Micro Managing Illness

Have you ever been guilty of micromanaging your trades?
I'm sure the answer is yes.
And what did you do?
Stop trading? Walk away? Close shop?
Bet you did not! And what was your daily result?
An ugly deep, deep red, I'm sure.

Micromanaging means, your heart is in each and every trade. And when your heart is involved, well, then you better make sure, the trade is a winner. Noone likes a broken heart!
Unfortunatly Mr. Market does not care about your or my heart. If you do 10 trades, chances are that 3-5 will be losers. When micromanaging you are most likely guilty of taking early profits, just because you are green and have a small profit. But the losers, where your heart is in can be really damaging, because you let them ride into the disaster stop, you will add to the trade, just to make sure it's no loser, and cling to it while another contract you usually follow offers wonderful trading setups, which you can't take as you first have to make sure the open trade is closed at a profit.
So this micromanaging really is the first step to a disaster day.

I did 10 trades today. I made 133$ profit. Of these were 2 trades on the HSI, which I closed at 3 ticks profit only to see HSI break 100 points right after, that’s 18$ profit vs 625$ profit potential, then I was in 2 Euro trades closed at Breakeven + 1 tick, which were 20 tick potential trades (250$/contract) and 2 losing trades (covered at Breakeven +1, which inspired me to this article), of which one Euro trade was held through 2 news announcements, which went max 40 ticks against me and came back. These 2 trades had the potential to make my day deep, deep red and only hope, luck and a bit of market knowledge saved me from this fate today.

So I wish you all a great weekend and I really hope, I'm over this micromanaging illness on monday.

Become a specialist

Do you trade always the same contract? Are you a specialist?

A lot of trading books for futures traders recommend just that. Trade one contract, learn it’s patterns, become a specialist. For stocktraders (at least stock daytraders) this notion is preposterous. They trade what moves, they scan the stock universe and trade what comes up on the radar screen.

On the other hand I know, that the big companies have specialists, they have one guy to trade MSFT, another to trade CSCO and a third to trade INTC. Being a specialist has advantages, you know how your vehicle moves, you know how far it moves before you can expect a bounce, what the ranges are. A specialist needs one look at the tape to know, whether the stock is moving quite normal or if extraordinary conditions requiring a different trading style are present. A stock hopper will fall into the traps market makers build using their huge resources, a specialist will see and avoid them.

Futures traders are by nature limited to a smaller universe, as there are a lot more stocks than futures to trade. And once you try to limit your trading vehicles you will start seeing the advantages of becoming a specialist. Consitent profitable trading is not about the big home runs, it’s about making sure you are able to make the consistent small profits. And that’s a lot easier if you are a specialist and know exactly how the contract or stock you trade behaves.

Thoughts on Moving Averages

Each and every Moving Average will work from time to time. Moving Averages show an Average. Quite obvious, but when you think a bit more about this statement you might get a better understanding of where moving averages can help you in your trading.
For myself I found that it's not one moving average which provides the Holy Grail, be it a 20_ma, a 34_ma or a 50_ma, but a combination of multiple MA's. I see MA's as tools to define an underlying trend and as providing support or resistance.

The Underlying trend is seen in the angle of a longer term MA. Does it point up on the chart we have an uptrend, is it basically flat, we are consolidating in a range and does it point down we have a downtrend. Simple and obvious, but a lot of traders seem to have a problem with that.

Support and resistance, here I use a combination of MA's and I don't try to pinpoint a specific price, that would be Top or Bottom picking. Instead in an uptrend I expect price to bounce somewhere between my short and longerterm MA. For my trading I use a 20 and a 55ema and I have colored a zone between these 2 MA's, so I don't try to pinpoint the entry. Somewhere between these 2 ema's I expect a bounce if the Downtrend as seen on the Euro chart below is about to continue (The black line is a Line on Close chart btw)

Why a zone? Because MA's are a kind of self-fullfilling prophecy, they work because of human behaviour as a group. We all use different MA's but it doesn't matter what MA we use, if price congests, MA's of different length congest as well, so regardless what MA we use, we all see the same picture. Price is nearing my MA from below and bouncing off = Go Short
It doesn't matter what MA you use, you will see the same picture as seen on my chart. To be reminded of that fact, I color a MA zone and I do the same with the Bollinger Bands btw, as I have seen, that they show a similiar behaviour. It's like price pushing into something soft, but not really giving way and you can expect a reversal. But you won't get it from the standard BB 2,20 bands or the BB 2,34 bands or whatever you use, you will get it somewhere and I just define BB ranges I consider important. A congestion of the bands tell me a lot of people will expect a bounce and if that BB congestion is broken we will see a major move ( As seen on the chart, The BB's were white at 1.2100 and it was a small band, which tells me there is a lot of support and it also tells me shorter BB's are above longer BB's, meaning we have real support now, but the Support broke and all traders who went long on that support covered and added to the downtrend.

