Success Depends on Knowing Your Outcome

The Asian Traders Investment Convention (ATIC) held in Singapore over the weekend drove home to me how important it is to our success that we clearly identify the outcome we want and the reasons for the outcome.

In Singapore, I hold one seminar a year. The aim of the seminar was always to provide an educational service that would allow newbies an avenue to take that first step to trading success.

My experience with the mentor program suggested that providing a free service was not the way to go. Not a single ‘sponsored’ (i.e. free course) student has ever graduated – perhaps one day. So, when I first ran seminars in Singapore, I charged the going rate and taught the areas I had the best knowledge: The Barros Swing, the Market Profile and the Ray Wave. Cost per head ranged from S$2,800 to S$3,500. But because overheads and cost of acquisition were so high, I normally lost a little money on the events.

The loss didn’t worry me; but what did cause concern was the fact that I did not achieve my outcome: the seminar made little difference to most of the attendees. So, they not only wasted my time, they wasted their time and their tuition fees.

So I went back to the drawing board and designed a 2-day course that focused on a quantitative journal keeping approach to identify the impulse trades; a simple position sizing approach and a plan based on Cutler’s use of the RSI – I did make a tweak here and there. Back-testing shows the plan will make a profit of around 10% to 12% with low drawdowns.

The outcome I want from the seminar is to teach the attendees to execute consistently their plan with proper position sizing. Once they attain this, they can expand their knowledge and improve their plan.

Since previously I had lost around S$5k per event, I planned my budget around that and came up with a fee of S$400.00 per attendee. If no one attended, my maximum loss was S$4000.00. All in all, a win-win situation: in my worst-case scenario, I’d lose less and the attendees had an inexpensive leg-in to success.

The trial seminar last year went well – around 63% of the trial class is making a small but consistent return. They are now ready to move on and expand their knowledge of the markets.

This year we launched the seminar at ATIC and I succeeded in niggling everyone around me:

  1. Understandably, I niggled my friends and fellow educators who were promoting their own S$3K seminars.
  2. I also niggled my wife and Ana Wang who work tirelessly on my behalf – they feel that the I am ‘selling’ my services too cheaply.
  3. But surprisingly, I niggled some ATIC attendees who were overheard to remark: ‘so cheap, must be no good!” And “Why does he think he is so good?”

The point is: unless you have a firm idea of the outcome you want, it would be difficult to maintain a sense of purpose. In this case to provide the attendees with a solid platform for future success preferably, at no financial cost to me. Whatever others may think of the idea, this is the vision I have.

What does this have to do with trading?

You need to know why you trade – this is part of the Vision and Goal aspects of the trading plan. And when setting the Vision, it’s not enough to quantify the dollars you want out of trading. Another Dr. George Lianos quip: ‘money is never just about money; sex is never just about sex”. What he meant was we need to look beyond the obvious: what does the dollar return mean to you?

Security, love, appreciation? And so the list continues.

By identifying the emotional premise for trading, we are on our way to identify what Denise Shull calls ‘the echoes of perception’ – the unconscious motivations formed in our youth that govern our lives today. By forming a well-formed outcome, we achieve two things:

  1. A standard by which to measure our behaviour and
  2. By understanding the underlying reasons for our outcomes, we ensure that they align with our values and in the process discover, and thus manage, our unconscious motivations. By uncovering them, we find that consistent execution of our plan becomes more a habit than a chore.

Market Profile Conclusion

Tonight I am concluding the Market Profile series.

This is a little late because I wanted to show a real-time analysis of the ES. 

Figure 1 sets 5-d (weekly) trend context. We are in a possible sideway market marked by A-B-C?. The A-B-C is taking place in the 18-d Primary Buy Zone, 1396 to 1370, basis cash (now an area of resistance).

 02-29-2008-5-d.jpg

FIGURE 1 5-d

Figure 2 shows the current Market Profile. At the end of the Initial Balance (‘C’ period), we know:

  1. The market gapped open below Value.
  2. It failed to cover at least 50% of the gap by the first 90 mins.

Both (1) and (2) suggest a trend day. To fit the trend picture, we needed to see smaller than normal Initial Balance. Instead we have a test opening and an Initial Balance of 80% of  the Normal Day’s range. This suggests a rotational day. In these condtions, the best fit Day Type is a Normal Day featuring a late in the day range extension to complete the Normal Range (about 20 to 25 points).

