(Potential) First Trade of the Year: GSVC

UPDATE: it never retraced to $15.78, so I wasn’t filled. Didn’t take the trade.
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As I promised, I was going to blog any further trades and document my thoughts. This isn’t a trade yet, but it may be by the end of the day.

GSVC is going bananas on the Facebook IPO news. They are going to file for their IPO next week. GSVC holds a position in private Facebook shares. I want to buy the rumor and sell the news so to speak. I think this is a good trade because it’s one step ahead of the pack. GSVC is just obscure enough that Joey Retail probably hasn’t heard of it.

I didn’t chase the breakout today. Instead I put a limit buy order out for $15.78. I chose that level because it’s a healthy pullback of today’s move and is just inside some other volume traded back to the left on the daily. If I get filled, then great, if not, there is no position. Here’s some charts showing what I was looking at:

If filled, my stop level would be $13.78, underneath all of today’s activity. I would hold until the IPO is filed, and I would take at least a partial on the first move to the all-time high at $19.97 if we get there first.

Just 2 NQ Points A Day

Just 2 NQ points a day. That’s all I ask. Instead of trying to get every last tick out of a given move, I am content to consistently pull out a little bit, over and over. This is the intent of the strategy.

The strategy is based on these market attributes:
1. The index futures (NQ Nasdaq emini in my case) tend to back and fill a lot. One way trends are (relatively) rare. Important price levels are revisited over and over again.
2. Market prices tend to move. Price doesn’t hold still for long.

Two points and then quit for the day should be achievable almost all the time. I just want to make chip shots. Just be consistent and do it over and over.

On a 5 min NQ chart, around half of all the bars are wider than 2 points:

The average daily range for NQ lately is near 40:

A two point target is in the noise. But that’s the point: Instead of trying to drink every last drop of a passing river, I want to dip my cup in and just catch a little of what is flowing by. I don’t need to catch an entire wave. Just a little portion of it.

All this time as a loser, I have been trading in hopes of catching a big move. I might have a 5 point target and a 2 point stop. I was constantly setting myself up for failure. I would enter at the market and hope for a big move, ready to take the small loss if need be. That risk:reward might look attractive, but my stop was being hit nearly every time.

So I literally faded my strategy. I looked at the current market, and placed limit orders to fade moves roughly 3 points away from the current price. That put my entry at pretty much exactly where my stop loss would have been if I traded my old way. Once one of them hit and was filled, I set a disaster stop of 5 points (basically an arbitrary number at this point), and a profit limit order just two points away from my entry. Then I sat and waited. My profit target would be hit more than 80% of the time. If the market kept going against me, I waited for it to come back. I honored the disaster stop, but in the first 18 paper trades it was never hit. Most of the time, I could get out for break-even or just a small loss close to 2 points. That exit for a small occasional loss is exactly where my trailing stop for a profit usually was under my old strategy.

To avoid fading a strongly trending market and getting my disaster stop hit, I didn’t use this method near the open or market close. I avoided fading near the highs/lows of the day. I waited for the afternoon doldrums and tried when the market was listless, choppy and noisy, putting conditions in my favor.

Another positive element in this strategy is the very short time that I am exposed to the market. In some of the engineering applications I encounter in my work, a trade-off is made between accepting risk vs. having reduced performance. A probabilistic design method is employed. Instead of designing for the worst case failure mode at the worst possible time in all conditions, we look at the probabilities that these conditions may overlap. If the worst case failure only happens at very extreme conditions, and a vehicle only spends a tiny fraction of a percent of its service life at that condition, designing for this condition puts a large burden of weight and performance reduction for the entire class of vehicle across the whole service life. We can slim down the vehicle by only designing to a probabilistically acceptable failure condition. We still have to avoid a disaster, so we make sure any failure is not catastrophic by keeping enough margin in the system. We just allow a failure to cause an aborted mission or acceptable amounts of damage. Back to my trading: most of these trades last only a few minutes or so. While big adverse moves happen in the market, the odds that one of these moves come during the few short minutes that I am exposed to the market are very small. If I’m always in the market and holding positions, then the odds are high. But the shorter my exposure time, the smaller the probability of a big event becomes. Since the probability is not zero, I still have the disaster stop, just like in the vehicle design. LTCM didn’t have a disaster stop. They KNEW that it was statistically “impossible” that they would see the conditions that would blow them up. I am not naive like that. A non-zero probability is still possible. You have to prepare against it even though you will probably rarely see it.

