Mechanical vs. Discretionary Trading

I am a strong believer of KISS (Keep it Simple Stupid). When I look at great busines ideas  and inventions, and the success of people it different fields such as entertainment and sports (isn’t that the same thing?), it all comes down to keeping it simple.  Something like myspace, which is really just microsoft frontpage done the right way ,makes hundreds of millions of dollars. If you are  a loser like me and actually watch sports interviews for insight, you will see the athlete say something such as ‘I just saw the ball and decided to swing’, or ‘I just let the ball go off of my hand’. You hear how they just let their bodies react and try not to think.

This has always been my problem. I’ll overthink a situation to the point where so much pressure exists that I become as uselss as a CNBC floor reporter. I do everything wrong , and then I get frustrated, and then , well ,we all know what happens. This is why I am a big fan of mechanical trading. If I knew how to program I would set something up to take those signals. Since I don’t I’ve set up rules that allow me not to question why I’m getting into a trade. I’ve seen more money lost by not taking a trade than by questioning whether or not to take it. My stop losses are always set, so I already know how much I stand to lose from the beginning.

I find that when I become discretionary it becomes more a matter of me wanting to look smart by being right. I want my peers to approve of how I picked the best time to get out, or how I’m consistently profitable. Sure I can make 70 dollars on every trade more times than not. However when I add it all up, losing 20 dollars one day and making 130 the next is more profitable.

The key with mechanical rules is that they have to take everything into consideration. I’m not up more this month because I’ve had to add more rules when new situations that I hadn’t accounted for come up. Something such as what if I miss a possible trade for the day, should I continue to take signals. Technically I should. However, I’ve realized that sometimes on bad days you can still make money, but it comes down to not missing that one trade.

Had I missed VIP yesterday I would have gone home with a loss and complained about how the market just won’t give me an opportunity to make money.  Mind you, yesterday was a bad day when it comes to volume anyhow, but I still managed to make a decent profit.

Today I slept over someone else’s house. I left the house at 8:50, expecting to make it to my office at 9:55 the latest. Nonetheless, the MTA had different plans, so I arrived at 10:25. That was ten minutes too late to take a trade on DY on the break of the third bar. The entry price would have been at around 19.20, with 15 cents of risk. The stock closed at 19.80. That’s almost 4:1. The bottom line is that I missed it. Since I did, my rule was to not enter anymore trades for the day. COST gave me a signal to short  on the break of the 11th bar. That would have given me a loss of about .25 cents if you include slippage. Maybe even 30.  DY gave me another signal to go long on the ninth bar. That would have been about 25 cents of profit.

Now I’m not saying that the results justify my actions. The reality is though, or better yet my reality, is that I feel as though sometimes being too late can be just as bad as being wrong. I still wouldn’t have lost , but I made as much with less the hassle by just not trading, because of my rule.

The point of this post is to illustrate the usefulness of having rules. You can’t trade if you don’t feel comfortable in a stock. The best way to do this is with rules made beforehand. Rules don’t only account for entries and exits. You have to know what stocks you’ll be looking at. What happens if it goes against you. What happens if you miss the first sign. I’m sure the are more situations that will come up, but make sure you make enough rules so that all you have to do is react when you see the trade.

Slow week continues

On Monday I didn’t get any stocks to day trade. Therefore, I was debating whether or not to avoid trading altogether this week. Then it dawnted upon me that I have no money so I can’t go away. What’s the point of staying home. Sure I’ll probably end the week with a small gain, or small loss, but hey, what’s it to me. In the end, I have nothing better to do. Well luckily Tuesday justified my showing up to work.

I usually stay till three to move my stops to breakeven. However on Tuesday I had to leave after 12:30, since I had to do some errands with my dear mother. OCN and FHN gave me a small net loss. VIP however was a winner.

