Making census of the test

McMURRAY, Pa. - There I was this morning, sitting with three elderly men in a bland corner room at the Peters Township Municipal Library, with a pencil in hand and 28 multi-choice questions at my disposal. The four of us arrived early to offer the proper identification and fill out the paperwork before taking the test. It was a bizarre scene that made me feel like I was in high school all over again -- albeit in an alternate universe.

Instead of the SATs or final exams, I was taking a test to gauge whether I had what it takes to knock on doors for the U.S. Census Bureau and count human beings like they were cattle. It might not be a glamorous job, but it offers a part-time schedule with supposedly decent pay. And, it's a good financial opportunity if the job market is still ice cold five months from now.

But back to the test. One man coughed and wheezed for a moment while filling out his paperwork. The elderly gentleman behind me forgot his ID, and needed to scrounge around his car to find a Social Security card and/or birth certificate (which I assume was printed in the 19th Century). A Census worker read instructions before the test, but the man next to me looked puzzled. He told the worker that he couldn't hear well enough, and asked for the instructions to be read again.

Splendid.

I rolled through the 28 questions, stopping on some for a few extra moments. I'm not really sure the point of the 30-minute exam, except maybe to sift through people born without brains.

I guess I have some semblance of a medulla oblongata (thank you Bobby Boucher) because I aced the test. So now I wait to learn if the Census Bureau will need my services next year. Maybe I'll even see my three geriatric test-taking pals on the beat.

Is this the Edge?

Christopher Columbus showed that the world was not flat and he didn't sail over the edge.

Well, I do have an edge. How do I know? Firstly, my trades are consistently profitable and secondly, what I do works in all liquid markets where I can get the information I need to see the order flow.

Today I am posting some extra charts of non index futures markets, the Euro FX and the Bund. By coincidence, at the present time both these markets work for me with 5 tick range bars.

Why should I care if I'm doing fine with the markets I am trading? Well, I was chatting with Kiki about trading from Australia or from Tokyo (she has a huge interest in everything Japanese). I did trade from Oz for a few months in 2003, when the Hang Seng future was the main tradable market.  Now, there is the Euro FX, Kospi, Nifty and others. Kiki wants to travel and trade. So an edge is an edge is an edge.

Let me note here that if volatility changes substantially, the methodology will not change but I may change from the 5 ticks range and my stop loss and first scale out would then change too. I know the next question is: how do you know that you have the change? The short answer is: when you see the increased volatility has arrived. The longer answer is for another day.

Euro FX Future

 

Bund Future

Today's trading was uneventful. There was one more trade I could have taken but my wife wanted to go Christmas shopping so..............

 

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Surprise, surprise

Yesterday and today are examples of how unpredictable the markets are. I laugh when on TV I see the host ask a so called expert what the Dow will be 12 months from now. I don't think that any of them could predict the Dow price 12 days from now, perhaps even 12 hours from now.

One thing I have learned in my trading life is that you can analyse and analyse all you want and one large order can make the market do the opposite of what you thought. I like short term day trading when I can read the order flow so if I see large enough selling coming in I know that at least the next 2 points is down and if others get onto the move I am likely to get one or two more scales out.

I have had a couple of questions mainly centered around Market Profile. As I said in a post, I try and envisage where the market can go as I mark up the support and resistance areas. This "vision" does not give a bias but gives me an idea of the possibilities. Kiki has found this to be one of the hardest concepts to put into practice.  She still asks for help with this almost every trading day.  As she is so smart, I guess it's a matter of practice, day after day.  I can give you one tip: If you see part of a profile that looks incomplete or with what I call a cave, pay attention to that if the market goes in that direction.

My comment yesterday about being "protected" by the Profile lead to a specific question asked by "be the ball". I have posted two charts of the ES for yesterday. One is a 24 Hour period with the profile split into the RTH session and the other is the RTH. The heavy dark pink lines are support and resistance.

If you look at the 24 Hour chart you can see that after the RTH market on 24 Nov closed, we had a new distribution develop. The VAH of the 24th was resistance. During the night the market broke resistance and it became support. So on the 25th by the time we started trading in the morning London time, we had the support of the 24th VAH and could look to the higher heavy pink line as the possible range.

The second chart, just the regular RTH trading gives a similar picture.

As trading developed, the distribution became the 1106 to 1110 area, very tight. If the day had unfolded just a little differently then the game could have been trading the developing VAH to VAL from the long side.

 

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Today's trades were again in the Dow Euro 50 (ET) again as we were uncertain of what the volume would be in the ES.

 

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While the Turkey's Away....

...the cats in Europe were rocking. The Dow Euro 50 opened with just selling when they saw the overnight weakness in Asia.  It was not difficult to read that order flow. There was a major support at 2872 and its' break coincided with range extension and a lot of low volume air underneath.

There were three areas of support below: 2850 at the top of value, 2836 which was a virgin POC and 2829 which was VAL. We didn't take the usual (for the ET) 10 point profit because of the air. We had our first scale at 2850 and watched the VPOC which didn't hold so waited til 2830 to exit the balance. Kiki and I were trading in tandem as it was a holiday trade and we were only planning on doing something if it was interesting. The day finished for us at lunchtime, London time, just before what would be RTH.

 

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Jedi is or Jedi Ain't

Well, to use a Star Wars analogy, the force was certainly not there today. The market was waiting and waiting and waiting for news today with sideways chop. I squeezed out a few ticks, Kiki got a a few less as she had an extra losing trade.

