The Spark

One of the most frequent comment poster on this site, Bluecollartrader has asked some interesting questions lately and got me thinking about some things that I hadn’t had the occasion to think about in a long time. Namely what were the breakthroughs or “AH HA” moments that made the spark of realization go off in my head.

I remember such a moment that had profound effect on my trading quite clearly.

After about a year and a half of watching the markets everyday, all day, I started to have more than just random success at predicting the movement of stocks. I was pretty good. I thought possibly that either the market conditions were responsible but on up days or down days I was still switched on. Maybe, just maybe I had learned enough and turned the corner from novice to a higher level. After another month of watching and predicting I finally asked myself, “How do I know?” I didn’t have an answer. After another month of not knowing it was really driving me crazy not knowing.

You see, I wanted to have an exact formula that would guarantee success with every trade. I wasn’t content with predicting any losers and wanted to eliminate them. (wishful thinking) One day, after more time not knowing how I was doing it, I stumbled across a box of my old motocross racing trophies. I reminisced fondly to those events 25+ years ago. It was interesting to see my progression through the ranks. The memory that the sanctioning body moved me from the Junior class to the Expert class in the space of 1 year triggered off more memories that led me to recall unique conversation from back then. When I questioned them as to why they were moving me and begged them not to

they basically said, “Look you can’t unlearn the skills you’ve got now. You’re getting better and faster every race weekend. Just keep on doing what you’re doing now and you’ll be fine”.

I hadn’t thought of it that way before “You can’t unlearn what you know.” Staring at those old trophies, I suddenly drew a parallel between time spent learning how to ride and race motocross and the time spent watching and learning the markets. Both skills were acquired through hours and hours of practice and IT DIDN’T MATTER HOW I KNEW WHAT TO DO, IT ONLY MATTERED THAT I COULD DO IT.

With trading, my eye saw price, information and patterns and processed the results and gradually built up my knowledge base in the same way I learned about bumps, jumps and muddy conditions for motocross.

It was a light bulb switched on in my head moment. I didn’t need to know! In fact I didn’t need to know any information about what made the markets move. Only that they did move.

After that point my thoughts were on how to have a plan to capitalize on the moves. That was the start of the hard work. How to position my skill and structure a stream of random events so that my skill can produce money from the events flowing across my screens? This was the genesis to develop a trading plan and hone my edge to take advantage of my skills.

But after all that, what is this skill? I believe it is nothing more than a gigantic memory bank that you draw from and try to fit in the missing piece of the market puzzle – the future event that will become either your next winner or loser. The eye sees. The brain records and files it away. After some time passes realization occurs. “Prediction” skills accumulate.

Your entry is nothing more than a guess no matter how much time or calculated theorizing you’ve done. Probabilities are the only thing the learned trader can go forward with. Playing the odds of a certain series of market events turning out as your collection of memories have seen play out in the past. This is what makes trading so fascinating to me.

Gut feeling is an interesting sensation and one that gets developed along the way. I trade with the first thought that comes in my mind when I see a chart because that is what my brain has surmised in an instant from looking at the details. I don’t bother with trying to talk my way into or out of a trade. I’ve learned to trust my instincts. My skill aquired by many hours of practice and observation.

An interesting and singular event happened to me last year when I should have trusted my gut feeling but didn't. I touched on it here http://fearandgreedtrader.blogspot.com/2008/10/good-day-at-155000.html#links but let me explain it in more detail.

During the market meltdown last fall there were many days of incredible moves. I was having a field day during this time as my trading style perfectly matched the market conditions. I was totally in the zone and attuned to the markets every move. At the end of this particular day my wife asked me to go to the supermarket for something she needed. (I usually take a nap at this time) As I went out the door I was struck by the idea that I MUST find a hat to wear. Here is what went through my mind :

-“Why do I need a hat? In case you need to walk home and it’s raining out”.

-“Why would I have to walk home? Because you’re going to have an accident!”

I was like a zombie for a minute of two as I looked around for a hat.

- “Fuck it I don’t need a hat”, went out and got in the car.

-“ Buddy go find a hat or you’re going to get your head wet when you’re walking home.”

- “Why am I going to be walking home? Because you are going to have an accident”

- “I have never had an accident in 30 years whats different about today?”

I got out of the car, went back inside and rooted around in a trance for a hat by the door, in my gear room, not seeing all the hats or hooded jackets right in front on me.

- “Forget this stupid shit, go to the store now so you can come back and take your nap”

So out I go, without my hat.

Less than a minute later I T-boned a black minivan.

And then it started to rain.

After finishing up with the cops etc. I started to limp the four blocks home vowing to always heed my gut feeling. All the while, a gentle rain fell down on me as I pondered the convergence of timing and events that needed to transpire to place me here in this moment.

The Enemy Within

In these lazy summer days I’ve had time to think in-depth about many things that go into becoming a successful trader. Part of this started when I was at a get together and the conversation turned to what we all did for a living. “ I like to ski steep and deep powder and mountain climb to keep alive ” and added with a smirk.” but for the daily grind, I’m day trader”

“Oh, we’ve got a real risk taker here” one piped up.