I got long on the break of the fifth bar. It was stalling while I was watching it but since I had to leave I couldn’t torture myself be staring at it any longer. Luckily once I was done doing what I had to do at around 3:45, I saw that the stock was up substantially. I was explaing to my mother how the other two trades were no good and broke even, but this one was a good stock. She tells me, ‘how come you didn’t just buy more of that one’. ‘Ma, I didn’t know it was going to go up like this.’ ‘Oh, so I guess it’s just all luck.’ Not wanting to explain to her what I do for a living for the upteenth time I said, ‘ Yes, that’s exactly what it is, just luck’.

Born Loser

Isn’t that stressful? How do you do that? Man, the market is rough, it must be hard. These are the things that I hear when I tell someone that I am a daytrader. It’s funny how people could no so little about what someone does for a living, yet be so right in all of their assumptions. That is unless you are actually a successful trader.

The journey to become a profitable trader is a long and arduous one. You find yourself questioning whether or not you should buy a stock. If you do buy it, should you get out now. If you get out early, you usually see the stock skyrocket. If you let the stock go, you see it go back down to breakeven, maybe even get a loss. Whenever you see  a stock that made a run go back to your breakeven point, you get out thinking that you did the right thing only to see the stock take off. You get stopped out by one cent. These are all things guaranteed to happen to you. You will find yourself questioning yourself. Questioning your strategy. Questioning whether this is the right thing for you. There’s no way to make money in this gig unless you’re an institution and you have insider info. The worst part is that you have every right to have these doubts.

Yes, the market is out to get you. God forbid you start to make money. You decide to increase your size, and that exact day, everything, and I do mean everything goes wrong. So you end up suffering your worst loss ever and now the system you thought was good, is no good, so you stop using it. Start from the drawing board.

The biggest problem with trading isn’t the market, it’s you. Unfortuanately we see the world as we are and not as what it is. Many people get into trading for instant money when in reality the succesful traders are the ones that grind it out. People think it’s exciting, while in reality, when you are trading to make money and not for thrills, it could be one of the most boring things in the world. Why do you think so many blogs get so many hits. Daytraders have to do something in their downtime.

The reality is trading is a reflection of life. In life you will get lots of shit with a few sprinkles of good stuff in between. It’s a matter of dealing with the shit, and moving on. If you’re not worrying about paying some bills, your car is getting towed. If you’re car isn’t getting towed, you’re getting dumped by someone. If that’s not happening, you have a tragedy strike in your family. We don’t wake up expecting these things to happen, but they do, and they will with a high probability. That’s what trading comes down to.

You have to learn how to lose. By that I don’t mean you shouldn’t get upset. I get pissed every time I lose. I just don’t bang my head into the desk. Instead I channel my anger into figuring out if there is something I can do to prevent losing the way I do. You want to minimize your losses. You want to make sure that when they do happen, they just hurt your ego and not your pocket. Sure, it would be cool to be right all the time but get real. You will be wrong. Question is, what are you going to do about it. Are you going to actually sit down and figure out that you could have avoided the loss. Better yet, are you giong to understand that you’re supposed to take that loss.

Even when you think you’re learning from your mistakes by making changes to your approach you may be regressing. People tend to change all of the variables and end up with something totally different. Every strategy has its drawdowns. Any book on trading will tell you that.

So the key isn’t only taking losses and learning from them, but taking the right approach when it comes to learning. I know this post may not make much sense but I figure that one day this blog will have lots of hits because I will be making money hand over fist. The cool thing will be to look back at this post and see if my perception of trading has changed by then. This is a new week so as such I wish everybody best of luck in their trading, because they are going to need it with this choppy volume.

Chop Chop

For the way I trade, this has definitely been my worst week. The good thing is that I’m only down about $60 for the week. That’s fantastic considering that the only reason I’m down is because of mistakes I have made entering orders. Otherwise, I would be up $80 for the week. Lots of people take off during this time since school is about to start and summer is about to end. I guess that’s the rational reason as to why it’s so choppy. I can’t wait for September – November. That’s when the market really picks up and my strategy will be there to make me some good money.