You can only take what the market gives. On days like this  there can be a tendancy to force trades. Forced trades are losing trades. I need to feel the wind behind my trade or I won't put it on. It has taken a long time to develop the discipline to keep out when there is nothing to do. If you look at the trades today, they were all entered at about the same price. That tells the whole story. The MP really is what protected us today. As the structure developed it was clear that for there to be any real money made today, there had to be a breakout and another distribution. It's dinner time here in London that didn't happen, so the trading day for us is done.

Unless there is some major news overnight or tomorrow, we'll get more of the same with Turkey Day in the U.S. on Thursday. We are not going to trade Thursday or Friday unless the Dow Euro 50 on Eurex shows signs of life in the mornings. I hope to post some thoughts on those days anyway.

 

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Happy Thanksgiving

Even in tough economic times, there is a lot to be thankful for. Happy Thanksgiving to all of our loyal readers, and please drive safely during the holiday.

And, yes, I know this is a scene from Christmas Vacation. But in the spirit of a classic holiday movie, it's turkey carving nonetheless.

Its a Long Way to Tipperary

Learning to trade can be a long road, as the song says. I have managed to set up a way of teaching my methodology that  has reduced the learning time for Kiki to about 6 months, although she has been listening to me talking about trading for years.

I get a number of questions by email and PMs to forums where I post, mostly asking similar things. I'll try to answer as many of the questions as time permits, here in the blog.

Patrick and others wanted to know what to read to get started. There are three books I would recommend and you can find them on the great river of books, Amazon.

They are, in no particular order:

Mind Over Markets by Jim Dalton - for structure not how to trade

Trading in the Zone by Mark Douglas

Trade Your Way to Financial Freedom (2006 edition) by Van Tharp

Clicking on the title will take you to links with full details

Sadly, you cannot learn to trade from a book but you need basic knowledge before you start to learn.

Another message compared my training Kiki with the Richard Dennis experiment with the Turtles. If you google it, you will see the whole story about Rich believing that he could teach anyone to trade and proved it by creating the Turtles who traded Rich's money with Rich's system.

I am a strong believer that most people can be taught to trade if they have the ability to focus, have the passion, have the determination to spend the hours and hours in simulation and also not have any fear of losing the initial minimum capital they need to put up to trade live.

But, and there is always a but, I do not believe that a scientific mechanical method such as Richard Dennis' works for most people.  The Turtle system, like most mechanical trading systems, had large draw downs, long strings of losing trades and in the end "stopped working" (that is, the draw downs put it out of business when RD started managing other peoples' money). Trading is an art not a science and there is no way a computer can be programmed to be as efficient as the human brain in evaluating all the variables and nuances that are required to put a trading plan into practice. If you look at the trades in the posts you see low draw downs and a high percentage of winning trades. Without these qualities in a methodology, most people cannot stick to a trading plan, me and Kiki included.

Others have asked about charts and indicators. The bar charts are using MultiCharts which can be programmed in Easylanguage (like TradeStation). My two volume indicators are not supplied by MultiCharts but were programmed externally. The second from the bottom looks at bar by bar buy and sell volume, the lower one smooths and accumulates that information. Each gives me different information that I use in my trading plan. The MomDot is something I use when I need to further qualify an entry or exit. It's what it says on the box, it looks at momentum in a tighter way.

The MP chart is an add-on to Ninjatrader. Its from fin-alg.

Datafeed: If you want to look at data then you need a feed that gives you unfiltered data. Some of the broker feeds filter or aggregate data, other don't, so you will need to do your due diligence as usual.

Finally, Sam and a bunch of others have asked me for mentoring and training.I'm concentrating on Kiki at the moment and that is taking all my extra effort. But follow the blog. There's a lot of good information here.

And now for the day's trades.

 

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Cleaning the workshop.....

My Son and I spent the better part of Saturday trying to clean up the workshop.
On Sunday I took 180lbs of scrap metal to the recyclers.

It was hard to scrap things I'd put hundreds of hours of work into, but that is what is needed.

The stuff I did for LLC is larger than the scale I intend to work on going forward so very little of it is presently useful.

Trying to return to a normal life, but I still find the end of the LLC leaves a big hole.

I'm putting some focus and effort into work to try an make up for the last few months of neglect and to rebuild the rocket fund.

I'll be the guest on the Space Show this Friday the 27th.

The failed interview

It took nearly five months, but I finally received an interview. Sure, the job opening had nothing to do with my communications/writing background, but it was for a position in a booming industry that I covered while at the Washington newspaper. That gave me a lot of confidence when I walked into the company's Southpointe office building Nov. 11 for a meet and greet with middle managers. My knowledge of the industry surely would be a bonus in the interview, or so I thought

It turns out I knew one of the managers interviewing me. We went to high school together and played in the percussion ensemble. It seemed that personal background could give me an edge when they made the final decision of whom to hire. The 40-minute interview turned into a gabbing session about drumming and my knowledge about their industry. We shook hands and I left the office, fully expecting to receive a job offer in the next few days.

It didn't happen.

So now I enter the holiday weekend with at least a taste of what it is like to go on a job interview in today's market. The interview didn't transpire how I expected it would, but the outcome -- or lack of one -- shocked me even more.

Range Bars Part 2

Range Bars have the unique advantage of being able to tell you in advance where the high and low will be. I had a question last week about how I enter my trades using range bars.

This gives you, as the trader, the advantage of being able to enter a trade with either no slippage or even slippage in your favour.

Let's look at the charts in the blog for the ES. Probably over 90% of the entries have a price the same as the price of the close of the bar.

This is not hard to achieve. I use two different methods, which of the two I use are written into my trading plan.

Say the set up has been identified. All it needs is the trigger and the range bar to close. We are 4 ticks into a 5 tick range bar. The Low so far is 1100.00 and the high so far is 1101.00 and the market is trading 1100.75 bid and 1101.00 ask. If the range bar closes at 1101.25, I want to be long.

