appears to pick up again continue trading it, even if it’s with reduced position sizing. It’s quite natural for systems to go through earning and losing periods.
  10. Don’t have an opinion and don’t listen to anyone who offers you one. I guarantee you that nobody knows more about the future than you do. We are all driving blind here. Besides, successful trading is not about predicting the future, it is about dealing what’s directly in front of you in the most productive manner. Meditate on that.

Before I let you run off – here’s one juicy chart for my intrepid subs:

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German Comedy Contest

I’m happy to announce that Bergamot entered late but wiped the floor with almost everyone else. Solid work there and although I suspect heavy plagiarism there was never any rule about that, and our ‘beg-borrow-or-steal rule’ applies. Bergamot: send me an email to admin@ and I’ll pass your info on to Howard Lindzon so you can claim your free ticket to the Stocktoberfest in Coronado, CA.


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • ridingwaves

    Great timing of Article, trailing stop out of XIV…
    Thanks for the post and all your effort

  • http://evilspeculator.com Sir Mole III

    Glad you enjoyed it.

  • AboveTheNoise

    Regarding Point 3 (a wider ISL), is that 1.5x the ATR of the Daily TF or the TF that one trades? Thx.

  • http://evilspeculator.com Sir Mole III

    1.2 daily ATR(14) – i think I was pretty clear about that. If you do NOT use ATR then multiply whatever used to work well for your system until your drawdown period by 1.5.

  • http://ibergamot.blogspot.com/ i Bergamot

    Mole,
    thanks again

    Please, give my ticket to ZigZag
    He wanted to go
    I can’t go to Cali in general and have no interest in what Howard does anyway

  • kudra

    you liking the miners (GDX) here, RW? I’m short. Also grabbed some TZA at 27.05

  • Mark Shinnick

    Probably about allowing for whatever the volatility happens to be in any instrument that makes the most difference in the trade.

  • ridingwaves

    not enough time to squeeze longs much further….I’m long and in the money from previously mentioned entry….

  • AboveTheNoise

    Is this applicable to FX markets? You’re talking about setting wide stops (Daily ATR even if one trades 1H or 4H TF), but I’m not seeing pairs move that much. Take AUDUSD as an example. Your ISL would be 85 pips meaning your 1R would be 85 pips. I don’t see it moving that much on the hourly or 4h tf. What am I missing here?

  • kudra

    Thanks.

  • http://evilspeculator.com Sir Mole III

    Zigzag – okay, have him email me and I’ll pass him on to Howard.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb
  • ridingwaves

    today’s tail down to 9/19 candle body (hammer) is kind of interesting..looks bullish…

  • jmoney3000

    Awesome post!! Well timed

  • http://evilspeculator.com Sir Mole III

    Where were you last Friday??

  • http://evilspeculator.com Sir Mole III
  • ridingwaves

    opex tomorrow..

  • kudra

    You view this as positive for gold?

  • ridingwaves

    financials getting hit over douchebank seems to be the big drain on spx..

  • almez

    While the market is currently down, I believe that TLT will still lead the market/assets/gold (asset price correlation). Still holding long.

  • ridingwaves

    yes

  • BKXtoZERO

    Mole, Thanks for another screenshot set of rules which I again saved to go with the last one.

  • Yoda

    That would mess up the EoQ’s books reporting if we fall of the plate here.

  • ZigZag

    This tape does make you want to take your head and find a brick wall to bang it against.

  • Yoda

    I agree, but you try first and let us know if it worked.

  • ZigZag

    But if you don’t hear back from me…

  • Yoda

    Then we’ll have to experiment with GG. 😉

  • ridingwaves

    is douchebank blowing up? financials are the issue today…

  • http://ibergamot.blogspot.com/ i Bergamot

    ZigZag
    get your ticket from Mole
    read my comment below or at the end of last post
    http://evilspeculator.com/german_comedy_contest/

  • Yoda

    5 min ZL shows a positive divergence now, so it could be a bear trap.

  • aka_ces

    yes, a painfully accurate depiction. Also, I recall you in early summer marveling at the perfectly orderly SPX advance from Feb. So, perhaps a 3rd anomaly here, periods of surreal perfection ?

  • ZigZag

    Thx Bergie, I emailed him.

  • OJuice

    I read a couple articles last week after the Fed that essentially said there was little to be worried about on the macro scale until the next meeting in Decemeber. The DB thing has been on everyone’s radar, but, Merkel and Draghi spooked folks with comments this weekend. My guess is risk on last week was a bit premature and some folks might be off balance.

  • http://evilspeculator.com Sir Mole III

    I haven’t heard back from Howard thus far :-/

  • http://evilspeculator.com Sir Mole III
  • http://evilspeculator.com Sir Mole III

    It’s a system…

  • http://evilspeculator.com Sir Mole III

    See above.

  • Mark Shinnick

    What fascinates me about this relative directionlessness is its apexing into today …as though setting-up upon tonight’s debate outcome. Who knows…but if the POTUS equation is given some real clarity then things like $ can then breakout one way or the other.