With the high being 1355, the low of the day can be expected around 1335 to 1330. Figure 2 also shows the possible entry zone at the point of inflection at 1351 to 1352,

 02-29-2008-es-day-type.jpg

FIGURE 2 Day Type

Figure 3 shows the Composite Profile since the low on Jan 23 2008. The last line of support is 1325 to 1330; so for today, we have some confluence of support 1325 to 1335. If I were day trading, and short from 1351, I’d seek to exit at 1331.75.

 02-29-2008-es-composite.jpg

FIGURE 3 Composite Profile from 1270 Low

Remember I’ll use the inflexion point (see Figure 1) at 1351 to 1352 for entry. Now for the stop: Figure 4 helps me identify its location.

 02-29-2008-es-composite-2.jpg

FIGURE 4 Composite Profile from Feb 28

There are two possible resistance areas:

  1. The 50% gap of the open: 1360 and
  2. The 50% of the IPM that started at the ‘L’ Period Feb 28. This comes in at 1358.

I’d place my stops for tonight at 1362.75 for the sales at 1351 to 1352. With an profit exit at around 1332, entry at 1351 and my stop at 1362.75, I have an acceptable reward:risk of around 2:1.

Hope you found the series interesting!

Normal Range in the Market Profile

Today I’ll be covering the idea of Normal Range. Derrick raised this on February 27 and it is a topic not understood by many. Indeed, many authors on the Profile take the view that: ‘Day Type cannot predict in advance and is only of marginal use in real time” (Tom Alexander’s ‘Practical Trading Applications of Market Profile’).

It is my view that this one is one of the best of Pete Steidlmayer’s contributions to trading. Understanding, no later than the completion of the Initial Balance, whether a day profile is likely to be rotational or 1-timeframe, has a major impact on the strategy I shall employ for the day. I covered this in the “Power of the Market Profile”. Keys to being able to doing this are:

  1. The type of opening,
  2. It’s location relative to the previous day’s Value Area,
  3. The Normal Range of the Initial Balance

(1) and (2) are covered in Mind Over Markets (Chapter 4, section 1). Let’s turn to the “Normal Range”.

Peter classified the Day type into 6 types: two were 1-timeframe and 4 were rotational. The 4 rotational days depended on the idea of the ‘day’s normal range’ for classification. Now here’s the problem – we don’t know what the day’s range will be until after the end of the day. So of what use is it?

Most newbies to Market Profile trading fell at this point and concluded that Day Type was not useful to trading.

I saw Peter work with this idea and knew he made successful trades with it. It finally dawned on me that part of Peter’s unconscious knowledge was an idea of how large a Normal Day’s range was. Armed with that, I classified two types of statistics:

  • The ATR and normal range of an instrument; and
  • The average Initial Balances and average 30-minute ranges for the last two hours of trading

Armed with this information and knowing the Day types allows me to ‘guess’ if a day is likely to be rotational or 1-timeframe and provides another means of estimating the day’s range.

Let me give you an example.

 02-28-2008-sp-day-4.jpg

FIGURE 1 Market Profile 

I have divided yesterday’s Profile into 3 stages. The first section covers the “A” to ‘D” period.

The market gapped down and opened below the previous day’s value area. At the open we knew:

  1. If the market remained below value, then a 1-timeframe day was probable.
  2. If it returned to value, the probabilities favoured a rotational day.
  3. If the market failed to accept above 50% of the gap in the 1st hour, we could expect a trend day on breach of the 1st hour’s range.
  4. If the market accepted above the 50% or closed the gap, we could expect a rotational day.

At the end of the “C” period, we added to our information:

  • Based on the above, the probability was for a rotational day.
  • We had a test opening and a probable Normal Variation Day. The Initial Balance was about half of the ATR range.
  • The test opening favoured a range extension to the upside and the Normal Variation Day suggested a double of the Initial Balance projecting a high of 1388.5 (roughly a double top with Feb 26).