I have two ways of entering as I said. The first is that I just put in a 1101.25 BUY STOP LIMIT so that when the market goes  1101.00 and 1101.25 ask, I will be one of the first to get filled as soon as 1101.25 trades. Of course I risk that the 1101.25 high does not get taken out and in fact the market goes down and takes out the low. But that eventuality is covered by my trading plan which requires the order flow to be up. The second way I can enter, if I am a bit more tentative but still want to be filled at 1101.25 and if the market is slower, I put in a BUY STOP of 1101.50 with a 1101.25 LIMIT. So the limit from the stop price is not 0 or +1 but it's -1. Any trading platform can do that. I do run the risk of missing the trade if the market suddenly gets stronger than I read it to be.

So with range bars there is no entry slippage.

My whole methodology has a number of so called nuances around the entry and exits. Using the SIM created the "muscle memory" so that these things become second nature and Kiki applies them without thinking, at least most of the time. That's why the SIM is so important. Like  pilots in flight simulators, we practice and practice in an environment where the outcome has no negative consequences and we practice until we are perfect. Then we risk money and have only that stress to deal with, not the stress of not knowing the ins and outs of our trading plan and the mechanics of our trading platform.

Trading for today:
The first trade today is one of my favorite types of trades. They don't come around too often and they are hard to take unless you have a specific setup in your trading plan.
I woke up with the ES strong, order flow was buying but price was at the keltner bands already and the CCIs were in overbought territory and going sideways. The risk here is that if the buyers slowed down, it would not take much to reverse the flow. Now we get to the fun bit. I looked at my 24 hour MP of the ES (I have attached it as a separate chart as its pretty important today for this trade). As you can see, I have split the profiles as I usually do and there is a nice VAH at 1095.00 and a virgin POC at 1101.50 with SINGLE PRINTS in between. Paradise for me as I "knew" that as soon as we hit the single prints, we should run straight up the zipper. We did. This is probably the only type of trade where I don't scale out at all. Its all in and all out. I exited just before the VPOC at the top of the zipper (line of single prints). Then I just went for a walk with the dog. This type of pre RTH action usually means that we will mark time until closer to the RTH opening. And that's what happened. Trade 2 used the S&R levels well. Two nice trades and we have the rest of the day off.

 

 

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Did the Market Bark?

I remember when I was a teenager, one of my favourite characters was Sherlock Holmes. There was one particular story called "The Curious Incident of the Dog in the Night-time". The "curious" thing was that the dog did not bark.

The analogy I'm drawing from that is in trading it's important to notice not only what is happening - what you see - but also to notice what does NOT happen.

Let me give examples. You see a bar that looks like BUYING volume. You see high volume at the offer price and the market either goes nowhere of goes down. The usual formula of BIG VOLUME BUY = PRICE GOES UP did not happen. Curious. You look at your momentum and you see that in fact the momentum is down or stalled or your MP shows you at a resistance, either a VA resistance or a high volume point. You don't buy as the order flow looks "curious", the market in the next bars goes down quite a lot. You just saw a large iceberg order. A strong hand selling but hiding his selling. This has become a feature of electronic markets. On the floor it happened too. A large institution would spread his order between different brokers, sometimes even passing them to unlikely ones so the large trade was not visible.

Another example is when your setup is almost there but not quite. One of the requirements for some of the setups for me is position direction and levels of the 2 CCIs. In the small screen shot here you can see the selling trade that failed because the longer CCI did NOT penetrate the zero line causing me to quickly exit the trade and quickly reverse as the BUY setup was triggered.

Its OK to be aggressive and enter when the setup is almost there but be ready to bail when what you expect to happen, doesn't.

Today's trades finished a nice week of trading with different types of days of different shades of green.

 

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Trains, Planes & Range Bars

I was asked in an email why I use range bars and not time, tick or volume bars. The writer of the email knew I said it takes out the market noise but did not see all the benefits.

Let me say that I use range bars because they make me money. If I use any other type of bars I get stopped out more. Its as simple as that. Let me show you. Kiki,you need to pay attention to this.


Kiki,as you know we trade price, not indicators - price resulting from order flow. We look for vertical development to make money. Range Bars look at vertical development and discount the horizontal development. Time is taken out of the display. Some people say that this is a bad idea, but I follow how long it takes for a bar to form -  how much volume. A range bar that takes a long time to form is usually a result of no distinct direction of order flow. Business is equal two way and the price goes nowhere.


The second main reason I use range bars is that when I put on a trade, I want instant gratification. I don't want to see a number of bars against me so I get faked out.


Thirdly, range bars make my money management and position sizing easy. My trade size is always in multiples of three and my stops are usually a tick or two above two range bars. It makes it easy for me to put the trades on. The two bar stop is part of my setup and trigger. Note: Stops can be over-ridden by order flow in certain cases in my trading plan. 

The result of this is CONSISTENT RISK PER TRADE. Your trade has not only to go in the right direction but the mathematics of your trading has to work when you look at the result of percentage wins, percentage losses, average loss, average win and so on.


I do NOT believe that one winning trade will make up for a bunch of losers. I need a high percentage of winners with tight stops and scaling out of my position as the market moves.


The short today, trade #2 was a great example of the above. I went short at 1099.75 in what I thought was too early an entry when the market moved horizontally for three or four bars. My stop was 1102.50, a risk of $137.50 and the profit on each 3 contracts totaled $988. Look at trade #3. Exactly the same entry type.


If you look back at all the trades in the blog, this is the type of trading maths you will see and this is one of the reasons why the methodology makes money. Its simple.

