Trade Team

Last week I wrote a comment on a friend's blog. Luckily he found it of use and kindly put it up as a blog post of its own, you can read it here if you're interested. On this occasion, I haven't reblogged his post as it felt silly to have three versions of exactly the same thing rattling around the internet. However, the exercise got me thinking about the continuing struggles we all go through when learning to trade and things I'd like to do to combat them.

trader / athlete

I often think of traders as aspiring professional athletes; hours and hours per day training, extremely strict routines, diet, mindset, psychology, studying etc. But the difference between the two professions is the distinct lack of support even professional traders have. Athletes have coaches for technique, coaches for strategy, coaches for routine, dieticians, physios, psychotherapists, training partners and teammates at their disposal every day! Even hedge funds and investment banks don't provide this kind of support to their traders.

I rarely mention it here but I was an amateur boxer for many years and I am now (after quite some time off) training at an MMA gym with an idea to compete at some point in the future. At my gym, I have unlimited lessons, 3 Brazilian Jiu Jitsu coaches, an MMA coach, a Muay Thai coach, a Boxing coach, a Wrestling coach, a Judo coach and a Strength and Conditioning coach. I get one-to-one coaching for an hour a week and I have 200+ training partners and 50+ teammates (those who are looking to pursue fighting). For all this, I pay £230 per month (the private sessions are what drive the cost up). But even so, this is extremely cheap when you think of all the support that is available to me.

Having said all this, what I would say is that in terms of progress, every part is equally important. You, of course, need your coaches to instruct you but you have to have your training partners to drill with and teammates to encourage you. Without them, you wouldn't last long. It's a hard sport that is designed to make you quit, a bit like trading really.

trade team

As traders, I doubt we will ever be able to get the same amount of support that is available to sportsmen and women but like my trading coach has always said, we could be far more effective in the way we utilise each other. I think much of what is lost in trading is the comradeship of a team, too often we fall into a slightly competitive mindset with each other, most likely due to the nature of the game we play. 

When I wrote my comment on my friend's blog I wanted to be his teammate. I wanted him to feel like someone had his back and would go to war with him. This is the feeling you get when you're in a fight team, you train with each other, you sweat together, struggle together and win together. We're honest when someone's doing something wrong, encouraging when they're doing something right and playfully competitive when you're able to be.

Going forward I would like to pursue this idea of building a "trade-team". A band of traders who go to war together. It's great to share victories and commiserate losses, however, I feel often when you need the support is when you're in the trade. In the midst, is often when you most need an objective friend, to either encourage you to continue with the game plan or tell you it is no longer working and to change tactics.

If anyone is interested in this trade team mentality drop me a comment below.

Fear Beats Greed (catalyst)

there's a catalyst(s) in here somewhere

So Wednesday evening we had quite a few events; US monthly budget statement, which came out worse than expected, then, of course, the 3 hour US press conference.

Rex was banging on about Syria...

then Russia...

and finally, Trump came along talked about the USD...

the catalysts

The above events had the effect of killing the USD (it has since recovered much of its loss) but there was quite a lot going on here and felt I needed to revisit them and identify the individual effects and causes.

NB: When trying to identify catalysts what I am looking for is events that that will trigger either weaken (fear) or strengthen (greed) the status quo.

1. US monthly budget statement: worse than expected is "technically" bearish for the USD but this is not a highly watched or volatile event, the numbers weren't drastically off so really was very low impact. Not a catalyst.
2.  Assad/Syria: War uncertainty,  to me this means Gold, Bonds, JPY and USD should appreciate and stocks should suffer. This is definitely a "negative" catalyst, war triggers uncertainty and fear and weakens the status quo.
3. Russia Relations: Uncertainty, even, fear of war. Again to me this means Gold, Bonds, JPY and USD should appreciate and stocks should suffer. This is another "negative" catalyst, uncertainty/fear over the status quo.
4. Trump wanting a weaker USD: This a funny one as there is clearly a winner and loser. This is dovish for the USD and positive for stocks. Ultimately this is best seen as a "positive" catalyst for stocks, as it creates some sort of stability (strengthens the status quo) and hence greed.

fear beats greed

As the title and subtitle state, the rule I use to help digest events is; "fear beats greed".Ultimately most investors in Wall Street and Main Street alike are here to make long-term gains for their pensions, retirements etc. They have worked hard and saved that hard earned money diligently. They (clients and fund managers) will always be scared of losing their initial capital, so when an event hits the market that causes "fear"/ threatens the status quo, they will almost always switch to a capital preservation approach where capital will be less exposed to risk. As such my feeling from the events above is that Gold, Bonds, JPY and USD should appreciate and stocks will probably suffer. 

