A Trade A Day

I am re-reading one of my all-time favorite trading books “Trader Vic - Methods of a Wall Street Master“. Vic talks about a trading idea he had as the result of keeping the books at Lehman Brothers. In turns out that several of the partners were building a sizable position in the stock of Superior Electric. Thinking that the partners at Lehman we’re the smart money, Vic recommended this stock “tip” to one of his friends. I’m sure you can imagine how the story goes. Vic’s buddy put $40k (This is 1966) in the stock and it tanks. Vic feels horrible and on page 8 Vic says something that I’ve forgotten up to this point:

“It’s one thing to manage someone’s money, even a friend’s, on a professional basis; if you lose, it’s just part of the professional agreement. It’s another thing to offer market advice when you think you’re doing people a favor - you usually hurt them more than you help them.”

Vic says point blank:

“Don’t do your friends a favor by offering them unsolicited advice on any market position.”

Lately, I’ve not posted many trading ideas. There are a couple reasons for this, but Trader Vic reminded me of this rule that I had long forgotten. I have to confess, I’m not good at sticking to it. The problem is I love to talk about markets and I love to share my opinions. I would argue that most traders/investors with a few years experience wouldn’t take a stock tip or idea at face value. What I see on a chart may be different than what you see. What may be a good idea to me, may be/is a crappy idea to you.

But I think the combination of stock tip and a less experienced trader is problematic. When I started out and I hit a losing streak, I traded other people’s setups. I had ideas coming from chat rooms and news letters. It was a distraction from what was truly the problem. The problem, in that case, was the perception that my method should be a consistent winner. I hadn’t defined “consistent” properly and didn’t understand that in a loser’s game you lose more than you win. And even if you understand that you lose more than you win, no one starts out thinking they may lose for weeks at a time.

So will I stop posting trading ideas? Probably. In my estimation, the only reasonable caveat is to illustrate a method or concept. What are you thoughts?

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So, I’ve been getting sucked back into day trading. If I am honest with myself and my readers, I don’t want to do it. I think there’s a fundamental flaw with day trading. That flaw is the number of decisions a trader is forced to make. I can make swing trades and make a handful of trading decisions a week. For me, trading less is a risk management technique. I may risk more on an individual trade, but my trades are thoroughly researched, and emotion is better kept in check.

If I’m going to day trade, I’m going to use one setup: The trap. I’ve detailed traps before. Today it worked really well. Let’s look at some examples:

Not a perfect setup on the daily, but I couldn’t ignore the gap this morning.

15mn entry over the HOD/triangle break worked out well. They don’t all run like this.

One other example.

I guess LOW was just “oversold”

Two nice entries depending on your timeframe. I prefer the 15mn, but also trade the 5mn.

Traps don’t happen all the time, and when they do happen, they’re not always tradeable. But if you can be patient and pick your trades carefully, they’re a very reliable pattern. If I can catch a few trades a week, I’m very happy.

The volitility in the market is killing my swing trading, but it’s this erratic market action has helped my intraday trading.

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A little MSM for you reading pleasure:

http://www.cnn.com/2008/POLITICS/03/17/poll.national/index.html

Ok, so how do you know this Recession is going to end. Honestly, it needs to get worse. As far as sentiment goes, when it can’t get any darker, you know the corner is close. It may be 6mo or 2 years, but it’s when everyone feels like there’s no hope. That’s when things start to change.

I don’t really put too much confidence in this CNN poll. I think we could drop for some time. But let’s look at a chart:

We’re in our third wave of selling. It is my experience that the waves beyond the third wave are more prone to failure. I’m not saying we won’t go lower and I’m not saying we’re going to rally.

What I am saying is if you haven’t gotten short by now, I would keep that capital close. There will be another opportunity.

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It gets stated ad nauseam that successful traders control their emotions. Greed and fear cannot enter the decision making process. The reason why traders have trading plans is to mitigate the input of emotions into trading decisions. But I’m not a robot. I’m not a computer that mindlessly buys and sells based on some algorithm.

For a discretionary trader, like myself, the ability to separate emotion from my decisions is a challenge. On the one hand, I have a rule based system that evaluates potential trades and governs my entries and exits, yet I must incorporate the human brain that looks for aesthetically pleasing chart patterns and reminds me of the cool toys I could buy if I exit a winner early instead of following my plan.

Here’s my suggestion for overcoming the emotional trader phase:

Associate trading capital to inventory. If you associate trading capital to some kind of illiquid inventory for your business, the less you will see it as something that could easily have been spent on toys, vacations, or whatever else you may want to do at the moment. I don’t even call money, “money” anymore. I call it trading capital. It takes the picture of a medium of exchange and replaces it with a bulldozer. I’m serious. When I hear “capital” used in a business context, I think of capital expenditures. Those large outlays that businesses make when times are good. For some reason I think of a Catepillar-brand bulldozer. Weird, I know, but it works!

Change how you measure trading success. Ultimately it does come down to how much you have in your bank account, but the daily fluctuations can be so erratic and dramatic that you’re better off associating trading success with the quality of how well you execute your plan. Being focused on following my plan doesn’t stress me out, instead it empowers me to push forward. I get a good feeling at the end of the day when I followed my plan to the letter because I know it works over the long term. One of the worst feelings I have is when my trading plan isn’t followed and I had a great day. I have no idea if what I did to do so well will work in the future. If faced with the same trading situation, should I bend my plan and do it again? I don’t like to answer those questions and feel that kind of pain.

As I stated previously, the ultimate gauge of trading success is the growth of your bank account. The only way to do this is to control your emotions. The only way to do that is to stop thinking like the investment public. Your trading capital is a tool, it can’t be exchanged for anything else and your job performance is graded by how well you follow your trading plan.

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I was having a conversation with another trader yesterday on the subject of trading ideas. What a surprise! Well, we were discussing the merits of a setup he was considering and I did my best to point out, what I considered, to be the merits/faults in this potential trade.

So today, I emailed him and asked if he took the setup. To which he replied that he considered what I said and that he didn’t take the trade. What really bothered me was that he said he may have chickened out too!

Ugh! Being scared is not an option. There are too many well capitalized, seasoned professionals ready to take your money. They have taken a good deal of mine and I’ll be damned if I’m going to let it happen except on my terms.

Look, I’m not Mr. Titanium. I feel fear, but if you feel fear when trading, it’s time to step away from the keyboard for a period of time.

So how do you at least mitigate fear?

Trade with a plan

I know. It sounds cliché, but it’s true. Trading is so much easier on the psyche if every action is orchestrated and planned out. Are there scenarios that occur which I didn’t plan for? Sure, but I thank the market for that piece of wisdom and modify my rules if necessary. I’ll post a sample trading plan in the near future. Suffice it to say that my plan contains the following:

1. What day I will trade
2. What time I will trade
3. What market I will trade.
4. What my risk per trade/day/week/month will be.
5. My entries
6. My exits

Trading plans can get be as robust as you want them, but it doesn’t need to be much more complicated than what I’ve listed above. I also like to include what my mindset will be, what I expect out of a trade, what I expect out of the day, scenarios where I won’t trade…etc.

If you don’t believe you have a well thought out, well researched trading plan. Don’t trade. When those bad days come and bad days turn into bad weeks, a plan is going to give you confidence to keep going. It will give you the structure you need to keep from flip flopping methods, over trading, and ultimately losing your stake.

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