Monthly Archives: June 2011

Patience

I think my biggest challenge in trading can be summed up in one word… patience.

It’s such a small word too but has so many implications…

  • Having the patience to wait for the entry conditions to be right
  • Having the patience to wait as the trade moves far enough to confirm you were right or wrong
  • Having the patience to wait before thinking about moving my stop to point 1
  • Having the patience to stay out of the market when I don’t understand what’s going on
  • Having the patience to wait and think rather than get emotional when I lose
  • Having enough patience to wait rather than snatch profits early…
When I’ve taken a trade and patiently waited for it to work out, it’s all gone ok… When I’ve been rushed or made snap decisions… It all goes pear shaped. Maybe everything does truly come to those who wait… and then take the trade 😉

Strategy – check! Self Discipline.. Erm… No…

So apart from the obvious requirement to have a strategy… see the post here you also need to be able to follow it…

This morning saw an exercise in futility and the emotional take over of my trading resulting in some truly crappy trades. I’m effectively way too embarrassed to post these up here in detail but after some soul searching and a protracted quest in search of a silver lining to the day a few themes have emerged.

Having a strategy is not enough

Great, you at least have a fighting chance that something you have discovered will work… not actually sticking to it’s entry rules and pre-empting the exact point at which you want to enter a trade will more than likely get you killed though.

So lets say I have a strategy that is ‘right’ 50% of the time (guess) but due to faulty psychology I only execute it correctly about 60% of the time. Now you’ve got something that only works 30% of the time… i.e. it’s unlikely to work on aggregate.

Today was an excellent learning example of getting over excited (emotional) and entering two trades early when the conditions were not confirmed. Nuts. I think greed and a vision of financial ease and contentment over-rode my good sense.

Think poker player, think ice cool, think like a general. Do not think like a ego driven fool. Do not dream or fantasize when trading. Manage risk, watch your own decision making, check your ego in at the door. Pay attention.

Forgetting earlier context/learning

I’ve written previously about the importance of levels and that being aware of them can really help put the rest of the market in your favour. Effectively I got slightly deluded and adopted the mistaken belief that I’d found the silver bullet with my strategy. I forgot to stack all the cards in my favour…

How can a bunch of moving lines predict price? Well, they can’t. They can make it clear in a more obvious sense what is happening and help trigger an exit or pare losses but it’s the context of the price in relation to previous levels that’s really key. Previous winning trades have been solely based on this idea. Today’s terribly optimistic punts didn’t pay attention to this. Doh!

I got blinded by indicator madness again. Back to the drawing board. Risk managed decisions on entry based on trends and levels. Everything else is window dressing and gets in the way of the thinking.

Patience Mr Bond…

Yep, I haz not enough of this. Again, previous successful trades were across multi-day time frames although using 1hr charts for an entry point. Place trade and sit on hands plus do NOT re-examine the trade on a lower time-frame…

Don’t get all emotional, just don’t

Getting all emotional means you really do stupid s**t. Like decide you’ve made a horrible, terrible mistake, cancel the trade and then place another one in exactly the opposite direction. This is also known as ‘trading like a 13 year old’… i.e. all hormones and no sense. Also led (on this occasion) to me pressing the buttons in the wrong order and entering a trade in the wrong direction.

Only sensible trade of the day…

I’m long gold. I’m prepared to wait for this to come good. Stop is below 1490.

‘Letting profits run’ is what exactly?

So if you’ve read anything at all about spread betting you’ll likely have seen the following quote: –

Cut your losses short and let your profits run

Great, but what does it actually mean? Yea, I know what it means but what does it actually mean I have to do? The answer hit me right in the head today…

Letting your profits run = DELAYED gratification

Now, delayed gratification is used in psychology to characterise whether a person is able to resist the temptation to take the chocolate right now right away or will wait for a bigger piece of chocolate they’ve been told might arrive but can’t yet see.

Delayed gratification is the ability to resist temptation now on the promise of a bigger gain in the future. This is pretty simple to understand looking at a price chart. For anyone like me (beginning spread trading) there’s an overwhelming temptation to grab the profits as soon as they appear simply because actual profits have been few and far between up till this point 😉

Taking what’s there rather than waiting for a bigger payday while the price dances about is very difficult to resist. So… what to do?

