Tuesday, 9 February 2010

One Might Not be the Loneliest Number

I get many emails and comments from people on the road to their success, looking for road signs and ways to avoid potholes. Trading for me is a very discipline requiring business. I need to focus very intently on what I am doing or I tend to go "off piste", as we say on the snowfields here in Europe, and enter trades that don't meet my trading plan. I think that this is one of the major reasons why people end up broke trying to learn this business.

There is a very fine line between trading mechanically and trading robotically. Trading robotically as an autotrader taking all entries and exits that meet a set of trading rules will give you an "average" result as long as the rules do not have to be changed with variations in market volatility. The end product of this will be a set of results that will have numerous losing days, maybe even a losing week or more, and not a daily consistent result. This is not necessarily bad if you know in advance that this is what you are going to get and are OK with it. Problem is that after 3 losing days people switch the robot off "because it's broken". They knew up front that there would be a week like this but when it happens they really cannot accept it.

Now trading mechanically is, for me, a different thing. I like to think I trade mechanically when I am fully focused. I have a written trading plan and I execute the trades according to that plan. My job is to process the information I see and assess whether it meets the criteria in the plan. This is often very subjective. There may be two instances that are very similar but different enough, or interpreted as different enough, to have different reactions by me. This is a great danger to your consistent profitability because unless you are focused enough to see what is there and consistently engage your "edge", you are on a slippery slope.

How does one achieve this? I have often preached the benefits of SIM but let's be more specific. I have also preached that a trader should trade one market with one chart plus the Profile for context. Let me add one more "requirement" for the aspiring trader, and this is how Kiki became CP (consistently profitable): ONLY TRADE ONE SETUP. Yes, let all the great trades pass by unless it meets the very strict criteria of one specific setup. Whether it's the morning ES RTH Gap trade or just continuation trades in a trend, whatever it is, pick ONE and become a master of it. Do it to death in SIM and then trade the smallest live until you can do it in your sleep without any knots in your stomach after the trade is on.

Now you have the tough thing to put up with.  Two setups look exactly the same and one makes a nice profit and the other stops you out. If you look at two entries today, the first at about 14:53 and the second at 15:07. Very similar trades. Why did one make money and the other not? Neither was leaning on any good support.

OK, do you take these trades or do you put something in your trading plan that requires support of a certain kind to back every trade? Depends on whether you can take a loss of 2 points at 15:04 and then put on the same trade at the close of the next bar and then make 4 points. The hard part is that the losing trade comes first. I have to stick to my trading plan. Going "off piste" is the road to losses for me and I daresay it's called the same for most of us. If you have a trading plan you only need to be clever once: when you create it. If you don't have one you need to stay clever 24x7. Way too hard for me.


  1. Very insightful post. I'm a little confused on what constitutes good support. In looking at the market profile, it appears that 1064.75 is the VAL of the top distribution yesterday. Thanks for any additional thoughts.

    Mike L

  2. Another gem in your blog to print and frame.

  3. Great post, Tom. Thanks for that.

    Myself I always had a problem creating a plan, which is specific enough but also leaves a bit of room for the discretionary aspects.

    How do you do this? The trade setup you explained for the outside-in-trade is very specific and does not leave much room I would say, but other entries you take seem to be more discretionary or knowledge based.

  4. I look at the second trade as leaning on the support of the previous low (at your 15:04ish, which it 1 ticked), and which ended up being ibl, but you didn't know that at the time, since the IB wasn't in. :-)

  5. Hello and thank you for your valuable daily journal. I really enjoy it.
    Could you please tell me why in particular you would use Drummond pl dots when all of your bars are the same size anyway? It would negate the effect or usefulness of the dots as the high and low would be equidistant.
    In effect it would merely be their difference in close which would be of any value.
    Also, aren't your other indicators overly smoothed by your decision to use range bars? Thank you again for your posts?

  6. Oooooh, I eventually got the EL_Setup_Sierra loaded into Sierra. But I'm having challenges on loading data to current date. The chart is showing 2/22 instead of 2/24.