Weekly System (for 2 Year Plan)

overview

In my last post, I talked about my 2-year goal and outlined a very broad system: plan my trade, trade my plan, manage my trade, record my trade, build my numbers up and learn my KPIs.

This a nice sound bite but actually, it provides very little in the way nourishment or sustenance for the tired trader/investor at the end of each day. What follows is a breakdown of what actually needs to be done. To clarify this information is in my TTP and SBP but is not as clear or concise as it is here, I will print this off.

weekend system

The weekend marks the start of my trading week and is when I do the majority of my work. There are 4  major jobs which consist of 9 tasks, I find I need to take a short break between each job.

Week to week my energy levels differ, so it is hard to specify an exact time to as when this work should be completed. What I can say though is that in order of preference they would be 1, Saturday Morning, 2 Saturday Afternoon, 3. Sunday Morning, 4 Sunday Afternoon, 5 Sunday Evening,

job 1: markets

1. Monitor the MOTR (Momentum and Trend) of each market (approx 40) (MOTR)
2. Find potential W1 and MN trades (MN, W1 candle setups with momentum)

3. Define where the MOTR Matrix is heading to across the markets.

job 2: trades

4. Update profiles,  add those with matching MOTR, remove those without (D1 long/short watchlist)
5. Review profiles for setups (D1 long/short watchlist)
6. Review potential trades, do they pass all your requirements (ie pin bar tail at least 60% of candle)

job 3: review

7. Review trade sheet and journals if appropriate. This needn't take ages. Just a weekly check-in to take stock and remind yourself of your KPIs.

job 4: broader themes

8. Research economic data due for the upcoming week.
9. Be aware of the current themes (FTWeekend and MoneyWeek).

daily system

Each evening I have 3 jobs consisting of 5 tasks.

job 1: themes

1. Stay abreast of news developments (twitter and FX street app)

job 2: trades

2. manage open positions (end-of-day).
3. Check for new D1 trades in Long and Short Profiles (end-of-day).
4. Review potential trades, ensure they match trade criteria.

job 3: record

5. Record closed trades (Journal and Trade Sheet)

Start of Year Update... 2017: Be The Gatherer

Apologies for my prolonged silence, since starting the day job I have had to adapt the ways and times I go about trading.

I am now starting to view my trading almost as "short-term investing". Often when seeing an entry I think "would I hold this for the next 3-6 months?

charts

I now use W1 and MN charts for building my primary positions. I want MN stochastic to have crossed in the direction that I am trading and for price to be at a MN/W1 area of supply/demand, with a nice candle pattern. I feel I am then trading with long-term momentum, at good supply/demand imbalances with a stronger signal. During the week I try to monitor the daily charts of pairs I am already in to see if I can add or build to them but this isn't always possible.

prep

My technical prep is done over the weekend (MOTR etc) but I now spend a lot more time throughout the week reading and pondering on geo-political and macro events, which are now the basis of almost all my trade ideas. My main sources are MoneyWeek, Pippa Malmgren and ZeroHedge.

setups

I am currently not finding perfectly matched MOTR (momentum and trend) pairs useful. The reason being is that I am often ready to trade a pair before MOTR is completely lined up. Having said this I always try to match an idea to the strength/weakness matrix.

Due to not knowing if I'm going to be in a good state to trade each evening, my mindset is, "get in tentatively when you can and start building" rather than, "wait for perfection" because "I could well miss the move".

The day job and the exhaustion it can create means that I'm sure if I'm going to feel good enough to trade each evening. So I would rather save my major entries for the weekend. I guess this is the price I have to pay. My hope is, with experience and practice that I  might be able to average down in the future.

metaphor

I'm seeing trading and investing as a metaphor of the Hunter/Gatherers of past.