 

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Long odds

I received a rejection e-mail a couple days ago for a communications position at a local non-profit organization in Pittsburgh. Since it's unusual we actually get a live one, I thought this would be the best opportunity to see what my chances are in the jobs market.

The woman responded the following day with a friendly and detailed response. But it also confirmed what I suspected all along: Our resumes are getting buried beneath hundreds of others. She told me the company had received 130 applications, and two workers narrowed the list down to 25. From there, they whittled it to 10 possible applicants, four of whom they interviewed.

The woman said she has been with the company for 20 years, and never had this type of response for this position. That also means I had a 3 percent chance of scoring an interview. Seems like I'd have better odds playing the PowerBALL.

This illustrates the problems many of us newspaper reporters face while trying to find a job that relates to our former profession. It also might be an indication that a new and totally different career is the best -- and maybe the only -- option.

Go with the Flow

Firstly, let's talk about what I mean by Order Flow.

When I was on the floor you could feel the Order Flow. The locals either had their hands facing inwards or outwards (buying or selling); the noise level changed with the level of activity as we bid and asked in line with our hand signals; we looked at the areas where the "paper" (orders) came in from brokers; we tried to watch the hand signals of orders being  flashed into the pit from the booths to their paper fillers. That was the order flow we traded against or front ran.

Electronically, we usually don't have these things. Some guys who were on the floor and now trade electronically can't trade without the floor so they subscribe to a "squawk" of the activity from a pit that corresponds to the electronic market that they trade. For me, the problem with that is that the pits' volume is shrinking day by day and will surely disappear altogether soon. Also, the volume traded in the pits is usually much smaller than the volume traded electronically.

So what happened? The exchanges and the data vendors provide great information about what trades, how and when. We can "read" this information with out computers and output it onto our screens. It is this information I look at to read the order flow. You have seen my charts and the indicators we have chosen. Each provides us information about what has traded, how it has traded and when it has traded. Processing this information in the context of Market Profile provides the setups and creates the triggers.

No Ifs, Ands or Butts 
The "butt" I am talking about is the butting in, or rather out, that I have done this week in Kiki's trading.


Kiki, I have been leaving you alone during trading all this week as I'm feeling sorry for myself because of the pain from my back. But it seems butting out was good for you.


Touching base after you have stopped trading for the day is what we will do from now on. If you need me during the trading day, you know I'm there.

 

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Roy Rogers' Horse: Trigger

Roy couldn't go anywhere without Trigger and neither can we.

I didn't trade yesterday as you can see from the blog -  I left the work to Kiki who had a great day. Anyway, it gave me the chance to surf the blogs and forums. I came across a blog written by a guy that was a couple of years younger than Kiki.  He had confessed on his blog to having had a terrible morning, commonly called "a mare" in the U.K. (nightmare). I read some of his earlier posts and replied to him about not being like Roy Rogers.  So I thought it was important for Kiki to remember the importance of a Trigger in trading.

We have a very detailed trading plan. It is detailed so we don't have to re-invent the wheel during a trade in the heat of battle, when there is no time. We react automatically to what we see and the information we process from what is visible. That is why Kiki spent months on the simulator before she went live, and that is a big part of the reason why she is on the way to being a successful (read profitable) trader.

Our trading plan requires us to do a little work each day before we trade. We start with MP and mark all the support  and resistance, POC, VAH, VAL, split the distributions and so on. We next draw our expectations for the day's profile - how we think it will look. Sometimes there are two different views.

Now we trade. Our trading plan has setups - the things that need to come together for there to be a possible trade. Then there is the TRIGGER. The Trigger is the "go - no go" for the trade. It is the point at which we must make a decision.

Why is our trading plan like this? Several good reasons, you as readers, will no doubt think I will say.  You are correct of course and the reasons are:

1. You have fixed criteria you are watching and can make the required complex assessments quickly

2. You are consistent

3. You can react, and don't have to figure out what to do

4. You know from the past that you have an edge and that over time, if you maintain your consistent trading plan you will make money

5. With a Trigger, you can automatically take the step to put trades on and take them off without real indecision. Its purely SETUP -TRIGGER - TRADE

6. You have no fear of a losing trade as you know in advance how big it will be and roughly how many a week you will see. The fear of the unknown is gone.

I tried, in a few lines, to pass this on to the guy whose blog I found. He says he trades order flow but from what I saw he is micro managing trades based on fluctuations in the price rather than having a trading plan that meets his specified and tested trading ideas. There was another post that advocated trading that way too. The guy I was trying to help is a real hard and dedicated worker. Puts in a lot of effort. My point is that most traders are made not born. Sure, I have seen traders on the floor who say they trade by the seat of their pants with no plan, they just trade and make money. But when you look at what these guys really do, you see there is a "plan" although they don't know it. They are born traders who just instinctively put it all together. They are maybe 1% of traders. The other 9% of us have to structure what we do so we can repeat it day in day out. The other 90% without a plan just ask "do you want fries with that?"

And now for today's trading:
Kiki finished light green in a day when the market didn't give up much. Up to the NY lunch, price bounced between previous day's POCs and VAs. These types of days can be harder to trade as there are many false starts and after days when the volatility was higher, you can miss exiting at the optimum places.

 

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To whom it may concern?

Found this little gem while searching a local jobs Web site. The position was for a Journalist/Feature Writer position in the Pittsburgh area. Here is a description of the job ad...

A community based Healthcare organization is seeking an experienced JOURNALIST/ FEATURE WRITER to join its team on a part-time basis.

This position is responsible for writing and editing several publications including the production of our annual report, occasional press releases, executive speeches, and scripting special events.

The ideal candidate will have a Bachelor’s degree in Journalism, or Communications with a writing emphasis. Previous experience in print media including editing is highly desired. Must have an interest in community based Healthcare, excellent written and oral communication skills, superior knowledge of grammar, spelling and sentence structure.

