Wednesday, April 29, 2015

Making it all back: The worst Idea Ever.

Wrote this months back, I have been working on the issue ever since.
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Needing to get even.

I find a problem of mine tends to be that when I lose a few times in a row and now need to make it back up, I feel like I have to hold on and make it back up with the next trade. If the next trade is a loser, well then I feel compelled to hold the next one even longer because something in me says "Get it all back and then some".

I am trying to help myself not do that and I want to point something out.

The statistical edge of a system or method lies in a slight advantage over the long haul of hundreds or possibly thousands of trades. In my particular method, the approach is to choose a zone of price and straddle it with a buy and sell area. Losing most of the time is expected with this method as it counts on price to eventually move far away from the zone and make up the losses. However, the key to its edge is to limit risk and have a larger average winner than its average loser.

One thing that I seem not to take into account is the average daily range. If I am trading a zone that is 5 pips wide and the daily range is 100 pips, losing 10 times in a row would mean that I have to hold on to the next trade for 50 plus pips. With a 100 pip range that is less likely to happen. The more you lose, the less chance there is of the market going the distance you need it to to gain what you need back.

Lets look at this closely. If I lose once, I now need the market to move 5 pips in order to get me back to break even. If I lose 4 times, I need the market to move 20 pips to get back to break even. And as stated before if I lose 10 times in a row I now need the market to move 50 pips to break even. What if when I had lost 4 times, the market moved only 15 pips in my favor and simultaneously reached a significant area of support or resisitance signaling that may be all the market is willing to give me in the short term?

The natural motivation in me would be telling me "I need it to go at least 5 more pips!", but that mindset is not thinking in terms of probabilities anymore. Yes you could argue that "if one can survive the beating long enough that the market will eventually move enough", but you really need to come to the market with a precise plan and know what YOU are about. If your intention is to battle it out for a long time just to establish a long term entry at a particular price level... then the level at which you are going to take punishment is expected to be a lot. However, if you intend to make short work of your trading day and come back the next day when a different opportunity may present itself, you need to think "long-term" in a different way.

If I lost 4 times with a drawdown of 20 pips and the next stopping point for the market seems to be only 15 pips away, perhaps I should take the 15 pips, lose 5 for the day and come back tomorrow.

If I think in terms of realistic movement for the pair I am trading coupled with good risk to reward ratios, its best not to dig too deep a hole at once trading with only that days movement in mind.

If the market stopped at +15 pips on that 5th trade, reversed and stopped me out for another 5 pip loss, I am now down 25 pips for the day. Possibly more depending on what the market does next.

If I take the 15 pips the market gave me and end the day down only 5, the probabilities of establishing a new price level with a new day and a new risk to reward ratio put the odds in my favor of capturing more pips during the earlier trades of that day. It prevents the loss from growing too large at once, which can seriously hinder my mental state AND require the market to move beyond what it may be willing to give me.

Stop thinking in terms of what you need to get back TODAY, because the market is not aware of that. Even if it were, that would mean nothing to the market. The market is filled with thousands of people with their own personal goals that they are attached to just like you. It makes no difference who you are or what your goal is, the market does not care.

So, coming into a new day the first trade of the day may be a 20 pip winner out of the gate. now I am up 15 pips and come back tomorrow for the next opportunity. If I stayed in the battle trying to get the 20 pips back yesterday, my losses may have grown to well beyond the minus 5 I left with, which would mean that today the 20 pip winner might have turned into a loser because I still needed more to make up for yesterdays losses.... See the difference?

Ending the day at a loss and ACCEPTING it and moving on, is actually part of being profitable.

Try and think of when you trade normally. If you have been building gains in your account for the last week, have those profits been taken according to what the market was willing to give you? After a loss, try and realize that if you keep trading correctly the way you have, you will continue to build up your profits little by little.

