Ruby - this deals with some of the same ideas you have posted here like etch a sketch ,frog glop, advanced planning, and a traders mindset. Although written for athletes, some good tips presented on what it means to get in the zone as a trader.
I was reminded of my efforts to become a reliable recreational soccer player, a sport I took up quite late in life after a couple decades of couch potato-dom. One of the first hurdles for me was learning to pass and shoot accurately. "Keep your eye on the ball" was the key to success, and I was certain I was adhering to this rule; yet when my boot hit the ball, my eye was on the player I was passing to, or on the goal, and as a result the passes were poor and the shots went wide, over the top, or I whiffed them completely. The pros are aware of the environment on the field, they know where their teammates are positioned, they glance up briefly, then when their boot hits the ball, their eye is on the ball so they can make contact exactly where it counts in a way that sends the ball where it needs to go.
My recent post here about trader's mindset illustrates the importance of evaluating only that which is meaningful to the trade, then acting without hesitation. The thinking and planning occurs in advance and you can then act with your eye on the entry price. If you're thinking about things like "what if it's another loser" or "I have a pretty fair profit already, hate to risk any of it" or "should I place a profit target or watch what price does and react to that" or "hmmm, Bennie's gonna speak in 10 minutes, maybe I should hold off" or "does it make more sense to enter with a limit order at support or trail a buy stop off that level" or "I know it's gonna break, I should get in now and avoid the slippage", then you're not prepared to trade (not aware of the environment on the field and not sure where your team players are) and when you go to place the order, your eye is anywhere but on the ball and you'll be in a state of mind that's prone to hesitate and miss out, or chase an entry that's gotten quite far away from you, or enter before there's a valid signal, or think about trade management after the position's on.
Turn on a recording device and speak out loud as you evaluate the price action and contemplate the environment and other factors leading into a valid setup or lack of one. It really helps maintain focus and it will be more difficult to argue with what you see unfolding before your eyes.
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I have enjoyed reading your posts. I am a scalper. I’ve no idea how one can stay in the market for more than a few seconds, hats off to those that can. 8 ticks to me is quite nice, 4 is just perfect with my 5 tick range bars. I solely focus on the 6E, why? My trading window is early morning 6:00ish MST after which I must go to the day job and dream of day trading. Some would consider what I look at as noise, but the 6E seems to always move during this time period. I pay close attention to news, staying away a couple of minutes either side of it. For the longest time I thought, enter where my setup is being proven successful, only to find my entries at these locations were often late, as you put it, after the frog glob formulated into one of my text book setups. Recently I got to thinking instead of success; why not look for failure and I found what I call failed second entries. For example the market has just experienced a nice exhaustive down move and prints a well pronounced low, price rises and then falls forming a higher low. This “was” the 1st entry short. Price then rises and drops a second time and “has just completed” a text book 2nd entry short. The market is now full of traders and some of them will be begging for someone to help them fill their stops. One can almost be assured there are shorts at that most recent 2nd entry short. On the far right edge I can mark the obvious 2nd entry short's stops (failure) and determine if there is a nice PT or not. Decision time, is the PT acceptable? I need absolute confidence in the move. Upon entry I immediately begin to manage the trade with an exceptionally tight stop. These pops either happen or they don’t and if they don’t they tend to quickly run/explode the other way. After a while (literally thousands of hours of live chart time) you get a feel for them. When I experience lots of stalls, stop starts intra-bar and hesitation - I pay closer attention. The best of these setups look absolutely ugly at one point in time and I can sort of feel the tension with every tick. My internal calm voice is talking to me now, not my excited look at that move voice. I find it very important to be in this price action reading mental zone while trading. Pop, then it’s over, win or lose and I wait for the next one, repeating this process till I need to leave for the day job.
My question is can one make a living with these little pops? My thought has been consistency consistency consistency , then add more contracts.
many trades I get into go against me 3 -4 ticks--pull back to around -1 then bAck down 4-5 ticks-- come Back to -1 or even--then against me again--basically tRending towards my stop--- to the point whEre I say to myself--I'm gonna get stopped out--yet--I let it happen.
ThUs I have fallen into that trap of pulling my stop in to tight and/or taking early profits.
Yes, Tulanch, one can make a living as a micro scalper, especially using the sort of tactic you describe. I think it's by far the most difficult method of day trading to understand and master; however, if it fits your personality, then once you have an understanding of the tactics, and absolute discipline, it would become quite routine as you end up truly in the zone.
I'm not a micro scalper, but I often engage in "fly fishing", which uses a very similar tactic to probe the market for break of a level (the "pop" you refer to). If the level I'm watching holds, I scratch the trade and wait for the next opportunity. It's certainly easy to manage the risk trading this way as long you're 100% disciplined to follow your rules.