This is a part-time position that offers flexible scheduling opportunities. If you are interested in joining our team that values excellence and creativity, please submit your resume, professional references, and writing samples.

Now, if a job applicant is going to be sending his/her resume to a prospective company, common courtesy would seem to dictate that said company should at least supply its name and/or location. Maybe they're trying to keep this job opening a secret until they announce the hiring, but I feel a little uncomfortable applying to a business that could be UPMC... or ...Satan's Medical Insurance LLC.

Congratulations and Jubilations

That was the title for Britain's Elvis of the 1960's - Cliff Richards' and it's what I think you deserve Kiki, for the morning trade: Exit all Longs @ 1100.50 and going short at that price. It was the best trade you have made since going live. Without the structure we trade in, it would be a hard trade to make.

The long at 1097.50 was a bread and butter trade for us and so was the exit part of the trade at 1100.50. However, going short at the resistance of Friday's extreme took your trading to the next level. Linking the exit and the reversal shows focus, understanding and sticking to your trading plan. We do not often do reversal trades. We may exit at one bar and then put on an opposite trade at the next. However, our plan calls for reversals in situations similar to today's where the order flow changed quickly right at the resistance where we were going to exit 1/3 of our position anyway.

What makes your trade even greater was that I wasn't trading today as I hurt my back.  I re-pulled an old skiing injury on Sunday and could barely move until after lunch.

This trade shows how crucial a good and fairly detailed trading plan really is. The problem for most new traders is that you don't know what you don't know.  Kiki says that my post here was right on the money. Price pulled back from resistance enough to give her a nice profit and then went sideways with our trading plan keeping Kiki out of trouble.


After lunch, London time, the buyer arrived and she rode the order flow until shortly before the Fed Chairman's speech when she finished the day nicely green.


Well done Kiki! Congratulations and jubilations.

 

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Technical difficulties

Sorry for the lack of posts this week, but I'm experiencing some technical difficulties with my laptop computer. Hopefully I'll be back online full-time in the next few days.

In the mean time, thank goodness for Allegheny County's RAD tax funding for local libraries. I have a Mt. Lebanon library card, but I can use it to access the computers and books at USC, South Fayette and Bridgeville libraries. I wonder how the teabaggers would feel about that socialist plot to spread around the literature wealth? That tax is coming in handy as I'm able to drive just a few short miles to scan the Internet for jobs or pickup a book at the nearest library.

Anyway, from busted laptops, to hissing stoves, to broken house windows, to airbag deployment warning lights... the expenses just don't end. At least our public libraries are affordable.

Do I Have to Dance All Night

I don't know how many of you know the song in the title to this blog by Leonard Cohn, but it kind of matched the question for the blog today:  Do I have to trade all day?

The answer depends upon your trading plan. Let me tell you how my trading plan works. 

Those of you who read the blog know that I moved to London to be in the best time zone to trade. in the middle of the US, European and Asian timezones. You can only earn as much as the market will allow: it depends on volatility.

You can see from my charts and the trading results that, in the current volatility, I trade about 5 times a day, starting early before RTH in the U.S., and stop when I have made around $1,500 per 3 contracts.

There are a number of reasons for this: I know that every time I put a trade on I am assuming risk; I want to trade the major swings or sequences of the range bars I trade. I stop trading when I am tired. I know that the opening and closing of the market provides the best opportunities.

So I now trade (ES or Dow Euro 50) when London opens (about 2am New York time but 7am in London). I may take a break for an hour or two before the NY open at 2.30pm but not if there is action. As soon as I feel my focus fading I stop. I could start again two hours before the NY close, but only if I have not made enough money for the day.

I won't trade if I feel tired or ill or just off my game. I won't trade if I am distracted or upset. I take breaks during the trading day when things are quiet and walk my dog, Sammy - she's a rescue jack russell of unusual intelligence. 

Trading is the focus of life for me as it is what earns me my living. However, it's important to disengage regularly and do other things so you can refill your trading batteries. I love to travel and being in Europe gives me opportunities to go everywhere, which we do. Kiki fences to burn off her trading stress and to keep fit which gives her more trading energy. My female Zorro.

So the answer to the question of "do I have to trade all day" is: No.  Find a rhythm of trading that works (= is profitable) and suits you mentally and physically, always allowing it to be tweaked day to day to fit the market's rhythm.

 

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How to Succeed by Really Trying

Kiki and I had an interesting conversation about learning to trade. I told her about a couple of quotations I had read:

"The harder I work, the luckier I get" and

"Genius is 98% perspiration and only 2% inspiration".

These sayings are the basis for learning how to trade. Why? Because no one lives long enough to learn everything they need to learn starting from scratch. To be successful, we absolutely, positively have to find people who have already paid the price to learn the things we need to learn to achieve our goals.  Perhaps even a person/coach to correct problems after you have become professional/successful in your field.  Why do you think professional athletes have coaches?  Even Tiger Woods has a coach.  Enough said.

Now let me tell you about a book: The Talent Code: Greatness Isn't Born. It's Grown. Here's How.  Here is the link to Amazon that tells you all about it. There is a short video that's worth watching. http://www.amazon.com/Talent-Code-Greatness-Born-Grown/dp/055380684X/ref=sr_1_1?ie=UTF8&s=books&qid=1254305330&sr=1-1

The author found a number of schools throughout the world that produced a statistically significant greater number of people of excellence at things such as tennis, golf, music and other things. He then looked to see what these schools had in common. Without trying to summarise the book, the main idea seems to be lots of practice but slowed down. For example, a pianist plays the music very slowly. So slowly that if any listener hears it and can recognise it then they are playing too fast.

