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Since I started to post my daily results on my blog I got several responses suggesting that my trading approach is too complicated and I NEED to use something simpler, something easier and I even got several suggestions as to how should I trade (EMAs envelopes seems to be one of the most popular strategies out there). I appreciate any comments so I decided I will write an article about why I think simple approach doesn’t work in trading.
Markets are not easy
First of all let me tell you that trading KISS (keep it simple stupid) strategy is like ”Brain surgery for dummies” or ”Rocket science made easy”. It simply contradicts itself. Before you even start to think about trading, you have to understand what is the market. People see market as something abstract and they don’t have any idea why the market moves one way or the other. Market is the representation of millions people’s decisions around the world. They all watch the market and place their bets (buy or sell orders) according to their best knowledge. If it sounds too chaotic wait for the next piece of information. Every single time when your order gets filled, somebody on the other side of the market auction has to place the opposite bet. In other words – always when you buy, somebody else screams ”what an idiot, it is clearly going down” and he happily sells you the instrument. This is how the market works. If the markets would be so easy and the simple strategies would work, there would be simply nobody to take the opposite side of your bet. And that is clearly not the case, it is quite the opposite as you will discover soon.
There is not such a thing as free lunch
Most of the traders are lured to trading by marketing. We see some sort of advertisement promising us lot of money, yachts, big villas and financial freedom. And all it takes is just to learn these 5 basic rules and you can start making tomorrow. Sounds familiar? Most of the people who are selling trading courses are not profitable traders themselves. They simply make money by selling trading strategies to others. Did you ever wondered why are they so successful in their fraudulent business?
It is simply because they are selling people exactly what they want: ILLUSION.
It is the same concept as weight control pills. There is nothing like pill which will burn fat for you. Everybody who understands a little about diet knows that, but at the same time diet supplement companies are making huge profits by selling the lie. People simply don’t want to hear the truth. They don’t want to hear that they actually have to work out in the gym, that they have to do cardio, that they have to adjust their diet and then it takes time and effort to loose weight. We live in a fast world and we all want everything right now: money, perfect body and success. And even if we know deep down that the only way how to achieve those is trough hard work we cannot resist the illusion of shortcut. Some magic pill which will give us what we need right now. No hard work, no effort just the outcome we wish for. And that is why people will continue to buy weight control pills instead of changing their lifestyle. They will remain fat and supplement companies will keep rising their profits. The same goes for trading. Instead of hard work, and studying the markets people will continue to look for a magic pill. Some easy approach or holy grail which will tell them when to buy and when to sell. If there would be such a thing like indicator, or simple rule when to enter the market, then the markets will simply cease to exist. Who in their right mind would want to take the opposite direction in these cases? Only holy grail which you can find in the markets is to understand them thoroughly. That is the holy grail which will give you an edge over the others who are still believing in magic pills.
Easy prey for market makers
You probably already heard about the rate of success in trading business. Nobody knows for sure but it is estimated that between 80% and 90% of all traders loose money by trading, 10% or 5% break even and only the rest 10% or 5% actually makes money. So, if we consider just this statistics, what do you think is better for you when trading? To go with the crowd, or to go against it? It is obvious that you would fare better if you go against it. But who are those 80% who are constantly loosing and how do they trade? Let’s look at those successful 10% first. Who are they? Who is constantly making money in the markets? The answer is obvious – banks, hedge funds, market makers. Those are the players who created this game and don’t be naive, the only reason why they did, was to make money. We all know that trading is a zero sum game (that is not really true but more about that in some other article), so in order for the big players to make money somebody has to loose money. And who is the looser? Some of you probably guessed already. It is you – the retail trader. Your only purpose in this game is to believe in the illusion of free lunch. That is everything what it takes to loose money. So, how do big players transfer money from your account into their account? Do you think they use some KISS strategy to do it – like crossing EMAs, or CCI divergences? You really think that is how professionals trade? That is why they hire the best brains in the world? That is why they hire mathematical geniuses? So they can tell them to enter long when EMAs cross? Not likely, is it? Those guys are hired to mathematicaly program the behaviour of novice traders into algorithms which are then used to automaticaly trade the markets. And how do they program the behaviour of millions different traders around the world? They can’t of course and that is why they concentrate on a specific group. The group has to be big enough so it provides enough liquidity for them and now comes the most important part of the whole puzzle:
The simpler approach the group is using, the easier for the programmers to program their behaviour into algorithm.