So without looking at context by the end of the ‘D’ period, I had a possible price for the top and I knew that I’d be a buyer below Value or at least the lower end of value: 1374 to 1372.5 Context provided 1393 to 1388 as a target for the high for the day.

Whether you are a day trader or position trader seeking to optimise your entry, the Market Profile in general and the Type of Day (including type of open), provides immense value.

The Power of the Market Profile

Today I want to show you the power of the Market Profile. It adds a dimension to my trading that would not otherwise be available. This is especially so when the market is in congestion and/or in a transitional phase.

In Figure 1 we have a candlestick daily chart of the cash S&P.

The chart provides a lot of information.

  • The 18d is in a confirmed downtrend. In the jargon of the Nature of Trends, we have an Upthrust Change in Trend pattern, with confirmed time and price filters (WPC, LCC and acceptance below the Maximum Extension).
  • The market formed a possible sideways market with “2 Extreme Rejection Pattern”: A rejection of the 1270 low was followed by a rejection of the 1369 high. The market then formed a value area.

02-26-2008-blog-2.jpg

FIGURE 1 S&P Daily

Since the Profile works off futures data, let’s turn to the ESH8

02-26-2008-blog-1.jpg

FIGURE 2 ESH8 Daily

The ES formed the Value Area and on completion gave a ‘failed mid-point break’ buy signal to then move above the top of value. What ought to have occurred was a move to the 1269 to 1270 Primary Buy Zone rather than a break above 1368 (based on the retracement areas).

On last night’s price action, we could say that:

  • There is MIDAS resistance (FIGURE 1).
  • But apart from that, the market looks strong. Last night’s range was not much below the previous two days (24 to 29) and the candlestick showed bullish conviction.

What does the profile tell us? Figure 3 is a composite profile since the 1269 low.

02-26-2008-blog-3.jpg

FIGURE 3 Composite Market Profile

  1. Once the market crossed above 1363.50 (Market Profile top of Value – Blue Vertical Line to right of composite), we could expect the market to move to the Primary Sell Zone ‘1395 to 1390’. Given that we had negative development by moving above value rather than below value, we should see a break above 1395. HOWEVER, if the market is in the grips of the bear, we should see the upside breakout above 1395 hold below the Maximum Extension (1418 basis March 08).
  2. This break above value was a sign of strength that was in conflict with a bearish view of the market. We need to assess this in any analysis.

Last night I was long from 1350.75 and looking for a break above 1395 to exit. The market got to 1388 and backed off.

Let’s turn to yesterday’s day profile to see what that tells us.

02-26-2008-blog-4.jpg

FIGURE 4 Market Profile 30-minutes

A few points to notice:

  1. We see that in the third 30-minute bar (‘C’), the market started an IPM and formed a bull pattern. If we join ‘A’ and ‘B’ to ‘C’, yesterday was a double distribution trend day. Trend days ought to finish in the top 25% of their range. Instead the market closed below the Point of Control.
  2. In addition, notice that there was no volume between 1386.5 and 1388.5.
  3. Added to this we have MIDAS resistance coming through and you have a possible top. All these are signs of weakness.

Given those factors, I exited longs and I am looking tonight to see if:

  • Selling comes in and if it does,
  • The quality of that selling. I define good, quality selling by looking at the average selling Delta volume and its standard deviation. Market Delta does colour code the buy/sell Delta volume but I prefer to keep my own statistics. I also keep the total volume per 30 minutes so I can form an idea if the buying/selling volume is taking place within the context of healthy/normal/unhealthy total volume.

It’s impossible to show the ideas in a blog; but I find that by having a context and knowing:

  • The type of opening,
  • It’s location relative to the previous day’s Value Area
  • The Normal Range of the Initial Balance

I can determine most times if we’ll have a rotational or a one-timeframe day.

Based on this analysis, I formulate the entry strategy.

  • In a rotational strategy, I look to sell above the Value Area and buy below it; I look to sell new highs and buy new lows. This means I let the market come to me – patience is the key.
  • In a one-time frame market, I sell new lows, buy new highs. Here, impatience is the key – I act swiftly on any volume break.