  • Mark Shinnick

    I believe that a lot…about there being a surreal perfection underlying all markets and our job to somehow begin to appreciate it.

  • BKXtoZERO

    Iza got my TVIX from Thursday Peak. Ready for a Trump blow out win.

  • Mark Shinnick

    Supposing you are still shorting miners? I don’t think I have the guts to hold these overnight, myself…see what happens with this breakout I guess.

  • aka_ces

    Mark, I didn’t say that it’s underlying all markets, I mentioned it as an anomaly that goes under-recognized when it occurs, due to the conditioning we get from long periods of quite the opposite.
    Best, aka

  • Mark Shinnick

    Her style will no doubt keep ingratiating her to her codependants.
    God protect DT; our political process needs him.

  • Mark Shinnick

    BTW… I am so clueless about such a volatility view. Things are so cluttered and perverse in my own mind about what-means-what. I.E. a DT win means a stronger $ as everyone seeks to re-patriate? …Hence bad for equities I guess. …but no clue at all about any pre-debate position unless my model reverses (which is close to doing) about the $.

  • BKXtoZERO

    I am expecting bare knuckles. Clinton is used to politically correct people, Trump is street fighter. I think he really goes after her and the fairy tale market controllers won’t like it.

  • Mark Shinnick

    For me, that is a POTUS debate wet dream…it would be so incredible :)

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb
  • Ronebadger

    She is going to run (debate) on her record….which is broken.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    if you figure it out, let me know.

    my money’s on Goldwater. errr, whoops – wrong Century.

    http://fm.cnbc.com/applications/cnbc.com/resources/files/2016/09/22/spx%20reax%20to%201st%20debate%20strategas_0.jpg

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    I didn’t want to dominate the Comedy Show.
    😉

  • Mark Shinnick

    That’s funny about the 2008 notation…where our derivative exposure is now a multiple of then.

  • BKXtoZERO

    easy knock out, as long as Trupm isn’t a complete idiot

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    Disney to bid on Twitter?
    Muwahahaha.

    carry on.
    [DIS]
    http://stockcharts.com/h-sc/ui?s=DIS&p=D&yr=0&mn=6&dy=0&id=p56778507830

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    wait….SHE CAN RUN?
    😉

  • Mark Shinnick

    Oh yeah…great fuckin’ idea!! TimeWarner buys AOL.

  • http://evilspeculator.com Sir Mole III

    AOL still exists?

  • Mark Shinnick

    Amazing..isn’t it?

  • Ronebadger

    there’s still millions that use their old aol email address

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    if you can believe the wiki..

    “AOL Inc. (simply known as AOL, originally known as America Online, stylized as Aol.) is an American multinational mass media corporation based in New York, a subsidiary of Verizon Communications. The company owns and operates websites such as The Huffington Post, TechCrunch and Engadget,[2] and spans digital distribution of content, products, and services, which it offers to consumers, publishers, and advertisers.[3]”

  • randomuser6789

    I had a guy last year who struggled with our website because he was using the AOL browser. No joke.

  • http://evilspeculator.com Sir Mole III

    I remember when they running one of their offices over in Burbank back in 1995. Pretty small operation still back then. Any of you guys remember these? I’d be very tempted to call customer support and ask them where to insert that disk into my MacBook Pro.

    https://uploads.disquscdn.com/images/58af1c9dccf2d397f5e6002d10b772fb5ac200cdc3a66ed69d710f0e383e8373.png

  • http://evilspeculator.com Sir Mole III

    That’s hardcore. Was he using a 9600 baud modem to get online?

  • randomuser6789

    “As long as Trump isn’t a complete idiot”
    You never know what you are going to get from that guy. I think he can destroy Clinton in the debate, but he can just easily destroy himself.

  • ZigZag

    Oh come on, that’s not even a floppy.

  • Yoda

    In 1995 I was in University, and it just feels like it was yesterday. Time f. flies.

  • ridingwaves

    I was buying Netscape in those years too…
    the one that got away….AZO, could have bought in at 16….

  • ZigZag

    Wonder if he weasels out?

  • Mark Shinnick

    Absolutely everyone who had a PC they badly needed fixing had this deeply invasive crap attached to its OS.

  • Mark Shinnick

    I’ve got a number of Trump positions on a prediction site which I saw during the debate and at debate end losing half their collective gains; Fibonacci?

  • ridingwaves

    Instant relief for anyone watching Hilary for more than 30 minutes
    http://i126.photobucket.com/albums/p116/seekskateboarding/f-Hot-Bikini-Beach-Girl-708.jpg

  • http://evilspeculator.com Sir Mole III

    Yeah, I’m not wasting any of my time on that freak show.

  • http://evilspeculator.com Sir Mole III
  • http://evilspeculator.com Sir Mole III

    Eye bleach :-)

  • Ronebadger

    Catch of the Day