I read recently that the development of will-power is like the development of any system. You need to practice it in order for your ‘delayed gratification muscle’ to develop. You will get better at not grabbing the cash early by practising delayed gratification. So I will be doing this with my somewhat atrocious diet.

At one point I was pretty good at this but recently I’m eating a whole load of crap like chocolate, crisps and more chocolate. So it’s a win/win. I’ll be delaying gratification till the weekends, not gaining weight, improving my diet and my trading at the same time – Huzzah!

Look mum, I built a strategy!

Before anyone reads this… first, a disclaimer… These are my own random ideas and half formed thoughts. Let’s be clear that if you decide they have merit and you might want to copy what I manage to vaguely explain then it’s your own responsibility entirely. I’m assuming you’re an adult so don’t expect anyone to trade these ideas and them blame me for something going AWOL. This is mainly to help me attempt to clearly communicate the ideas in my brain to myself. You have been warned…

So… over the past couple of weeks I’ve been thinking and researching about for a longer term strategy that means I can actually work at my job, not get fired and not attempt to deal with emotional over-exuberance while making trading decisions.

It’s been something of a struggle to say the least.

However, based on a number of threads and extremely limited testing I’m thinking there may be some indications of some cautious progress. This post already feels like it might be quite a long one so possibly go find tea before proceeding… Got it? Onwards!

Look mum, I’ve got a strategy

Part 1 – Follow the yellow brick trend

So lets begin with the fundamentals. Trend following and how to define one… I’m going to use a shorting example below.

Well on a daily chart for almost everything it’s dead obvious. Everything is down against the Swiss Franc, Gold is going up and the Euro is all over the shop. Aussie dollar is up versus the US dollar etc. Daily trend? Up or Down etc. If it’s sideways I’m going to leave it alone cause I’ve no clues about that right now…

With this in mind I’m attempting to take advantage of the crowd (consensus) and only trade in one direction for each instrument. It doesn’t matter what it is. Lets use EURCHF as an example. The trend is down. Therefore I only want to short it… Why?

Well I definitely want to take advantage of the 10-25% advantage you get from going with the trend. Of course I don’t know that whenever I’m in a position it’ll go down (for shorts) but having the ‘crowd’ on your side is all the advantage I’m looking for at this stage.

Yes, but Rob, what about all those ‘up’ (opposite direction) trades you’re going to miss?! True, I’m sure I’ll miss a couple of really long runners but think about it for a moment. The price is dropping and you’re essentially suggesting that you can spot when a proper retracement is going to begin then hang on as all that downward pressure is temporarily restrained, there’s a gain over a number of days, suddenly everyone gets out and you spot the exit point?

Hmmm… sounds a little optimistic to me. I’m going to take less trades but they should be less risky and, over the long term, more profitable for less mental effort. Last point on this – there are always other instruments to trade. Price is price is price. My belief is what should work in stocks, should work in FX, should work in stocks. The basic psychology of the people in the market is the same.

It’s possible lots of people will disagree with this opinion and yes, I’ll agree there are environmental and news related factors that need considering for each. However, fundamentally all the data is displayed the same way so one strategy in FX should work the same in indices. It’s only your track record in making money from each instrument that should really count. I’m digressing a bit 😉

Part 2 – Timeframe

Daily? Too long for FX… 4hours? I’ve not got enough patience, frankly… 15 minute? Too short and I consistently lose money… Hourly? Yes.

Why hourly for me?

  1. I don’t have to keep too keen an eye on what’s going on
  2. Requires development of patience on my part
  3. Strong enough ‘signal’ i.e. if a bar falls consistently and far for an hour it’s unlikely to stop on a pinhead and reverse straight away (forgiving)
  4. Moving stops about seems pretty straight forward
  5. Allows me to get out if the impact of news send the position into reverse… not a big consideration but worth keeping in mind
  6. Allows the development of strong trends on easy to read charts
I did look at 4 hour charts for FX but it’s just too long for me. In a market that ranges quite wide but can be volatile it’s just a little bit too ‘committed’ for me to be comfortable with at the moment.