Accept your account balance as whatever it currently is. Try and imagine that this is the amount you deposited initially, or if you are still at an overall profit, realize that you took an even smaller number than you are looking at right now and made it grow to that number through taking profits when they were made available.

Ask yourself how many home runs you scored while raising your account to that level. Probably not many right? So realize that you do not need to try and make back what you lost all at once. If you adhere to what got you there in the first place you will not only get there again, you will far surpass that mark eventually.

Consistency is key. Fortunes can be built on it. And the best way to lose consistently is to aim soley for home runs.

Sunday, April 26, 2015

Starting to finally feel positive about my ability to make money

In the space of the last few months I have teetered back and forth between feeling negatively and positively about my abilities and future performance in the trading world shortly ahead for me.

When I came across Tim Sykes's material I got a rush of inspiration. I ordered his DVD How to make Millions. I hated the idea of trading stocks, but thought to myself "If this is the way to make money, I need to overcome that and do this."

I began to feel negative about Forex trading due to Tim expressing his negativity about it. It really threw me off. So I put the majority of my efforts towards learning his methods of stock trading.

In the last few weeks I have had a lot of time to digest things and I have also come across a man named Jason Stapleton on YouTube. He is a professional Forex trader and has some really excellent free material. I mean top notch no bullshit instruction. Consuming his material with lots of focus centered me quite a bit and allowed me to focus on some things. Some things I had forgotten, and some things I hadn't yet realized. Here are my thoughts:

Tim does indeed have a pretty awesome strategy. It not only makes sense, but is most importantly available to pretty much anyone who can open an account and start trading. If you are disciplined and do as he says, I believe you will over time make money. The biggest benefit of Tim's strategy in my opinion, is that it is quite predictable. Shady companies that pay promoters to pump up the stock price always fail eventually. In all honesty however, I feel that is where the advantages of his methods fall short in contrast to trading Forex.

On what will seem like a total side note, a long time ago I purchased a Trading robot from Rob Booker called "the Mouse Trap". I became interested in it after hearing Rob and his friend Chris Davison talk about it in one of his very early podcasts. I purchased the robot and backtested it in Metatrader and sure enough, it would turn a $10,000 deposit into millions over a period of years. Upon Seeing those results I had decided to leave my desktop on at home with the robot running to see how it did with live trading. As the numbers suggested, it only won about 15% of the time. I let it run long enough to lose a lot and then one good winner brought it back to where I had started it. Shortly after that, I decided I wanted to have my computer on the road with me so I took it along. Being that I couldn't keep that computer connected to the internet 24/7 I no longer ran the mouse trap, and thus eventually forgot about it altogether and began later on focusing on using the other robot I bought from Rob, "the Box".

Anyways, watching Jason's videos happened to remind me of a very critical element in the trading world: Statistics. More importantly, statistics derived from back testing. You see, when a methodology has very strict rule based entries and exits, it's performance can be repeated again and again through back testing and also applied to "forward testing". That is where Tim's strategy fails. Yes he has a track record of profitability, but it's his track record. And his entries and exits are based more on guidelines than strict mechanical rules. His track record is a direct reflection of his personal experience, which is entirely unique to him.

With the mouse trap, each entry is rule based and uses no subjectivity whatsoever. I was reminded of this while watching Jason's video about what he calls "The 2618" trade. I won't get into the details, but in the two and half hour video he shows you the precise rules for entry and exit that leave no room for subjectivity. He then shows you exact statistics that system has produced over a 12 month period. That is what I needed.

I needed numbers. I needed results. Why? Well, in another video Jason made the point of exactly why I needed them. Statistics give us a basis for belief, which when built to a level of certainty causes us to take massive action. Massive action then produces massive results, which again feed our beliefs. I am a person that has always taken a level of high action when I believe in something fully. Remember the network marketing company I maxed out my credit cards to be a part of? I spent that $3,000 because I had a statistical number I believed in, and that was a very small number. They had found that only about 3% of people responded and that was enough to get me thinking massive and acting massive.