The Trader is the Hunter: spending huge amounts of time and energy stalking prey, setting traps and failing often.
The Investor (long-term trader) is a Gatherer: She simply walks through the fields each day and notices what is beginning to germinate, flower, bloom or wither. She knows what is going to feed her today and has a good idea of what is going to feed her in the coming months.

summary

I feel I am relating strongly to the gatherer. I want to get in slowly when a market is germinating (turning), I want to add to my position as it begins to flower (trends) and take profit once it's bloomed (begins to turn again),  I use momentum to help me predict the seasons, the timings aren't precise but that's quite nice as it takes much of the pressure off "being perfect" which was something that flagged up strongly in my Tharp Report. 

Geopolitics & Trading Sentiment

Over the past few months my coach (Paul Wallace) has been emphasising the importance of geo-politics. He recommended I read Barton Biggs - Wealth, War and Wisdom -  and believe it or not I'm finding that a "geopolitical framework" is starting to crystallise. What follows are my thoughts to date.

my framework

My basic concept is really very simple; the market is more or less in one of two states.

1. Uncertainty (supply): Uncertainty of course exists in all markets. What I mean by "uncertainty" is an "opaque" risk / one that is becoming increasingly difficult to define and size. These events often build progressively, think pre Brexit, the 2008 GFC or 2015 crude supply glut. 
2. Stabilised Uncertainty (demand): Uncertainty still exists but it has been stabilised by an event or action, making a "transparent" risk that is easier to measure. Think post Brexit Carney /BoE promising £150B in QE, the Fed delivering $700B in QE in March 2009, Or in January 2016 simply the news that OPEC were finally talking about reducing crude output.

What is important here is news doesn't necessarily need to be particularly uplifting or downbeat, just less bad or good than it was previously. Biggs uses the Battle of Midway as an example. Despite WWII being far from over, the US Navy defeating the Japanese Navy was better news than had came before (Pearl Harbour). This marked the lows of the US stock market and the start of its recovery during that period.

brexit example

certainty - a predictive state

My final thought on sentiment is that I think it's fair to say that markets are always moving towards some kind of climax, this I see as two kinds of certainty.

1. Certain optimism: when the market and main street get to the point of believing something is genuinely amazing, the market is often overbought/topping. (Bonds and Equities)
2. Certain pessimism: when the market and main street get to the point of believing something is completely doomed, it is often oversold/bottoming. (Crude)

When things are at their unimaginable best/worst, there's really very little room for markets to climax further. Working on the Biggs premise that you only need slightly better/worse news than previously to turn a market, you can start to preempt tops and bottoms. Such as the DotCom bubble in 2000 or oil lows in 2016.

To be clear I'm not suggesting that one would trade "certainty", I see it more as a preemptive tool to start preparing for options in the other direction, if and when they are confirmed by events and price action. Actually it was this very thought coupled with a few events and technicals that made me want to get long crude last week.

summary

To me there is a catalyst that gets everyones' knickers in a twist, causing "uncertainty"(supply), then there is a "stabiliser". This doesn't eliminate uncertainty but creates a "stabilised uncertainty"(demand) that markets can rise in. Finally as a predictive tool I believe listening and looking out for when the market/world is in "certain" optimism or pessimism is a very useful tool to start preparing for a top or bottom.

Maybe my views will change again in time but at least for now this is how I believe markets work. What I like about this is that I have always believed markets move due to supply and demand. From a technical perspective I think I have a relatively good grasp of this but on a sentiment front this has always been lacking. Identifying what supply (uncertainty) and demand (stabilised uncertainty) look or feel like has strengthened my commitment to my strategy as it is starting to flow through the market in a more holistically way.

Tharp Continued: Overcoming My Challenges

copyright K1 Dynamite hopefully I can channel my inner Fedor (right)

recap 

This is the third post in my Van Tharp series. Here are the links to posts 1 and 2.  On completing the Tharp Trader Test I was sent a personalised report stating my three strengths and three challenges. The challenges I face will be the focus here. Please forgive me if this turns into a rather lengthy post it's really meant more for my records and trading development...

my challenges

1. Need for External Confirmation: of ideas, your systems and beliefs, which can be detrimental to becoming a successful trader. You need inner confidence to trade consistently successfully. Read the Article “What Is Involved in Peak Performance Trading?”
2. New Ideas:  to apply to trading systems that are already working can screw things up.  Understanding the purpose of trading systems and their role in pulling money out of the markets. Read the Article “Paradigm Shifts for Trading Success”
3. Needing Excitement: Good trading tends to be boring. It is imperative that you have an outlet other than trading; excitement in trading is most often very expensive. Complete the “Compulsive Trader Test” 

challenge 1: peak performance trading

According to Tharp this requires each trader to have their own business plan.  I actually have worked on one with my coach Paul, which he calls a Strategic Business Plan.  Tharp recommends each plan has the following items.

