Starting Down the Yellow Brick Road to CP

I have recently been getting a number of the same types of questions, over and over again so I think I need to say some more about how to use this blog to help you get to CP (consistent profitability).

In the next few days I will post a series that answers these "how to" questions that can act as a starting point to seeking CP. I will also post this series in KEY POSTS as "The Yellow Brick Road."

OK, you found this blog and it looks to you that we are doing something here that fits the way you want to trade. First step is to read the blog from beginning to end, including the comments, looking at the trades on each chart, trying to work out why the trade was taken. You can print out the blog/comments if needed as a reference.

Next, you read through the blog and the comments a second time now knowing a lot more about how we trade as you have already read the blog, but this time taking notes on the charts that will help you create your own trading "rules". Perhaps you will need to do this more than once. Write these rules down, this will be your first attempt at your trading plan.  Trading plans evolve so don't worry.  I'll talk about this later.

You now should have your own ideas of what a trade setup consists of. The entry trigger for these trade setups are bar close. As a first step, I would, in SIM, only look to exiting trades "all out" at the first logical scale point. This way, you can concentrate on entries and trying to achieve a high win rate without worrying about how to maximise the profits on each trade. That can come later.

The first decision you need to make is which market to trade. It should be a market with the highest daily volume in the timezone you want to trade in. There are markets trading 24 hours a day in different parts of the world so everyone can find a market that is tradeable before or after their working hours so that they can achieve CP in SIM while they are still holding down a job that pays the bills, saving up money for their trading capital.

Next, you need to setup your charts using range bars as your single trading chart. Finding the "correct" settings is easy once you use a bit of logic. The range bar length needs to look to eliminate the "noise" from the market while revealing the vertical movement clearly. The first rule I have is that the length of my range bar should be such that my drop dead stop loss should be no more than the length of two range bars plus a tick. This will give you a maximum value for the range bar. For exanple, for the ES I use 5 tick range bars as I am happy with a drop dead stop loss of $312.50 per contract. I exit most trades well before this limit is hit but I am prepared to lose $312.50 per contract on every trade should I not be able to get out cheaper. Don't have your drop dead stop too close as you will get stopped out of winning trades and you will begin using the stop as an exit mechanism rather than letting the market tell you when to exit both at a profit and a loss.

You find the correct settings by eye balling the chart. I go a step further by using a computer program to test the profitability of different range bar settings for specific setups but you can do a similar thing manually, although it takes longer to do. I'll speak about this in another post.

More tomorrow.

Today's trades below. Not much happening in the Hang Seng and it is acting quite subdued.

Click to enlarge

The Number 1 Reason Why Traders Lose + Hang Seng

I was on board flying to Oz when I was writing this post. I flew London to Hong Kong and connected to a flight to Sydney. I can highly recommend Cathay Pacific if anyone ever decides to do this marathon flight, about 24 hours airport to airport.

I got to chatting with the guy sitting next next to me and the talk reached the fact that I was a trader. He was an older guy than I was, very intelligent and well informed. He asked me a question: "why do most people lose money trading?"

We went through all the usual answers including emotional, psychological and other similar things. None of the reasons we concluded were due to people not being able to learn the mechanics of trading nor was it because they couldn't find setups.

After a few hours of this we concluded that the reason boiled down to three reasons:

1. Losing the money on a stopped out trade mattered to the trader

2. The trader did not have a detailed trading plan that took care of whatever happened during the trading day,and 

3. If the trader did have a proper trading plan, he did not follow it because of the fear of loss in point 1.

I mentioned this right at the beginning of this blog when I suggested that traders start out trading the very minimum size until they achieved CP (consistent profitability).

So, the reason that traders lose money boils down to the old negotiating saying:"He who cares most, loses."

This is what a trader has to beat to be CP. Kiki did it by developing her "muscle memory" on SIM so everything became a reaction to the obvious - setup by setup. Kiki went live on a setup as  soon as she was CP on that setup. This provided positive reinforcement of bringing in earnings as she got the next setup ready.

I know I have posted on this subject before but it seems to me that this is what makes the difference between achieving CP or not.

So how do you cope if you are down to your last $25,000 or less, and need to feed your family from your trading?

