An argument for why not trading much makes no sense

So I work with a trader who started very well.  I was very happy with his progress.  He was consistent with his results.  Steve frequently would remark at his overperformance given his experience.  And then recently he has not traded well.  So much so that yesterday I wrote him this email:

Hey what is going on w u? Something bothering u in your personal life? You went from great progress to honestly u suck.

Today after the close, with his review, he responded……..

Bella,

Sucked less today .  In all honesty there are no troubles going on in my personal life. …I’ve been more quiet than usual just because my confidence in my trading has been down a bit.  Besides the first day of the month, last Friday, and today I’ve been really disappointed in my trading as of late.  What’s been frustrating me more is I know it’s earnings season and I feel I’ve been putting in the preparation getting a jump start the night before to look at all the charts of the stocks that reported after the close that day but for the most part not seeing the results.

I’ve been trying to adjust how I’ve been trading lately maybe too much to the people around me.  I think it’s smart to emulate people that are having success at a craft but maybe part of me feels like I’m having an identity crisis as a trader.  Deep down I feel like my style is just being patient, not writing a lot of tickets, only trading a few names, and then just getting big in those plays.  When I get off to a positive start in the open I usually feel in control and I think become even more patient and can usually stick to only a handful of names.

The real problem is when the first few ideas don’t work, I start thinking “Well I need to just need to be in something that looks like a good setup and get in light to all of those and hopefully something hits because it only takes one trade to turn my day around.”  I want to be in names that everyone else is trading and those are the days I feel like I trade more names, more tickets, and finish either net flat or down for the day.  I guess the real question is how do I adapt to a market that’s always changing while still staying true to what works for me as a trader?

So there is so much talk of not overtrading.  But what is overtrading?  Too many misuse and misunderstand this concept in our game.  And does not writing a lot of tickets = not overtrading?  Does not writing a lot of tickets = discipline?

There is confusion here.  Traders should be selective.  Becoming a high level trader requires developing a selective playbook that makes sense to you.  You size up in ONLY the best plays from your playbook.  But does that mean not writing a lot of tickets?  Does that mean not trading a lot?

Isn’t a sign you are an elite trader making a ton of trades?  1) You have a large playbook.  2) You are finding a lot of these plays.  The problem is not trading too much for most developing traders.  The problem is not having the skill to trade the plays your are trading.  If you stink at the plays your are trading then of course you should not trade many of them.  You stink at them.  And more of them is gonna mean more lost money.  But this means you need to get better at your plays not make less trades.

And here is another huge negative of not making many trades.  Let’s say you are one of those two or three a day traders.  GMan makes more trades than that sleeping  Inevitably you are gonna hit a bad streak.  If your normal win rate is 40 percent, and you hit a bad streak, it might be a few months of negativity for you.  And then the doubts enter stage right.  And then you start to think about making adjustments that perhaps you might not need to make.  It might just be the math is not on your side for these few months.  But you mix that up and overvalue a normal drawdown for the inactive trader.

Then you start with plays that are not even in your playbook.  Then you skip the best plays that are in your playbook.  And now you have created a whole new math for yourself.  How bad you can be when you make trades not in your playbook and skip the ones that are.

But if you are an active trader making many trades, with a thick playbook, the math will work better for you.  It will be so much harder to have a bad month, heck a bad week, heck a bad day.  The math indicates that it is improbable to have the long negative streak of the inactive trader.  And you are less tempted to all that getting in your own way above.

Let’s take basketball as an analogy.  So Lebron James can dunk.  His shooting percentage is extremely high slamming the ball.  This summer he worked on developing a post up game.  He wants to develop more shots that are also high percentage plays so he can score more points for his team.  Isn’t that good for the Heat?

If you have a play that works and makes sense to you, you want to trade as many of them as you possibly can.  If you have shown the skill and discipline to find a play that is profitable, then you can find more.  You can grow your playbook.  And then you are gonna want to find as many of those other plays as you possibly can.

So do not mix up stinking at a play with the need to not trade much.  That makes no sense.  Of course be selective with your trading and only make the trades that make sense to you.  But don’t you want to find a whole lot of those trades?  And then don’t you want to develop the skill to trade more set ups that make sense to you so you have more opportunity?

