Passion is Not Enough in Trading

May 11, 2011 2 comments

Lately, I’ve been inspired to write about some of the changes I’ve been making in my life to become a better trader.

When I opened my first brokerage account about 12 years ago and put on my first trades, I felt the thrill of the markets for the first time. It was more about the chance to score some extra weekend money back then, or a path to quick riches in my mind. Mr. Market taught me the hard way early that stock prices don’t always go up when most of my trading money was tied up in a bankrupt little Chiquita Banana company $CQB. Looking back, that was just the start of my life in the stock market.

My first year of college I learned how to write professional grade software, and was picked up by a Hedge Fund to write risk/analytics software, portfolio management and scenario based tools to help professional traders manage their trades across a multitude of strategies. I learned a lot over ten years at a hedge fund among some very expert traders and coders. Everything I worked on while I was there, I poured my heart and soul into learning and doing well. The more I learned, the more I wanted to use those strategies. You could see the passion for coding and trading just pouring out of me. I built platforms for RiskArb, GlobalMacro, LongShort, ConvertArb, and even CDO/ABS strategies. I was all over the place and loved it.

Last August (2010), I decided to take the plunge and leave the comforts of the place that treated me very well over the years. Not only did I want to explore work with a new employer and gain the flexibility to work independently remotely, but I also wanted to gain more flexibility to get in and out of trades without holding periods or legal pre-approvals or restrictions on trades.

Although I had a lot of ‘book smarts’ and passion for staying ahead of the market through daily study and research, I quickly learned that passion is not enough. Think about it. The market is built to chew up and spit up those that are not prepared, don’t have the mental stamina and toss aside those that succumb to their own emotions. Therein lies the problem with relying too much on passion. To quote journalist David Allen,

Emotions seem much too unsteady to be associated with anything or anyone I consider truly successful. As fast as they go up, they can come crashing down. Just try to hold only a single feeling for any extended period.

If you rely too much on passion and drive, I’ve found that you may be setting yourself up to fail in ways that you don’t even know until you are more disciplined to become aware of the problem. We are all participants of the market, not directors of the market. Allowing your day to be controlled by the ebbs and flows of a chaotic market may turn your quickly from euphoria to depression.

Not only is it dangerous to allow your mental state / emotions and level of passion for trading to be affected by the day to day gyrations of the market, it’s equally or more dangerous to be making decisions based on that mental state. It takes a strong person to admit when they are wrong and allowing emotions or passion to control their decisions.

To help keep my mental state in check, I have found that it helps to run trade ideas by @gtotoy in daytraderbootcamp.com — a room full of top notch, real-deal traders. They’ll won’t hold back in there and remind emotional traders that there is no room for emotion or regret in trading. Staying disciplined and keeping a level head is more important. “Next!” is a common phrase used by traders who have been around the block a time or two.

Finally, remember that you are not the only one who is passionate. This market is full of very driven individuals, many of whom are working very hard to be more successful than you are. They may be more focused, more disciplined and more experienced than you. Many of the people who don’t have that basic character trait of passion for the markets in their blood, don’t last long. You’re swimming with other passionate sharks.

Don’t get me wrong; it’s important to be passionate in this business, but it’s not the only character trait you need to be successful. Just don’t let your passion get the best of you. I’m taking steps to change, and I’ll share that in my next post.

I hope fellow traders share what they’ve done to get better in the comments section below. The @StockTwits community is all about community, trading and sharing ideas. I hope my ideas help some of you in the days ahead.

Categories: stocks

Off The Cuff Nonsense and Living in Interesting Times

May 6, 2011 1 comment

It’s been a crazy week. We got Bin Laden, the market saw a 12 point gap up and a 10 point gap down in one week. Lots of ups and downs in the market, lots of churning. Below you’ll find another contribution from the journal of @seldomawake as he reflects on some of his actions during the course of this week. Enjoy.

“Plan your trade, trade your plan.” I must’ve seen that a million times on the stream. Everyone, I figured, must be sick of hearing it by now. Except, apparently, I wasn’t.

Last night, I tweeted my read on the market. If memory serves, I said that the IWM chart “needs a chalk outline,” and that while I was getting sell signals from my charts, SPY and DJI hadn’t quite confirmed the sells. Today, of course, I got that confirmation. However, when I pull up my broker page, I can’t help but notice that I am the owner of a (significantly diminshed) swing-sized position in IWM… calls.

How on earth did I manage this? The problem, I suspect, is best expressed by John Wayne: Life is hard; life is harder when you’re stupid. You see, around 1PM, I couldn’t help but notice that my stocktwits stream started jumping like a grasshopper on PCP. The bulls were on parade. I saw as one trader after another made money and the market shot upwards, and calls that I had been watching jumped 10, then 20 percent.