Part 3 – Simplicity

Being simple myself 😉 I need to be able to understand what it is I’m attempting to do. So in non-technical terms I’m trying to hitch a ride on the coat-tails of the market when the overall trend resumes… A lot of the next piece of thinking comes from things that Richard Farleigh came out with about trading as well as points from Malcolm Pryor in his book ‘Winning Spread Betting Strategies’.

Now… How do you tell when a trend resumes? Look at the price. Yeah, right, that helps a lot! Cheers! Ok… You need to have the confidence that the market is backing your opinion. How is the market going to tell you about this? Price movement. What’s the most un-‘disguised’ or clearest way you can see this sentiment? Moving averages based on certain periods… Does it matter which ones? Possibly not but there needs to be a slow one and a fast one.

Malcolm Pryor uses 10, 20  and 40 period EMA’s. So let’s use those then. He’s applying these on weekly charts but I’m not that patient, as I mentioned before.

So with EURCHF I’m going short when the 10EMA drops down through the 40EMA…

Enough of the market should have moved enough of the way down so that two things happen…

  1. The price drops for at least another period (1hr) so that I can move my stop to break-even
  2. People pile in to the resumption of the trend further reinforcing the likelyhood of 1. happening
This ties in with using hourly charts because people need time to notice things happening, you’ve got the time to get out if you’ve royally ‘effed up and lastly it actually doesn’t seem to happen very often when the price drops over an hour period then immediately reverses taking you right out.

Notice how I’m also trying not to lose cash here! 

On this basis my stop movement is pretty aggressive. As my example from yesterday will show… possibly a little too much…

Part 4 – Stop loss placement

This is what levels are for. DO NOT ENTER a trade where the stop loss you need to place is a thousand light years from your entry point and negates your risk reward criteria. Unless you have a large trading account stay the heck away from Crude Oil 😉

From an aggressive perspective you could place your stop above the previous high if you’re shorting…  Then once the price has fallen for a couple of hours go to just below entry – enough to buy a latte… Then, depending what happens next you could close the trade early or do a dance as the price continues to plummet.

I’m actually considering using a time stop here, rather than a figure or percentage. This comes from Simon Townshend who uses a 4 period stop as a way of retaining cash. In other words if the trade isn’t going your way after 4 hours, days or whatever you’re trading on then get out.

Or maybe look at the half way point of the last longest bar as the point where you might want to start considering whether to get out. I might also pick an arbitrary figure – 50 points say.  I need more data before deciding this. Maybe it’s just the second or third bar then out after you enter the trade… I really don’t know yet.

Part 5 – Exit Criteria

Apart from your stop getting taken out the next thing to consider is whether to have an actual signal on the chart to indicate it’s time to get out of a trade…

I’m looking for a bit more real world experience before I try to decide this part. There are a number of reasons for this. The exit point depends on the behaviour of the price relative to the support/resistance levels surrounding it.

Also depends on your own number targets, the amount of time you can dedicate to monitor the position, if it’s fairly sideways and only pausing before resuming it’s drop or if it’s now bouncing back to eat your profits. This is a judgement that needs to be made based on experience. I need more problems like this 😉

So here’s breakdown of my EURCHF trade from Wednesday (22nd)

Happened to be looking and spotted EURCHF heading down off some resistance. With this overall trend down this is on the ‘right side’ of the crowd. Initially I made a mistake and entered long by clicking on the wrong button!! 😦 Cancel and reverse it for a small loss (dumbass!)

Right… in the trade proper now from 12,085 shorting with the trend and my stop is somewhere above 12,150… the drop continues beautifully and about 2 and a half(?) hours later I see the price bounding up again and I get out for about 36 points…

However, all my mistakes are in exiting this trade early… Apart from the price going back up I don’t really have a reason to get out. The EMA’s still indicate the trend is down. There’s another strictly price based indicator I created that shows the trend is still down… Hence my comment earlier about needing an exit strategy 😉

Here’s the proof from today…

Yep, had I had some balls, more faith and an actual exit plan I’d be pretty much £200 better off at the middle of this afternoon!

