My Training

Getting up early on Saturday morning sucks. Even though now that I've programmed myself to wake up early I still like to sleep in on Saturdays for an extra few hours. This Saturday was different though because we were having someone coming in to do some training for our office. I don't know exactly when I started following Brett's blog, maybe about a year ago or whenever he was a guest on Horowitz' podcast. I was really drawn to his perspective and what he was writing about trading from a psychological standpoint and the different technical indicators he used. Having read a lot of material on the human mind while I was doing sales I was pretty excited about his presentation and meeting him.

I took 7 pages of notes... yeah, I think I'll break up into sections. There were some really good stuff. I wish we did this more often. I'll start on what we talked about in our group break out sessions.

On being extremely profitable:

• There are no extremely profitable as opposed to the consistently profitable. The extremely profitable takes on excessive risk and when they go into a slump they become extremely unemployed.
  
• The best traders study and work on themselves, even when they're on top of their games.
  
• Video tape, review and prepare for the market each day.
  
• How much time you spend in front of the screen internalizing and focus on the market is going to make a difference in the long run.
• You have to be constantly learning from others, always changing, improving
• There's a difference between people who work hard to trade for a living and those who trade to not have to work hard for a living (he lost me a little bit here... I think I was too busy writing)

On expanding trading:

• Expand into different markets, different time frames and different set ups.
• When expanding, play it with the smallest size you can
• Eventually you'll always have a couple of things working for you
• In general, learn how to trade one time frame larger (I think I have stretched a lot more into the 4-10 min. time frame so I'd be looking for set ups that I can hold into the 10-20 min. time frame)

On greatest mistakes traders make:

• Not knowing what they're good at
• Not sizing up enough when they're seeing the market well
• Size up to a point where you won't ruin your whole day if you are wrong or whole week.
• In general, size up 10% more at a time
• 20 to 1 max to min ratio depending on when you know you are right or not sure at all

On dealing with slumps:

• Trade small size
• You won't know at first if it's just temporary but at some point you have to reign in your size
• Identify what's a normal slump so you won't get super worried when it happens
• Do not get more aggressive
• Focus on your core competency

I had to ask a side question. I've read a lot of William James material about the link between our thoughts and our action. In sales they've always told us that action cures fear, but I tend to think if you're having problems it's easier to cure the mind first. I've asked other people this question before: Should we try to act our way into healthy thinking or think our way into healthy acting. In other words, should we trade our way into healthy thinking again when we're in a slump or think our way into healthy trading. Eric from the Quant Team falls under the healthy thinking then acting camp, Steenbarger said that both sides are valid but it seems that he's in the camp of trade your way into healthy thinking, as in trade very small to regain your confidence and then once you're back, increase your size back up. I suppose this is no different from major league baseball players going back down to AAA or AA league to build themselves back up.

We talked a little bit more about having a plan compared to being stubborn when the plan is not working. Brett believes that when you're formulating a plan, you mentally rehearse for the different scenarios. I guess in a sense he was saying there's no way to be stubborn if you've already accounted for every scenario and what you are going to do in each case.

When the topic about the change in the market in 2009, Brett told us that the best thing we can do is to share what's working. You have to constantly process new information, whether it's through reading or listening and talking. Whichever method works for you best is what you should do.

In closing, Brett encouraged us to focus on the process and the money will eventually come. Learn to process your thinking in a different way and learn to love your losing trades b/c they will teach you something either about yourself, the market or the set up you're trading. You are who you are as a person and the trader side will reflect that as well. Learn to accept it, appreciate it, and love it because you can change it. I wish someone had told me this when I was like 16-years-old. I don't think I became fully comfortable in my skin until I was like 21 or 22.

My Conversations

My conversation with David didn't turn out to be as beneficial as I had hoped but there were still some good stuff there. I didn't want to spend too much time talking about trade ideas or set ups because I personally felt that at this point the focus is on some of the more intangibles and mental aspect of the game. I wanted to figure out how to try to get to that next level, but I didn't hear anything new really. That is not a negative really, b/c it just reinforces some of the previous conversations I've had.

David's advice was to try new things, especially options and on small enough of a scale where I wouldn't care if I was wrong b/c the damage would be very minimal. I wanted to short SKF when it was way up high but we couldn't locate shares, I wish I had thought about selling some calls or buying a few puts. Next time, next time. One other thing I had to ask him was about what he was doing pre-market, which I didn't get the time to probe too much and I don't want to disclose his secret to everybody but it has to do with industry wide overall... how's that?

Next thing to work on is to scale my trading, meaning that either trade more shares of what works for me or in a different way or different industries. This led me to set up a lot more other link transformers for different stocks in the same industries that trade together or at least some what correlated. Another thing is to find a strategy that would work consistently enough for auto trading.