Firstly, you have back-tested your trading plan up the kazoo so you REALLY BELIEVE!!!!

Secondly, you SIM trade until you don't have to think to put on a trade. You see and you do. The seeing involves processing all the information at the close of each bar and coming to a conclusion without any hesitation. If you need to think and consider then you have not done enough SIM.

Thirdly, you have the stats of your methodology from SIM so know what to expect in live trading.

Now make sure you really BELIEVE and trade what you see, as focused and unemotionally as you did in SIM.

Today's trades in the Hang Seng Futures, "the road runner". This market is all "beep beep" and "zoom". So I trade it all in and all out. Today's trading was quite subdued compared to what I saw before. This market has become very interesting as it is impacted by both the U.S. and China and I haven't worked out how. But trading it by order flow means I don't really have to understand it, just trade it. There is one complicating factor with this market - it stops for lunch and then restarts again. Taking a position over lunch carries extra risk. By the way, as I haven't traded this market for a long time, I traded just a one lot today. I'll increase my size tomorrow to something more meaningful and if I don't make too many mistakes I'll post P&L after that.

Click to enlarge

Jet Lagged

Jet Lagged so no trading or post for Monday.  Hopefully will be back at it tomorrow and I will also try to get the backlog of comments answered.

Photog for Hire

By Greg Tarr
BLB Guest Blogger

Never thought I'd use it again, but I held onto it anyway. Who knows, one of these days I may just be a member of the press again. It's a long shot considering since June 24 (lay off day) I haven't applied for a single photojournalist position or even considered it. But in the console of my car still sits a Pennsylvania Newspaper Association parking tag from 2008. And I'm glad it was still there.

Thursday at 3:45 a.m., I went outside to get into my car so I could head to work. Work? I'll get to that a little later. Quarter to four in the morning? I can explain that too.

I wasn't expecting a layer of frost on my windows, but it was there. Unfortunately, my ice scraper was in the garage. Instead of going back in and wasting time, I reached in my pocket for my driver's license (a great scraper in a pinch) but it wasn't there. That was in the house, too. Finally, what do I find looking up at me just waiting to be used again? Used for anything at this point? My PRESS parking tag. A little flimsy, to be honest, but it got the job done.

So what job was I scrambling to make it to for a 4:00 a.m. start time? I'm a part-time employee at Target working mostly in the stockroom. I've been working there since the beginning of November. Retail is a different world from what I am used to, but it's going. I've met some new friends and I get a 10 percent discount. That's really all there is to say about the job.

Now, about the photo business. I secured the funds to purchase photography equipment a few months ago and have been picking up little photo jobs here and there. I have four weddings booked for 2010 as of right now and I have a few others pending. The first wedding is coming up May 8 in Chicago. Before you start to think that I'm already a famous wedding photographer traveling the United States, I'm going to be honest. It's a friend's wedding. I'm excited about the future and can't wait to start shooting.

So there's a little update on what I've been doing with my time. If you know anyone out there looking for a very reasonably priced photographer cutting his teeth as a new business owner, I know a guy.

Greg Tarr previously worked as a staff photographer at the Observer-Reporter in Washington, Pa. He can be reached by e-mail at gmtarr@hotmail.com, or visit his photography website at www.gregtarrphoto.com

Working on Blue and....

Last week I fixed the landing gear on the blue ball in preparation for taking it to spaceup last week for show and tell. (You can see a picture of it there on its new gear here: http://www.flickr.com/photos/dizee/4395476515/)

Last night I worked on building up a new cat pack. I started with the cat pack from silver and added some new disks. The top third of the cat pack was stripped and dead, I'm not sure what is going on. If I'm overheating the cat pack I'd expect the bottom third to be bad, not the top third. This leads me to believe I have some kind of contaminate in the h2o2. The new pack is ready to install.

My prep list looks like:

• Remove the bottom half of the motor.
• Grease lube and inspect bearings on the vanes.
• Install cat pack in motor.
• Replace seals in all the sanitary fittings. (This is preventive)
• Reassemble the motor.
• Replace the GPS antenna cable. (It has a kink at one of the ends.)
• Inspect the wiring.
• Build new Tethers.
• Do a full electronics checkout.
• Charge all the batteries . (computer, actuators, abort rx, telmetry box, laptop,2x rc transmitters, 3x cameras )
• Do a tethered flight (on the 20th)
• Do a free flight to about 1K ft. (maybe on the 20th)
• Do a higher free flight???
  

