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We've had quite the sell overnight! ZN is down '145 from Friday's close. The ON range is 122-040 x 121-180 and, like all other days, the high probability play is a break of this range. The path of least resistance is down and I will be looking for US shorts this morning to continue what the Europeans have been doing all night long.
Can you help answer these questions from other members on NexusFi?
Good Things: I'm very slowly starting to understand order flow. The games played by folks with big pockets are becoming more evident the longer that I trade. I do not yet have a profitable edge, but I can recognize profitable opportunities in the market and I can execute on them and occasionally make money on them. I didn't lose more money this week than I did last week. My expectancy has stopped plummeting and is hovering at -1 tick per trade. My average time in a winning trade is more than 4 times as long as the average time in a losing trade.
Bad Things: I scaled up size too quickly. This cost me pretty big, as a string of eleven losers which took 48 ticks out of my account. I walked into the market thinking that I had mastered order flow and could start printing money. This is not the case. Profitability and consistency take time, study, and focus to really start seeing things work. I had a blow up day/week this month. I revenge traded and continued to crack off trades when I wasn't seeing things well, when I was angry, and when I was not going to perform well. My win rate is terrible. 24% winners means that I'm stopping out a ton, which means a couple of things. Either: 1) I'm trading randomly, not according to any set plan; or 2) My stops are in the market noise, and I'm getting stopped out before the trade gets a chance for the market to confirm/reject its position.
I think it's a combination of the two. There were certainly periods this month in which I either traded without a plan, or I traded directly contrary to my plan. This constitutes stupid and careless trading, which rightfully cost me money.
I found what helped me was thinking over the day after the market closed, and then formulating a plan in the morning when I had a better idea on where it would open. I'd throw up two to three levels that I was interested in, combine that with the type of order flow I'd expect from each level, and go from there.
I'm going to look closely at my winners to determine if there's something anomalous about those trades that I can apply to my February trading. After all, a trader needs to find a way to generate more winning trades and ideas...
1) The ON stat is insane. In the last 30 days, 85% of trade in ZN has exceeded the overnight range. While that's by no means a certainty, 85% is an excellent edge on which to lean. I'll be sure to include ON range breaks in my morning trading plan. ON breaks are a nice spot to do business; in many cases, large traders will be watching and executing around these prices. Instead of trying to make sense of twenty ten-lot guys trading in the middle of the range, I'll see a couple thousand-lot traders executing and I'll be able to follow the market better.
I'll be updating this throughout the weekend as well as I find more time to pore over my trading.
@lax99
This is appreciated!
Well done, even though you may feel a bit 'worn'.
What would be helpful to you going forward is to find out what is driving orderflow.
There is orderflow happening all day long, right? You will progress at a faster pace if you spend more time finding out what is driving the 'skew' in flow. There are many things that drive orderflow. Some on a 'micro' scale and some on a 'macro' scale.
You have cause and effect.
Cause: When water is heated, the molecules move quickly.
Effect: Therefore the water boils.
Cause: (FOMC statement) "Inflation on a 12-month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term."
Effect: Back-end (ZN, ZB) sold off hard.
Following through on the above, you'll see snapshots below:
• ZT (US02Y) and the ZB (US30Y) performance on/week.
• ZB after the FOMC meeting.
• Excerpt from the latest Fed statement.
A question I had to ask myself a long time ago was: Do I really understand what is happening in the market I trade?
There are so many retail traders trading fixed income these days and they don't even read central bank statements or consider the central banks economic projections. This to me is extremely worrying.
Traders pushing around billions are analysing the central banks and economies. All in an effort to trade forward.
That orderflow you see on your DOM, that is these guys putting money on the table.
As a retail trader you need to understand why and where they are likely to push their money.
When you get to this level, then orderflow is useful.
I hope this helps.
Worn is actually the best way I've heard trading described. It's a very tiring venture. Folks like to say trading is risky, exciting, stressful, easy, hard, or "the path to financial freedom". But rarely will somebody talk about the weariness which comes with the learning process and a month-long drawdown.
I don't understand the underlying fixed income fundamentals. I know the basic price/yield relationship, and I understand that the Fed is expecting inflationary periods in the future, but I don't know which pieces of data I need to watch to better anticipate central bank policy.
In an effort to familiarize myself with the yield curve and things, I've done some number crunching this weekend.
The first figure is a 3D plot of the yield curve (5-10-30). It's a bit tough to visualize in a static medium like this forum, but the takeaway is that the short end has seriously accelerated in the last year. The curve remains steep but is flattening, as it appears that investors are selling 5s in favor of 30s.
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The second figure is a combination of the 5, 10, and 30 year yields over the last year and a month. It's a bit easier to see the flattening curve in this case.
The final figure is a snapshot of bond yields on 1 Jan 2017, 30 June 2017, and 2 Feb 2018. Once again, flattening is evident.
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And now for my rudimentary analysis:
We know that the Fed is going to be raising rates. They've been talking about this for a few years now. From the most recent FOMC statement, we know that the Fed expects inflation to increase this year. All interest rate products sold off on the news, but ZF recovered the most after the ES and other indices took a tremendous hit.