• Your Vision, commitment is key to success, your vision is your dream life, write this out in detail, what are the "whys" in your life, this give real motivation, you'll know you have it right when you're so excited you feel you must do something right now ( written but will need a revisit as I haven't got that urgency yet!)
•  Your Purpose. Written
• Your Objectives. Written 
• Assessment of Strengths and Weaknesses, based on real trading logs: Strengths: 1. Money management, 2. risk management, 3. good record keeping 4. Organized TTP and SBP written. Weaknesses:  Fear Based Trading: 1. Cutting winners early with discretionary exits out of fear instead of TTP exits (might need faster TSL method than fractals like 3 bar stop). 2. Cutting winners early by BE trailing too quickly out of reversal fear (fixed to 70% stop).  3. being lazy, not respecting spread (respect the spread! dickhead) 4. taking shit candle patterns too "creative" (write exact rules)  5. Not trading off S/D (improving now only using W1 and MN levels) 5. Buying high , selling low. (improving now only using W1 and MN levels)
• Thorough assessment of big picture of fundamentals. yes through STAM
• complete understanding of your beliefs about the market. Working on with Tharp exercise
• How to get empowering beliefs and mental states behind you.
• Documentation of system research, determining their effectiveness, no
• Procedures for maintaining discipline, yes but needs above work
• budget and cash flow, yes
• systems for back office record keeping. yes but needs time set aside
• worst case contingency,  yes
• System 1 compatible with big pic, yes
• System 2 also compatible with big pic, no
• System 3 counter big pic yes

challenge 2: paradigm shifts for trading success

Tharp says there are 4 major shifts to make they are...

1. Trading success has very little to do with what’s outside of you, Instead, you must determine who you are and what your objectives are. Once you have done that, you can design a trading system that fits you. Q Who are you and who do you choose to be? 
2. There is no Holy Grail in the markets outside of you. But there is a Holy Grail and that comes from developing a trading system that fits you. When you do this you can do much more than outperform the majority of market players. ...economists are beginning to say perhaps the markets are not efficient. And, perhaps by studying human frailties, one can begin to predict how the markets are not efficient. The field of behavioural finance has been born. Applying it means working on yourself to make sure you don’t have these inefficiencies. 
3. You don’t have to predict the market to make money. Instead, making money comes from controlling your exits. The golden rule of trading is “Let your profits run and cut your losses short.” What does that have to do with prediction? Absolutely nothing. Instead, it has everything to do with getting out of the markets using a systematic plan. Enough said! 
4. You don’t have to be right to make money. Instead, you must understand R-multiples, expectancy and opportunity.I understand this so not going into this...
5. Big money does not come from any of the factors that most investors and traders focus their attention upon. Instead, big money comes from having a position sizing strategy that is
   designed to meet your objectives. I understand this so not going into this...

How to Make Your Own Paradigm Shifts

copyright Van Tharp Institute

1. Examine who you are and what you are doing from multiple perspectives. your perspective, another involved person’s perspective, and the perspective of an outside observer watching what is going on during the event. If you were to continually observe yourself from perspectives two and three, then it would not take long at all to jump out of the box. A simple exercise you might do is to simply replay each day at the end of the day from the perspective of an outside observer. Amazing changes will occur in you when you do so.
2.  Examine your beliefs. Your beliefs might form a set of concentric circles. inner most are the ones you know are true. then think are true, might be true. then ones you have real doubts about... Tharp says: I think the beliefs that are probably the most damaging are the beliefs in the inner circle—those we know to be true. Spend time questioning those beliefs and you’ll begin to make major paradigm shifts. Try questioning one or two of your major assumptions about life that you know are true. What would life be like if those assumptions were not true? Questioning of this sort is what would be most profitable and evolutionary for most people.
3.  Notice your projections. Operate as if the world is a mirror to your own mind, then you will really begin to find out what your boxes are. And when you know where a box is, it is a simple step to get out of the box and make a paradigm shift.
4. Keep a daily journal of your emotions and experiences. Then read regularly in order to notice your paradigm shirts
5.  Meditate regularly. Simply pay attention to your breathing for twenty minutes. Think of breathing in as “inspiration,” for it very well may be that.