Still, rather than self recrimination – let’s look at the positives…

  1. I learnt some stuff
  2. I didn’t lose money doing so
  3. I have a good entry strategy
  4. I looked at this today across a number of other markets and it looks promising 😉
Will be paying attention to this in the future as I intend to trade this approach for another 29 trades and record my aggregate results. The only valid testing is ‘real world’ with real money.
The challenge isn’t the entry point, it’s managing your ‘self’ between that and exiting. More practice is needed but I’m happy and looking forward to testing 🙂

Teach yourself to trade – INCENTIVES (part 6 of 6)

If you begin anything it’s usually with an over-arching goal in mind… Well, it should be obvious that I’m not sitting in the Caribbean next to my luxury yacht so how do you keep yourself focussed and moving forwards in the meantime?

However the challenge is really that this is a two YEAR project for me and ffs how do you keep moving the whole thing forward as the slings and arrows of outrageous fortune etc. other commitments and just the fleeting nature of time buffet you about like a turd in the sea?

Incentives, or in other words… bribes with conditions attached.

Pick something small which you’d like to sort out, fix, or change and then absolutely don’t allow yourself to ‘cheat’ – only by achieving your interim goal will you be able to fulfil your promise to yourself.

For me, it’s to get a new phone…

The phone I have                                 versus…                    The phone I want

So yes, I broke my previous smartphone by dropping it on the kitchen floor and now I’m living as some sort of social pariah with a £9.90 handset from the O2 store. It could have been worse… they also had a pink one 😉

Phone on the left. Icons for menu selection, calls and texts but only if you have the patience of a saint and the message is short/curt/rude.

Phone on the right? The completely awesome Samsung Galaxy S2 which will do your tax return, runs Android 2.3(?) and generally kicks huge amounts of internet enabled derrière!

On this basis when I’ve made some decent gains from trading I will be replacing my phone, and NOT BEFORE! 

Incentive? Check!

Emotional roller-coaster survival

This blog post isn’t really related to the trades I was in this week (although I’m going to put the chart up) but more to do with dealing with the emotional impact of making a less than stellar trading decision. This began as a sort of investigative experiment but ended up telling me an awful lot about my mental and emotional approach…

First, a bit of background… In my reading I’ve seen a number of people talk about having an ‘edge’ in a trade, along with time stops and of course the all important entry point. What messes up a lot of traders early on is that they place stops way too close to their entry points in choppy markets. There’s no room or the trade to move/breathe/react to market noise. However, trading with the trend does at least give you something like a 10% advantage that the whole scenario will work in your favour.

I’ve also done my own loose monitoring/experiment to validate this belief [here] and it came out with a 25% percent advantage to following the trend over my own decision making… Possibly a shocking indictment of what goes on in my head but hey ho 😉

From what I’ve seen/experienced trading stocks it’s that money (investment capital) moves in and out of stocks roughly in time with market sentiment. So, even if you’re long on a great stock that just keeps going up, when sentiment is negative people will take profits and recover their capital to move it elsewhere. On this basis it’s challenging to make money going long when the market is dropping. This applies even if the sector you’re in is also outperforming the market. It’s just human nature that people feel at risk when things look bad.

Just as an aside here these are all my opinions/perceptions so if anyone does really disagree with me that’s fine. I’m not telling you what to think or putting myself up there as an example at all.

So what I decide to do is find an FX pair with a significantly strong up or down trend and just place a trend following trade with very wide stops at an opportune moment. This was an experiment to see what would happen and whether I could deal with the unfolding situation emotionally. Testing my faith in the idea of trends so to speak.

I’ve broken the experience into three phases.

  1. Preparing to place a trade – creating a scenario
  2. Being in the trade – managing fear, doubt and despair
  3. Exiting the trade – resisting the pressure to cut and run

Following some deliberation I saw that AUDUSD had recently reached new highs and was trending up strongly.

So rather rashly and with a disregard for what was actually happening in the moment I entered the trade long.

I also noticed that USDCHF was in a long term downtrend but had recently risen so I entered that short.

I’ll talk about the AUDUSD trade because that is the best illustration with the widest movement of the two. So no-ones hanging out for the ending to the blog and because it’s not actually the point I ended the AUDUSD trade up about 35points and closed the USDCHF trade at evens. So lets take a look at what happened.

Preparing to place a trade – scenario creation

I’m guessing that experienced traders can probably go through this process in lighting fast time. It may also be that at shorter timescales (15 mintues and below) I’ve consistently lost money because I’ve just not had enough thinking time to step through all the options.