“Holy cow,” I thought, “this train’s leavin’ without me. Where’s an entry?”

I dropped whatever I was doing. I must have, at the same time, dropped any plans I had carefully developed the night before, because I went from “careful, sit on your hands” to “BUY! BUY! BUY!” in sixteen minutes flat.

However, I had a problem. The charts were still screaming bloody murder. You see, I’m a swing trader. I trade five, maybe eight times a month. The smallest chart I use is an hourly chart.

Of course, hourly charts don’t allow for 16-minute bear-to-bull transitions. So… I started looking at shorter charts. And there, on my 20-minute chart… there! There was a reversal! My bullish thesis was confirmed, I could now buy with impunity!

So bang, I did. And sure enough, I had a quick 5% gain. Then, of course, the big charts asserted themselves. The short move completed, the larger bearish paw came down…and squished my calls into the close.

The truth of it is, even if we had rallied into the close and closed green, it would still have been an awful trade. Trading the 20 minute chart isn’t my plan. My plan, of course, had gone out of the window the minute I, however subconsciously, was swept up in the stream, and decided to trade on other people’s sentiment. The trade was right for them, and not for me.

I know that I was swept up in the excitement, because in my trading journal, I wrote as I entered the trade, “Discipline should trump conviction, but…” What’s perhaps most painfully hilarious is, I had written this under the “emotional state” section of my trade log. Painful, hilarious, and, uber alles, telling. We decide first, and rationalize post-hoc. This isn’t new. I just can’t believe I’m still doing it. I thought I was over this amateurish error.

I’ve spent over a year working on coming up with a system that works with my style, that I know how to handle, that carefully frames, plans, and allows me to develop my trades. I spend hours night after night, studying, looking for an edge.

Taking a trade because it’s trending on the stream, be it from greed or from fear, tosses all that work out of the window. The off-the-cuff nonsense invalidates all the work we do night after night, the work we’ve put in over the years. It takes a boring, profitable trade, and turns it into an interesting, heart-pounding, watch-each-candle-paint, kind of trade. I, for one, have had enough of living in Interesting Times.

I can’t wait for trading to be boring again.

Categories: seldomawake, stocks

Seven Steps to Getting Out of a Trading Slump

April 22, 2011 2 comments

This post started out as a response to @ppearlman’s Market Shrinkology Mail Bag, and thought it would make a great full post on my own trading blog. I can very much relate to the gentleman who reported having trouble sticking to his stops. As I made very public on the stream during the month of February and early March, I suffered from the same “can’t stick to stops syndrome”. A large part of this, after deep reflection and deep realized losses, truly is the result of an ego built up during the prior months of a major bull market.

I reached out to MANY of the best traders on the stream for their advice, and they were kind enough to give me advice. There are many individuals that have reached out to me on the stream, and some very special individuals who had extremely professional and helpful advice. I really hope you follow them. They all have their own styles and bring something special to the table: @chessnwine @stocksage1 @zortrades @jfahmy @traderstewie @traderflorida @1nvestor @fibline @stevenplace

Having some non-professional trading buddies helps as well. You can bounce ideas off each other and keep each other in check without annoying the pros with your requests “for help”. For that, I can’t thank @seldomawake @caribbeanlink and @jimcollins enough.

After a *lot* of reflection, I came up with a new set of rules. I’d like to pay it forward.
The past few weeks have seen a tough set of ups and downs, a surprise US debt downgrade, serious shakeouts and strong reversals, but I have personally experienced my best personal performance this year after enacting these rules.

Please don’t simply take my ideas and write them down. Make your own ideas by borrowing some from me, some from others, create your own and then OWN all of the ideas. It is only then that you will truly break your own slump.

1) wipe the slate clean COMPLETELY. Start over. Your portfolio is probably full of some winners but mostly losers, or trades you got into for the WRONG or unclear reasons.

2) Start a trading journal. Write down your plan and hold yourself accountable. Nobody is going to change you. You have to change yourself. There are no do-overs, and there are no second chances in the market. Just a new day, a new plan. You must treat the market with respect and professionalism, or it will swallow you whole.