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Tightening stops and taking early profits ruins most edges, because most edges are rather slim when taking in to account commissions and slippage.
My personal rule is to only tighten a stop or take a profit before it hits my minimum target if the price action tells me to exit and reverse. If the reason for my trade is still valid, then there's no reason for me to take a smaller loss or smaller profit. I sometimes stop and reverse (SAR) for a smaller loss or smaller profit than initially planned when a new signal arises and triggers a new trade in the opposite direction.
Now if the market's tried to do something and failed, I may choose to scratch a trade at or near break even, but that's not officially part of my trading plan, and seems to take me out of as many profitable trades as unprofitable ones.
I've done enough statistical analysis on my setups and trade management, comparing various styles of trade management, to know that even if I simply accept full stop or target, the plan is net profitable. That knowledge helps me avoid micromanaging the trades.
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I am a firm believer in things happen for a reason, for example why did I start to read your post? I have read/heard, time and time again money management is the key to trading. The first thing that used to come to mind is how can such a simple thought have any significant impact on a trading plan? What seemed logical was to simply have a winning setup strategy/plan and things will take care of themselves. While this is true, in reality/real-time, I make mistakes and setups simply do not work all the time. In your post the term “Positive Expectance” came up again and for some reason I did further Google searching ( see trading_101_expectancy link from tradermike dot net ). I am a type of person who can be told things over and over and over but until it hits home, until an “ah ha” moment, it is just words - bla bla bla bla bla. For example words like, don’t count your chickens before the eggs hatch; as in don’t buy that new car until you get the bonus check cashed (yea that sucked). I recently had just such an experience with “Positive Expectance” (sound angle-chorus MP3 now). After reading your post and researching the term again, I’ve altered my setup validation to ensure the potential trade has a minimum RxR ratio, then and only then take the trade. Why? Then the math does the work for you. I now see it is absolutely critical to maintain these values (specifically the PT). If I do, the math does the rest. I punched it up in a spread sheet, the numbers are easy to calculate and I proved it to myself based on the setups I use, percent success and their average returns. I see now why, as a trader, my job is to manage the trades to maintain the RxR and thus maintain a Positive Expectance. I follow the plan and the plan does the rest. Only taking trades that have a required RxR ratio (based on market context and price action) leads to “Positive Expectance” that in turn will allow the money tree to grow. It’s in the math, the math is the root of the plan more so than the setup(s) which I have been so focused on. Thank you for being the catalyst of a truly eye opening moment.
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In the Foreword to Mark Douglas' Trading in the Zone, Thom Hartle writes:
"The 95% failure rate makes sense when you consider how most of us experience life, using skills learned as we grow. When it comes to trading, however, it turns out that the skills we learn to earn high marks in school, advance our careers, and create relationships with other people, the skills we are taught that should carry us through life, turn out to be inappropriate for trading. Traders, we find out, must learn to think in terms of probabilities and to surrender all of the skills we have acquired to achieve virtually every other aspect of our lives."
Consider how difficult it is for a cult member to be "deprogrammed" after just months or maybe a few years of participation. Now imagine an environment where success depends on overcoming a lifetime of programming, and you can understand why so few succeed at trading for a living. Nearly everything facet of our lives revolves around the quest for something as close to certainty as possible, and success is often defined by finding oneself rated in the top percentiles. Yet successful trading depends on narrow margins of positive expectancy and the ability to accept what feels like "failure" all the time. In fact, trading losses in a winning system are crucial to the profitability of the system because we cannot know the outcome of any individual trade, only the odds of net profitability over a series of trades.
Mark Douglas captures the essence of profitable trading with what I like to call The 5 & 7:
The 5 Fundamental Truths of Trading:
1. Anything can happen.
2. You don’t need to know what is going to happen next to make money.
3. There is a random distribution between wins and losses for any given set of
variables that define an edge.
4. An edge is nothing more than an indication of a higher probability of one thing
happening over another.
