Month: July 2014

Losses are important in trading

Pullbacks are important for the market. They serve to flush out rampant optimism and reminds everyone of risk. People who think about risk make educated decisions. It keeps the market efficient. A market that continues without pause creates an imbalanced demand and supply equation. People feel comfortable buying higher and higher, people forget about risk and everyone is long from overvalued prices.

When the market finally corrects, it tends to be much quicker and much more fierce. If everyone is long, who is left to buy when the market finally drops?

Your equity curve is like a stock chart, you need pullbacks along the way. Why? Because those are when the real lessons are learned. Losses reminds us of risk, it refocuses our attention on the type of game we need to play in to win in the long run. Losses motivate us to research more, to think more and to correct our mistakes.

Compare this to what winners do for us mentally and emotionally. Winners make us complacent, cocky, arrogant, maybe even lazy. We feel we know everything there is to know about the market. We give ourselves the “I made it!” speech. After all, who needs to research when we are already making money, right?

I guess what I am trying to say is embrace losses. If you embrace them, you won’t fear them. If you don’t fear losses, you can take them naturally and not let them get out of control. This is more of a reminder to myself than to any of you. But if you find it helpful, well that’s cool too.


ES Gap fill and hold until close trade

Stats for the day were bullish, high chance of gap fill and closing above the open. I entered long a few minutes after ES open and experienced a pretty big draw down (comparable to my profits). I was still confident in the trade. Even if the market did not fill the gap, it should close above the open.

I would normally hold for the entire gap fill, however, because ES dropped so much (compared to the average range), I thought it would be difficult for the market to rally much further. In my experience, complete reversals are not that common. As you can see, my extincts proved accurate for the day as the market essentially closed where I cut.

This trade honestly had a terrible entry, I’ll try to do better next time.




YM gap fill trade and nq odds

Stats for the morning trade was bullish, signaling a gap fill for the NQ and the YM. I usually don’t trade all my stats, there really is no point to since most of the indices are highly correlated and I can make up for it by using size. Today I chose the YM over the NQ because it was a bit more bullish. Based on the YM’s configuration of the past few days, it had a 70% chance of closing above previous lows in addition to the gap fill. I took the long a few minutes after the open and exited just before the gap filled.



Trading and discomfort

I cut winners early because I want to lock in a profit.

I hold on to losers because I don’t want to realize a loss.

I ignore system trades when “feeling” afraid, only to see those trades win.

But, this is not a defect of my personality (or yours). Centuries of survival instincts have made the human mind very irrational when dealing with matters of money. These same irrational money tendencies have been studied in apes which imply that risk/reward instincts stem from a very ancient and un-evolved portion of the brain.

When dealing with issues of survival, information bypasses the logical thinking and shoots straight to the fear center, otherwise known as the fight or flight center located in the amygdala. The same instincts that keep us safe ironically makes trading a very dangerous profession for the the uninitiated. Emotional impulses desperately seeking comfort and security hinders the ability to make logical risk decisions. We can’t take a loss because it goes against untrained human nature.

This means that proper trading is very difficult. Usually the correct trading decisions are very uncomfortable as they stand against the mind and body’s natural urges. Traders must suppress a lot of their instincts and intuitions to make money. A lot of what “feels” right in the market is completely wrong.

The good news is that due to neural plasticity the brain can be trained with focused practice. As martial artists train and build new connections, it forces the brain to adopt new automatic emotional and physical responses when faced with certain kinds of stress.

Indeed, it can be done but you need focused and dedicated practice, and most importantly, time. Simply understanding “how to trade” is not enough, you need enough experience and practice that your brain carves out new pathways.

If you are struggling, don’t rush it. Make sure you have enough capital to sustain through the learning curve. Adopt good processes and practice, practice, practice. Eventually your brain will adapt, as it was designed to do.


NQ and CL futures day trading odds

Odds today were for the CL and NQ futures, I tweeted these out in the morning but did not have the time to place trades like I normally do.

NQ: High chance of a gap fill, and if we break previous day’s low, stats were suggesting an early morning fade and an afternoon buy the dip.



While the NQ didn’t quite close back above the lows, the bounce was large enough to produce profits. The gap filled worked out fine.

 CL: CL had a good chance of closing above the open. After a slow grind lower, CL put in an afternoon bottom to make new intraday highs by the close.



Crude Oil Buy the Low Odds

Stats for crude oil was bullish today. There was an overwhelming chance of closing above the open AND closing above previous close (close green on the day). I waited for a pullback and scaled in long using the USO ETF while using CL futures as a price action guide. The stats for the day worked out pretty much immediately. I held until CL close and exited for a nice profit.






Odds for this NQ trade were bullish, however, there was a high chance of a gap fill. I waited for that minimum requirement to occur before getting long. Why get long before the gap fill if we know there is a high chance? Once it filled, and I saw the VSA, I entered. I exited before the previous highs since only 55% odds of closing above.

I could have reentered later in the day, but I didn’t. This is mostly a lack of discipline, I didn’t want to lose my profit for the day. But I need to remember: when odds are there, just take the trade. You cant predict which trade will win or lose.