3) Even if you THINK you have found the bottom or the absolute SURE THING, you haven’t. Do NOT pile into a trade with everything you have because you think you found the holy grail. Never think you’re smarter than the market. Nobody can time the market consistently *every single time*. You might start to feel this way after a series of good trades, but this can quickly turn into one of the worst trading slumps of your life. This can lead to #4…

4) NEVER revenge trade. If you entered a trade and your plan starts going wrong, do NOT double down on it, or worse triple down because you know it will turn around on you. TAKE THE LOSS you had in mind when you entered the trade. Say you plan to risk $500 on your trade. If it goes against you by that much, you’re out. PERIOD. Either your entry price or your timing was wrong. You can always get back in. Human beings are inherently loss averse, but this is a dangerous mentality for a trader. A trader must be able to take small losses in order to let the big wins, when they do come, finally run. Think about it for a minute: why hold onto a losing position just because you think you’re right, when you can _really_ be right on a better trade? To hold onto a losing trade is implicitly saying you can’t make more money elsewhere. That’s just poor psychology.

5) This is similar to #3, but really hammers in the point that POSITION SIZE IS KEY. If you’re finding yourself losing sleep over a certain position in your portfolio, or having to check your position with every tick, chances are the position is too large. Sure, it’s fun to think that you’re going to score big on some cheap rare earth stock that’s sure to be a buyout target in the future for only $13/share. Just think… If I had bought ten thousand shares on margin of $REE at 10, I’d have made more than some people make in a year! But wait… that sort of leverage or position size works against you just as fast when it doesn’t pan out.

6) This is a continuation of #5… If you’re not using leverage or going “all in”, you could still be risking too much as a percentage of your portfolio size. Do not let one position take more than 10% of your portfolio. After all, stocks are nothing more than pieces of paper with a number attached to them. You don’t need all of your eggs in someone else’s basket. A report could come out tomorrow that halts trading on a security, wiping out all or most of your investment. Realize that every trade you make could theoretically go against you completely. The chances of loss are real. The market owes you nothing. Sometimes the market starts to price these things in, and sometimes it doesn’t. When the market knows something you don’t know, it often goes down and goes down fast. Trust ONLY your stops. Allow your position size to be large enough so that it keeps you interested but not so large that every down day in the market shakes you out. Know the ATR, Average True Range of the stock you are holding. Know the 20 day moving average, 50 day moving average and 100 day MA. Use these indicators to help guide when you buy, hold and NEVER hold under certain situations.

7) If you’re only taking the trades of others and not doing your own homework, you’re not treating this business serious enough. You must create your own charts, do your own research and have specific entries AND exits in mind. If you do find that really good trade, pounce on it and ride it till it stops moving. But don’t stop your homework there. Peel some off and ride the rest, sell calls against part of your postion, but don’t let it get imbalanced. Position size remains key. Don’t get shaken out when it doesn’t make sense to bail, but listen to the market. It knows more than you do.

Trade ’em well.

Categories: stocks

Wherein Whole Foods Eats Me Whole

April 20, 2011 Leave a comment

Another insightful contribution from our friend @seldomawake. My takeaway is a lesson I’ve had to learn the hard way a month ago about always sticking to stops. ALWAYS. Have a plan before entering for multiple scenarios, not just the best case.

Another key point to be made is that exits are just as important as entries, if not more. @seldomawake and I (@codertrader) entered $WFMI with that descending trendline break as the key to our entrypoint. I entered the trade after I noticed an intraday cup and handle being formed, with a goal of 65/share in mind. I exited at just under 65. Our friend @seldomawake did not. The point is that the same trade made by two different people can end up very differently for each participant. He did a lot more research than I. In this case quick thinking and technicals prevailed over the fundamentals without a clear plan. I’ve made the same mistakes before; we’re both learning and improving.

Know when to get out before you enter the trade. Enjoy! Please leave comments below. ~@CoderTrader

I am told that the thing new traders are best at is taking profits, and the thing new traders are worst at is taking losses. I’ve been told this over and over again, yet I manage to keep proving it to myself… again and again.

Letting winners run is hard, and cutting losers is harder still. Why is this? Today, while reviewing a failed trade, I think I stumbled on a clue. Come along with me as we play the “Let’s See What Went Wrong Now” game. (As an aside, I hate this game…)

Let’s take a look at my adventure with Whole Foods ($WFMI). The subtitle for this adventure will be Why All My Shopping Will Henceforth Be Done At Publix.

I knew that April was seasonally strong for supermarkets. I watched $SVU report, read the conference call, and liked what I saw. I then picked my target: $WFMI.

The technicals looked good. I saw the long-term uptrend, and I saw that we were retracing back to the uptrend line. I waited for the bounce, then went long with August 70 calls on the break of the 20SMA. As with all my trades, on entry, I grabbed a notepad, and wrote down the defining parameters (“borders”) of the trade::

1. Profit target: 20 (or +1 on the call).
2. Timeframe: Out in four days if no strong up move. Will take whatever profit I have.