So coherent trades I’ve entered have all worked because I’ve created a scenario around them about what is happening now and what I expect to happen in the future. Here are some quick bullets about the AUDUSD trade

  • The aussie dollar has been on an up-trend for ages
  • There’s decent amount of support to halt any retracement
  • The price has bounced off a level (x) a number of times and headed back up
  • I’m going to place really wide stops because I believe eventually the aussie will keep rising
  • I’m prepared to let this trade play out over several days if I have to
  • I’m going to have a >100 point stop so that I don’t get stopped out by market noise
  • I will not fold the trade early because I’m uncomfortable
  • I will only move my stop up when it’s really safe to do so i.e. when the trade is up at least 20 points
  • I will not spend my time watching the trade or looking at my P&L

So happily the AUDUSD fell like a brick on Wednesday and I decided to go long.

Now, at this point this was actually a bad entry decision (isn’t hindsight amazing!) because I’d not really had any kind of confirmation that a reversal was even close or the downward momentum had ended… Not a good start.

For those interested purely technical point my entry was at point A at about 21:30 on Wednesday. I was looking at the bounce off a new low without taking into account there was still plenty of scope for the price to keep dropping…

Being in the trade – managing fear and despair

Now, the one thing I had in my favour as this trade went south for 36 hours was that I’d already mentally rehearsed my reactions based on my beliefs about this trade. I checked this trade at one point yesterday and it was 81 points down (see point B). At that time I quickly logged out of IG Index and got on with what I was supposed to be doing!

I’ve found that dwelling on a situation is counter-productive and you have to eventually have faith in your own ideas and decision making. The fact that, although I wasn’t ‘happy’ about how this trade was going I also wasn’t beating myself up about it or letting it get to me too much. Now, I’ll of course admit that I wasn’t jumping for joy either 😉

The thing that helped, apart from having already thought through how I was going to react if indeed the trade did go against me, was realising that emotionally ‘I am not my trade‘. The trade that is currently in play is a completely separate thing from me. There’s no reason for me to really credit the emotional reaction to a situation in this trade with any ‘weight’. It’s a separate thing over which (now it’s in the market) really don’t have any control. So if I can’t control it why worry about it?!

Of course this is the conclusion I came to as the roller-coaster went up and down as my emotions went the same way. What I’m pleased about in all this is that I had the patience to hang on and trade the scenario I had laid out mentally in advance. It wasn’t a particularly pleasant experience but by un-linking my ‘self’ from the trade I managed to stay the course…

Exiting the trade – resisting the temptation to cut and run

The most difficult part for me, or the part with the most intense ‘feeling’ component is actually all around exiting the trade. Again, especially for beginners, this is difficult to deal with because we’ve not experienced a lot of winning trades to practice this bit on! 😉

After two days of doooowwwwnnn then slow climb to even (no loss) I felt under huge emotional pressure to walk away and just get out of the trade! How dumb is that? Now, also notice that there are entry and ‘in the trade’ rules in my scenario but I’ve not written any ‘exiting’ scenarios. I found I had to make these up on the spur of the moment!

As I got to +1, +5 and +10 points I was incredibly tempted to just close the trade. A couple of things stopped me… The scenario points I made up on the spot were: –

  • I’ve not done all this ‘work’ and been through the 36 hr rollercoaster for nothing (emotional)
  • EMA’s were all moving up
  • Trying to limit loses but need to let profits run – the great maxim
  • I can move my stop up to a sensible point (i.e. open) after 20-30 points and not lose money
  • It could always carry on going up further, as it dropped further than I thought it would initially – lol

This temptation to quit out happened twice – at point C and at the second break through my entry where I was 5 or 6 points up and the price was going plus 1 plus 2 then back to entry…

So I managed to hang on till I was about 35-39 points up (point D) when the whole work scenario got in the way and I felt happy to close the trade and not have this going on in the background while I was having to deal with a significant project problem.

Summary

The points I had in my favour…

  • Having thought my way through the trade (and holding my nerve) in advance
  • Understanding that how the trade was going didn’t reflect on ‘me’ and wasn’t linked to me emotionally
  • Having wide stops
  • Being patient – letting the trade ‘do the work’

Things I didn’t do particularly well

  • Should have waited for a better entry point – 10 period EMA not still nosediving would have been a start!
  • Hadn’t thought the exit scenario through in enough detail – would have made resisting temptation easier!

