A post!

Surely its time for a post...! I've been soooooo flat out with other aspects of my life that trading got pushed back down the list. However, I feel energy for the subject returning and so I thought I'd post (if there's any readers left that is). If not, fine I'll talk to myself... Surely "anonymous" is still around ready to abuse me. I've noticed that posting has been dropping off in a few of my old blogger mates also.

Recently I've been losing like a bitch which has been depressing. I have gone into a fairly consistent pattern of building up my equity one brick at a time, and then knocking it all down plus a bit like the swing of a mighty demolition ball.

I have also recently been using a trading simulator a lot which allows me to test my methods in a speeded up fashion, and what do you know - the pattern is the same. I found this quite remarkable actually; my equity curves in simulation were identical to those done real time.

I've gone into a phase of restudying the basics (again) - it never gets old. On a more fundamental level, I have to say I've been acknowledging that my commitment is not quite what it was - I just don't care as much anymore. I need to rekindle the fire!!!

The problem is that the process of learning to trade is accompanied by an endless beating in terms of losing money. Your efforts to study, learn and practice are rewarded with financial loss after financial loss.

Smart guys presumably paper trade first, then demo, and then finally go live. Unfortunately I was not one of them, so now I've got this deeply ingrained bruising from the market which is something I have to work over the top of. I know there's traders who read this who will nod their heads in agreement.

It's like I've already deeply convinced myself and PROVED to myself that I cannot jump the hurdle, yet I line up again for another go. This is an issue - a real issue that needs to be overcome.

The agony of the crash lives on

When the financial crisis began to take shape, I was lucky enough to make a decision early on to pull my super out of the markets and into cash, I've talked about it before as being the best trade of my life. But really it was very much good luck also.

From that perspective, I have to admit now that I then watched the unfolding meltdown with a certain glow of good feeling. Each red candle down of course made me righter. I see now that I sat there watching the action from then on like a spectator watching a football game on TV that erupts into a violent riot. Great entertainement.

But not for some. Tonight I met someone who brought the reality home to me; I FELT the crash for the first time, as this particular individual was unlucky enough to lose everything in it, and at a time of life where he is not far off retirement. He cried like a child.

He finds himself in a position now of having to rethink everything, and asked questions such as "Why me? I've never hurt anyone!"... To me the crash was an interesting chart formation, for him a new way of life.

Everyone now is talking about optimism; bury our dead and move on. Like all violent war zones, they eventually become a tourist destination.

I guess today was the first time I saw what the market can really do to someone.

Grouping trades

This is something I do now when I look at my performance, and its very beneficial from a psychological point of view in terms of dealing with losses. When i track my performance day to day, I group losers and winners, as much as possible onto the winning side.

For example, say if my last few trades looked like this:

($280)
($110)
$535
($15)
($89)
($130)
$645
($67)
$149

...I'd bunch winners and losers together thus:

($280)
($110)
$535
--- $145

($15)
($89)
($130)
$645
--- $411

($67)
$149
----$82

This is a "cost of doing business" mentality. It sounds irrelevant, but after a while you actually begin to think like this and I've found it to be very beneficial. In the mind, it literally nulls the negative charge of losses - they simply become costs.

Non Obsession

Only one post in May reveals how my mind has been on things other than trading. Yet interestingly I made great profit in May. I traded in a kind of flippant one-eye-open style, just going into the market if something was obvious.

I really didn't have time to do ANYTHING other than check my morning broker statements. I put on a position and watched it via my statements until it was looking interesting enough to load up my charts and move stops.

I've seen this before - when I obsess over trading and really work at it, I lose like hell, and when I'm almost too busy to give a damn I make money.

My conclusion is that the obsession that trading can be is the actually thing that creates the terminal losses. The obsession IS "over-trading".

Where'd he go?

Did my blogging inspiration die? Not really, I am just in the midst of other life demands, in particular starting my own business as well as helping a couple of other friends start their businesses. Forex has for the moment taken a back seat - I have no doubt it will come back up the list. Stay tuned...