Stop Management

2 trades and I got it twice on the chin. Not only were both of my long trades stopped within 3 ticks of the low, no, to make matters worse, to give me the ultimate knock-out: Both trades came back to my entry, within 20 minutes. And I’m not talking about a 5 tick stop, no I’m talking about 20 ticks in the euro respectively 30 ticks in the IBEX35. 2 V moves where I get stopped-out within ticks to the bottom.

I really had no emotional problem with my stops, they were far away when I opened the trades, sure, but I have decided, that using this kind of stop is better for my trading than small stops. That’s fine, that’s the way I trade. And I thought the stops were logical, meaning they made sense. And I already argued with Mr. Market, why it happened today..TWICE.

BUT writing this, I can see, I (again) violated one of my own Stop placement rules. The Stops were not logical, they did not make sense, because they were placed right above Support. I did not consider this, when opening the trades, because I did not really see the Stop getting hit. And when it became a possibility I was unwilling to increase the risk, because moving the Stop beyond Support would have meant moving the Stop against me. Something I had done too often in the past.

So looking back, thinking about my trades I can see, that the 2 V moves aren’t really so unusual at all. Price broke one support level only to be held by the next support level further down and then moving up again. Nothing unusual, actually something absolutly ordinary.

…

Had I not written this today, the shadow these two trades would throw on my further trading would be a lot longer! Why? Because initially the feeling was, Shit, I hate stops, everytime you get stopped, you see the trade come back, totally forgetting all the times, when prices did not come back, when it went just further and further against me.

But now. Now I see I made 2 dumb decisions about my Stop placement. Well, I can live with that. Better someone tells me and I can do something about it, than not knowing at all, that in reality it’s not the market being mean, it’s just myself being dumb. I had to pay for this lesson, That’s the way trading is, that’s the way we get our education. In trading the tuition is not fixed and you don’t know when an installment becomes due. But you will have to pay from time to time.

It’s for us to think about it, to recognise for what we had to pay. Often there is a lesson to be found and if we see it, if we understand it, well then the payment was one well invested.

Without writing this article I would have not seen todays message, instead I would have taken again (for the umpteens time) the wrong, well trotten path to No Stop Trading.

I’m sure glad I have this ability to express myself, to write without knowing what will be the result when the writing is finished. And I can only suggest to you out there:

Try it. Start today after the market. Open a blog and try writing about your trading, what you felt, why you did what you did, why you think something worked or did not work. It might feel difficult in the beginning, in the first few weeks, but I can guarantee you it becomes easier, it will feel like second nature, and maybe sometime in the future you will be able to let your subcontious mind do the writing, having found a way to let it speak to you, so you are able to see, what it is, that really influences you. Only then you will be able to discuss some of these thoughts with yourself.

I did that, when I started writing the 3rd paragraph above. First I felt cheated by the market, was angry, frustrated, but then I could show myself that a Stop in the Euro at 1.2155 (FX) (futures 1.2227) isn’t something very intelligent, when you can expect the Euro to test the 1.2150 level after breaking the support at 1.2175. Same for a Stop in the IBEX35 at 11901. 11895–90 yes that’s ok, 1.2145–37 in the Euro, fine as well, but ..55 or ..01 on longs, that’s just dumb….and recognising this is well worth the money I paid today.

Stop Management

2 trades and I got it twice on the chin. Not only were both of my long trades stopped within 3 ticks of the low, no, to make matters worse, to give me the ultimate knock-out: Both trades came back to my entry, within 20 minutes. And I’m not talking about a 5 tick stop, no I’m talking about 20 ticks in the euro respectively 30 ticks in the IBEX35. 2 V moves where I get stopped-out within ticks to the bottom.

I really had no emotional problem with my stops, they were far away when I opened the trades, sure, but I have decided, that using this kind of stop is better for my trading than small stops. That’s fine, that’s the way I trade. And I thought the stops were logical, meaning they made sense. And I already argued with Mr. Market, why it happened today..TWICE.

BUT writing this, I can see, I (again) violated one of my own Stop placement rules. The Stops were not logical, they did not make sense, because they were placed right above Support. I did not consider this, when opening the trades, because I did not really see the Stop getting hit. And when it became a possibility I was unwilling to increase the risk, because moving the Stop beyond Support would have meant moving the Stop against me. Something I had done too often in the past.

So looking back, thinking about my trades I can see, that the 2 V moves aren’t really so unusual at all. Price broke one support level only to be held by the next support level further down and then moving up again. Nothing unusual, actually something absolutly ordinary.

…

Had I not written this today, the shadow these two trades would throw on my further trading would be a lot longer! Why? Because initially the feeling was, Shit, I hate stops, everytime you get stopped, you see the trade come back, totally forgetting all the times, when prices did not come back, when it went just further and further against me.