5. Every moment in the market is unique.
The 7 Principles of Consistency:
1. I objectively identify my edges.
2. I predefine the risk of every trade.
3. I completely accept the risk or I am willing to let go of the trade.
4. I act on my edges without reservation or hesitation.
5. I pay myself as the market makes money available to me.
6. I continually monitor my susceptibility for making errors.
7. I understand the absolute necessity of these principles of consistent success and, therefore, I never violate them.
Douglas tells us (and the emphasis is mine), "...to whatever degree you haven’t accepted the risk, is the same degree to which you will avoid the risk. Trying to avoid something that is unavoidable will have disastrous effects on your ability to trade successfully. To operate effectively in the trading environment, we need rules and boundaries to guide our behavior. It is a simple fact of trading that the potential exists to do enormous damage to ourselves – damage that can be way out of proportion to what we may think is possible. In trading, no one (except yourself) is going to force you to decide in advance what your risk is. In fact, what we have is a limitless environment, where virtually anything can happen at any moment and only the consistent winners define their risk in advance of putting on a trade. For everyone else, defining the risk in advance would force you to confront the reality that each trade has a probable outcome, meaning that it could be a loser. Consistent losers do almost anything to avoid accepting the reality that, no matter how good a trade looks, it could lose."
If you want consistent success in trading, over time and through varying market conditions, if you want to trade for a living, at the very least you have to do ample research and develop a plan based on favorable probabilities. That’s the absolute minimum requirement. Then comes the real work: learning to trade your plan or automating your plan without overriding it.
Mastering one part of your plan isn't good enough. It must be mastered as a whole. Positive expectancy comes from a combination of win rate and risk:reward ratio, just as hydrogen and oxygen are required to make water.
If you learn to hold trades until you're stopped out or your profit target is filled, that may be a huge step forward for you psychologically, but if you haven't mastered the ability to trade every valid setup without hesitation, your excellent trade management ability won't help much at all. Or maybe you have no problem jumping on every valid trade opportunity that presents itself, but you move stops and targets around. There goes your edge!
A positive expectancy trading plan offers an environment of certainty, but it doesn't feel like certainty in real time because it requires what we refer to as "losses" and the concept of "loss" has a negative connotation for us due to a lifetime of programming. In trading, losses that occur as part of a well-research trading plan are absolutely necessary, Without embracing them, you're attempting the equivalent of trying to quench your thirst by inhaling some hydrogen and then later inhaling some oxygen.
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So true. Initially, devaluing the importance of any individual trade's results is one of the most difficult and yet most important things to do. Trying to avoid losses truly is a losers game.
Even when you finally come to realize this intellectually, it is hard to do in real time. You've proved your edge, you know what you need to do to be profitable over the long term, but as soon as you find yourself sitting ready to trade you either skip valid trades or do everything in your power to tweak rules to avoid losses.
Great thread Ruby. Thanks
You don’t trade the markets; you only trade your beliefs about the markets.
- Van K Tharp
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I once had a brief conversation with a struggling trader and he seemed to have a decent grasp of price action and a workable basic trading plan, yet he complained that he kept losing money. So I asked him to provide me with his trade log for that day.
The thing that struck me immediately was the large number of trades. Without looking at a single trade, I knew at once what was wrong (overtrading), though it took a few minutes of further study to understand the cause of it.
I use the term "overtrading" to describe taking multiple trades where one trade would suffice. This can lead to revenge trading, which is more serious because at that point you're trading from a negative emotional state, and in the limitless market environment this often produces the same sort of result that drinking too much produces. Basically, you're probably going to end up doing something that you'll really regret later.
As I studied this man's trades, I quickly realized that he indeed had a good grasp of price action and a solid method of entry, allowing for low risk and logical profit targets equal to or better than the risk. The problem was that he was using a smaller chart to micro-manage the trade once positioned. He'd move his stop closer and get stopped out, then he'd get back in at a worse price, then do the same thing again. He'd take small losses and cut profits short with this innocent little habit. When I eliminated these excess trades and evaluated his results had he simply allowed for initial stop or target to be hit, it was quite positive. As covered in my previous post, his desire to limit or prevent losses was causing him to be a losing trader with a winning method!
Breaking the rules of a trading plan - hesitating and missing out, jumping the gun (for fear of missing out), chasing an entry, micromanaging trades - can easily lead to revenge trading.
Revenge trading is like driving drunk. Your judgment is totally impaired, yet you have no idea just how badly. Just as a drunk driver is likely to run red lights, drift into oncoming traffic, and even black out completely, a trader under the influence of pure raw emotion will chase entries at levels where s/he'd normally be taking profits, will average down, will move stops farther away (or remove them altogether), will fight a raging trend.
And just like the drunk driver, the revenge trader may end up with nothing more than a bad hangover, or may end up fatally injured.
A couple things that may be helpful if you've experienced overtrading or revenge trading:
1. Implement a rule that if you violate your trading rules twice, you're cut off for the day. (And if you can't abide by a rule like that, you may need a Trader's 12-Step Program )
2. If you exit a trade without a reason (either moving a stop closer or taking profit too early), reminder yourself that the trade is over and step away for a moment to stretch. You can even set a timer for N minutes to remind you to wait patiently for the next valid setup.
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