Anyone disagree? I hope so, and please share your thoughts in our comments section.

Bella

One Good Trade

How do I regain my trading confidence?

Hi Mike,

I think it’s crazy (in a great way) that a successful trader/prop firm manager/author still takes time to answer random question from traders… Thanks so much for considering responding to mine.

First, a bit of background so you know where I’m coming from. I started trading at the beginning of 2004 at a prop firm in Chicago that specialized in intraday stock trading, much like SMB. However, the training was minimal (1 week of classes, 2 of simulator with virtually no oversight, and sat next to a veteran) rather than the ongoing support SMB provides to its traders. I had promise from the beginning, was gross positive from the start, though I sometimes tended to overtrade. Was the first in my incoming class of 8 to have a $1000 day and the only one still there after a year, but I sometimes had more red days than others, especially when the market was slow. Long story short, I left after 3 years having covered my 2k a month draw but made little on top of that because I just needed to start making money to live on. I then went to work as an analyst for (XXXX) and became a trader on their trader product. I also traded on the side with some money I was given by my grandfather. Luckily, the market became excellent for my style of trading in the back half of 2007 and became downright amazing in 2008 and I blossomed as a trader and made significant money. I left briefing to focus full-time on my trading at the beginning of 2011. My profits continued with the usual setbacks until the beginning of October of 2011, which not-coincidentally was the low in stocks for 2011. When that happened, I was up about 1.2 million for the year and by the beginning of December I’d given back 1/3 of that and stopped for the year. It was still my best year trading, but I found myself in a very negative mental place because I lost that money by overtrading and making poor decisions

Now I find myself losing money again at the start of 2012 and haven’t found any kind of rhythm or flow with the market. I haven’t been this frustrated since 2006, when I left the prop firm. I’ve had setbacks before and confidence blips, but this is an oder of magnitude greater than what I’ve experienced before. I know I do best in emotional trading environments, (I crushed silver futures last year) but I find myself unable to simply wait for a better environment because I’m sitting at home with nothing to occupy my time except for trading and nobody else to help hold me accountable for poor trading. I’m in a bad mental place and the market doesn’t mesh with my style right now, but I already took a month-long break. My question in it’s most basic form is this, Will you talk about the time when you had the biggest “crisis of confidence” regarding your trading and how you got through it? It think just hearing that story might help me overcome some of my newfound trading problems related to confidence and conviction.

Bella

Confidence: Your resilience in the face of disappointment- Dr. Andrew Menaker

I wrote about this in One Good Trade. Check out page 313 and my experience in 2001. Essentially, I took a break. Every year I think this is the end. And then I do some thought and research.  I condense my playbook to my better trades and rebuild my confidence and PnL. Much of trading is taking the time to understand your best plays in the current market, finding more of them and trading them with more size. So I ask: what are your best plays in this current market?

Most experienced traders, who have known trading success and then like the trader above struggle, use plays that have stopped working in the current market.   All experienced traders go through periods of struggle and self-doubt.  I know one high level trader who seems almost distraught for months of every year before he runs into his next good streak.  I work with one trader who if he fights the trend could finish every month decidedly negative instead of his normal positive.

Thxs for reaching out.  Congratulations on your trading success.  If you made money in the past you can going forward.  I have no doubt of that. It’s the guys who have never make money and just think a simple change here and there will make all the difference that I worry about.

I hope that helps.

Bella

One Good Trade

Is this a tape reading play that you make?

Mike/Bella/Mr. Bellafiore,

First, I can’t thank you enough for all you’ve done for the trading community. I’ve learned orders of magnitude more from the fruits of your efforts than from any other single source since I’ve started trading. You’re doing great things.

My question is about tape reading.

How would you describe the difference between tape action that signals a turnaround from healthy tape action during a trend, where price ebbs and flows naturally, but doesn’t completely turn around? Tape reading alone for a reversion-to-mean style doesn’t seem to yield setups for more than quick scalps. For bigger plays market structure seems to be far more influential. What I’m working to understand is how the two really work together.

I’m also interested in what you would say about jumping in front of big orders in the book. Definitely not cool to jump in front of traders on your desk. But jumping in front of other people’s orders … do you put that into the category of “not real trading”, or “using every tool in your toolbox”? If you factor big book orders into your trading, what information do you get from them?