1) There is very little change in the Fed's language. Expectations continue as such. The market is going to be watching the change in Chair come March, which makes me think that the Fed will remain essentially motionless. They don't want to introduce any more volatility with a regime change, and I see no reason to expect deviation from the current language.
2) There was pretty much zero flight to quality on Friday. With the ES down 60 handles from Friday's open, I would have strongly anticipated a drop in yields (and an increase in price) as investors move from stocks to bonds. I'll be keeping an eye on this correlation in the future. The entirety of my trading experience has been "Stocks Down, Bonds Up". I don't watch the ES intraday, but this change is certainly interesting.
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For Monday, 2/5/2018:
Expect continued selling in ZN. The 10 year yield is currently 2.86% as of this writing. The yield is up 0.21% since last week. A similarly ranging week this week could ram ZN right into the 3% yield range. I will be keeping an eye on this number during this week's trade. I don't yet have enough experience to say what a given trader will be doing with this number, but I have enough sense to realize that it is important.
I'll update more later tonight and tomorrow morning.
In reviewing all of my good winning trades this month, I'm seeing that they're pretty freaking obvious. It's the kind of thing where I'll see a level trade big size, then go bid/offer from there, and then the trade is simple. Position yourself with the big money. Position yourself with the aggressor.
1) ZN is dropping. 1500 to 2000 are selling and selling and it's falling. Then it stalls. 4000 to 6000 absorb as shorts buy themselves flat to ring the cash register. The offer pulls, ZN goes from 040 x 045 to 045 x 050 in the blink of an eye. And then it sits and waits. A few hundred contracts hit here and there but nothing is really trading. The offer will pull again, and then sellers immediately hit the bid as it appears. The market will stick there, bids get hit, and then it ticks down again on size (~2000+ contracts). New lows will see 3000+ sold on a couple of prices as the market falls further.
2) The bid/offer is somewhat light. If the surrounding price levels are about 2500-3000 bid/offer, the absorption price will be 1200-1500. Maybe 1000 hit into the 1200, and then the 200 orders present are quickly filled back up to 1400. The same thing happens again. The price might tick against the absorber, but the absorber will prudently hit a couple thousand contracts to get the fill that they're looking for. This will continue for the course of a few minutes, until the price in question has traded an ungodly amount of size (10k+ contracts). Finally, the counter-absorber will pull away, the absorber will drop a couple thousand at market, and ZN begins to move.
1) Zero Blowout Days. This is both easy to achieve and tremendously important to my trading. My Stage 5 stats are included below for an easy visualization. My blowout day set me back significantly for the whole month. I intend on avoiding that to keep pushing my expectancy closer to 0, and eventually higher.
2) Record my Thought Process Mid-Trade. I use my GPU to capture my screen when I trade to review this. I want to use my headset/microphone as well so that I can sort of narrate my thoughts to see where I was thinking correctly and where I wasn't.
3) Make my Expectancy Less Negative. I've punched a few numbers and it would take 14 trades with an expectancy of 0.5 (3 tick target, 2 tick stop, 50/50 WL ratio) to boost my expectancy up to -0.50. I realize that this is unrealistic, so I want to achieve the -0.50 expectancy over the course of 30 trades. This starts looking like an expectancy of 0.1 ticks per trade, starting this very moment. This basically means that I want to be slightly better than scratch throughout the next thirty trades. I think this is an achievable goal. Another way of looking at this goal is that I want to raise my win rate from ~25% to 40% throughout the next month.
Absolutely insane day in the indices and treasuries. I called it quits around 6:50 AM MST because I wasn't seeing any order flow in which I might have an edge. I went to my day job, checked the market around lunchtime, and saw that there was major blood in the water. I can't remember the last time the ES had a 50 handle day, let alone two 50+ handle days back to back. CNBC is talking about the biggest Dow drop since the crisis.
I traded once in the hyper-volatile ON session. I was long 121-285 and flattened at 121-305. I'll post screenshots later.
I'm considering intentionally not trading tomorrow. If this volatility continues throughout the week--which I have no reason to expect it to slow up--then my order flow reading is out the window. I have no experience reading a ZN DOM with 200 offered at each level. I'm used to 2500.
I have no thesis for tomorrow. I don't know what to expect with this volatility, other than vicious stop runs.
Edit: I actually took two more trades this evening. The first stopped me out 22 seconds after I put it on, and the second hit my target. Both were plays expecting another stop run above 121-190. I had the sense on the second trade to exit at market when we couldn't lift the offer at 165. No trading tomorrow morning still. Going to take a breather and see what the hell is going on in this market of mine.
I'll make further comments later today and throughout this weekend. I had four trades on Friday; 3 losers (2 tick stop) and 1 winner (1 tick basically scratch). My expectancy for this week is a positive 0.143 ticks per trade! Unfortunately, that should have been much higher. The scratch trade today really really cost me in terms of expectancy. If I had let it run to full target (4/5 ticks), my 0.143 would be up at 0.5716.