Anatomy of a trade

This Monday, as most Mondays, I didn’t find many stocks that fit my criteria. Actually, I only found two. One was XING where I broke even, the other was TRMB. Now I initially wasn’t going to take the trade because even though TRMB was my number one candidate, it really didn’t have the amount of volume I’m accustomed to. Lucky for me I didn’t follow my logic and instead followed my day trading rules.

TRMB

I got long on the break of the third bar. This was a trade in the past that I would have broken even, made a bit of money, or lost a bit of money. Nowadays I get into a trade expecting it to make me good money or hit the stop. If I break even it’s not because I didn’t give the trade enough time to develop.

If you notice the stock made a big move over the next half hour. At one point I was up .74 cents. then I saw the stock start coming back down. I figured it was one of those trades that wouldn’t be smooth. Either way, strangely enough, it didn’t bother me. Instead of outhinking myself and trying to manage the trade I just shrugged and decided that if I was going to lose money then so be it. When you let your winners ride you have to be willing to give back what you may deem a large profit so you can have the opportunity for a larger one.

In any event the stock went down slightly below where I got in and then made a final push towards two o’clock. Now when I get a signal within the 15 minute range, I use Fibonacci extensions to designate a profit target. I use the low of the previous day and the high of the current day. I learned about that from Trader-X. I took my profit at 52.32, and if you look at the charts thats the area where the stock reversed and just collapsed. It doesn’t always work but it’s a decent place to take a profit especially considering the risk that I had. All in all it was a $118 dollar day, on a day when I barely had anything and volume was light overall. Not bad for a day I thought I was going to at best break even.

08182006; BEBE & RMD

First, the trade I didn’t make:

MVSN

I could have gotten long on the break of the seventh bar. Technically, I could have gotten long onthe break of the 4th bar, but the stock wouldn’t have shown up on my scanner since it didn’t have that much of a range for the day. It sold off hard on the last fifteen minutes of the day but with a .16 cent risk, you’re still making good return taking on the closing price.

My biggest winner was BEBE:

I went long on the break of the eighth bar. Unfotunately the stock stalled at the top of it’s fifteen minute range. The good thing is that I stayed away from the temptation of taking profits, and managed to get something out of nothing towards the close. Remember, stocks tend to have an increase in volume during the last half hour. Sometimes it works against you like in MVGN, and somtimes it works in your favor like BEBE.

My biggest loser was RMD.

I got short on the break of the eleventh bar only to get stopped out immediately and then watch the stock go south. This used to bother me but I just shrugged it off.  For the day I pretty much made barely more than breakeven.  I did mess up on my rules and that’s why I missed out on .60 cents. I would like to blame the fact that my scanner (www.prophet.net) wasn’t working until about 10:30, but in reality, if that was the case, then I shouldn’t have started using other volume filters. When I tend to do that, I come up with more candidates than I like. I like using prophet.net because it lags, and misses some volume candidates. However, it will catch the big ones. Those are the stocks that I want. The ones that’ll even show up on a lagging scanner are definitely the movers of the day.

Once that happens, it throws me off of my routine and I start rationalizing as to which stock to get into. MVSN was one of those stocks that I thought couldn’t possibly move up for the day.  I”m too dumb to figure out if the stock will move or not. I might as well just get into it and leave it to the law of probabilites.

08172006; ARXX & HPQ

They say that it’s good luck to step on shit. Well I accidentally kicked a whole mound of dog poo on way to work and somehow I sitll can’t make that correlation.

Only three stocks showed up on my scan today. The unusual suspects were ARXX, SHLD, and HPQ. SHLD was the one that ended making a move, or is as of this writing which is an hour before the market close, however the stops were too wide for my tatse. I ended up making two trades in ARXX and one in HPQ. I’m not upset that I went 0 for 3. The end result was me losing $60. So yesterday I’m two for two and make $250, and today I lose $60 after three losing trades. I’ll take those odds any day. On to the charts.