I've also try to take the initiative to talk to some of the newer traders, especially in our pod. Personally I felt like nobody to talk to when I first started. Only when I'm feeling extremely frustrated I'd go talk to Lawrence or Nick. In coaching them, I'm coaching myself a little bit as well. Because if I'm telling them to maintain their discipline or be patient and follow their trading rules then I better follow through on my end and be an example to them.

One of the rookies in particular... I won't name names but I'm beginning to be a little be frustrated b/c it's not necessarily he won't listen, it's just that I feel there are things he has convinced himself to be the truth when it's not really the case. I actually spent some time chatting with him after we played volleyball on Tuesday. Just so you know, by the time we were done it was about 11:40pm already and by the time I got into my car it was like 12:40am. He was incredibily frustrated and was just kind of beaten up. I'd say probably the first 40, 45 minutes or so was just me listening, relating to him. Finally it got to a point he was just whining way too much and I had to switch gears on him and tell him to pick up his skirt and go to work. Yeah, I actually did say that. Mr. Nice Guy approach wasn't getting through to him so I had to try something a little different. I told him that he knows how to trade and how to make money but he was letting little things stand in his way.

I think I'd be a good coach... I really do. I just need to get my production level up there and consistently to be nominated. A day at a time, a day at a time. I'm shooting to get there by end of May or the end of summer.

Trading in the Zone Recap

I just finished reading Mark Douglas' Trading in the Zone. It took me way too long to finish the book. The Dale Carnegie class started when I was in the middle of the book so I started reading for the class instead and I didn't really pick up Douglas' book again for a while. Plus, I just have to say that this book is pretty deep. There are time I felt like I was Neo from The Matrix reading something Morpheus wrote. It's in English and I understand the words but when they're put together I can't seem to understand them sometimes. It's like the author is using one string of long and complicated thought to explain another long and complicated thought.

Despite that, I'd still recommend the book. It talks about trading on a psychological level, which is something that I need to read at the moment. The main idea of the book is to get over the fear or other negatively charged energy that we have and trade in a state of mind where we're not scared of losing money or get upset if a trade doesn't work out, but instead treat trading as a series of probabilities. You can achieve consistent result if you identify what is your edge and have good risk reward, therefore if you win only say 50% or 60% of the time but you have a 3:1 or 2:1 risk reward you're going to make money consistently.

Here are the quotables from the book:

The defining characteristic that separates the consistent winners from everyone else is this: The winners have attained a mind-set --- a unique set of attitudes --- that allows them to remain disciplined, focused, and, above all, confident in spite of adverse conditions. As a result, they are no longer susceptible to the common fears and trading errors that plague everyone else.

I don't think I could put the difference between the consistent winners and everyone else more simply than this: The best traders aren't afraid. They aren't afraid because they have developed attitudes that give them the greatest degree of mental flexibility to flow in and out of trades based on what the market is telling them about the possibilities from its perspective. At the same time, the best traders have developed attitudes that prevent them from getting reckless. Everyone else is afraid, to some degree or another. When they're not afraid, they have the tendency to become reckless and to create the kind of experience for themselves that will cause them to be afraid from that point on.

So if you are afraid of being wrong or losing money, it means you will never learn enough to compensate for the negative effects these fears will have on your ability to be objective and you ability to act without hesitation. In other words, you won't be confident in the face of constant uncertainty. The hard, cold reality of trading is that every trade has an uncertain outcome. Unless you learn to completely accept the possibility of an uncertain outcome, you will try either consciously or unconsciously to avoid any possibility you define as painful. In the process, you will subject yourself to any number of self-generated, costly errors.

... It will feel like you can't trust the markets; but the reality is, you can't trust yourself.

Trading can be characterized as a pure, unencumbered personal choice with an immediate outcome. Remember, nothing happens until we decide to start; it lasts as long as we want; and it doesn't end until we decided to stop. All of these beginnings, middles, and endings are the result of our interpretation of the information available and how we choose to act on our interpretation. Now, we may want the freedom to make choices, but that doesn't mean we are ready and willing to accept the responsibility for the outcomes. Traders who are not ready to accept responsibility for the outcomes of their interpretation and actions will find themselves in a dilemma: How does one participate in an activity that allows complete freedom of choice, and at the same time avoid taking responsibility if the outcome of one's choices are unexpected and not to one's liking?

The hard reality of trading is that, if you want to create consistency, you have to start from the premise that no matter what the outcome, you are completely responsible. This is a level of responsibility few people have aspired to before they decide to become traders. The way to avoid responsibility is to adopt a trading style that is, to all intents and purposes, random. I define random trading as poorly-planned trades or trades that are not planned at all. It is an unorganized approach that takes into consideration an unlimited set of market variables, which do not allow you to find out what works on a consistent basis and what does not.

