The Wisdom of An Experienced Trader

I recently got this communcation from an experienced trader. I thought it was very wise and worth sharing. There’s a lot of very good advice in here, and it is especially applicable to me:

“I have traded for over 30 years. Some of those were a struggle but many of them were great. In my first trading job I sat on a trading desk at a primary dealer in Chicago. I had been on the floor learning the business and was a broker. I kept talking to guys and finally met the head trader at that primary dealer. Over time, he liked me and gave me my first trading job. Before that I had traded customer money and my own small account. There were over 30 guys who traded for a living on the desk at the primary dealer. Each one traded a little differently. I tried to learn a little from each one of them. I was successful but just barely for a few years. I never could get over the hump and make real money. I went to Mark Douglas, who ran a trading psychology business. After talking to him, I realized that I was trading to make a certain amount of money and no more. I was effectively limiting how much I made by my trading decisions. I was undercutting myself without knowing it. He suggested that I set up a foundation and put a % of my winnings in that. That way I was not just trading for myself but also for the people who would benefit by my foundation. As silly as it seems, it worked. I just had to understand what my motivations for trading were. I already had the tools. I just needed to learn how to use them more effectively.

Over the years, I have traded on many trading desks, from hedge funds to prop desks to CTA’s. The guys who made it were the ones who learned what worked for them. See what your risk parameters are first. Learn money management. That is more important than anything else. Determine a trading style that works for you. Make sure your money management will keep you in the game. Take the emotion out of the equation. That is what people mean by saying making money is boring. If you trade for the thrill of it, you will lose. Play the odds and stick to your game plan. Don’t second guess yourself. Learn to control your emotions but use your gut when it is working for you. When you are hot trade more aggressively. When you are cold, trade conservatively and patiently. Limit your losses each day to a set amount. If you lose that stop trading. Watch the markets. They will tell you when conditions are ripe and when they aren’t.

You learn about yourself first and then you learn the markets. Find what works for you. Ignore the rest. Keep it simple and add things that seem to work for you. Try different styles and methods. See what works for you and incorporate that into your trading style. Watch and learn the markets. They change over time and you must change as well. Remember that there are millions of ways to make money. Successful traders learn what time frames work for them.

I wound up being an event trader. I traded when the conditions in the markets were ripe for me. I traded technically also. The hardest thing for me to do was to stay with my winners. I tended to want to fade markets, but finally learned that I could make more money if I traded longer term in options along with trading short term in futures and cash Treasuries. I wound up trading differently for each time frame. I kept them separate. Once in a while a short term trade was a winner and I moved it into my long term trading drawer. If my gut changed, I would move some of my long term trades back into my short term drawer.

I hope that helps some. Remember that the first thing you must do is understand yourself. Then look to the money management side of things. That will take some of the emotion out of it. Then try to understand the markets as well as you can, both technically and fundamentally. Look for trading methods that fit your risk parameters. If they work, add them to your repertoire. Keep learning more things to add to your trading basket. Eventually, you will be able to compartmentalize things and be confident in your methods and money management tools. Then just do it!

Markets go in rhythms. Trading can be easier if there is a group of people who are giving money away. That has happened over periods of time in the past. In the 1980’s the Japanese started to trade Treasuries. They traded in herds. They all got in at the same time and had the same positions on and also got out at the same time. Many traders made a lot of money trading at that time. Later the S&L’s were having troubles and firms took advantage of that to profit from trading. Recently both hedge funds and quant firms had troubles that created large profitable situations for certain traders. The sub-prime troubles created a situation for some traders to greatly profit.

One of the keys to trading is to try to understand which groups are losing money and to adapt your trading to take advantage of those groups. Realize that there are traders who trade different time frames and thus have different risk parameters. Markets have a way of finding the weak hands. Try to understand who are the weak hands and try to take advantage of them..

You should also chart your trading. See which types of trades are making you money. See if you are exiting well. See how many days you are profitable and how many days you are very profitable. Look at your risk parameters for all your trades but also look at your daily risk parameters. Make sure you are winning more days than you are losing.”

Trading Strategy Themes

I’m documenting here some of my recent thoughts about themes I want to capture in my trading strategy. This is more of a scratchpad of ideas than a complete article, a window into my twisted mind, as it were.

•Fear and Greed are like fire and water. Both can help you, both can kill you. Use them, don’t be used by them. Fear to break your own rules. Fear to lose your discipline. Fear to lose more than you planned to before the trade was opened. Be greedy and hold out if the trade is acting well. Greedily press your winners. Sell on strength, taking advantage of the greed of others. Buy on weakness, using the fear of others to your advantage.

•You make money by taking it from a loser (especially in futures). Your best chance of success is to take a loser’s position off of his hands at a favorable price to you. We’ve all been on the other side of that trade, but that’s where the market profits come from. Price moves because it has to, not because it wants to; or rather most traders make trade executions because they have to, not because they are taking advantage of an edge. The losing trader is your edge. Fade the losers.