Plans & Technical Analysis II

"You HAVE to watch to see if / when things look like they are starting to play out how you thought they might (or to see if the plan is being violated by the market)."

Think what an important juncture this is in active trading at which to either take a correctly timed position, stand aside and abandon the plan (two right actions) VERSES a myriad of possible mistakes one could make for psychological reasons. 

For instance, if you have a directional bias you may actually refuse to believe that the market will do what it is doing. Going back to the military analogy, its like they are coming up the hill, and you say "there's no way they will come all the way up this hill"... You could take a position based on that belief, but it would be wrong. Even if it worked out it would STILL be the wrong reason to enter. Why? Because it became a gamble at that point. 

Being rewarded for a gamble almost certainly means you will do it again next time around. You could also jump the gun, feeling so certain of your idea that you cannot wait to put it into action. Or even simply be that filled with the need to be right that you cannot see anything else (previously mentioned blindness to black numbers coming up if your money is on red). 

What we are seeking as traders is a moment when we are certain we are right based on the evidence unfolding before our eyes, having been completely open to all other possibilities. There comes a perfect moment for calculated action - the point of least risk and maximum possible reward. 

Losing a trade at these moments never hurts. You know you acted correctly and it was worth the risk. 

Plans & Technical Analysis

Continuing from a discussion of upcoming technical setups, I thought to add the following: 

Writing this I realize I may sound like I'm doing the opposite of that which I wrote about in recent posts, i.e. seeing what the market is doing NOW etc, but actually there is no conflict.

It's ok to prepare, to look ahead, to plan. BUT the market will do what ever it wants to do, so you HAVE to watch to see if / when things look like they are starting to play out how you thought they might (or to see if the plan is being violated by the market). 

It's like you watch what the enemy army is doing and say "If they march into the valley, we will bomb them, but if they come over the hill we will flee!"

Then you watch... No judgment. No directional bias. 

At a certain point in time you can say with a good degree of certainty "they are coming over the hill..."

So much for planning and technical analysis; plans that get drawn up and abandoned with the fluctuation and unfoldment of new information. 

From the art of War - Chapter 8, Variation of Tactics

"If we wish to wrest an advantage from the enemy, we must not fix our minds on that alone, but allow for the possibility of the enemy also doing some harm to us, and let this enter as a factor into our calculations."

What I think MANY traders are doing is TAKING A POSITION based on technical setups before they begin to actually to work (i.e. violating the above mentioned law)... They jump the gun in effect, are in early, commit early because they are too certain of their own ideas, and/or don't have the patience to wait. Then the market invalidates the setup (as the market has the right to do) but they have already committed to it. 

They've already ordered the bombing of the valley, but the enemy turned about and are now marching over the hill. 

What's the market doing NOW?

This is a question I had to train myself to ask AND see... Over time it became the most important question to ask. I would normally spend hours staring at charts and coming up with all kinds of different technical scenarios based on indicators or price action setups etc. It's actually an addictive pass time.

The thing to note with this kind of activity though is that you are often doing it when the market it is idling; i.e. in moments of boredom or non-activity or even on weekends. Unless you are a professional analyst, quite possibly you are doing it simply in order to feel PRODUCTIVE. Rarely does the amateur technical analyst sit there doing this when the market is flying. I'm not saying its a bad or useless activity of course, as many people make a lot of money from it, but at the same time bear in mind that all you are really doing is looking at a historic database of past prices depicted in a graphic form, and then making predictions. This was something that stunned me somewhat when I first heard it - "a database of past prices". I had never thought of my beloved charts in that way before. A database?

That's all.   

So we stare at this database and make predictions, and when you look at your charts with your predictions in mind you WILL be filtering whats actually happening through that particular pair of spectacles. Why? Because you will be looking to see if your prediction was correct. Of course.