The best traders think in a number of unique ways. They have acquired a mental structure that allows them to trade without fear and, at the same time, keeps them from becoming reckless and committing fear-based errors.... the bottom line is that successful traders have virtually eliminated the effects of fear ad recklessness from their trading. These two fundamental characteristics allow them to achieve consistent results.

The consistency you seek is in your mind, not in the markets. It's attitudes and beliefs about being wrong, losing money, and the tendency to become reckless, when you're feeling good, that cause most losses--not technique or market knowledge.

It's when you're winning that you are most susceptible to making a mistake, overtrading, putting on too large a position, violating your rules, or generally operating as if no prudent boundaries on your behavior are necessary. You may even go to the extreme of thinking you are the market. However, the market rarely agrees, and when it disagrees, you'll get hurt. The loss and the emotional pain are usually significant. You will experience a boom, followed by the inevitable bust.

What separates the best traders from everyone else is not what they do or when they do it, but rather how they think about what they do and how they're thinking when they do it.

If your goal is to trade like a professional and be a consistent winner, then you must start from the premise that the solutions are in your mind and not in the market. Consistency is a state of mind that has at its core certain fundamental thinking strategies that are unique to trading.

You can't rely on the market to make you consistently successful, any more than you can rely on the outside world to make you consistently happy. People who are truly happy don't have to do anything in order to be happy. They are happy people who do things.

The best traders stay in the flow because they don't try to get anything from the market; they simply make themselves available so they can take advantage of whatever the market is offering at any given moment.

The threat of pain generates fear, and fear is the source of 95 percent of the errors you are likely to make.

Risk is relative, but to the person who perceives it in the moment, it seems absolute and beyond question. when the child encountered his first dog, he was bubbling with excitement and curiosity. What is it about the way our minds think and process information that could automatically flip the boy into a state of fear the next time he encounters a dog, even if it's months or years later.

If there is such a thing as a secret to the nature of trading, this is it: At the very core of one's ability 1) to trade without fear or overconfidence, 2) perceive what the market is offering from its perspective, 3) stay completely focused in the "now moment opportunity flow," and 4) spontaneously enter the "zone," it is a strong virtually unshakable belief in an uncertain outcome with an edge in your favor.

Not predefining your risk, not cutting your losses, or not systematically taking profits are three of the most common--and usually the most costly--trading errors you can make. Only the best traders have eliminated these errors from their trading. At some point in their careers, they learned to believe without a shred of doubt that anything can happen, and to always account for what they don't know, for the unexpected.

When you've trained your mind to think in probabilities, it means you have fully accepted all the possibilities (with no internal resistance or conflict) and you always do something to take the unknown forces into account. Thinking this way is virtually impossible unless you've done the mental work necessary to "let go" of the need to know what is going to happen next or the need to be right on each trade. In fact, the degree by which you think you know, assume you know, or in any way need to know what is going to happen next, is equal to the degree to which you will fail as a trader.

In what way does a trader have to learn how to be rigid and flexible at the same time? The answer is: We have to be rigid in our rules and flexible in our expectations. We need to be rigid in our rules so that we gain a sense of self-trust that can, and will always, protect us in an environment that has few, if any, boundaries. We need to be flexible in our expectations so we can perceive, with the greatest degree of clarity and objectivity, what the market is communicating to us from its perspective. At this point, it probably goes without saying that the typical trader does just the opposite: He is flexible in his rule sand rigid in his expectations. Interestingly enough the more rigid the expectation, the more he has to either bend, violate, or break his rules in order to accommodate his unwillingness to give up what he wants in favor of what the market is offering.

A probabilistic ind-set pertaining to trading consists of five fundamental truths:
1) Anything can happen
2) You don't need to know what is going to happen next in order to make money
3) There is a random distribution between wins and losses for any given set of variables that define an edge
4) An edge is nothing more than an indication of a higher probability of one thing happening over another
5) Every moment in the market is unique

The best traders are in the "now moment" because there's no stress. There's no stress because there's nothing at risk other than the amount of money they are willing to spend on a trade. They are not trying to be right or trying to avoid being wrong; neither are they trying to prove anything. If and when the market tells them that their edges aren't working or that it's time to take profits, their minds do nothing to block this information. They completely accept what the market is offering them, and they wait for the next edge.

Consistency is the result of a carefree, objective state of mind, where we are making ourselves available to perceive and act upon whatever the market is offering us (from its perspective) in any given "now moment."