Bella

The tape can tell us a trend is about to end.  Some tells from the long side are:

a) the buyer disappears

b) a new seller appears on the offer

c) a weak new upmove (“that is no upmove I have ever seen before”)

d) the buying pattern dissipates

e) blow off topping action

If we see the above that can be a Reason2Sell.

I am not a big fan of stepping in front of a big order as the ONLY reason to enter a position.  Combined with strong technicals and I might step in front.  This reason alone is almost never a reason I enter a trade.

Now having said that I do know of and have trained traders who became very good at this- stepping in front of big orders.  This technique worked better in 06 and better still in 03 and better still in 01.  As time has passed this technique has become less effective for most.  These traders saw a big order on the bid that foreshadowed a big buy order and stepped in front.  This is the key.  They did not step in front of EVERY big order.  They stepped in front of the ones that tipped to them the big order would STEP HIGHER and thus the stock would trade higher.  They might buy 3-5k shares of this stock for just spotting an unusual big order and ride it for 25-50c.   They wanted that big order to STEP HIGHER. And they got paid for this play.

So there is money to be made mastering this trade.  There is less than the mid 2000’s.  But it still pays for those who discern the real from the fake big orders to step higher.

I hope that helps.

Bella

One Good Trade

Free Options Webinar: SMB’s Options Tribe: Tuesday, January 31, 2012 at 5pm EST: Broken Wing Butterflies

Measuring Opportunity Intraday

After having trading professionally for 16 years I still find the lack of understanding among friends and family as to how myself and other short term traders make a living humorous. Here are some of the comments I still hear on a regular basis from my parents and close friends “Market was flat today so I guess you didn’t make any money?” “Market was up 3% you must have really crushed it?” “Market was down over 2% did you lose a lot of money?”

Discretionary intraday traders make money based on intraday price movement. Period.  Whether a stock closed up 1% or down 10% is in no way determative as to how much money a trader will make in a particular stock. All that matters is what happens in between.

Let’s exam the statistics and take a look at the chart for AYI from January 9th and see if we can assess the trading opportunities that were presented to the intraday trader.

The first thing that catches my attention is the stock’s intraday range (the difference between the high and the low during normal market hours of 9:30-4:00). Its range was over 5 points which represents about  10% of the stocks price. If we examine the distinct moves that occured in the stock the intraday there was even much greater opportunity than the 10% range suggests.

1. The stock opens at 54.98 and then drops to 52.25 which is 2.73 points
2. It then bounces from 52.25 to 57.81 which is 5.56 points
3. It then drops from 57.81 to 55.10 which is 2.71 points
4. It then bounces from 55.10 to 56.93 which is 1.83 points
5. It then drops to from 56.93 to 54.06 which is 2.87 points
6. It then drifts up from 54.06 to 55.06 which is one point before closing for the day

The total movement described above is 16.7 points which represents more than 30% of intraday movement. But a casual observer might say AYI opened at 54.98 and closed at 54.94 and that is only 4 cents of movement all day. How would a day trader possibly make any money on such a small move?

My response: the change from Open to Close is not a relevant metric for determining opportunity for a day trader. It is as meaningless as whether a basketball team loses by 1 point or 30. Either way the team has a single loss added to its record.

By the way, this type of intraday movement is fairly common for stocks that are In Play. But it is far less common for the market overall. That is why SMB focuses on trading Stocks In Play each day. They offer more intraday trading setups with better risk/reward ratios than trading the broader market. One of our trading tools the SMB Radar, has a column titled “Days Range” which ranks stocks such as AYI that have unusual intraday ranges compared to what we might see normally.

Obviously the money any individual trader makes will not only depend on the opportunity available but also his or her skill level and trading playbook. That is why SMB focuses on building fundamental trading skill during year one as well as helping our trainees build a playbook that makes sense to them.

Steven Spencer is the co-founder of SMB Capital and SMB Training and has traded professionally for over 15 years. His email is sspencer@smbcap.com.  For more information on the SMB Radar that contains a series SMB’s of proprietary algorithms click HERE.