For instance, if you are at the casino playing roulette and put your chips on red, what are you looking for when the ball spins? Of course, you are looking for the ball to land on red - black hardly even exists in the moment. When it lands on black, it's almost offensively wrong; a shock. I've experienced this shock myself many times: "what the hell? GBP/USD sold off??!!"

How could I even think this way if I didn't have a strong directional bias in the first place? 

Prepare but don't predict

Imagine being in a place where no matter what the market did it did not surprise you... Hmmm. Revolutionary thought isn't it? Even if it runs a thousand pips, no surprise. A complete reversal in direction? No surprise. If you are not making predictions, why would you be surprised?

To do away with this directional bias train yourself to watch the current bar; watch how it moves... In this moment, is it being bid up or sold off? With what degree or speed? How active is it right now? Is it aggressive or passive? Obvious or confused? Yes past prices matter, but they are nothing compared to the action unfolding on this current bar. 

Cut the beast some slack

"MARKET STEAL UGG'S MONEY??!!"

I'm flat tonight after I shorted AUD and GBP and even though this market might go to hell in a hand basket I don't care.

 
Once I get over $500 a day profit (which I just did, which is nothing compared to 95% of traders I'm sure) AT THIS POINT IN MY TRADING CAREER it starts to make me feel sick, so I take my money and leave. I ALLOW myself to trade at the level I can trade at... 

Why do I feel sick at that particular amount? I have no idea. Possibly because I've got YEARS of experience working with my nose to the grindstone for some barrel chested bully-boy boss, 8 hours a day for X number of days to achieve the same thing, and it starts to fry synapses in my brain. The open position hits $500 and my brain starts saying "ERROR!!!" 

In some sense this is taking profits early - a classic traders mistake. But its ok, I cut the beast some slack. He is still dumb, you know? Yes, he has not attained Dr Spock like mental purity yet, but he's doing what he can. So I shut down the charts now and wont look at them until tomorrow.

If I open them tomorrow and see the GBP and the AUD dropped another 1000 pips I do NOT kick myself or say "damn". Practicing not having any reaction if it DID is a part of the process.
 
Trading in my FEELING ZONE is a recent thing for me really - I used to read all the books and fight it. In a sense try to do the opposite of what I wanted to do. You can't go on like that...

So if I'm in a trade and I feel weird about it - I cut it. If I'm in a winning trade and I start to feel sick I cut it. The secret is that when a trading session is over for me then its OVER. I won't look now until tomorrow. Its not my session anymore...

 
I think this is a problem for traders. They read the books and then try and jump too far over their true ability. Trust yourself as well. Work just slightly outside of your comfort zone but not a million miles outside of it or you'll never get a feel for this.

How good is your WHY?

I've been taking a minor natural break in trading over recent weeks, and in the meantime I've been pondering the power of the "WHY" I have when entering trades. You need a good why, no matter what you are doing in life, but especially when you walk into one of the toughest and most volatile markets in the world and put your money on the line.

What's your WHY?

I can see looking back that the vast majority of my trading had a feeble why behind them; no wonder I lost cash hand over fist. Really my reason for entering was that I just wanted to enter, thats all. The second problem most likely is that even when I THOUGHT I had a good reason, the idea behind it was faulty.

So you can have no reason to enter, or you can have a wrong reason to enter.

Also I notice on the forums that the VAST MAJORITY of newbie / semi newbie traders there are trying to formulate their own personal why. Their own UNIQUE system, inventing unique indicators.

They think that the idea of the game is to outsmart everyone else in the market; to be unique. The obsession with system creation or inventing new indicators has being unique and outsmarting everyone else behind it as a hidden motivation. The thing with markets though is that its not about you, its about consensus. If you invent your own amazing oscillator and you are the only person in the world looking at it, then how good a reason is this to enter the market? How much consensus do you have behind you? Who supports your decision? Who agrees with you?

Probably nobody, except a handful by pure chance.

There's more to say on this, but ponder your WHY when you pull the trigger. How good is that why?