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