That’s it folks.  I hope I was able to at least arouse your curiosity in the Market Profile.

Two Missing Igredients for Success

In today’s blog, I’ll be considering two practices followed by professionals that are usually ignored by retail traders.

The first one is the ability to hold, at the same time, two or more competing ideas on the basis that both are equally valid. In my mentor program’s trading training section. I start with a rule-based approach, as mechanical as the student’s personality will allow. The outcome I seek is to ensure the trader learns ‘to see a trade, take a trade’ and to ‘trade what he sees, rather than what he’d like to see’.

As a trader evolves and becomes a more experienced discretionary trader, he understands that at any given moment, the market can do one of three things: move up, move down or move sideways. He takes all competing information, organises it as best he can and concludes if he will or will not take a trade; if the former, at what price to enter, place a stop etc. He does this without falling into cognitive dissonance.

Cognitive Dissonance theory says that we have a tendency to seek consistency among our beliefs and/or our sensory data or other beliefs. In the case of sensory data, we tend to either change the data to suit our beliefs or change the beliefs to suit the data. In trading, I think a better way is to hold the competing ideas as being equally valid and to then to organise the data as one or more of the possible market behaviours: up, down or sideways. Based on this organization, we come to a trading decision.

Let’s use the current ES as an example. I hold the view that the 18-d (monthly trend) and 13-w (quarterly trend) are in a start of a downtrend; and the 12-M (yearly trend) needs to complete an Upthrust Change in Trend pattern by giving a bearish bar close in February. Now, that’s what I call a bearish mindset!

But, here’s the thing. On Friday, the ES had a bearish setup for the 80-min 5-period swing (1d i.e. Daily trend) – see “A Surprise or Unexpected Event“. The Gann idea I call, ‘the 4th Time Thru’, is a very reliable pattern. If the market is as bearish as I believed, then I’d have expected the ES to breakdown on Friday following the breach of 1337 (basis March). While the ES did move lower, it did so sluggishly. When I went to bed, I was expecting to awaken to see new lows made, with a close near the lows – much like the price action yesterday (except yesterday I was looking for an close).

When on Thursday I analysed the ES, I had to be able to hold two conflicting ideas: the market was bearish, and therefore it should break 1337 and close down. If it was bullish, or at least not as bearish as I believed, then the downside breakout would fail and the market would reverse. In that case, I had to consider if I wanted to be long. I decided I did.

I decided this because if the market reversed then:

  • The minimum target would be 1373 to 1378 and there probably would be a retest of the breakdown zone 1397 to 1400. And
  • If the market did fail on the fourth attempt down, the underlying market trend may be up despite my tools. In other words, the market behaviour and my belief that the trend is down are at odds. In that situation, I am better off deciding on a course of action considering the market’s behaviour rather than closing my mind to the contradictory information.
  • I hold this view despite the fact that I believe the Ambac rescue package will not change the bear trend i.e. the news that pushed prices up on Friday are a ‘surprise event, rather than an ‘unexpected event’ (“A Surprise or Unexpected Event“)

Too often the course taken by traders is to block out the information that fails to support their view; in other words to pursue what I call myopia. Unfortunately for us, many times the market rewards myopia until one day… until the day she decides there a lesson to be taught. On that day, the learning is painful.

A good, and tragic, example of this is the ‘High Probability Trader’s’ experience on ‘Soc Gen Day’.

So that’s one trait. The second trait is the unfailing use by professionals of their monthly (or weekly reports or quarterly reports). Certainly one weekend a month I pore over my psychology and equity stats to look for patterns of behaviour that positively or negatively impact my trading. If I see a large loss, or a series of losses, I look seek to identify the events that contributed to the losses. The same for profits.

Of all the ideas I teach, this one is the most honoured by its breach. I thought that perhaps it was because I asked students to do it manually rather than by Excel macro. So I asked someone to do it on the basis I’d sell it at my speaking engagements. He charged S200 (about US$150). Not what I’d call a fortune. Out of 60-odd members, 2 took up the offer. So doing it manually is not the answer.

I don’t know what the answer is, but I do know that your period’s benchmarks are critical to success.