The biggest weakness I see is if I end up fading a persistent trend. I’ve paper traded this strategy a bit, and on a strong trend day it’s easy to rack up two 10 point losses in a hurry. That wipes out a lot of winning trades. This strategy would be best used during choppy sideways markets. How to rigorously define that is not clear to me. I guess that’s where I often get hung up. I can’t know exactly if a move will turn out to be an adverse trend every time. I have to define a way that works much of the time an accept the few times it when it doesn’t. I want to take discretionary elements out for now. The book “Trading in the Zone” is helping me to think more probabilistically rather than in “right or wrong” terms.

So the idea is literally fading my old self to have a winning strategy. I’ll be doing some back testing with it soon. If you have any comments about this
approach, I’d love to hear them.

Thinkscript Chat Room Comes to Think or Swim

Today I got word from Think or Swim of a new resource for Thinkscript users and developers. The ToS folks are listening to the requests of their customers for more Thinkscript support. Within the next two weeks, there will be a new chat room inside of the Think Desktop platform covering the topic of Thinkscript! The idea is to build a ToS sanctioned community where people can share ideas and scripts, or just ask for help. It will be moderated by ToS. They plan to have free chat times, and also have the occasional presenter talk about a certain topic of interest like they do in the other rooms in Think Desktop.

As you may know, I tried to put up a little discussion board, but there wasn’t enough interest. I know that there are sporadic groups of folks on the yahoo boards, or communities at sites like Thinkscripter’s. Hopefully having a centrally located area will gather more people together. I think it will also be a good place to make requests for new features in the Thinkscript language and report any bugs that we see.

I see any attention given to Thinkscript from inside ToS as a big positive, since the management types don’t necessarily see it as a big profit center. The more we as customers show up and support the work of the ToS dev team, the more firepower they have to get resources to bring us more capability.

So look for this in your Think Desktop platform soon!

Humbled

Since I wrote the “Facing Reality and My Dilemma” post, I have received a lot of feedback. Everything from “You can be a successful trader” to “Your tools help me–don’t stop!” I was surprised and humbled by the outreach. I also received a gift of “Trading in the Zone”. This put me over the edge. I’m blown away. It placed a bid under me. I thank all of you. All this time I had hoped that my stuff would help someone to be successful. I didn’t think it would come back to me in this way. Traders consistently surprise me by the depths of their generosity and camaraderie.

I’m going to make another try at trading. It will probably be another few months of preparation, but I will be back sometime in 2012. In the meantime, I will also work new tools and scripts for you readers. I had my moment of existential crisis, and now I’m back on solid footing, thanks to you.

Thank you, sincerely, to all of my friends out there.

Facing Reality, and My Dilemma

Anyone familiar with my roughly 6 year long part-time trading history knows I’m a net loser. Never had a profitable year ever. Not one. I’ve ground down three small accounts now, trade by trade, loss by loss (with the occasional win, though). I’ve done the spectacular blowout before, losing 30%+ of the account at once, done the revenge trade campaign, but this time, I’ve just been wrong in my timing and direction more than I have been right. No big blowout trades, just consistently losing 1R at a time. I’ve matured to be in control of myself, I just can’t bring home the results.

So as I near the close of another losing year of trading, I see that yet again it is time to stop trading. The discretionary setups I have been playing just are not working, as evidenced by my win/loss rate and my PnL. While this is a psychological blow to me, it’s not a big monetary blow. Nothing in my life changes because of the lost money. I make plenty of money as an engineer to cover our family’s lifestyle and save for retirement. Basically, the middle class dream. But there is nowhere else to go. No more upside, and very little personal freedom. That’s what trading represents to me: being in control of my own life. So far, I have not succeeded. While I have a lot of success in many areas, especially the ones that count (health, family, career), this one is where my heart is set. Either I need to give it up or try a different approach. Since I don’t have the approach right now, I’m stopping until I do.

So this is not an emotional breakdown, I didn’t go tilt, no real damage done. But I am sad that I still can’t win at trading. I will likely study some more, watch the markets, maybe make another try next year.

Now, the dilemma: what do I do with my programming/blogging? I feel like I have no business writing about trading, making indicators and software for other traders if I can’t even do it myself. It just doesn’t feel right. If I’m trying myself, and having success, then I feel like sharing and working is honestly good. What I worry about is this: if I’m not a good trader, then people come looking to me for something that will help them find success. I’m no snake oil salesman. I don’t want to prey on people and their desperation to find something that works. I won’t do it. So that leaves me with the question: is it ethical to do the programming work when I can’t make money myself using the same tools? Say the answer is yes. Then is it enough business to replace my income and do it full time? So far, the answer is far from yes. So where should I invest my skills to have the greatest chance at my end goal: financial freedom, while I am still “young”? Again, I don’t know.

So that’s where I’m at. I believe it is possible to make money at trading, but it is far harder than even I thought. If I can’t do it, how can I help anyone else do it? And if I don’t trade or help others to, then what should I do to meet my goals? Welcome to the inside of my head.