Now there are people who think that simulated trading is useless and a waste of time. I am not one of those. Yes, simulated trading does not provide the stress and require decision making with monetary consequences that live trading does, but that is not the purpose of simulated trading. Simulated trading should be used to create the equivalent of "muscle memory" that athletes develop so that a trader can react automatically to the market without thinking. This can only happen after hundreds, perhaps thousands of hours of so called screen time. Now if you add to this process by first using market replay in slow motion you may be able to shorten and strengthen the learning curve.

So for me, the progression after you have found a trading edge, is to first do slow market replay, then trade real time simulation, then real time with real money but only of an inconsequential size so that losses really don't matter to you, then scaling to larger and larger size as you make money. The qualification for the progression through each of these stages is the achievement of consistent profitability at the stage you are at.

I had started teaching Kiki with a trading manual I had created and some videos I had made for her. These set out exactly how a trader trades.  From pre-trade preparation to putting the trade on and then managing it.

Next, when she had worked through that and understood exactly what was required, she did market replays, slowly. All this was after work.

When she was consistently profitable we went onto a simulator in real time after work. When that was profitable she took two weeks holiday and stayed on the simulator until she was more than consistently profitable. I was looking for relaxed trading, reacting automatically to what the market did. This was successful so she quit her job and went back on the simulator until I was satisfied.

She had saved up the equivalent of about $10,000 and went live trading three contracts of either the ES or the Dow Euro 50, depending upon what we expected the day to be.

Today started off slowly. I think that the market was expecting something more from President Obama and so the market waited. There was a little disappointment after the speech and the market traded down into the U.S. lunch, our dinner time.

 

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Its a bird, its a plane its a drag!

The LLC vehicles have had almost no aerodynamic constraints. The Rocket Racers of Armadillo and Xcor used off the shelf airframes with established functional aerodynamics. Not even spacex has yet dealt with aerodynamics in any complciated way. The Spacex falcon 1 did have aerodyanmic Max Q issues, and probably aerothermal issues, but there were no aerodynamic controls and aerodyamics does not get much simpler than a long round tube with a pointy end.
(The recovery parachutes of the F1 first stage either were not included or failed)

Spacex is about to fly the dragon capsule with hypersonic aerodynamics, aero thermal, and stable parachute deployment and recovery issues. Armadillo is starting to fly to higher altitudes, Masten hopes to soon follow and or surpass what Armadillo has been doing.
Xcor is planing their next rocket vehicle where the aerodynamics include transonic and some aero thermal issues.

From a rocketry stand point the smaller New Space organizations (Masten ,Armadillo and Xcor) are nearing the level of rocketry sophistication reached by the Germans at the end of WWII. Please note that the Germans never flew a supersonic aircraft. (Yes the V2 was supersonic) Get in your time machine fly back to 1946 and ask Chuck Yeager if supersonic is a big deal?

If an LLC L2 vehicle was flown on an airless earth with zero drag and maintained a steady state 4G acceleration (3 g net) it would run out of propellant near 30Km and coast to 119Km before falling back to earth. Using my really simple aerodynamic model... assuming a Masten Glow of 900 lbs, and 25" diameter with very good aerodyamics removing the 25Kg payload and flying the same 4G flight Mastens L2 vehicle would reach about 116Kf or 35Km. Now in practice you would probably have to throttle back to reduce max Q if you picked 300Knots as max Q equivalent then you would have your velocity limited by maxQ until at least 40Kft and one would trade more gravity loss for reduced aerodynamic losses and get to about the same place just over 115K ft.

This not an up and soft land simulation, this is a up up and away simulation with a crash landing at the end. So given the stated goals of both armadillo and Masten to fly payloads to space they will need vehicles that are both higher performing and more aerodynamic than what they presently have.
(A max Q of 300 knots equivalent may not seem like very fast in a world with 500knot airliners, but a skydiver released into a 300 knot airstream would experience more than 8 g of deceleration.)

I vaguely remember Henry Spencer making a comment that the Apollo command module heat shield had an eqiuivalent ISP of 7000. If your going to build reusable vehicles that fly to space and come back its never going to make sense to kill your velocity via propulsion as long as we are using chemical fuels. So when reusable suborbital vehicles start flying to 100km they will need to use aerodynamics to scrub off the energy from the gravitational potential.

Will this look like the space ship 2 shuttle cock? will it look like NASA's hypersonic ring slot parachutes developed for viking and used on every mars landing since? Will it be airplane like?
I think this is going to be a harder problem than many think. Mr Musk of spacex has been quoted as saying that a fly back first stage booster would be a really useful thing to reduce space access costs, but it would cost > $1B to develop. Some solutions look simple like the rocket becomes winged vehicle as shown in Charles Pooley's Microlauncher presentation. I don't think that an easily fabricated simple wing will function well with supersonic shocks, flutter stiffness etc... One wants a shape that can give you decelerating lift at high altitude, does not provide much drag on the way up and is structurally stable at all points in between. This is a you pick any two sort of problem. The U2 had very long thin wings to get get lift at high altitude. Yet it it was a subsonic aircraft and as a result operated in a very narrow box where a few knots faster and it hit Mach buffet and a few knots slower and it stalled.

One can work around these issues by using a combination, like a hypersonic parachute to decelerate you to subsonic followed by rotate open wings to glide back to base.

Whatever features will be used they will require testing. With the exception of xcor all of these vehicles are unmanned. The regulatory environment for testing rockets under the amateur or experimental permit rules are now well defined and reasonable friendly. If one is developing a glide back system one would like to test the basic aero controls, flight, landing etc in an incremental manner. Just try getting the FAA to give you permission to fly such an unmanned vehicle in their airspace? The Aircraft side of the FAA is significantly less understanding than the AST. (Just ask John Carmack) So from a regulatory standpoint one is going to have to fly it as a rocket under AST's jurisdiction. This is not testing that can easily be done under tether, or even at the locations that Armadillo and Masten are currently flying from.