———-

An aside: On Mar 1 & 2, I’ll be speaking at Singapore’s Asian Traders Investment Convention (ATIC) to be held at Suntec City. See
http://www.theatic.net/mailblast/sg_atic_2008.htm

This is a quality event for a very low price. In fact, you can even avoid the entry fee, S$18.00 (to the convention) by filling in the survey in the link above BEFORE February 28. I’ll be presenting new and unique ideas on managing impulse trades and position sizing. Note that for key note speakers there is a fee of S$30.00.

A Surprise or Unexpected Event

I wrote this piece for the WILKI (a meeting place for student and friends). I thought I’d post it here to illustrate:

a) The market can and will do anything. In my case, I did not stop and reverse. I prefer to see how the market behaves at a price rather than just place a straight stop (for entry or exit). I was tired my Saturday morning and went to bed 45 minutes before the close (4:00 am HK time; 3:00 PM EST). I had taken 1.5 normal size for a risk of around 1.0% with the stop at 1451.75.

I have to admit I also thought I was ‘safe’ on the shorts at 1343 and 1346. The market was trading at 1333 when I hit the sack. I placed stops at 1351 for the 1337 entries and 1357.75 for the others. BTW in the post below I said I missed getting stopped out by 2 points; I should have said 2 tics. I exited my remaining positions my Monday morning at 1457.75

b) Position sizing and risk control is everything in this game. No matter how confident, we’ll keep position sizes that risk minor damage to account should a black swan event occur.

I have made the original post on the ES setup available at: http://tradingsuccess.com/stc/

——————————————

Friday’s price action is the reason I am not a ‘pure’ technical trader in the sense of the maxim: ‘the charts tell all’. That’s true with hindsight but hindsight is not of much use when we are seeking to make money from the markets.

Technical traders trade off patterns that over a large sample size repeat; it is this trait that provides us with profitable opportunities. But, as Chaos theory shows, the market is subject to inflection shocks – shocks that can change the market’s dominant direction – what Tubbs, Wyckoff, Livermore etc called the path of least resistance and I call ‘the dominant trend’. Such shocks can ruin the best historical patterns.

Pete Steidlmayer anticipated Chaos theory when he taught that fundamental events can be classified into 3 categories:

a) Expected events: the news is in the market and correctly perceived by the traders. This results in a sideways market. Traders sell whenever the market moves above value and buy when it dips below.

b) Surprise events: essentially acts of God i.e. events that come out of the blue but are events that have no lasting impact. Price moves away from value and when the shock is over, prices return to value. In other words, we see a sharp, sudden correction against the trend; like all corrections, the trend resumes once the correction exhausts itself.
The price activity after Chernobyl is a good example.

c) Unexpected events: events known but their impact appreciated by few traders. The event has changed the dominant trend and value will lead price. For me, the sub-prime impact was such a key event.

(An aside: For those that believe the FED will get the US out of the current mess by lowering rates, the insights provided by Tim Morge should prove insightful: http://www.moneyshow.com/msc/investors/playerCust.asp?v=1388&scode=01080)

This brings me to the last hour of Friday’s price action because of a possible Ambac rescue package. The details have to be worked through and have to be announced . This is expected Monday or Tuesday. The deal may fall through but I doubt it. Unlike the Buffett offer, this deal will be important to all parties, so like the LTCM bailout, I think the parties will strike an arrangement.

Assuming that this eventuates, the question we have to ask ourselves is: is the deal a ‘surprise’ or an ‘unexpected’ event? I believe it is the former. The deal will assist Ambac but will do little to assuage the problems so brilliantly set out by Brussee. (Hence my review the other day). In other words, we can still expect to see a bear market develop.

So if you are short, like I am, ‘so how?’.

I can speak only for myself: On Friday, I sold against a Market Profile Test Opening at 1446, and 1443 for 2/3 size. The remaining 1/3 I sold at 1337. I was stopped out of the 37s by the late rally and I missed being stopped out of 40s by 2 points. So, now what will I do?

A: Exit first thing Monday morning (Singapore time).

Why? The reason for this trade is gone; my views on the Ambac deal are irrelevant for this trade.