I traded well this week. I avoided much of the insane volatility--because bid/offer sizes of barely 500 in ZN isn't ZN!!--and I ended the week up +1 tick in comparison to last week. Again, I'll go through my performance later in the weekend, but I'm starting to get my trading legs under me. I'm making errors in cutting winning trades too soon.
Something for later: My avg time in a winner is around 5 minutes. My avg time in a loser is 50 seconds. How can I make more money with this information?
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One of the things I'm considering doing is moving my automatic stop from -2 to -3 ticks. I was looking over my winning trades, and 58.33% of them take heat. "Heat", of course, is only 1 tick of heat because I'll stop out if it moves further against me. This seems a bit arbitrary to me; it's like I'm forcing myself to pick the perfect entry--though my order flow knowledge is rudimentary, and I'm currently a losing trader--and then make money consistently by finding the next perfect entry.
My losing trades see 0.5 ticks of profit, on average. Only 45.83% of the time do they actually see any profit whatsoever. It seems that the losing trades that I take--which are numerous--are basically never destined to be winners from the start. How can I change this? Is this a statistic which I need to change?
I traded on Monday evening and then Friday morning this week. I ended up 1 tick for the week, but down a few dollars after paying $3.14 per round turn. My average loss this month is down from last month; however, this is an artifact of me trading a 2 lot last month and not having a single winning trade with that size.
So, after the first real trading week of February, I'm basically flat. My expectancy has edged up from -0.96 to -0.81. I think this is in part because of the volatility, which made trading into obvious stop zones a really easy trade. I don't think I've ever made easier money that on Monday evening. There were just obnoxiously obvious zones, and obnoxiously thin trade, and the ZN danced from tick to tick like I'd never seen before.
Things I did well:
I scratched out of obvious losers without hesitation. I'm slowly getting better at seeing when I'm wrong and reacting to that. I'm less afraid of taking a loser than I was last month.
I traded while the trading was good. And then I stopped when I realized that the markets were weird. This week's equity action was strange and the treasuries were no different.
Things I did poorly:
Like a moron, I held a trade into the ES open on Friday at 7:30 AM, MST. My 2 tick stop was touched soon thereafter. New trading rule: Close all trades held near the equity market open, and do not enter new trades for a minimum of 5 minutes after the equities have bounced around.
I chased the market down on Friday as well. In reviewing my trade videos, I offered at 3 different levels as ZN approached the morning low near the ONL. I was so sure that it was going to break the ONL that I completely disregarded the short momentum we had going on. If I had just hit in with the momentum, I would have had a 6 tick winner at the point at which I finally got short. Oh, and that short ended up stopping out, too. When 700 can take the market offer and 2000 can hardly hold the bid, it's a clear choice. Momentum down. Sold.
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I was talking to a coworker on Friday (non-Finance job) and I was telling him that I typically look for the ONH/ONL to get broken. After all, the statistic is 88% over the last 65 days. He has very little experience in the markets, but he said "How do you know when it's going to break?". I said something along the lines of it being a contextual read, that order flow helps, that it's just a general feel. And then I spent the rest of the day thinking about the statistic which I had been collecting.
The 88% stat is true. But that's for the whole day. I only trade from 6:20 to 7:30, give or take. What the hell was I thinking trading off the whole day stat when I only care about the first hour???
--> After looking over the stats, the % of an ONH/ONL break in the first hour is 51.8%, based on the last 27 trading days. Wow. No better than a coin toss. Red and orange"market moving" news reports listed on Forex Factory, however, are 50% for breaking during the first hour. If I start getting choosier with the numbers (and select only the large news events), that percentage jumps up to 62.5%. It seems that Unemployment Data and Non Farm Data are the most consistent pieces of news to cause an early morning break of the ONH/ONL.
If I take this trade in the future, I need to really watch the context closely. There's no free lunch, and there's no reason to blindly hit and expect a break when my time frame is no better than a coin toss.
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As kellys was mentioning a few days ago, I'm going to incorporate the importance of understanding the curve and what other traders are doing in response to Central Bank statements into my trading. I personally believe that the next Fed Statement is going to be terribly important and bring plenty of volatility to the market. Loretta Mester is speaking this coming Tuesday and I'm sure that she'll address the equity market drop. It'll probably be some silly little "We continue to monitor various markets and economic activity and maintain our current outlook", but it's nonetheless important.
The curve steepened slightly this week; 5s were bought, 10s basically stayed flat, and 30s were sold.
I think that this momentary change in yield curve is going to be short lived. We've been flattening for a long time now, and my anticipation is that the steepening we saw this week was entirely due to the equity volatility. CNBC is talking "Stocks and Bonds are Doing XYZ like the 1987 Crash". I don't know if anything is going to crash. But I do know that a long term trend takes quite a bit of volume and time to stop. So, relatively speaking, I'm expecting 5s to be sold, 10s to come out relatively even, and 30s to be bought at the end of next Friday.