None of this is impossible, its just another layer of problems to be tackled. Anyone have any good recommendations for a good book on supersonic aerodynamics ?

Big Girls Don't Cry

The song was wrong. Big girls do cry, at least when they miss a trade. My daughter, Kiki, was pretty upset this morning when she missed the BUY at 1095.25. I said: 'Why didn't you just buy it?" She said:"Well I was waiting for it to pull back closer to the EMA." "But it was the second green candle - the market was moving. Long CCI had turned up, the short CCI had hit -200 and turned. Order flow had turned and "they" were buying. What more did you want to see", I said. "The price was even past the MomDot."

The question I got about the smoothed volume indicator on one of the charts brought it all back to me. Most new traders use indicators as a proxy for price. Big Mistake. It's price you are trading, not indicators. The indicators are there to give us information that we, as information processors (as Pete Steidlmayer referred to us), process so we can make trading decisions.

Trading is an art, not a science. As a discretionary trader I  enjoy a high percentage of winning trades which is very important to me. I have low draw downs. This is not the case in most computerised automated trading systems which rely on science to find the best combination of indicators and numbers to grind out profits in the longer term.

I learned long ago that I cannot sit out long strings of losing trades in a row or large draw downs because I don't know whether its just a draw down or whether the market has changed again to make the automated trading system broken.

As a discretionary trader, I do the same thing day after day - I process the information I see and make my trades. I know if I am reading the order flow and momentum correctly I will be consistently profitable.

What was my last answer to Kiki? "Don't fret about it. Forget it. Trades are like taxis. Another one always comes along". Taxi!

 

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Zzzzzzzzz's Can Still be $$$$$$$$

I had to watch paint dry while I was trading. It was very boring and difficult to keep my focus. I walked the dog when I couldn't stand it any more.

Europe was a waste of time today so those who are in an unfriendly time zone and got up: Commiserations! You can see in the chart that although price at first tried to move upwards, my smoothed volume indicator moved sideways but with a negative bias, so no trade for us.

However, it was not all a waste of time. Three trades appeared by dinner time in London and we finished green on the day with a respectable harvest per 3 lot.

 

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Crystal ball gazing....

Its clear that Armadillo and Masten are going to take their lander technology and pursue scientific and other payloads to the ignoreasphere. (IE the space between 100Kft and 150Km). If we had won any LLC $ at all our plans would be similar. This by itself is not going to change the world. (Masten article in AV week)

In an optimistic scenario it allows both Masten and Armadillo to become cash flow positive and continue to develop. From a pure business stand point one can count the number of heads in the masten shop make some educated guesses about rent and insurance etc.. and one would come up with a burn rate some where between 500K and 1.5M a year. So the new found prize money buys them another year of operation. Today's masten press release had a figure of about 100K per flight. Assuming they have good gross margins and get 20 or so customers a year they have an on-going growing business.

Beyond the scientific payloads to the ignorasphere you will have people like scaled/virgin providing man tended flights to this region for prices double what Masten is quoting for a "Brick" When that starts happening Mastens prices are going to have to plummet to compete.

The next big step is some sort of orbital capability. I don't see a clear revenue path for incremental improvements from high suborbital to orbital. The Technology shown by armadillo and Masten (hover for ~200 sec iat 9.8m/sec) give a DV of 1962m/sec. To reach orbit with a small high drag vehicle (small == high drag) one needs at least 8000 m/sec dv. Giving some credit for vac ISP gains and calling the present vehicles the 2nd of three stages one could probably put a 5 lb "brick" in orbit with a gross lift off on the order of 10000 lb. Is there a market?

Clearly spacex has demonstrated there is a potential market for 200Kg payloads, but 50 to 100 times smaller? Can either Masten or Armadillo grow into this spot without significant outside capital? Only time will tell.

I'm a real fan of simple dumb booster. The series LEO on the cheap has a lot going for it. As I've said before I really liked the Beal Aerospace approach, big simple pressure fed. I just think he aimed too high for the first vehicle. Something 10 times smaller would have been a good start.
Even starting there its hard to rough out a plan that does not take $50M+ to get to cash flow positive and profitable. Virgin recently got investments on that order and maybe they can grow into this space.

I've often thought about writing a detailed business plan to seek funding, but I have major personal resistance to becoming another one on the long list of people that say "just write me a really large check and trust me I'll build a spacecraft that owns the market." To properly assemble a plan that could realistically get funding is a lot of work with low probablity of success.

The engineering is not really even a big part of the problem, one has to also build a functioning organization with Management, recruiting, HR, legal, government liaison, etc.... It would be hard to just bring forth such an organization in a timely manner given infinite funds. Space lauunch is such a broad problem covering so many disciplines It would be really hard to find someone to
organize the business part if you had the perfect engineering team already in place. How many people have a sset up a brand new manufacturing facility on that scale in the U.S. in the last 20 years? Not many.

Where do I go from here? The question is a lot broader than the technical topics discussion I wrote last week. Do I want Unreasonable to be a slightly profitable side business?? Do I want to compete against Masten/Armadillo as a the lowest cost provider? Can I contribute something technically to this 'space'? Do I have the chutzpa to try creating a externally funded start up?
I've worked at funded start ups and my current business that was started with zero outside $ in 1998 was a lot simpler to start and has done well. How far outside of my personal comfort zone would I like to stretch?