These five steps should help you to make immense paradigm shifts on a regular basis. Plan to do it for the next 30 days.

challenge 3: the compulsive trader

Tharp says: compulsiveness is perhaps the most serious of all trading problems. Gamblers Anonymous has recognized that for a compulsive gamblers, stocks, options and commodities are definitely gambling. 

There is then a set 20 questions based on a GA survey to see how compulsive you are. I scored a 6 out of 20. Despite being simple "yes/no" answers some questions I found surprisingly difficult, on these grey area ones I sided with a "yes".

Accordingly compulsive gamblers answer "yes" to seven or more questions. Most speculators will answer yes to one or two of these questions, while if you answer "yes" to six or more then you probably are not a successful trader (which I'm not). If you answer yes to 7 or more you have a problem. If you answer yes to 12 or more you are definitely compulsive about your trading.

what is a compulsive trader

Tharp says: Most people are at some level compulsive. Compulsive traders get a certain sense of "being alive" that comes only when they gamble or trade. They deny they have a problem.  Their lives are falling apart around them,  but they don't feel they have a problem. If you answered yes to 12 or more questions (even if it's only 5 or more) you might be moving in that direction. A compulsive trader will have lost much of the money they originally had for trading.

3 phases of a compulsive trader

1. short winning phase:  during which many compulsive traders develop elaborate systems for winning and tend to become very skilful of carrying them out.
2. the losing phase: once consumed by the action of trading, you begin to make mistakes and starts the losing phase. The compulsive trader,however, does not focus on the losses, but on getting his money back.
3. desperation phase: all the assets are gone. all sources of credit are gone but the compulsive trader is driven to continue maybe even doing illegal things.

dealing with compulsiveness

Tharp recommends his Peak Performance Course, of course he does. But there is a good introduction above from the Peak Performance Trading article... He says you need to

1. learn how to control your mental state, your urge for action. (again some good ideas are above in challenge 2)
2. learn to break the link of trading behaviour  that is set into action by environmental cues. So the second step involves finding all the cues that trigger compulsiveness and linking them to more appropriate behaviour, each cue must be found and neutralised (look to challenge 2 ideas)
3. you need to found outlets for your need for excitement (see challenge 2)
4. recognise that you will not win as long as you are compulsive about your investing. Since action is your primary motivation for investing or speculating , once you stop craving the action,  you may not want to do what it takes to be successful.  

My notes: I found the section quite disturbing. I scored a 6 on the test so had a mini melt down, thinking I was gambler and was ruining my family's life, I even called the wife at work to make sure I wasn't making her life hell. ha! 

I feel here I'm in catch 22. I love to worry and normally when something gets under my skin I break it down, but by doing that here I worry that I might be in denial as Tharp mentions above. arhhh!

Ultimately  I've decided I'm taking this as precautionary warning. In the danger of sounding in denial, I think I have some compulsive traits but I don't think I am very compulsive in the usual connotations. This is mainly because my coach who knows me well has classified me a FBT (fear based trader) as I'm extremely risk averse. So much so that I still refuse to trade real money until a turn a paper profit (7 years in). If anything I think I might be compulsive in my risk averseness! For instance often breaking trade plan rules to take discretionary exits or trailing stops too tight to reduce risk.

Tharp Continued: Maxing My Strengths

This is the first follow up to my post Tharp Trader Test.

recap

After completing the Tharp questionnaire I was sent a personal report. I came up as "Facilitative Trader", which according to Tharp means that of the 3 core trading qualities above I have 1&3 but will need to work on 2. Making decisions based on logic and analysis.