I expect to finish all but the last four this weekend.

I have almost no traditional HPR experience with things like recovery high speed airframes etc... to remidy that I've been contemplating building a really simple H2O2 monoprop out of 4" or 6" aluminum tubing. Something that could go supersonic and reach to 20k ft or so. I'd use conventional dual stage recovery just like the big HPR guys do. This is something I can do with today's budget. Making the same basic vehicle bi-prop would make it capable of 100K ft.

It would probably be three increasing complex projects:

• Unguided simple blow down mono prop to learn recovery.
• Fin guided pressurized mono prop.
• bi prop.

One of the really cool things I saw at spaceup was Ventions LLC small 100lb thermally
decomposed biprop h202 and RP-5 motors. Dr London had some cool video of it fireing on his phone. The motors were interesitng for both the construction and the thermal decomposition.
The were constructed out of stacked photo etched plates diffusion bonded together.

Getting a reliable thermal decomposed h2o2 motor to work would also be a really cool project.

The TMZ effect

Easily cast aside as a celebrity gossip forum, TMZ.com is becoming an increasingly legitimate source for news, especially offbeat sports stories. Whether it be photos of Steve McNair's lover to snapshots of Tiger Woods' smashed Escalade windows, TMZ is finding relevant information and putting it on the Web.

And now they broke a monster story. The website was the first to report that Steelers quarterback Ben Roethlisberger is being accused of sexually assaulting a woman at a Georgia bar. Roethlisberger has not been charged with any crimes, but this is still newsworthy because police are investigating. And once TMZ pounced on the story Friday afternoon, it prompted every major news organization in Pittsburgh to stumble around for information on the investigation.

How do they do it?

Some cast them off as a joke, but it's clear they have informants in unusual places. Now, a lot of the celebrity gossip photos they publish are stupid. But TMZ might soon become the most trusted name in news if they continue breaking stories in lieu of the mainstream media.

Is the Trend Your Friend

The answer to the question is definitely "YES"! But there are trends and there are trends.

I have stressed the importance to Kiki and everyone reading this blog, including reminders to myself of only trading one time frame. One of the reasons for this is because every timeframe has it's own trend. The daily trend could be down but your 5 tick range bar trend for the time being can be up. The same for any other intraday timeframe.

So for me, the trend is the trend of the chart I am looking at. I have tried the multi-timeframe approach and it only confused me. There are too many conflicting indications and by the time everything lined up, the move was usually over.

The best inside out trades for me are pullbacks in the direction of the trend, leaning on support if possible. Many of the setups are based on this. Everyone can find them with some work.

The starting point is defining the trend. The simplest definition is that the trend is in the direction of the 33EMA. It's a stronger trend if the 99EMA is in the same direction. If the two EMAs are separating then it's stronger still.

If the 45CCI is above or below zero that is another indication. If the 45CCI is going up or coming down through plus or minus 100 that is another. 

Once we have our trend, Kiki and I look for a pullback and then wait for order flow and momentum to resume in the direction of my trend. Bang! We pull the trigger and manage the trade.

These inside out trend trades are the highest percentage trades I have found. Some people just trade to the first logical scale out point, all in and all out, and then look for the next trade. Its a matter of style or risk tolerance. If you shoot for smaller but more certain profits then to earn the same amount your size needs to be greater and therefore the risk per trade (not per contract) is higher. Everything is a trade off. On the other hand, if you scale out of part and can get to breakeven on the rest then you have free exposure, as Pete Steidlmayer called it. For my part, I do a mixture of both depending upon market volatility. If there is reasonable volatility and I read the order flow correctly I can get more than the first scale, risk free.

Next week I will be in Australia on family business and will probably be posting trades of the Hang Seng Futures. I'll have to wear a safety belt because that market is on steroids if it's anything like it was before.

Well, what an anticlimax today was. The market didn't give us too much today. But that's trading. I remember standing in the pit BSing with the guys that the market was dead and we would never make money again. And then all hell broke loose and we were happy again.

 

Click to enlarge