In other words, the easiest prey for the market makers is the novice trader who believes in the illusion of free lunch. Those traders are looking for some simple strategy because they want to make money NOW and without much effort. So which path will they choose? Are they going to start studying and watching the markets for months or years? Of course not, they will google for some simple approach and most of them will end up using Woodies CCIs, EMAs or price action patterns like double tops, double bottoms etc. Most of the novice traders will start with very similar account (5 -15k USD) and they will use very similar money management rules – max. stop loss 2%. With that information in mind, the programer’s job is very easy. He knows at which price level will the novice trader enter and he can guess quite accurately where is his stop loss. So what is he going to do with this information? He will program the algorithm so, that it will constantly lure the novice traders into the markets. Then they will make sure to push the market to the opposite direction to take advantage of their stop loss (which is basicaly market order) and trade the momentum created by them. It is like watching the flock waiting to get slaughtered. If you learn to understand the orderflow in the markets, you can watch the slaugthering every day over and over again.
How not to get slaughtered in the markets?
First of all – don’t be the sheep in the flock. Remember the success rate in this business. If you behave like the others, you will end up like others. And 80% of them end up being slaughtered. They say that trading is the hardest way to make easy money. Trading was never easy and it will never be. The best advice I can give you is the saying from Sun Tzu’s Art of War:Know your enemy! And I will just add that when it comes to trading, everybody is your enemy. Know also who are the ones who are donating money to others (if you don’t know exactly, then it is you). Know who are the big players, how they play and what they want to achieve. But most importantly understand the market, understand why, when and how it moves. You have to know why the market moves one tick higher or lower. If you don’t know the answers to these questions, you are not ready to trade and no KISS trading approach will replace the missing knowledge you NEED to succeed in this business.
He was an independent ßoor trader in the S&P 500 futures pit in the Chicago
Mercantile Exchange. He has nearly 20 years of foor experience and has been a member of the
Chicago Board Options Exchange and the Chicago Board of Trade. Prior to being a trader, he
worked at Bear, Stearns & Company.
In his book he has simple idea " Buy high, sell higher. Sell low, buy lower"
When market is going higher is more likely to continiue to move in same direction.
I have simplest trade system by higher low short lower high and it works.
My problems is that I don't do it consistently, 100 % of time.
I strongly disagree with the simple strategy of buying when the market goes up and selling when it goes down. There are exceptions to this rule of course but in general it is not a good idea. It is the same principle which repeats itself over and over again. Take gold for example. Always when you hear that buying gold is the perfect investment from every TV station and newspaper - the opportunity is over and those who have big positions in gold (banks, hedge funds etc.) just need the flock to provide them with liquidity so they can dispose of their positions in liquid market. That is why they advertise in every TV that you should be buying gold. People who have no idea what are they doing will be buying and those who already made profit will happily sell them their position.
And this principle works in the markets since they have been created. There is a very old book, written in 1923. It concentrates on events from late 19th century until beginning of 20th century but it describes these principle with astonishing accuracy. Among other things, it also describes how big players always need to lure the flock into the market when they trade heavy positions so the market doesn´t move against them while they close the position. It is called: Reminiscences of a stock operator by Edwin Lefevre. If you didn´t read it I strongly recommend it to everyone.
Short term trading enviroment is no different. Big players need liquidity also here. So they also make 'advertisements'. It is just littlebit different than (unofficial) advertisement on bloomberg or CNN where some great analyst is explaining that you should buy gold. In this enviroment they advertise simply by market moves. They push the market strongly up and most of the simple traders will buy - because that is what is simple in their opinion, then they get trapped and then slaughtered. It repeats itself over and over again. I am watching it happen on the tape every single day.
Today was very short trading day for me. I was done after first 30min since opening. Took two trades, picked bottom and top and reached my daily profit target.