To remove the sense of threat, you have to accept the risk completely. When you have accepted the risk, you will be at pace with any outcome. To be at peace with any outcome, you must reconcile anything in your mental environment that conflicts with the five fundamental truths about the market. What's more, you also have to integrate these truths into your mental system as core beliefs.

When you really believe that trading is simply a probability game, concepts like right and wrong or win and lose no longer have the same significance. As a result, your expectations will be in harmony with the possibilities.

When you believe at a functional level that every edge has a unique outcome (meaning that it's a dominant belief without any other beliefs arguing for something different), you will experience a state of mind that is free of fear, stress, and anxiety when you trade. It really can't work any other way. A unique outcome is not something we have already experienced, therefor it is not something we can already know. If it were know, it could not be defined as unique. when you believe that you don't now what is going to happen next, what exactly are you expecting from the market? If you said "I don't know," you are absolutely right. If you believe that something will happen and that you don't need to know exactly what that something is to make money, then where's the potential to define and interpret market information as threatening and painful? If you said "There is none," you are absolutely right again.

If you are not experiencing the quality of mental freedom and it is your desire to do so, then you must take an active role in training your mind to believe in the uniqueness of each moment, and you must de-activate any other belief that argues for something different.

If you asked me to distill trading down to its simplest form, I would say that it is a pattern recognition numbers game. We use market analysis to identify the patterns, define the risk, and determine when to take profits. the trade either works or it doesn't. In any case, we go on to the next trade. It's that simple, but it's certainly not easy. In fact, trading is probably the hardest thing you'll ever attempt to be successful at. That's not because it requires intellect; quite the contrary! But because the more you think you know, the less successful you'll be. Trading is hard because you have to operate in a state of not having to know, even though your analysis may turn out at times to be "perfectly" correct. To operate in a state of not having to know, you have to properly manage your expectations. To properly manage your expectation, you must realign your mental environment so that you believe without a shadow of a doubt in the five fundamental truths.

When it comes to personal transformation, the most important ingredients are your willingness to change, the clarity of your intent, and the strength of your desire. Ultimately, for this process to work, you must choose consistency over every other reason or justification you have for trading

What separates the "consistently great" athletes and performers from everyone else is their distinct lack of fear of making a mistake. The reason they aren't afraid is that they don't have a reason to think less of themselves when they do make a mistake, meaning they don't have a reservoir of negatively charged energy waiting to well up and pounce on their conscious thought process like a lion waiting for the right moment to pounce on its intended prey.

Self-discipline is a technique to create a new mental framework. It is not a personality trait. People are born with self-discipline.

Beliefs can be changed, and if it's possible to change one belief, then it's possible to change any belief, if you understand that you really aren't changing them, but are only transferring energy from one concept to another

sub-beliefs building blocks that provide the underlying structure for what is means "to be a consistent winner."
1) I objectively identify my edges
2) I predefine the risk of every trade
3) I completely accept the risk or I am willing to let go of the trade
4) I act on my edges without reservation or hesitation
5) I pay myself as the market makes money available to me
6) I continually monitor my susceptibility for making errors
7) I understand the absolute necessity of these principles of consistent success and therefore, I never violate them.

Conversation with Jon

I met with another HP on Tuesday and watched him trade for a little bit on Wednesday. I really should probably bring a pen and a pad with me the next time b/c some of the stuff we talk about is really valuable and I can't rely strictly on my memory, especially trying to recall almost a week after.

Jon's been trading for about three years now. He was actually neighbors with my coach when Lawrence started. What really surprise or impress me sometimes is how nonchalant he is. Some traders I've met or talk to they're really competitive or they get upset sometimes when they lose money. Jon seems completely confident in his ability, even if he had bad trade he knows he can make it back (that's my impression at least). We talked about this one bad trade which led to the worst day of his career and how he lost a lot of money shorting JRCC as the stock went from $4 to I think $60 and the entire he just has the expression that it was no big deal, you live and learn.
Apparently Jon had done something similar to what I'm doing with another trader. They wanted to interview the top traders out on the floor and publish some kind of magazine (for internal circulation?). He said that one of the top traders told him that it's ok if you lost a lot of money for the day as long as you learned something. It's only a bad day if you've waste the day.

As a trader, Jon says he'll trade just about anything. He'll be in tons of different stocks and some longer term trades. It seems Jon is making a conscious effort to improve his longer term trading as he's made goals in that area. I would love to stretch out my timeline as well once I've established that I'm good at one thing to build the confidence and increase my risk appetite like some of the HP's have. Jon says he typically gets in about 6:45am and scans the IDB headlines and if there's anything that interests him he'll read more in-depth.

The biggest takeaway for me is probably to watch the float and short interest, which I already kind of do but probably doesn't pay attention to it that much and maybe it's more for longer term plays.