If the deal falls through or the market breaks for whatever reason, then I look at a new trade. My job as a trader is to control my losses. I have learnt the hard way that sitting on a losing position (because of some view) is a sure way to the poor house. The loss if I exit on Monday at around 1455 will be about 1.5%, well within my loss parameters. But if I hold the position, who knows what the loss may be?

Sure, there may be no loss but if the rally continues, at what point do I cut and what will that cost me? Certainly more than 1.5%. Sure, I may fail to get back in on this new break. But, there is always another trade at another time in another instrument. I can always recover the 15 or so points per contract lost on this trade.

The Steps to Success (3)

The trader in this category here has probably been trading for five to seven years. In NLP terms, he ranges from consciously competent to consciously, unconsciously competent. Most of your good trainers fall into the latter category.

At this level, the trader is now or has been producing consistently profitable results. It’s not that his ‘rat brain’ doesn’t from time to time seize control and cause damage to his account; but the effect of the impulse trade (i.e. a trade that breaches his rules) is limited. Rather than causing a blow-up, the impulse trade may cause a loss of one or two percent.

A trader in this category is continually honing his skills. Some of the areas of improvement include:

The point I am making is we never stop learning about ourselves and about the market. One of the benefits of teaching is it hones my trading skills forcing me to articulate some instinctive trades. I can’t tell you the number of times a question from a student has led to a profitable line of thought, research and validation. Dad taught me the moment we start thinking we can stop learning and improving, that’s the moment we start our decline.

A Second Detour from the Steps to Success

Tonight I was going to round off the series; but like the last detour, there is a very clear (and rare) pattern I’d like to consider.

Last night I exited crude oil longs I initiated on Jan 24 at 89.525 (basis March). If you are a reader of Nature of Trends, see if you can recognise the current pattern before expanding Figure 1. If you have not read the book, then go to Figure 1 now.

02-20-2008.jpg

FIGURE 1 Crude Oil Perpetual

The great thing about the Horizontal Terminal is that if it fails, then we have a projection target for the upside breakout. Let’s firstly consider the boundaries of the pattern.

The lower boundary in the pattern is horizontal rather the usual low lower than ‘B’. For the pattern to complete we need ‘E’ preferably to hold below the maximum extension or at least not accept above it. The maximum extension is either 10% of XA or 20% of AB whichever is the greater. Figure 2 shows that this maximum extension comes in at 103.30

02-20-2008-me.jpg

FIGURE 2 Maximum Extension

Entry for the pattern is a bearish conviction close below the Primary Sell Zone. Readers of the blog know that I use the 1/8 retracement levels as a substitute for the Market Profile 3rd standard deviation. Figure 3 shows how closely the two often correlate.

02-20-2008-psz.jpg

FIGURE 3 Primary Sell Zone

Based on the Market Profile, the close would need to be below 98.63 basis the CSI Perpetual Contract. Basis the April contract (and this is the entry price I’d take), the entry price would be below 98.525. The stop above the maximum extension (103.30) would be too large for me. Hence my stop will be:

100.725 + 10% of the range from the current high (100.725 basis April) to the low of the entry bar.

My core profit target would be around 86.40. Assuming we get in at around 97.8, we’d be risking around 3 points for a possible 12-point gain, a reasonable risk:reward. On top of that, this is a forecasting pattern and hence we can look for much more if the pattern plays out.

That’s where the Nature of Trend material would take the analysis. If you use the Ray Wave, then we can use it to provide the context, which will either confirm or cast doubt on the Horizontal Terminal scenario. I use the Ray Wave as a roadmap and context validation tool.

Figure 4 shows 3-wave structures that have hit a cluster of price targets around 99 to 100 basis the Perpetual Contract. It also shows the two possible scenarios:

  1. A completion of the Horizontal Terminal [Wave (3) ends around last night’s high] and
  2. A failure of the Horizontal Terminal {Wave (3) ended at A and formed wave [1]}. If this proves to be the case, then the Ray Wave projects a target to 115.