To paraphrase my reply, I said no, I don’t put my nuts on the line too often and if I do only then for a short time after taking in the odds of my surroundings. I do however live the probabilities during both activities.

I’m not the worlds most extreme skier or climber by a long short but I relish the feeling that challenging myself physically and mentally by reaching out as far as I can. Excitement, sheer terror, occasionally survival are emotions that make me feel more alive than at any other time.

Conversely, when trading I am Mr. Bland. I do the same thing trade after trade, day after day.

Probabilities exist in both of those worlds. Will it avalanche and kill me, will a rock fall on my head and kill me, will I misstep and fall to my death, will I break my leg 15 km from civilization and succumb to the elements. Will the markets reverse and hit my stop.

Anything can happen and does happen on a regular basis because both nature and the markets are unpredictable. But safety steps can be put in place to mitigate risks or disaster from affecting you.

In both worlds it is better to survey the possibilities of danger to yourself and/or account and meet them head – on. You must make preservation of your life or preservation of cash priority number 1.

Why is it so hard then for traders to follow time tested rules such as not adding to their losers? Even though the markets are not logical some or most times, it is logical to quickly sell a loser rather than holding it longer or worse adding to it. Think about it. It is going down. Your money is tied up. Your focus is compromised. Is not a smaller loss easier to take now? Well not if you are misguided and let your expectations rule you. Unsuccessful traders have a hope/dream/wish that the losers will reverse back to the original entry price just so they can get out and break even. Whew! I was lucky there! Talk about an emotional roller coaster.

What they need to do is confront the loss before the trade is entered. That is the price at which your reason for buying the stock will be proven wrong. Kiss that money goodbye. Monetarily it’s a cost of doing business. Emotionally it’s called trading your plan.

Truly accepting the risk is a huge step forward. Maybe it shouldn’t even be called risk. It’s more like an entrance fee or the price of admission that may or may not be taken. When you really, truly, deeply accept that $ amount may be taken from you, it is then very easy to let it go.

Which brings me to a second point I’d like to make. Having a trading plan that works for you is something that takes time to develop. Many factors need to be weighed; your responses to many conditions need to be factored in. What are your goals as a trader? How much time do you have? What is your personality? What drives you? Do you have mental agility, to name a few on the emotional side. That’s not even delving into the technical side. Trading is a never ending learning experience, what you think you know now is nothing compared to the future. A trading plan evolves into your roadmap/checklist. Its conditions are not arbitrary, ready to be broken one moment to the next. A plan can’t be called that if it’s deviated from, that’s called a free for all. It can’t be said that you are following the plan of principals if you break your rules. That’s being dishonest with yourself. And that will led you to your demise as a trader because it will become easier and easier to lie to yourself and justify breaking your own rules.

How can you defeat this enemy within? It takes the realization of the following:

You have no control over what the markets will do. Any joy, anger, disgust, mistrust or fear you have is just your own interpretation of the market information. Because…

Expectations you have about market direction add up to nothing more than dreams based on fairy tales.

Your hopes, dreams, wishes or black magic voodoo mean nothing. The market will do what it will do, with you along for the ride or not.

So if you can’t control the market , how do you make the jump from only seeing the moves to capitalizing on them? Control your interaction with it in such a fashion as to stick with your trading plan and let the probabilities work themselves out. You actually do need an edge that has demonstrated it works more often than not. Your edge is something you have discovered as being a high probability move that gives both an opportunity and protects you from fear and greed-i.e.yourself. It is something that you have comfort with and confidence in. It is developed by way of honest observation of the market and yourself. Regardless of chart patterns, it’s how you interact with the market. How true you are in sticking to the winning principals.

The most important thing is having to face all sorts of problems and situations that you don’t face normally in your life, It helps you to know yourself much better. And when you truly know yourself, an edge with confidence and a winning attitude will bring you the positive results. You have to believe in yourself. It is all up to you whether you will win or lose in this game. I could even say the market has almost nothing to do with it.

A momentum indicator.

An invaluable momentum indicator to me is the hitting new highs/lows ticker. Real Tick calls it a TAL Alarm. Your trading platform should have a similar one. I have one for NYSE, QQQQ and stocks on my watch list.

I can set the filters to display any price range of stocks. As you can see from the photo it displays new highs and lows in a real time dynamic basis. The number of times a new level is reached today and 52 week highs and lows are shown with the price colour coded.

Aside from mining many opportunities from this indicator I use it to tell me the cycle of momentum. Used in conjunction with the 5 minute charts of the S&P and QQQQ it clearly gives the health of markets and tipping points of momentum.

Strong/weak stocks leading the markets higher or lower setting new prices in that direction give me an excellent visual of what is happening.

When the markets are trending strongly these tickers are scrolling rapidly by. They slow as momentum slows. They change from green to red as the markets do. 50, 70 or 100% green or red is a very telling story of momentum.

I don’t need to look at them in detail. Most times I can see what is happening in my peripheral vision and absorb the market direction information. If a block of new prices appear for a stock(such as FSLR shown here), it grabs my attention so I can click on that and the charts for that stock comes up.