Conversation w/ Mike

So I started this thing where I'm taking an HP out for drinks each week. This week was Mike and I already got Jonathan lined up for next week. Mike also told me Anthony would be a good one to talk to as well and that would be pretty easy since he was one of the guys that did the round robin interviews with me.

Mike is predominantly a momentum trader and he gets in big size when he likes what he sees. It doesn't seem like he does anything too special preparation wise for the day, just spending some time watching bloomberg and reading WSJ in the morning. He also uses Thompson I think for more technical levels, which I might have to ask some follow up questions on that.

Since Mike trades a lot bigger size, which obviously I'm not there yet but it's something to think about as my position size gets bigger, he usually doesn't play some of the ETF's he trades unless it's got 1.5 times the average volume for the day. He also watches the NAV. I tried watching it thinking maybe the ETF will converge back with the NAV or have some other theories but basically b/c I couldn't find anything conclusive to validate my theories I stopped watching the NAV but now I think I'm going to pull it up on one of my tapes and see the trend the NAV is making. I don't suspect it'll make a drammatic effect in my trading but it's just another indicator for me to get in/out quicker or judge my position size. Mike also says he uses the NAV for some pre market trading, like couple minutes before the market opens and there are programmed ECN's coming in. If futures gapped up/down big, like 15 points then he'll try to play it and get hit close to yesterday's close.

We also spend some time talking about flipping a trade, which is something I have thought about but when you're in an actual trade and you've just lost money on you sometimes don't think about flipping it to go the other direction or you think you're revenge trading, but if something is breaking the trend then get out and flip to go the other way is one strategy, or if you're getting in front of a big size and that big size is getting hit, go ahead and take your out and flip the other way b/c chances are other people are trying to get out, too.

I also ask him how they're trading BRK shares and really it's no different from any other stock in that it moves in correlation to the futures and the A shares correlate w/ the B shares. The value is a lot higher but you're trading 1 or 10 share lots so the spread is really not that bad. Maybe the next time there's an imbalance I'll play it to get my feet wet b/c otherwise it looks really scary. There are other guys in the office that play a lot of the high dollar stocks like WPO, MKL, Y, SEB, WTM but I don't think I'm there yet, even if Mike says there's some really good money to be made in them.

Mike's imbalance strategy seems a little different from what our pod does. He seems to be getting in big size almost right before the close and then put limit order out just a few cents away to ensure that he'll be able to get out

Other than that, I think I'm on the right track. Some of my strategy are pretty similar to what Mike does so that does make me feel better. What I need to work on is just making good trades and gradually get in more size, like 100 or 200 shares more at a time to increase my comfort level.

Market Wizards: Steve Cohen

Most traders make money only in the 50 to 55 percent range. That means you're going to be wrong a lot. If that's the case, you better make sure your losses are as small as they can be, and that your winners are bigger.

I always tell my traders, "If you think you're wrong, of it the market is moving against you and you don't know why, take in half. You can always put it on again." If you do that twice, you've taken in three-quarters of your position. then what's left is no longer a big deal. I find that too many traders just stand there and let the truck roll over them. A common mistake traders make in shorting is that they take on too big of a position relative to their portfolio. Then when the stock moves against them, the pain becomes too great to handle and they end up panicking or freezing.

[Another mistake people make is that] They make trades without a good reason. They step in front of freight trains. They short stocks because they are up, as if that were a reason. They'll say, "I can't believe the stock is so high," and that's their total research. That makes no sense to me. My response is: "You have to do better than that." I have friends who get emotional about the market. They fight it. Why put yourself in that position.

You trade your theory and then let the market tell you whether you are right.

I felt that the inability of some traders to achieve success was usually due to personal flaws rather than a consequence of bad ideas versus good ideas. All traders have something holding them back.

Market Wizards: John Bender

There are a lot of similarities between gambling and trading, although gambling is a bad term because it implies that your results depend on luck. The people that I'm talking about look at poker or backgammon as a business, not a game of chance. There are a few things that are essential to success in both trading as well as playing gambling games as a business. First, you have to understand edge and maximize your edge. Second, you have to be able to deal with losing. Third, you have to understand gambler's ruin---not playing too big for your bankroll. As a professional gambler or as a trader, you are constantly walking the line between maximizing edge and minimizing your risk of tapping out.