I've even contemplated sending a resume to Spacex, but I have not figured out where we could live within driving distance to Hawthorne without a reduction in our standard of living.

On a personal level its been a hard week watching the LLC awards ceremony and having tons of people tell me our accomplishments were amazing. Feels a lot like I think 4th place at the Olympics would feel. Amazing results, just not as amazing as gold,silver and bronze. Its really frustrating at some level.

Over the last year my schedule was up at 5am work on Unreasonable til 8:30 take a shower go to work, come home at 6pm work on unreasonable. This last week I've been getting to work before 7 and leaving around 4:30. Coming home and feeling lost. I still have not gotten up the motivation to tackle the entropy in the workshop.

I'm gathering up some data on the technical performance of Masten, Armadillo, unreasonable and several other interesting ideas and some time in the two weeks I'm going to do an ideas with supporting "numbers" post.

Is 3 to 5 better than over 50?

Let's Look at Losing Trades. There are two types of losing trades - those that are part of your trading plan and those that are not.

When I first started on the floor, I was in and out of the market 30 to 50 times a trading session. Over time I learned that a big amount of trades did not turn into a big amount of money. What I was reacting to was price rather than to the order flow. I  have carried that same hard learned lesson with me when I switched to trading electronically.

I believe that my methodology of using range bars helps me focus on order flow. I take a position and go with the flow while other traders are jumping in and out of positions and missing the move. 3 to 5 trades a day is what my expectation is. On many days, it would be even fewer if I scaled out more often than 3 times. I just run out of bullets- no more contracts left to sell, and the first trade today was one of those. I took profit where I had to on the last 1/3rd.  But, I have found that 3 is a magic number for me and I can usually find a valid re-entry if the market continues.

I expect the market to move in my favour immediately after entry. If it doesn't, I watch even more carefully to see if there is a reason to bail.  30-50 trades a day gives you that many more chances to make mistakes. Every time you put a position on, you are taking on risk. It is better to put on the sure trades with increased size than to be in and out all day, tiring you out faster and burning money in commissions. At $4 round trip, your 30 trades cost you $120 while my 3 cost me $12. Over a year the difference an be over $20,000  just on a 3 lot size.

So losing trades that are a result of my trading plan are fine. I expect 25% to 30% of that type of loss. The other type of loss, the losses due to impulse are not fine. Impulse or "I've missed the bus" trades are the enemy of every trader. It still happens to me if I lose focus due to tiredness, being unwell or some external worrying. Either buckle down and focus or don't trade. When I am trading, that's all I focus on. No phone calls, no TV, perhaps some classical or jazz music in the background.

Today was good. We woke up and were at our consoles by 7am London time and had a trade almost straight away. Lucky I had my third espresso at my desk. I switched from a Starbucks espresso machine to one of those Nespresso machines that my daughter K. gave me as a surprise.  She said she had enough of espresso grounds all over the trading desk.

 

Trading is My Business – It Can be Yours too!

OK, you have read my ROAD MAP from yesterday’s post. What now?

I am going to use K’s statistics for the purposes of making my point.  I will make a couple of statements that are very important to understand.

ANYONE WHO IS CONSISTENTLY PROFITABLE PAPER TRADING CAN MAKE MONEY IN THE REAL LIVE MARKET UNLESS THEY START TRADING WITH TOO BIG A SIZE.

If you trade a very liquid market such as the ES, DOW EURO 50 or the main FX pairs, then you can slowly increase your size and earn as much as any person needs.

It is much easier to read the order flow that will move the market for the next 10 or so minutes than to try and see where the market will go longer term. Why? Because 1 very big order can change everything. That’s why I Day Trade. I only have to be right for 10 minutes 6 or 7 times a day.

So your first task on the road to becoming a full time trader, paying your bills from what you earn trading, is to get a methodology and train to use it.

OK, you found a mentor and in 6 months you are consistently profitable trading 3 ES or 3 DOW EURO 50 futures and work between 4 and 8 hours a day. Now what?
Now we look at the math. What is the basis of every business? The business plan.

After about 6 months of paper trading 3 contracts, K’s stats look something  like this in the last week:

Number of contracts traded per trade:     3

Number of trades a day:                        6

Percentage of trades profitable:             71

Ratio of Won $ to Lost $:                      7.5:1

Largest Loss:                            $312.50/ 300 euro

Largest number of losses in a row:          3

From these numbers we worked out how much capital the business needed:

Notional Margin:  $800 or Euro /contract = $2400 or euro per trade

Provision for draw down or expected losing string:     $300 or euro /contract = $900 or euro

Double the expected draw down: $1800 or Euro

Monthly data, IT and platform costs:  $200

Total Minimum Capital Required = 2400 + 1800 + 200 = $4,400 or euro

You need $5,000 to become a trader if you have met all my criteria. This is money you must have mentally written off before you start trading. Very important. You must not have the fear of loss as it will very likely become a self fulfilling prophecy. So wipe that amount off your net worth before you begin.  I call this your cost of doing business.

The business gets under way. With each $5,000 earned K can add another 3 contracts.

How much can you earn?

When you move from paper trading to real trading expect to only make about 20% of what you made paper trading. Once you get to 100% trading real money, you are ready to start increasing your size.

If things go according to plan, the following is possible:

Looks pretty optimistic doesn’t it. Perhaps, but to make it happen you need to do your part and the market needs to move to allow the profits. With the financial mess in the world, I think we can count on enough volatility.

But let’s say the earning curve is a little longer. Maybe once you are trading over 10 contracts your mind starts playing games with you. Just slow down the growth level. Stay at the number of contracts that leaves you in the “I don’t care about the losing trade” comfort zone. The result will be that your account will grow more slowly, but grow it will IF you stick to the trading plan.