•Define your market environment. I want to trade the market open. The market moves at the open. Volume is high, trader interest is high, momentum is high. I want to be early to position for the rest of the day, and if the trade works out, waiting for a move of several points. Conversely, the lunch hour(s), pre-news (Fed minutes, important economic numbers), summer doldrums months like August, pre-holiday sessions are all poor times to trade for trends or momentum. Volume is low, traders are on vacation or waiting. Trade is choppy and random, dominated by noise. Knowing and defining the current market environment and only employing strategies that work within it is crucial.

•Trading the markets is a battle against yourself more than a battle against other traders. I know these things about myself:
-I am loss-averse. Losses weigh on me more than wins lift me up
-I hate being in an underwater trade; no staying power or strength to fade price like some others have
-I would rather win 1 point 9 times out of 10 than win 10 points 1 time out of 9. Play for singles, not home runs
-I can manage exits well. I need systemmatic discipline for my entries
-I like to be in a trade for as short as possible, then do it again and again. I don’t want to wait at the plate all day for “my one perfect pitch” to swing at
-I need to be available to take every trade indicated by my system. If I pick and choose, based on my PnL or my daily schedule, I will doubt myself and end up skipping the trades that would work out, while forcing subpar trades to make it back

Adaptive OR Trade Plan, and Today’s Trades

I went back over the last 5 days of Adaptive OR trades, and did a lot of research. I looked at parameters like profit at first favorable swing point (first peak), first pullback swing point after the first peak, max profit without reversing back across the opposite side of the OR, and so forth. I looked at all trades all day, and I counted 34 over the 5 day period so far. I will keep adding to my database as time progresses.

Using a target of 1 or 2 points increases the win rate to near 70%, but kills you because your losers are bigger than your winners. Targets of 3-5 points were best for maximizing profit. Taking trades after the first two per day decreased profits significantly (choppy day if levels are revisited over and over). I assumed that if the first pullback went back across the opposite OR, it was a full stop loss, and if we never hit the target (an input) that you would eventually be stopped out at the first pullback level + 1 tick slippage.

After this analysis on all of the Adaptive OR setups over the last 5 days, I came up with this trading plan:

Use AdaptiveOR_Pro(0930,5,3) on a 133 tick chart.

Take (up to) first two OR breakouts of the day.

Entry is 1 tick outside OR levels.

Target is 4 points (limit order).

Initial stop is 1 tick outside opposite OR level.

After first pullback swing point prints, raise stop to 1 tick behind that level.

Sit on hands.

Trading this plan over the last 5 days would have made +20 ES points on about 7 trades. So today I traded this plan exactly. Here’s the results:

The first trade short entry (yellow line) got slipped a tick against me because my stop entry order waited until price crossed it rather than touched it (??). Then we had the pullback, so I lowered the stop and got out for -0.5 points. No biggie. Then I took the opposite long entry right after (other yellow line), and it immediately ran back to my stop for a full -2.5 point loss, total -3 points. So I stopped trading, because my research said that a choppy day was ahead. Perfectly executed plan, apart from the first entry weirdness (I used a market order for the second entry).

And guess what? If I took the third trade, I would have made my +4 points if I got a good fill on my target limit (green line), or +1 point worst case if my first pullback stop was hit (red line), or the full 4 points if neither got filled, because it eventually went through my limit target (I’m still not sure how the Think or Swim stops fire. It seems that it doesn’t work on price quotes, only on the bid or ask crossing your stop level?)

The lessons: Even if you do everything “right”, sometimes you still lose. And sometimes doing the “right” thing makes you miss out on a win. And I have an incredible timing ability, apparently. The days I traded this week were chop days, until I stopped trading and then boom went the dynamite. What can you do?

Apart from continuing to gather the data on the setup, I’m going to see if I can come up with some kind of follow-through filter that will help me bail early to minimize losses on the immediate losers (like the second trade this morning), but sit tight for the 3-5 point profit on the others.

Adaptive OR Setup for Today

Here’s my Adaptive OR indicator for today. More than 3 points and counting. And I didn’t trade it, of course, after yesterday. 😡

Lost My Ass

I traded off of the Adaptive OR this morning as I planned. The first trade was a 1.25 point loss. I took three more, thinking that the next one would be the one. All according to my setup, and all losers. In the end I got chopped for -6.75 ES points. Didn’t have time for any EoTPro trade setups today, but it’s seeming like I don’t have the margin to trade their way anyway.

The lesson? Maybe one trade off this Adaptive OR is the maximum–It’s a win or a loss. Maybe I need a chop filter of some kind. Plus, trading in August bites. Same time frame that I blew myself up last year.