Stock Market Wizards: Mark Minervini

• The fruits of your success will be in direct ratio to the honesty and sincerity of your own effort in keeping your own records, doing your own thinking, and reaching your own conclusions.
• Being wrong is acceptable, but staying wrong is totally unacceptable. Being wrong isn't a choice, but staying wrong is.
• Understand that you will always make mistakes. The only way to prevent mistakes from turning into disasters is to accept losses while they are small and then move on
• Concentrate on mastering one style that suits your personality, which is a lifetime process. Most people just cannot weather the learning curve. As soon as it gets difficult, and their approach isn't working up to their expectations, they being to look for something else. As a result, they become slightly efficient in many areas without ever becoming very good in any single methodology.
• You need to have a plan for every contingency... ... ... The most important contingency plan is the one that will limit your loss if you are wrong. Beyond that, you need a plan to get back into the trade if you're stopped out.
• Many amateur investors get sloppy after gains because they fall into the trap of thinking of their winnings as the "market's money," and in no time, the market takes it back. It's your money as long as you protect it.
• You don't have to make all-or-nothing decisions. If a stock is up and you're unsure what to do, there's nothing wrong with taking profits on part of it.
• Don't let your ego get in the way
• Don't allow yourself to be influenced by what other people think
• Many people approach investing too casually. They treat investing as a hobby instead of like a business; hobbies cost money.
• None of this is a black box. You have all these people trying to come up with formulas to bea the market. The market is not a science. The science may help increase the probabilities, but to excel you need to master the art of trading

Stock Market Wizards: Steve Watson

So I actually looked up this Steve Watson guy online... for some reason I find the idea of working for guys like this appealing. What he does, much similiar to other Lynch-istonians is look for a catalyst. He'll look for a catalyst to get long or the removal of a catatlyst to short. He often focuses on small caps b/c he feels he can get an edge. What he did that I found absolutely amusing was that he would call up the CFO's of these small cap companies or even call up their competitors, customers, suppliers to try to gain some information and edge on the street.

Stock Market Wizards: Stuart Walton

• Be patient--wait for the opportunity
• Trade on your own ideas and style
• Never trade impulsively, especially on other people's advice
• Don't risk too much on one event or company
• Stay focused, especially when the markets are moving
• Anticipate, don't react
• Listen to the market, not outside opinions
• Think trades through, including profit/loss exit points, before you put them on
• If you are unsure about a position, just get out
• Force yourself to trade against the consensus
• Trade pattern recognition
• Look past tomorrow; develop a six-month and one-year outlook
• Prices move before fundamentals
• It is a warning flag if the market is not responding to data correctly
• Be totally flexible; be able to admit when you are wrong
• You will be wrong often; recognize winners and losers fast
• Start each day from last night's close, not your original cost
• Adding to losers is easy buy usually wrong
• Force yourself to buy on extreme weakness and sell on extreme strength
• Get rid of all distractions
• Remain confident--the opportunities never stop

"Either go at it full force or don't go at it at all. Don't dabble."

My Conversation with an HPT

We had to move our whole pod to a different location today since we were expanding and running out of space. It's kind of weird because there's all this space between Pat and me now reserved for the two rookies that are coming out to the floor soon. It's kind of weird... b/c now I'm not the rookie on the team anymore. As in, starting next week I'm going to have people asking ME questions. Snap!

I've been feeling like I'm plateauing lately. Some of it might has to do w/ the fact that February has been kind of slow. The other might have to do with the transition into more share size. It's not rare for me to take a 1,000 shares of EEM at times now. I think I took 1,500 shares once today and I shorted 1,000 shares of UNH today. Thank god I didn't get burned on that UNH. Even though I felt like it was really going to die and shorted strong into it I didn't mean to take that many shares. The thing dropped a point but then bounced hard for two and a half.


I wanted to talk to more HP traders (HP = $150,000+ in the past 12 months) and it was natural to start with David, my coach's coach. I should do this more than I have in the past. Maybe like one HP per month, just take them out to lunch or happy hour. There were quite a few things on my mind, mainly just frustrated with improving and usually Davi'd response was "it takes time." Not exactly what I wanted to hear, but maybe that's really it... there's no magic, no trick. If you put in the time and due diligence you will get what you deserve in return.


David's been trading MOO a lot lately and of course I asked him what's the kind of play he's making on that. I also happen to see someone had a spreadsheet of bunch of ETFs and looks like they're making plays off of their IVs. I think I'm going to try to do something similar.


Some takeaways from our conversation:


Once you have something that you do well, then either do it with more size or more often and you'll do better (for me that would be EEM right now. I'm kind of eager to see what Jane has to say from her analysis tomorrow)

If you put an order out and you're getting hit really quick then you're probably getting out too early

You do want to push yourself a little bit. Just slowly increase your share size to a little bit beyond your comfort zone but not so much where you're scared.

Market Wizards: Final Word

Common demoninators

All those interviewed had a driving desire to become successful traders---in many cases, overcoming significant obstacles to reach their goal.

All reflected confidence that they could continue to win over the long run. Almost invariably, they considered their own trading as the best and safest investment for their money.