Trading the new high/lows is a great way to trade with the trend and momentum. I never think a stock is too extended or beaten down to buy or short. The fact that it is still going up or down is enough for me to jump aboard.

To see this in action click here http://fearandgreedtrader.blogspot.com/2010/02/good-shorting-today.html#links

Order entry.

A sorely neglected aspect on the blogsphere has been order entry. I’ll go through what I do as far as day trading goes and you can take whatever applies to your situation.

Check out the picture of my market maker box. There is information on price, spread, volume, high, low in the top box. Below that is a horizontal multi coloured bar that displays bid ask spread and quantity. It moves right or left depending on the spread/volume. To the right there is a ticker that shows price and volume of the ongoing trades.

Bid/ask price levels are shown in 5 tiers with different colours in the middle of the box.

Below that is where the order are input. Symbol, volume, type of order, stop price, route.

Volume is set at 1000 shares and spins up in 100 share increments when I click on it. Order type is set on market. If I click on any bid ask tier, that price appears as my order price and also changes the default market type order to a limit order.

Route is set to ARCA for NYSE and the ETFs stocks and NSDQ for Nasdaq stocks. Buy, Cancel, Sell, Short buttons are colour coded.

Now when the time is right to place an order it’s always a balancing act as to whether go market or limit order. If I have time I will go limit. If I sense things are about to move fast or are jumping around I will put in a market order. In these days of .01 spreads it is easy just to do market orders all day long. Sure it costs more in fees than limit but I am not left chasing a higher price and missing my opportunity. The penny saved is not worth the dollars lost or the emotional turmoil you can be left with seeing your opportunity fly away from you. I believe when the time is right it is best to act- the momentum will do work for you.

Another important detail is to not screw up your order types. If you have ever put a buy order in when you really wanted to put a short order in you’ll know what I mean. I was trading RIMM a few years ago getting ready to sell the long and go short. I mistakenly bought another chunk of it in a pile driving market. Believe me, the next few moments were exciting, discovering what went wrong and then trying to sell a bunch of stock when the price was going in the toilet.

Order entry is one of those sublime things that is very important yet stays on the fringes of trading. Learning how to do it takes time and the experience of recognizing past mistakes.

Market Language

You’ll notice over on the right of this page there are translation buttons to assist people in making an easier job of understanding what is written here. Click, English to German, Spanish or whatever.

That got me thinking the other day about how easy it appears trading is to beginners versus the reality of it’s possibly the hardest endeavour that you will ever decide to try to learn and become successful at.

“Buy low and sell high right”? That’s the joke you get when people discover what you do for a living. Usually the 2^nd statement from people is “how do you know a stock is going to go up after you buy it?” When I tell them I don’t need to know what a stock will do, they always have a puzzled look on their faces.

Until you immerse yourself in the nuances of the markets movements you can’t really appreciate the amount of knowledge a successful trader needs to absorb to know what’s going on. Then in my view after you learn some things about the market it’s best to not let those thoughts turn into expectations of market movements. For you will be destroyed by your ego when you are constantly wrong in a contest with the market which is never wrong. It just exists and displays information.

So is there an easy way to translate the way the market moves into easy one size fits all definitive trading program? No, because every trader has a different personal constitution, objectives and ideas about what they want out of trading.

Momentum day trading works for me because I have the time to spend actively watching the markets and I want to get the most bang from my buck in the shortest time period. Swing and position trading require another set of beliefs that I don’t have. This has come about because I have narrowed my focus to become a momentum specialist. I’d be fighting against myself if I try to change my trading time frames.

Whatever style of trading you are involved with, it is necessary to be able to read the market and digest that information and then use it to put on a successful trade. While it appears simple on the surface, it is the absorption of numerous small details of market movements that give the clue to the next movement. The real time interpretation and recalculating of odds are what separate the winning trades from the losers. This can only come from experience which is gained from direct psychic injection.

If you think you are lucky to put on a winner or unlucky with a loser, it really has nothing to do with it. You were in the right place at the right time. It takes no skill to put on a single winning trade. You only have to guess buy it or short it. The skill comes on being right over an extended period of time, being a consistent trader and having more winners than losers. The skill comes in conquering your emotions so that you are not affected by the uncertainty of all things market related. The skill comes in managing risk, profit taking, cutting losers so that you can maintain confidence in your system/edge.

I wrote several months ago about how I believe fundamental analysis is useless and the waning usefulness of technical analysis. This is because the information displayed has come from the past and its relevance to the now moment diminishes rapidly due to ever changing world and thus market conditions.

Reading the tape, gathering all the different factors involved in the dynamic market, calculating the probability and correctly acting on those will provide you with a successful translation of market language…profits and knowledge that you have a edge.

Markets are pretty dead with not much moving at the moment.

Gold/energy creeping up a little. May be a good day to cut out early....

TCK

ERX

GG

Pot stalled at the top. Check out doji on 15 minute chart

POT 15 minute chart

POT