ARXX

I got short on the break of the 3rd and seventh bars. Once it stalled the second time around at around 9.70, I had a hunch I was done for. Many times my hunches have been right. Other times they’ve been wrong. I figure the best thing to do is let the stock verify if I’m right or wrong by either stopping me out or making me mucho dinero. It opted to stop me out.

HPQ

I was long on the break of the seventh bar. I wasn’t too crazy about it, but I’ve seen stocks open up, go down and stall a bit, only to rocket way past it’s prior highs. This was not the case today and the stock took me out for a loss.

All in all I was fine with the losses. If anything, I was begging to get stopped out at around noon. I figured if I’m going to lose, I might as well lose right away. Of course I had to wait for the choppy noon session to come to a halt to see what I thought was going to happen anyway.

So far this week I’ve had two down days for -37, -60, and two up days for 250, 97. Unless I do something incredibly stupid I should end the week on an a positive note, which is refreshing. With my average risk being at .25, I think I”ve actually done pretty well for the week. Hopefully , Friday will at least be a decent day and allow me to add more profit.

08162006; CG & ANF

Today was definitely a good day. Not only because I made money, but more importantly, I resisted the temptation to take profits off the table earlier than I initially planned to. When I did my morning scan the following stocks showed up : ANF, CG, PETM, SNDA, & DAKT. I stopped paying attention to PETM and SNDA as soon as they closed against the prior day’s closing price. Once a stock like PETM, gaps down and goes up so much, I pretty much have noticed that there is no way for me to figure out what the prevailing trend is. Those situations are tricker for me and trading is hard enough, so I stay away from stuff like that. Off to the charts.

CG

I got short on the break of the fifth bar. It ended up being about .28 cents of risk. The trade moved in my favor right away and was never negative, so it was a stress free trade. If anything, it was just annoying since it was stalling around the lower part of the fifteen minute range for most of the day. At three I moved my stop to about breakeven and closed the position at the end of the day.

ANF

Looking at the charts, I should have gotten long at the break of the seventh bar. However, the price didn’t print above that bar so my order didn’t get triggered at that moment. It did get triggered two bars after that. The stock moved beautifully, so it also was a painless trade. I felt good about the this trade from the beginning because of the way the bars were getting shorter and accumulating at the upper range of the fifteen minute opening range. At around three my total P&L was at around $200. I really wanted to close all of my positions since I hate seeing my P&L that high (this is off of 100 share positions), and then ending the day at $138. Worse than that though is taking the $200 and seeing that I could have made $240 if I had left it alone. Thankfully I did the latter. It feels good to see things work out when you do follow the rules. I know most days won’t be like this ,but hopefully the rest of the week will bring me similar results.

Recap

I’ve been lazy once again, but I”m back. Friday, could have been a good day for me. ADI and MLS were the only stocks that stood out. ADI broke the second 15 min bar, which was an inside bar and never looked back. I wasn’t in that because for whatever reason I had the habit of waiting until around 10:10 to scan for stocks, even though i’m only against trading the first half hour. Needless to say, now I start scanning at 9:50 instead. I did get a chance to short it later, and MLS as well, but all in all, it was just a different way to break even.

Monday really had nothing going on . I usually don’t like to keep scanning for stocks past 11. My reasoning being that if a stock hasn’t come up by then, then there really isn’t anything with much volume and volatility going on. Needless to say, I did get into STI and tried to short it. Yes, I know the market was up , but hey, I”ve seen shorts move in an up market and longs move in a down market. Got stopped out for a small loss.