The fact that Tim only provides guidelines effectively hampers one's ability to gain concrete back-tested data to build certainty on. I have a few other points in mind that I wish to express as well.

Anytime Tim speaks about leverage, he always speaks negatively about it and usually attaches Forex trading along with it for a group scalding. What I need to say is that Tim is always reminding us that penny stocks are the only financial instrument he knows of that moves 50% in a day, which is why he tauts it as the best way to "get rich". The point I want to make is that the leverage in Forex allows the currency market to basically scale it's gains and losses to that of Tim's penny stock realm. With that said.. Yes, yes, leverage can be dangerous, but so can any financial instrument in the hands of the uninitiated.

As I digested Tim's material internally while simultaneously taking in Jason's material, it began to become clear to me what had happened in my heart and mind. The same thing that happens to all who lose their personal sovereignty at the words of a Guru: You begin to believe without question what you are told. Here is Tim, a very successful trader worth millions, showing you exactly how he made his millions, telling you with authority that Forex trading and using leverage will get you essentially nowhere but owing your broker money. A light bulb came on over my head. Tim spoke so negatively about Forex trading because all he ever heard about was people losing money. He had always been obsessed with Stocks and hated on Forex without experiencing it for himself. Had he been successful in Forex, he'd probably be hating on stocks just like I did before I took the time to understand how they work. It doesn't matter who you are, or how much you know about your specialty... Your authority only covers what you yourself are an expert at. As a truck driver I have come across people who only drive trucks, that sit there and try to convince me I can't do what I do on my street bike, even though I do it all the time. I can't tell you how many people I have come across that have spoken with authority about things I can't do, that I have already done successfully. I simply realized that Tim was no different than someone telling me I'm going to destroy the transmission in my bike because I don't shift with the clutch. They don't know shit about what I do or how it works, and unfortunately, neither does Tim. In fact, Tim mentions over and over again throughout his materials, his ignorance of the Forex market. I am not bashing Tim about any of this, just expressing what came to light in my mind about it all.

So, aside from the Leverage issue, There are some other comparison in which I am now starting to feel that penny stocks are not as great as I initially thought. There is a long list of issues that may make mechanical Forex trading look much better by the end of this.

First of all is the giant setback of what is called the Pattern Day Trader Rule, which restrict anyone who has less than $25,000 in their account to only 3 trades per 5 day rolling period. Which ultimately limits you to two trades unless you plan on holding that third position until you can legally exit it again... With Forex you are free to trade as many times as you want.

A large part of Tim's strategy when playing pump and dump stocks, is going short. Well, if you plan on shorting a penny stock, you first have to reserve shares to short otherwise you risk missing the trade altogether. Secondly, for any stock below $2.50 you still have to put up collateral for that stock as if it were $2.50 anyways. Want to short 10,000 shares of a $.10 stock? Although the value of that trade is only $1,000 you'll need to have $25,000 in your account just to put the trade on. In Forex you trade whatever your account will allow you. After that issue is the short stock restriction. If the stock falls 10% on the day you can't short the stock unless it upticks first. In Forex you can short at any time the market will fill your order. Lastly is liquidity. In penny stocks, a lot of the volatility produced comes from the fact that there are very few shares to trade at times. I won't go into numbers, but the shift from penny stocks to the Forex market is literally going from one of the least liquid instruments to the most liquid instrument on Earth. For those of you who don't understand liquidity, liquidity refers to the ease of which you can enter and exit a transaction. Real Estate is very illiquid, the majority of high priced stocks are very liquid, and the currency markets are the most liquid. The larger position you transact, the more liquid you want your market to be, otherwise you suffer what is called "Slippage". That is when the market's supply cannot meet your demand and the price changes out of your favor until enough supply is met to fulfill your demand. I could explain in depth but now is not the time.