T1 I took the first long after I saw no interest of bears to push down. I had 3 ticks heat for approx. 2 seconds. I took the first momentum. +10 T2 I was trying to go short 2 ticks higher. The market touched my limit order but I was not filled, so I chased the market a little at still acceptable price level but that was the lowest price I was willing to accept. If the market wouldn´t fill my order I would miss this one. I took the primary momentum again. +9
After these two trades I reached my perfect daily profit and quit trading.
Results
And how would I best describe today´s trading? Probably with this song
On days like today, you have to ask yourself a simple question: ¨Do you really have to trade?'' If your answer is yes, you are in a wrong business. We have FOMC (Federal Open Market Cometee) meeting at 13:00 US CST. That means everybody is playing World War I, sitting in their trenches doing nothing and waiting for the enemy to do the first step. This results in low volume and volatility. Low volume enviroment is the realm of market makers and quants and their algorithms. It is much easier for them to move the market wherever they want because they don't have to fight so many traders. This means higher risk for us - retail traders. On the other hand the volatility is also lower, which means low potential for each trade. Summa summarum it means you have to risk more for lesser profit. The best position in such a market is sitting on your hands.
I was well aware of the situation so my approach was to take only low-risk trades. If I was not able to get into a trade by risking 4 or 5 ticks I would simply let it go.
T1 When I see low volume I try to concentrate more on the market structure. This was a perfect example. I entered in fade with my limit order waiting below the market. It resulted in low-risk trade with 2 ticks heat. In this volatility I am happy even for +9 ticks.
T2 I tweeted 5min before that 4376.50 is interesting price level for me to go long. Market went down, touched exactly this price level and I saw bears trying to push lower without any luck. So I went long. After few secs I saw that bulls have no interest in pushing the market higher so I killed the position at +3
Then I almost felt asleep by watching the market so I decided to stop trading for today. I reached just 50% of my PDP (perfect daily target) today, but I am satisfied.
For the last couple of weeks I kept testing my trading strategy on the SIM account. I was tweaking the settings, changing the software setups, testing different entry timing tactics and trade management rules. But most importantly I was trying to become confident while trading. My trading become more and more calm, resulting in less trades with higher win% ratio.
I started the final testing stage on January 7, 2015. This is the final statistics and equity since then:
The red marks indicate end of the week, the black ones the daily outcome. Just from a quick look at the equity you can see an uptrend but also improvement since the last 2 weeks ($1.190,92 mark). Drawdowns are more shallow, there are less losers and less trades in general resulting in steeper equity.
I challenged myself to reach 80% win ratio with 20 trades before I go live. Today I fulfilled it. Statistics of the last 20 trades:
In addition I feel very confident and... well I would like to write ready, but I am not sure I would ever feel 100% ready for live trading. But I feel as ready as possible. So, starting from tomorrow I will trade from my live account trying to fulfill my ultimate challenge.
Conditions
Starting capital: $6.533
Instruments: e-mini Nasdaq, e-mini DowJones
Max. contracts: 1
Timeframe: no limit, but I expect to reach the goal in 6-8 weeks
Goal 1: $8.000 cumulative profit ($1.467 profit), which equals 22.46% ROI
Max. drawdown: $1.000 (reaching it would mean fail in this challenge)
After fulfilling the first goal I am planning to start trading with multiple contracts for higher profits.
By the end of this challenge I should be able to answer these questions:
1. Is it possible to start trading with relatively small trading account and become consistantly profitable?
2. How long does it take to become consistantly profitable?
3. How great is the psychological influence on trading while transition from SIM to LIVE account? (by comparing the LIVE and SIM results)
For the record - this is not my firts transition from SIM to LIVE so I already have some experience with LIVE trading. If you are transitioning from SIM to LIVE for the first time, your experience might differ from mine.
I pledge to publish all of my results here with all profits or losses plus everything what I will learned on the way. I hope I will be able to post daily, but even if I don't I will make full disclosure results overview with all great but also bad trades at least on weekly basis.
Pepe/sniper. Very nice. I like your dedication and commitment to your system and testing before going live. I will continue to cheer you on. Good luck.