Today, Tuesday, stocks on my radar were EQIX, SHPGY, DLP, CA, & NTES. Tried to short NTES, but it wasn’t available for me to short. I didn’t mind because the market was strong and the rest of the candidates were potential longs. I got into SHPGY on the break of the 7th bar, only to get stopped out. I got into DLP at the break of the third bar only to see it stall for most of the day. Luckily it made a move towards the close so that covered my losses for the day. CA was entered on the break of the seventh bar but that also stalled all day, so I got out for a 5 cent loss. EQIX was the big winner but it definitely wasn’t fun to watch. Thankfully, I cover the charts and my P & L because I don’t want to be part of the roller coaster. I got in on the break of the 11th bar. From where I got in the stock managed to go up more than a point, come all the way back down and turn negative, go back up a point and a half, and end the day giving me 80 cents profit, which sucks, but beggars can’t be choosers. Occassionally I did peak at my P & L and I did have the urge to close my positions. The move would have worked, but I know that someties a $150 open p&l can turn into a $300 p&l. The only way this can happen is by allowing my profits to run. So even though my profit wasn’t near what I wanted or expected, I didn’t lose money, and more importantly , I followed my rules.

I can’t post charts now because Im off to a Trader’s Monthly 30 under 30 event being held in the Wall Street area. I have to wear a suit for that even though I wear raggedy jeans and t shirts to work, go figure. I’m not expecting much but I just have this thing for good food and blue label that comes at the  whopping cost of free ninety nine.

Exercise in futility

I’ve been moving my stops up to the high/low of my entry bar once it gets completed. I’ve realized that reducing my risk after the first fifteen minutes of the trade just makes me feel psychologically safer. In reality , those stops are more likely to get hit, like IMCL today, and I just end up doing more trades for the day, which in the long run will just make my prop firm more money.  When I checked the results from the last seven days, I would be up slightly more if I didn’t touch the stop and my return on R would be slightly higher. The only major difference is I make more trades, which is more stressful and once again will just end up costing me. I definitely will take the lazy way in this one and not even touch the stops until three. Now I just have to figure out how to keep myself busy from 12:30 to 3:00.

IMCL

I shorted on the break of the fifth bar. After the sixth bar completed I moved my stop to it’s high. I got stopped out by one cent, only to have to stock close at around 28. I did get in again at the break of the 11th bar. At three I moved my stop to the nearest swing high to my break even price, which was 23.11. I lost .05 on the second trade

FILE

I went long on the break of the fourth bar. I moved my stop up and got stopped out three bars later. I got in on the break of the very bar that stopped my first trade out and held till eod. (end of day).

SVU

Here I got in on the break of the fourth bar. The reason I did this was because I had my order in for the third bar. As soon as the fourth bar formed my order got hit. Eventually I saw that it was an outside bar, bullish engulfing, whatever you want to call it, but it wasn’t a bar I would get into according to my rules. I should have gotten out immediately. Moving my stop up in this situation did help, but once again, I shouldn’t have even been in the trade. I reentered on the break of the tenth bar and got out eod.

My other trades for the day were CEPH and EAT. Both were choppy so I took some losses. The toughest thing about trading this way is that you will always start out in the red. Why? If you’re taking profits towards eod then the only positions that will be closed are losers. Earlier today I was down $85. Thankfully, I followed me rules and actually got out -$9 for the day. There were many times when my open p&l was at about $47 and I was tempted to take it just to have a small loss for the day. By following the rules, I gave the stocks the opportunity that it sometimes needs to make a move. Any one of the stocks I was in could have moved at least .40 cents more in my favor. Of the stocks on my watchlist that did move , ZOLT was the only one. I didn’t trade it because the risk was more than .50. For whatever reason .40 is as number I fell comfortable with. To be honest, I don’t even know if it was shortable for me (some stocks can’t be shorted through my platform. I have to call the desk to see if I can borrow the shares). Even though I lost, I’m happy with the loss. I’m also glad that I realized that what I’ve been doing with moving the stops is ridiculous since it doesn’t necessarily make me more money. It was just a silly crutch. At this point, having traded for more than half a year, and using parts of this system for three months now, I should know better. It’s not going to work every day, but when the stocks move, you look and feel like a champ. Hopefully tomorrow will be one of those days.