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Forex. price expectation

A trade in GBP/USD using our psychological price expectation patterns. A trade that started from our daily chart and ended as a swing trade.

related articles: a good time to trade, the real market trend, forex correlation.

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Yesterday’s Options Tribe Meeting: Crude oil options and “edge”

SMB’s Options Tribe is an online community of options traders dedicated to sharing successful options trading ideas with all of our members worldwide. Each week the community will meet online for the primary purpose of watching live presentations made by veteran options traders and experts in the world of options trading. This week, crude oil options broker Jordan Ness, and Charlie Ferguson discussed crude oil options, long-term options trades and “edge” in options trading.

If you couldn’t make it to the live webinar,  here’s your chance to watch the recording.

To view the recording: Click Here

Make sure to look out for the invitation to next week’s Tribe meeting.  That invitation will appear on this blog shortly.

Seth Freudberg

Director, SMB Options Training Program

The SMB Options Training Program is a twelve month program designed for novice and intermediate level options traders who are seeking an intensive training process to learn how to trade options spreads for monthly income. For more information on this program contact Seth Freudberg:   sfreudberg@smbcap.com.

Risk Disclaimer

The March Bearish Butterfly Trade

This post is the first in a series that we will be publishing over the next several weeks, tracking the hypothetical performance of the bearish butterfly trade  as it would have been  handled  according to our guidelines contained in SMB’s Bearish Butterfly Video Series.

On Friday, we initiated the March  bearish butterfly trade in the $RUT.    If this was  an actual live  trade, you’d need to set aside about $25,000  in your account in order to leave some powder dry for adjustments that you may need to make if the market rallies in an extreme manner after the trade commences.  At the time that we initiated our hypothetical  trade, the $RUT index was trading at  784. In accordance with our guidelines,  we placed a 5-lot put butterfly, centered at $RUT 760  below the market at a cost of 10.23 per lot.  So our total initiation capital level is a little bit over $5,000.  As of this morning, our position is up a little more than 1% of planned capital, but that means essentially nothing.   This trade can be active for well over a month in some cases and  how the market  plays out  over time–and whether we react to it with discipline– is much more important than the positive or negative P and L that will appear in the early days of the trade.

John Locke

Locke In Your Success, LLC

Please note:  Hypothetical computer simulated performance results are believed to be accurately presented. However, they are not guaranteed as to accuracy or completeness and are subject to change without any notice. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Since, also, the trades have not actually been executed; the results may have been under or over compensated for the impact, if any, of certain market factors such as liquidity, slippage and commisions. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any portfolio will, or is likely to achieve profits or losses similar to those shown. All investments and trades carry risks.

Risk Disclaimer

Free Options Webinar: SMB’s Options Tribe: Today, January 24, 2012 at 5pm EST: Crude oil options and “edge”

The Lense Matters

One of the questions I am asked most frequently by aspiring traders is what time frame do I use on my charts for intraday trades. My stock answer (no pun intended) is that from 9:30-10:00 I am looking at 1min or tick charts and then I zoom out to 5min. But recently I have found that a 15 minute view is more helpful for guiding me in intraday swing trades. Previously I had used 15min charts mainly to identify multi-day inflection points and trading zones.

Let’s take a look at SWN which I traded on the Open today. It was gapping up with the strength in natural gas and very In Play. I got long around 9:50AM when I noticed the 31.50 bid would not drop. Based on the price action I was seeing I believed my upside was in the 32.30-32.50 range. It made a new high around 10:25AM but failed to consolidate higher so I moved my stops up to 31.59 and 31.49 thinking that the price action had become less bullish.

I was stopped out after I left the desk on the down move around 11:30. As I looked at the 15 minute chart in my office an hour later it still looked like a great long to me. Each price spike below 31.50 was met with buying  causing a close above this level each bar. At 1:00PM when it began its next up leg it consolidated very tightly against 32 which was the longer term resistance. Based on today’s price action it seems like the next resistance area of 33.75 is in the cards very soon.

Steven Spencer is the co-founder of SMB Capital and SMB Training and has traded professionally for over 15 years. His email is sspencer@smbcap.com. for a free trial of the Stocks In Play call send an email to rmendez@smbcap.com.

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