The report starts by recommending 3 articles to ensure that I am making the most of my strengths, these are what this post will cover.

strengths

1. Energy and Creativity: not afraid to try new ideas, good at coming up with new ideas. Creativity best applied to systems ideas, need to understand all that’s required in a trading system...Read the Article “What Is a Trading System?”
2. Ability to Pull the Trigger: don't require extensive back/live testing to execute your trading ideas.  I need to understand that my ideas really are beliefs, read the article. Read the Article “Your Beliefs About Trading”
3. Quickly Develop Trading Ideas: Your ideas will continue to come easily and naturally if you remain in the flow of the markets. To see what that means, read the following article. Read the Article “The Flow of the Markets”

strength 1: working on my trading system

This was quite a long article, I will try and keep things as brief as possible but initially Tharp talks about Robert Kiyosaki's Cash Flow Quadrant. This I found very interesting and would like to spend a little time on.

defining self

1. Employees: run systems created by businesses but often don't understand that they're even doing so. They are akin to the investor who wants to be told how to do everything.
2. Self Employed (ME): are motivated by control and doing it right. Cannot see the system because they are so much a part of it, the more they work the more tired they get. Stuck in all the details, have a strong tendency to want to "complexify" things, always looking for perfection believing that the perfect system must be complex. They will likely have a discretionary system that is constantly being changed.
3. Business Owner: Creates simple systems to run the business then delegates. Usually does very well in the trading arena, would hire someone to run the system at a much lower wage.
4. The Investor: Looks for returns of 25%+ and no work. Kiyosaki says rich people typically derive 70% of there income from investments and 30% or less from wages.

This alone has been an eye opener for me. I have already been...

• Adding more trade plan rules(systems), like a "business owner", to get me further out of the in-trade decision making process and hopefully a little more like a "system following employee".
• Despite having to run the system, as I have no staff, ha! I'm trying to take a step back to remove the need to be in control by putting surplus energy into other areas, ie blogging.
• To try and avoid the desire to "tweak" I have a set a time of day that I can look for trades.

trading strategy essentials

Tharp then goes on to describe exactly what a Trading Strategy should contain, that being...

1. A market filter, 2. Setup conditions,3. Entry signal, 4. Worst case Stop Loss. 5 Re-entry when appropriate. 6. Profit taking exits. 7. A position size algorithm 8. Multiple systems for different market conditions

The fact that I have nothing to do here is entirely thanks my coach Paul.

business plan essentials

The next thing Tharp talks about is what you need in your business plan...

1. Executive Summary, 2. Business Description: mission, history, services(growth of cap and risk control), operations, equipment needed, location, organization and management of employees.(I have but needs adding to). 3. Industry Overview and Competition: needs work on! 4. Self Knowledge 5. Trade Plan 6. Your Trading Edges: self explanatory (I have but needs adding to). 7. Financial Information 8. Worst case Contingency Plan.

developing a system

Tharp then offers some tips on developing a systems...

1. Defining who you are. 2. Objectives: define what you want the system to achieve 3. Calibration: what are your performance bench marks? what are your criteria for knowing it is working? how will you make decisions when your criteria are met? 4. Tips: Work out how you will make decisions ahead of time there should be a mechanism and a range of contingencies (got). we want robust simple plans that can cover a wide range of conditions.

strength 2: understanding my beliefs about trading

Tharp says "you do not trade the markets- no one does... what your really trade are your beliefs about the market... (and) your ability to so is tempered by your beliefs about yourself". So you trade your beliefs but your beliefs can screw you, great!

belief exercise

1. Write down your beliefs about yourself, its okay if this is difficult, just start. 
2. continue this exercise each time you open, manage or close a trade.
3. keep this up until you 100+ statements about yourself.

strength 3: the flow of the markets

Paraphrasing from Tharp: "The market is like a river. The river just is, no matter how much you struggle, it moves downstream and nothing you do can change that. Your struggle "is the need to be right", to chose the right trend, chose the right turning point, chose the right SL, chose the right profit target. But these psychological needs obscure the obvious solution: Letting go. The market is not going against you personally, the market is simply moving. The market isn't the problem, the" trader's struggle" with the market is. When you realise the problem stems from you, then the solution becomes obvious, just relax and flow with the river". 

This a lovely metaphor that more than hints that we should be happy to concede. I don't disagree with this however I would say sometimes it is hard to know whether you are conceding out of fear, or out of "respect for flow". 

It therefore stands to reason you need clear rules/guides to identify "fighting flow" from a trade that's still valid. I'm happy but will revisit my rules that tell me what the trend is and when a trade has failed but I need to work on my rule that tells me when a trade has topped. These would provide a good indicator to when I am fighting the market.