But now. Now I see I made 2 dumb decisions about my Stop placement. Well, I can live with that. Better someone tells me and I can do something about it, than not knowing at all, that in reality it’s not the market being mean, it’s just myself being dumb. I had to pay for this lesson, That’s the way trading is, that’s the way we get our education. In trading the tuition is not fixed and you don’t know when an installment becomes due. But you will have to pay from time to time.

It’s for us to think about it, to recognise for what we had to pay. Often there is a lesson to be found and if we see it, if we understand it, well then the payment was one well invested.

Without writing this article I would have not seen todays message, instead I would have taken again (for the umpteens time) the wrong, well trotten path to No Stop Trading.

I’m sure glad I have this ability to express myself, to write without knowing what will be the result when the writing is finished. And I can only suggest to you out there:

Try it. Start today after the market. Open a blog and try writing about your trading, what you felt, why you did what you did, why you think something worked or did not work. It might feel difficult in the beginning, in the first few weeks, but I can guarantee you it becomes easier, it will feel like second nature, and maybe sometime in the future you will be able to let your subcontious mind do the writing, having found a way to let it speak to you, so you are able to see, what it is, that really influences you. Only then you will be able to discuss some of these thoughts with yourself.

I did that, when I started writing the 3rd paragraph above. First I felt cheated by the market, was angry, frustrated, but then I could show myself that a Stop in the Euro at 1.2155 (FX) (futures 1.2227) isn’t something very intelligent, when you can expect the Euro to test the 1.2150 level after breaking the support at 1.2175. Same for a Stop in the IBEX35 at 11901. 11895–90 yes that’s ok, 1.2145–37 in the Euro, fine as well, but ..55 or ..01 on longs, that’s just dumb….and recognising this is well worth the money I paid today.

RULE #1

Never, ever, under any circumstance, should one add to a losing position ... not EVER! (see all the rules at The Big Picture)

A conundrum!
Each and every trading system I have tested has perfomed better, when I allowed adding to  the losing position compared to adding only when the trade was profitable. Actually quite a few systems turned negative the moment I let it add to a winning trade.

Of course it is correct that adding to a losing trade is the first step to disaster and I have lost a few arms and a leg already clinging to hope, while the right thing to do was just cover and reverse.

Let's look at an example and maybe some here can tell me, how they would trade it: Say the contract you trade made a nice move higher and is now in a 15 tick consolidation for the last 5 hours forming a nice and friendly bullish flag. So you "expect" the trend to continue higher and are looking for a long signal.

Prices tested the lower range, bounced, suddenly jump, you get a signal from your system and take the long as it happens just 2 ticks below resistance.
The Stop goes 3 ticks below support which means a 16 tick Stop on this trade. A bit wide, but imho there is no other logical place to put the stop.

Well this trade might work, prices might overcome resistance, having consolidated for 5h and decide to go up further. And assume that eventually prices will do exactly that...but not this time. Resistance holds and it's down again to support, for just another bounce. You, being not the dumb newbee, have placed your stop a few ticks below support and are not stopped out, even if support was broken by 2 ticks and you see yourself 15 ticks down. On 3 contracts, your regular trading size, that can be expensive, and just waiting for one hour before the breakout really happens will cost you a lot of mental energy.

So why don't you trade it differently:
Why no Scale In,
Why not enter the initial trade with 1 contract long, add another one at the middle of the range and add the last one 1 or 2 ticks above support. The first trade has a 16 tick stop, the second one in the middle of the range a 10 tick stop and the last one a 5 tick stop.
That means the Stop on the whole trade remains always 3 ticks below support, you make sure you get a bit of the cake, if the breakout happens right away, and if not, this technique actually saves you 17 ticks if stopped compared to the first example where you enter with the full position right away.

Just that this Scale-In is made into a losing position and it therefore violates Rule #1 or
does it really, if  the Stop remains the same.

As I said I already got my marks from violating Rule #1, so even if this Scale-In looks good, I'm always second guessing myself before I apply it. On the other hand, applying it makes for a very relaxed trading, so somehow it seems to be a technique my sub-contious mind likes. And one of the reasons is, that you no longer try to catch a top or bottom, try to pinpoint the exact entry, but work your position until being fully committed.

So if some traders reading this rather long post could tell me how they do it, I would really appreciate it.

Chart Pattern Book

Regardless what type of trader you are. If you use Technical Analysis in your trading I would suggest you start a chart pattern book (if you havn't done so already). Every time you encounter a great setup in realtime, you make a screenshot and copy it in your chart pattern book. Add some remarks, if necessary and over time you will get a great resource of patterns you consider worth trading.
It doesn't matter if you took the trade or not, but I would suggest you only copy patterns in your book, which you have seen develop in realtime. Thing is a pattern often looks very clear in hindsight, but you need to learn the price behaviour when your pattern is forming, so you will be able to recognise it, when you encounter it again in the future