Oh, I then thought, I suppose I should specify that other thing too..

3. Loss target: A break of the uptrend line.

Great! Now, I was done. I had Just Put Money To Work! I was Going To Be Rich!

I sat back and watched as.. the stock did nothing. I wrote some code. I watched some more. The $WFMI still did nothing. Stocks were popping left and right, and I know I missed at least two great opportunities on $QQQ… but no, I was in a trade, I had a plan, and I was going to Trade the Plan.

I know from experience that if I had hit my profit target, or even come close, I would’ve been out like a lightening bold. I would’ve taken the money and run so fast several axioms of special relativity would have been violated.

But when the stock broke support today? I had a clear sell. I was down 20%, which was sizable.

I opened up my broker page, looked at the position, keyed in the order to close the position…

…and froze.

After sitting on the position for a few hours, and having it do nothing but drop (now with bonus theta!) I think I’ve figured out why I froze on taking the loss.

I really have been treating loss targets on the trades as an afterthought. I’ve had a great year, and I’ve literally let myself get sloppy. And, as a result, I’ve lost about half the money I made YTD in three of the four trades that went wrong this month.

I don’t think traders — certainly the ones I know in person — are pessimistic people. I certainly am not. In practice, this means that in any trade, I focus on the loss aspect just as an afterthought.

So, here’s what I’m going to do to compensate:

1. If the stock doesn’t move within a day, I’m closing the trade. There are simply far too many good opportunities out there for money to be sitting in a lazy stock.
2. I will focus on the loss target before anything else associated with a trade. I will work to quantify the risk, and when the target is met, I will actually exit, instead of freezing.

You’d think I’d have learned this by now. But… nope

Happy hunting, folks, and I hope this has been helpful. If it makes you some serious money, when you’re down in the Southeast, buy me lunch.

…just not, y’know, at Whole Foods.

Categories: seldomawake Tags:

Social Trading

April 15, 2011 Leave a comment

Tonight’s post was sent to me by @seldomawake — a friend I met on @StockTwits — after sharing several of our recent trading experiences with each other. We have shared both the joy of well executed plans, and the pain of trades gone terribly wrong. Tonight we’ve decided to start journaling to learn from our mistakes and to improve our skills over time. We hope that the community as a whole can find value in what we have to offer.

As @ppearlman has repeatedly said, Visualizing and Journaling Past Successes will likely help us become better traders.

Without further ado, tonight’s first post from H Khan, @seldomawake:

Seeing as how both @CoderTrader and I are relatively new to this trading business, I thought I’d join him in blogging about learning to trade. While his posts discuss the actual nuts and bolts of trading, I thought I would focus on the psychological side. The trading mindset is pretty darned far from the mindset of civilians, something that I find endlessly fascinating.. mostly because I still deal with them on a daily basis..

The obsession started early. In 2007, with the Dow around 12,000, I had dinner with a veteran investor. At the time, I didn’t know anything about the markets at all, except that the Dow was some measure of the biggest US companies. Over dinner, he casually mentioned that he was very short, and expected to cover around Dow 7,000 to Dow 6,000.

I stopped chewing, which is a pretty big deal. You don’t normally come between me and my food.

“So,” I said, mouth full of glazed tuna, “you’re expecting our major companies to shrink by.. half?”
“Oh, yeah,” he said, matter-of-factly, while munching on his salad. The salad was, to him, far more exciting. It didn’t even have dressing on it. He was that bored.

I’ve known him for some time. The man’s got ice in his veins.

Over the next year, I watched the Dow drop. Around Dow 6,000, the Dow bottomed. Well, I thought to myself, I’ll be. I gotta get in on this. How hard can it be?

So, I opened a brokerage account.

I proceeded to find myself unable to take my eyes off the damn quotes. I couldn’t look away. Mostly, I saw red. Far more red than I would’ve liked.

I’ve learned a lot since then. I can look away from quotes. I am far more calm, and a lot more disciplined. I’m not quite at the stage where I can casually discuss a halving of the Dow over salad, and far from the point where I can swing a giant chunk of the move.

Over the coming weeks, I’ll start talking about some of the psychological aspects of learning to trade. Hopefully, I’ll help some other folks starting out.

What could possibly go wrong?

Categories: seldomawake, stocks Tags:

What difference does one teacher make?

What difference does one teacher make? The timing of this question could not be more relevant than now.

Does learning a wide array of subjects over the course of first twelve years come naturally?
Does every student see the importance in following through on a syllabus filled with diverse subjects?
Can each individual student latch on to every single subject they will take during the course of a high school education?

