Monday, 10 October 2011

Less Risk, More Profit

The key to trading has been to take less risk to make more profit.

Sounds obvious, but it is amazing how traders try and guess or predict where price will go without any empirical evidence. I don't know about you, but I think it's pretty hard to predict. What I do is to make a deduction from the evidence before me as to what "they" are doing so I can join them. Trying to do what King Canute showed couldn't be done is a no win situation.

I'm a fan of Sir Issac Newton and Leonardo da Vinci, both alleged members of a secret society, but to me, members of a small group of men that made discoveries that have had a huge impact on the world's understanding of itself. Newton's Laws of Motion are the basis of trading as I have written once before.

So my business is to detect the trend of the prices of the chart I am trading from. I then wait for a hesitation (pullback) in that trend and trade the subsequent thrust back in the direction of the trend. "A body continues in a state of rest or uniform motion unless acted upon by an impressed force". Those were the words I learned at North Sydney Boys' High School in my physics class. I had to say them over and over like learning the times tables until they were embedded in my muscle memory. I remember them today and what I am doing in my trading is find ways of seeing the order flow so I can judge an end to the continuation of the uniform motion. I'm looking for the impressed force that is acting against the trend to stop it.

There are lots of tools available to us today with all the modern technology. Electronic trading allows us to slice and dice instant information so we can see "their" footprints that are as fast as the speed of thought. When I was on the floor there was a huge pit full of traders making trades and then verbally reporting the trade to the observer: "34 trades", who had a reporter with a key board typing the sales into the computer that then appeared on quote screens around the world. I first saw prices being reported on the Sydney Stock Exchange. In those early days there was a gantry with a chalk board running the whole width of the trading floor with all the stocks listed. Next to each name were 4 boxes. The middle 2 were the bid and ask and the outside 2 were the numbers/mnemonics of the brokers who were bidding and asking those prices. Trades took place almost by appointment.

The chart below is anther way of looking at "their" footprints. It's no better or worse than the other ways I use to detect the order flow but it may talk to different traders more loudly and clearly than other ways. This chart is a 30 second chart and moves very quickly - it acts a lot like a range bar. To help me see things instantly, I have dropped the indicators and PAINTED the BARS. Green bullish, red bearish and cyan neutral. The coloured bars are not signals but tell me a trading picture is setting up. I can only trade with the trend. This algo is one step away from fully auto.

We'll be looking at ALL the tools I have during the workshop so that the attendees can build themselves a trading model that fits them, both discretionary and algo.

In your search for a trading methodology/trading plan, the starting point is to take a chart and pinpoint on that chart all the trades you would like to have caught. The next step is to find the tools to catch them with a high consistency. Nothing is 100%, or close to it, but a methodology that shows you when you are probably right and probably wrong is what you are after. Then, by wrapping it in money/trade management, you have a business.

RTH opened with the market in a bullish mode. My envisioning was for an up value. I wasn't disappointed and went long at the first arrow on the first pullback, not waiting for the thrust. I started scaling as I didn't know where the market was headed and where the move would stop. It's not hard to see those higher volume nodes and congestion where I took some off. The dotted red lines are ATRs and act as support and a marker to consider bailing. I hit the magic 5 handles profit within half an hour and my day was made. The rest was cream. I looked at the daily charts for resistance and bailed the balance as it neared the 1181.75 high of 28 Sep. I'd had 3 good pushes. I was tempted to stand in front of the train and fade it there, but went for a lie down until the feeling passed. There are old traders and bold traders but no old, bold traders. Although I did reload half way through the move, I find it hard to re-enter after completing a trade like that. So I switched back to the DAX that I had been trading in my London morning. The 30 second chart is only good for me when the market is moving very fast. 


  1. There's a lot of talk about a financial transactions tax in Europe. What are you hearing over there? The last article I read about it said it would add about $20 to an ES round-trip. Does it stand a chance of passing in the EU?

  2. Anon 18:26, I don't think it will happen in futures as it would kill volumes and the exchanges will stop it from happening.