I truly love what Tim does. I am not knocking it in anyway and I am in fact glad I purchased his DVD. It's taught me some valuable things and I can carry that over to other parts of my trading. Well worth every penny and if you love stock trading you should go buy it.

It however as I've mentioned previously, does not come with built in predictable metrics you can build belief upon. You must first adhere to guidelines as best you can until you produce enough results to analyze for yourself. This can take an enormous amount of time, an amount that can hold many back. I am sure if someone had the time and interest they could create a set of strict, non-subjective rules regarding Tim's system and go backtest it for solid statistics, but I don't think that will even enter the minds of the people he is reaching because he doesn't think or teach from that frame of mind at all. I think the belief generated in the minds of his students comes mainly from testimonials of other successful students. The ones who have applied serious study and application of what Tim teaches and made it personal for themselves as much as Tim has made it personal for himself. I have simply lost interest for the time being as I need more to go on that other people successes. I need numbers, and Tim has no way to provide them.

The Mouse Trap on the other hand... I just ran a backtest for the last 16 months and got real hard numbers. It lost a small percentage in that time, but in the last few years has made a significant return. But that is not what matters to me at the moment and it is certainly not why I wrote this post. What matters, is that I know what I have to do. I have to stick to numbers, because I am a person that needs belief to act. I had so much doubt in myself since the inception of this blog, even with the incredible success of the robot in the early posts. Yes, I was kinda building a database that I could look back on later, but it was based on random feelings. There were no objective rules in place that would make any of that duplicable, just a hunch that over the long term I would make money. I still have that hunch, but I don't want fucking hunches I want belief.

So when I get home and have legitimate time, I need to make rules that will allow success to be definable and repeatable with a system that fits my personality. I will explore Jason's offering of the 2618 trade and probably others he has for sale, but I'm most interested in producing numbers with my methods described in this blog. Preferably in a market with none of the restrictions that, to me, outweigh the benefits of an eventual outcome.


Wednesday, April 15, 2015

From Blindsight to Hindsight

What you are looking at is something that crossed my mind while talking to a friend the other day.

I said "Remember that 35 loss in a row post? I wonder how far away price actually moved since then..."

Well I looked it up today and sure enough, the very last trade from that post here was in fact the very last time the market was at that price since then, and it has moved 1,981 pips south... so... in the end because of this insane trend we have going on here, those 35 losers would have been nothing.

But, given that hindsight is worthless it also must be said that looking back at the past on a monthly chart shows ample reason to have taken profit. It makes sense that significant support from years back would be relevant to some degree, but we blew right through it.

In the end, although those loses would have easily been recouped by an insane amount, we can't bank on things like that happening. Regardless it gave me a laugh to look at :)

Wednesday, April 8, 2015

Hilarious

In town today so I decided to trade the robot with martingale today. Took 2 losers and then a winner, but what cracked me up was how far and fast the market dropped after I got out. I only made $20, and the market moved another $240 in a few minutes right afterwards.

Getting out of the trade is not something I regret at all. When trading this way, where you increase your risk every trade, the goal is to take what the market gives you when it's there without getting too greedy and having to take another loss. I got out at an area of support where the market could have easily reversed and given me another loss. Especially because today the FOMC is meeting and discussing policy. Markets can go sideways a bit until information impacts things.

If I was trading a smaller fixed position size for each trade, then I would have still been short during this move down more than likely as my risk would have been much much smaller. here is the chart!


Friday, April 3, 2015

A quick trade on Non-Farm Payroll

Somehow I screwed up my off-duty time last night so when I woke up this morning I still had an hour and forty-five minutes before I could go on duty. Then I realized it was non farm payroll today so I took a look at the charts. I felt it was a turning point so I opened the robot. first long was a loser for 10 pips. Second trade was a short and I started running out of time and the chart was stalling so I just took the 20 pips for a net gain of 10 pips today. very small, but I followed my plan and made a profit. thats what matters.




**Update**