Each trader had found a methodology that worked for him and remained true to that approach. is is significant that discipline was the word most frequently mentioned.

the top traders take their trading very seriously; most devote a substantial amount of their waking hours to market analysis and trading strategy.

Rigid risk control is one of the key elements in the trading strategy of virtually all those interviewed.

In a variety of ways, many of the traders stressed the importance of having the patience to wait for the right trading opportunity to present itself.

The importance of acting independent of the crowd was a frequently emphasized point.

All the top traders understand that losing is part of the game.

They all love what they are doing.

Market Wizards: Mark Weinstein

Always do your homework.

Don't be arrogant. When you get arrogant, you forsake risk control. The best traders are the most humble.

Understand your limitations. Everyone has limitations---even the best traders

Be your own person. Think against the herd, as they must lose in time.

Don't trade until an opportunity presents itself. Knowing when to stay out of the markets is as important as knowing when to be in them.

Your strategy has to be flexible enough to change when the environment changes. The mistake most people make is they keep the same strategy all the time. They say, "damn, the market didn't behave the way I thought it would." Why should it? Life and the markets just don't work that way.

Don't get too complacent once yyou have made profits. The toughest thing in the world is holding on to profits. That is because once you have attained a goal, you then set a second goal that is usually the same as the first one: to make more money. Consequently, for many people, attainment of that second goal is not as rewarding. They may begin to question what they really want from trading and trigger a self-destruct process in which they wind up losing.

You have to learn how to lose; it is more important thant learning how to win. If you think you are always going to be a winner, when you lose, you will develop feelings of hostility and end up blaming the market instead of trying to learn why you lost.

Market Wizards: Gary Bielfeldt

You don't just play every hand and stay through every card, because if you do, you will have a much higher prbability of losing. You should play the good hands, and drop out of the poor hands, forfeiting the ante. When more of the cards are on the table and you have a very strong hand---in other words, when you feel the percentages are skewed in your favor---you raise and play that hand to the hilt. If you apply the same principles of poker strategy to trading, it increases your odds of winning significantly. I have always tried to keep the concept of patience in mind by waiting for the right trade, just like you wait for the percentage hand in poker. If a trade doesn't look right, you get out and take a small loss; it's precisely equivalent to forfeiting the ante by dropping out of a poor hand in poker. On the other hand, when the percentages seems to be strongly in your favor, you should be aggressive and really try to leverage the trade similar to the way you raise on the good hands in poker.

Market Wizards: Paul Tudor Jones

When youare trading size, you have to get out when the market lets you out, not when you want to get out... ... ... If you want to move a large position, you don't wait until the market is in new high or low ground because very little volume may trade there if it is a turning point.

Even though markets looks their very vest when they are setting new highs, that is often the best time to sell... ... ... to some extent, to be a good trader, you have to be a contrarian.

Never play macho man with the market. Second, never overtrade.

Decrease your trading volume when you are trading poorly; increase your volume when you are trading well. Never trade in situations where you don't have control.

If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in. There is nothing better than a fresh start.

Don't be too concerned about where you got into a position. The only relevant question is whether you are bullish or bearish on the position that day. Always think of your entry point as last night's close.

The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible drawdown.

Don't be a hero. Don't have an ego. Always question yourself and your ability. Don't ever feel that you are very god. The second you do, you are dead.

From studying history that credit eventually kills all great societies. We have essentially taken out our American Express card and said we are going to have a great time. Reagan made sure that the economy would be great during his term in office by borrowing our way into prosperity. We borrowed against the future, and soon we will have to pay.

Trend following. The basic premise of the system is that markets move sharply when they move. If there is a sudden range expansion in a market that has been trading narrowly, human nature is to try to fade that price move. When you get a range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion

I always believe that prices move first and fundamentals come second.

Don't focus on making money; focus on protecting what you have.

Market Wizards: Richard Dennis

I have learned that when you have destabilizing loss, get out, go home, take a nap, do something, but put a little time between that and your next decision. Wehn you are getting beat to death, get your head out of the mixer.

95% of profits come from only 5% of the trades

The times when you least want to think about trading---the losing period---are precisely the ties when you need to focus most on trading.

Market Wizards: Ed Seykota

The elements of good trading are: 1) cutting losses, 2) cutting losses, and 3) cutting losses

I handle losing streaks by trimming down my activity. I just wait it out. Trying to trade duringa losing streak is emotionally devastating. Trying to play "catch up" is lethal.

A) Cut losses. B) Ride Winners. C) Keep bets small. D) Follow the rules without quesiton. E) Know when to break the rules.

Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.

It is a happy circumstance that when nature gives us true burning desires, she also gives us the means to satisfy them. Those who want to win and lack skill can get someone with skill to help them.