Learning from the lessons and mistakes of human history, the mysteries that lie underneath the biological and chemical surfaces that touch us on a daily basis, discovering the mathematical beauty behind the golden ratio or the fibonacci sequence, feeling in tune with multivariate game theory of economics and business, finding freedom of expression by observing the colors painted outside the lines, or jumping outside the comfort zone of one’s natural spoken language.

All of these subjects are part of compulsory education. Each student is required to attend.
Do they like it? The answer is more likely no. Every student usually does not find all of the above subjects relevant. The chances of a student succeeding in a subject they find no interest in is slim.

On the first day of most high school classes in America, we assign seven or eight 900-page hardcover books to a student, and send them home with a backpack used to shlep material they don’t want to read.

Or worse yet, the books end up collecting dust in a cold, dark locker. The elected officials have the luxury to look on at their ‘mission accomplished’; in their minds, another successful year is beginning. In their minds, the work is done. The students are on their way. It is almost as if we as a society are setting up our youth for failure. We’ve led them to the water, but we haven’t even shown them how to drink.

So what makes the difference? What puts the odds in favor of the player instead of the house?
The answer is passion.

Teachers with passion inspire students. They turn a boring subject into something, at a minimum tolerable, and at best a new hobby that the student owns. Passion gets a classroom to transform from cacophony to harmony. To the average teenage boy in high school, it can transform a piece of Shakespeare from a dull story into the highlight of the day when done just right.

Getting students interested is the first step. Keeping them interested is the challenge. Good teachers have mastered this skill. If we are to value a well-educated society that is capable of making incremental improvements in the world, we must first find the value in our nation’s coaches, teachers and mentors. They are our first line of defense to poverty. They are our last line of defense to ignorance.

The passion I’m speaking of cannot be faked. Passion is rare. Passion is valuable. If you know a passionate teacher, thank them. Support them. Some day they will be supporting your children.

Today, I recognize Tim Nelson, the Passionate Teacher, coach, leader and friend.

Happy Birthday, Tim.

P.S. Thanks for the English writing skills.

Categories: Uncategorized

Charting the StockTwits50

February 23, 2011 2 comments

By the end of Wednesday, this post may either prove me wrong or very right, but at least I’m brave enough to take a stance on my views at this point.  After a -2% day in the $SPY and -2.8% day in the $QQQQ many people have found themselves either redeemed after months of being under-invested, or feeling like they are left “holding the bag”.  Every investor, especially home gamers, need a way to strategy to prevent them from being complacent or worse yet, falling victims to their own analysis paralysis.  For the past couple of months, my strategy has been to leverage the power behind the algorithmically developed StockTwits50 by @ivanhoff and @howardlindzon at StockTwits50.com.

With nearly 10 years of history working for a hedge fund, I have a great deal of knowledge of the markets I’ve developed over the years, but there is no doubt in my mind that the knowledge that can be gathered, filtered and analyzed through the @StockTwits community is invaluable.  The advantage that young investors have, being surrounded by the minds and mentors of @ZorTrades @1nvestor @chessNwine @traderstewie @TraderFlorida @TA_Trader @StevenPlace and countless others, allows the inexperienced investor to accelerate their learning process.

It is no surprise to me that the momentum found in this social network of traders, scalpers and investors is a perfect fit in the middle of a market that has massive momentum behind it.  Therefore, I find it extremely fitting to rely on charting the StockTwits50 on a daily basis to help determine my course of action for the next trading day.  Each trader, sticking to their style or strategy, has to make up their own minds on a daily basis and stick to an objective plan if they are to survive long term in the market.  This includes adapting to ever-changing markets.

In my opinion, after reviewing the charts of the StockTwits50 leads me to believe that the bull market momentum is still in tact.  My indicators point to a temporary blip in an ongoing uptrend, with many of these high-octane momentum stocks showing healthy pullbacks, basing patterns, pulling back to (and holding above) key 50SMA levels or 20day VWAP levels.  Some stocks are continuing to stay within basing patterns they have been building for weeks, and others, like $LVS are showing a repeat of the pop-drop and chop pattern.  There are even some gems like $WLK and $GPOR that had stellar days. There’s even one stock that looks like a “pocket pivot” play, like $CPWM.

Sure, many of these stocks may be drawing their line in the sand here, but the fact is, in the context of a broad bull market with massive momentum, the key is to ride it until it stops.  $SPY & $QQQQ weekly charts are looking fine.  I’ll be posting each of the 50 charts for this week’s StockTwits50 with important basing / support levels indicated on the charts.

http://chart.ly/users/CoderTrader

Trade ’em well.  ~ @CoderTrader

Categories: stocks