This trade also broke the 1% risk rule by a significant margin so although it was a very useful experience I’m not planning to do any more of these soon… Will be adopting a more sensible approach  next week.

Teach yourself to trade – FEEDBACK (part 5 of 6)

So if you’ve read my previous post about adopting some humility you might know that I’ve completely failed to follow this piece of advice myself 😉

It’s a basic rule that if you don’t measure something then it’s unlikely you will improve at doing it… or… if you do improve it’ll be at a slower pace. If you’re not keeping records and measuring the activities you’re undertaking then how do you know whether you’re going in the right direction or not?

In order to have feedback that will help you course correct you need to record what you’re doing.

Rather than use excel I went slightly overboard and am using Filemaker (database creation for idiots) to record what I’m doing. There’s another table linked to this which helps me calculate risk/reward and whether it’s actually a credible trade. Will post this later at some point when I’ve got it all working smoothly.

Apologies for the picture quality. I’m hacking things from PDF’s, through ‘theGimp’ and back into a better size in order to create this.

So this (above) is more like an aim, an ideal, rather than an illustration of what I’m doing at the moment – also – all the crap you see on this chart from 5th May is no longer there…!

This is more like it…

So the moving averages exist just to help me spot trends because I’m still a little retarded when it comes to seeing the obvious. Here I want to see either a bearish engulfing bar back near 1600 to confirm a short or slightly less aggressively a drop through 1516/1500. Or the price could bounce off 1538 again with up-side resistance at 1650/1670… we’ll see. Anyway it’s certainly in a downtrend… probably best look for shorting opportunities eh?!

This is slightly off topic (feedback)! Right, so feedback is insanely important because you need a mechanism to determine what’s actually happening without relying only on your P+L

    1. Your opinion of yourself/abilities isn’t objective. If you’ve read any of my stuff in this blog, tried to diet or committed to an exercise program you’ll know this. My opinion of myself and the fact I’m awesome is unlikely to be totally objective. You will undoubtedly have the same issue 😉
    2. You need to know that you’re sticking to a system before even considering whether the ‘system’ is working for you or not. This probably means 30(?) trades with a single system before you can know whether it’s one you can stick to and if it actually performs in the real world.
    3. Contextual feedback is important – is this trade type working only in a certain type of market? I’d suggest that short trades have maybe a higher likelihood of success in a falling market. Now, actually the only way I would have to validate this idea over the long term would be using some sort of feedback. Gettit!?
    4. Feedback is what helps you learn and get smarter in the long term. It’s what should essentially prevent that bruise on your forehead from getting bigger. My head hurts from banging it against the wall – oh, I guess I better stop that then 😉 For trading I suspect the following is true..
    5. Help you identify personal trends i.e. by doing x,y,z at an emotional level then decision making seems to be more successful. Yes, everyone talks about the importance of keeping a trading diary. Have I been doing it? Nope, not until now! Putting all this stuff into a database seems the most efficient way to keep track of everything
    6. Recording trades and putting everything into a system also means you treat this whole topic as if running a business and not simply having a punt. Businesses keep proper records

Better records = better feedback = shorter learning curve + better ideas for later

Here’s a final feedback analogy to put the final nail in the coffin…

I enjoy going to the gym (weights) and since I started recording what I’m doing, weight (lifting) and how much I weigh my actual results and progress has been double what it used to be when I didn’t pay attention to recording what I was doing. I was in the gym, yes. I was working out, yes. What I wasn’t doing was either of these things at peak efficiency. So I got a bit disillusioned and pissed off as well as tired… I almost gave up…

Get to this point with trading and it may well be game over.

After I started recording what I was doing it was remarkable how quickly things improved. You can go after something with a record of where you’ve been. You’re aware of the pitfalls and things you shouldn’t do. All previous mistakes, trades, gym sessions, whatever are there to learn from.

So, if there’s one ‘secret’ of trading I’d suggest it’s keeping really, really good records of what you’re doing. Now I’ve managed to explain this to myself and convince myself it’s a super idea which will help me get an ‘edge’ I’ll be doing that then 😉