Market Wizards: Larry Hite

Successful investment was really a matter of odds, and if you could compute the odds, you could find and test methods that could beat the market.

What makes this business so fabulous is that, while you may not know what will happen tomorrow, you can have a very good idea what will happen over the long run... ... ... The insurance business provides a perfect analogy. Take one sixty-year-old guy and you have absolutely no idea what the odds are that he will be alive one year later. However, if you take 100,000 sixty-year-olds, you can get an excellent estimate of how many of them will be alive one year later. We do the same thing; we let the law of large numbers work for us. In a sense, we are trading actuaries.

If you nver bet your lifestyle, from a trading standpoint, nothing bad will ever happen to you. Second, if you know what the worst possible outcomes is, it give you tremendous freedom. The trust is that, while you can't quantify reward, you can quantify risk

Never risk more than 1 percent of total equity on any trade... ... ... keeping your risk small and constant is absolutely critical.

Always follow the trends... ... ... you can lose money even on a good bet. If the odds on a bet 50/50 and the pay off is $2 versus a $1 risk, that is a good bet even if you lose. The important point is that if you do enough of those trades or bets, eventually you have to come out ahead.

Diversity: trade more markets worldwide and don't just use a single best system.

Track volatility: when the volatility of a market becomes so great that it adversely skews the expected return/risk ratio, we will stop trading that market

In trading, you can define three categories of players: the trade, the floor, and the speculator... ... ... The trade has the best product knowledge and the best ways of getting out of positions... ... ... The floor has the advantage of speed... ... ... While the speculator doesn't have the product knowledge or the speed, he does have the advantage of not having to play. The speculator can choose to only bet when the odds are in his favor. That is an important positional advantage.

When you are on a motorcycle, never argue with a car. You will lose. The same leson applies to trading: If you aregue with the market, you will lose.

1) If you don't bet, you can't win. 2) If you lose all your chips, you can't bet.

Market Wizards: Bruce Kovner

Don't get caught in a situaiton in which you can lose a great deal of money for reasons you don't understand

You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.

[on how you're different from the average guy] I have the ability to imagine configuraitons of the world different from today and really believe it can happen. I can imagine that soybean prices can double or that the dollar can fall to 100 yen. Second, I stay rational and discipline under pressure.

One of the jobs of a good trader is to imagine alternative scenarios. I try to form many different mental pictures of what the world should be like and wait for one of them to be confirmed. You keep trying them on one at a time. Inevitably, most of theses pictures will turn out to be wrong---that is, only a few elements of the picture may prove correct.

To make money, you have to hold a position with conviction. That is very difficult when you are following someone else.

The general rule is: The less observed, the better the trade.

Undertrade, undertrade, undertrade. Whatever you think your position ought to be, cut it at least in half. My experience with novice traders is tha tthey trade three to five times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks.

Place your stops at a point that, if reached, will reasonably indicate that the trade is wrong, not a a point determined primarily by the maximum dollar amount you are willing to lose per contract.

Market Wizards: Michael Marcus

I learned the importance of intraday chart points, such as earlier daily highs. At key intraday chart points, I could take much larger positions than I could afford to hold, and if it didn't work immediately, I would get out quickly.

My trading was a little bit like being a surfer. I was trying to hit the crest of the wave just at the right moment. But if it didn't work, I just got out. I was getting a shot at making several hundred points and hardly risking anything... ... ... I don't think it would work as well in today's markets.

I think the secret is cutting down the number of trades you make. The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone. First, the fundamentals should suggest that there is an imbalance of supply and demand, which could result in a major move. Second, the chart must show that the market is moving in the direction that the fundamentals suggest. Third, when news comes out, the market should act in a way that reflects the rigth psychological tone. For exmaple, a bull market should shrug of bearish news and respond vigorously to bullish news. If you can restrict your activity to only those types of trades, you have to make money, in any market, under any circumstances

Place an order to get out of the position with an order to get out.

If a position doesn't feel right as soon as you put it on, don't be embarrassed to change your mind and get right out. If you become unsure about a position, and you don't know what to do, just get out. You can always come back in... ... ... When in doubt, get out and get a good night's sleep. I've done that lots of times and the next day everything was clear... ... ... While you're in, you can't think. When you get out, then you can think clearly again.

A good trader can't be rigid. If you can find somebody who is really open to seeing anything, then you have found the raw ingreideint of a good trader.

Gut feel is very important. I don't know of any great professional trader that doesn't have it. Being a successful trader also takes courage: the courage to try, the courage to fail, the courage to succeed, and the courage to keep on going when the going gets tough.

Trading is emotion. It is mass psychology, greed, and fear. It is all the same in every situation.

Never commit more than 5 percent of your money to a single trade idea.