I favour the first scenario unless we have a strong bar up in the next three days breaking to new highs and accepting above 103.30

02-20-2008-rw.jpg

FIGURE 4 Ray Wave

The Steps to Success (2)

In ‘The Steps to Success“, I introduced the idea that newbies face formidable barriers to their success. Chief among them is the unreasonable expectation of what is possible and the underestimating of the effort required to achieve their dreams. Add to these two more facts:

  1. at the beginning newbies are unaware of what they need do to make it and
  2. are encouraged by the industry hype to persist with their unrealistic expectations.

Frankly, I am amazed that so many of us survive the 12 months to 18 months period most of us need to bring us to the next stage.

For most of us 12 months to 18 months after we begin trading is the crucial period. We were on the way to attaining success if somehow, and from somewhere or someone, we learnt that the secret to our success lay in the use of appropriate tools that created an environment enabling us to consistently execute our risk management and written trading plans,

For most of us, this is not the road we’ll take. And, for most of us, we’ll fail in this game. I survived because I was lucky in two respects:

  1. I had a wife, Chris, who put up with seven years and A$750,000.00 of failure and
  2. At the right moment in my learning, I came across Pete Steidlmayer and his works.

Not everyone is so lucky.

Why do so many fail after this period? Because we entrench the patterns of failure.

  • we seek to be right, rather than to ensure that our expectancy is positive;
  • we seek to hit a home run every time at bat, rather than accept singles until the right ball for a home run comes along;
  • we overtrade either because our position size is too large relative to our capital and/or we trade too often;
  • we trade without keeping metrics of our performance even though subconsciously we know we should – usually we are just afraid to face what the metrics will reveal;
  • we persist in ways that have not succeeded, throwing good money after bad.
  • we trade without a plan or if we have one, fail to take the trouble to validate it so that we have no idea of its likely performance.
  • we have a plan but we honour it by not trading according to its rules.

If you have been trading for 12 months – 18 months, ask yourself: does the above sound familiar? If it does, what are you going to do to change it? Einstein once defined insanity as: ‘doing the same thing over and over again and expecting different results’.

This comment is only partially true: it’s true if you have been at something for a while (some call that persistence) and have produced the same results. You have had 12-18 months and the results have not changed. So what are you going to do to change it?

In this seeking for change, it’s important that you change the essence of what you do. In my quest for success, I tried therapy, seeking self-awareness and knowledge. One among several of Dr. George Lianos’ comments has stayed with me: “If repeated behaviour leads to the same results, look to understand the relationship between the behaviour and the results rather than the reasons given for the behaviour – no matter how reasonable those explanations may be”.

I don’t know you so I can’t advise you on what behaviour is causing the results you don’t want. But you know what changes you need to bring to the table:

  1. Start with a validated simple trading plan. By validated, I mean know its performance metrics. If you don’t know how, then have someone do it for you. Whatever it costs, it will be a lot less than trading with a plan that has a negative edge.
  2. When testing the plan, test it with your position sizing rules and on a portfolio basis (the latter if you are trading more than one instrument).
  3. Have a money management plan that includes risk per trade, portfolio risk at any one time, and rules relating to when to increase and decrease size.
  4. Check your open risk daily. Remember your open equity is not where the market is trading but where you have your stop loss.
  5. Check your metrics at regular intervals.
  6. Have a plan to minimize your stress. Look to understand your strengths and weaknesses; in this regard, I find it’s invaluable to keep a journal that is cross-referenced with my equity spreadsheet.
  7. Spend time preparing for a trade. We are traders; when we have completed our analysis it boils down to this: we need to know where and when we will enter and exit a trade. Unless we are scalpers, even day traders need to have some plan of action if only for the first trade of the day. I have found visualization of the plan for the trade very useful in avoiding impulse trades.
  8. Seek to understand the context in which you are likely to break your rules (i.e. take impulse trades); if you identify the reason for the limiting pattern so much the better.

At the end of this process, you’ll have a risk management and trading plan supervised by a process that encourages consistent execution. I have written about 900 words – and they have been relatively easy to write – and even easier for you to read. But to have the knowledge to write them has taken 30 years of trading. Here’s what I’d like from this blog: I’d like this blog, the most important I have written, to help one trader find his way to success – I hope its you.