Sunday, January 25, 2009

The Weekend Trader - Trading an Edge

If someone new to trading were to ask me to sum up trading in one sentence, it might be: Find an edge -- any edge -- and then go into a secluded place and trade the hell out of it.

Now let's have some fun and dissect the two words highlighted:

Advance warning: I received some junk mail touting a trading "advisory service" the other day which again got my blood boiling, so vendors should change the channel now.

First, let's talk about "edge". One could easily argue that there may literally be an infinite number of trading "edges" out there. Yet I don't know about you, but I still get tons of junk mail -- both via the old fashioned USPS and email -- from services telling us they'll sell us their edge. Advisory services, chatroom horse race callers, subscription services ... you name it.

And while the volume of such "junk" has certainly declined since the sick daytrading hype days of the late 90's and early 00's where everyone from vacuum cleaner salesmen to former construction gurus suddenly became "experts" after learning a pattern or two, it's still out there and probably always will be to some degree.

An edge is of course simply statistical probability that scenario A will more likely occur than scenario B. Nothing more, nothing less. And at the risk of making the most obvious trading statement of the century, the industry hype touting any particular "edge" is simply marketing noise. Nothing more, nothing less.

All the fancy pattern names ... including one whose name suggests it's the end-all, be-all of patterns and could also cure cancer ... are also simply marketing. Umm, last I checked, no pattern provided 100% results. If I want to buy a truck, I can choose from hundreds of combinations of makes, colors, and accessories. You can call it a Toyota Tundra or a Dodge Ram. In the end, they're both just pick-up trucks. And a market pullback is just a market pullback ... do we really need to name it? If I want to buy Ibuprofen, I can choose from Advil, Motrin, Nuprin, and Medipren. Yet despite the fancy names and billions of dollars spent on marketing, they're all the same dang thing! Plus, the marketed "name brands" cost more to cover the costs of ... yup ... marketing.

There's a classic line in the first Shrek movie where Donkey jumps up and down while shouting, "Oh! Oh! Pick me! Oh, I know! I know! Me, me!" No need to continue the thought ... 'nuff said.

Now let's talk about the "secluded place".

OK, let's assume -- and hang with me on this -- that you've indeed found a bona-fide edge, hopefully through a quality education reinforced by experience. Or perhaps you even made the leap to "purchase" the edge from somewhere. Again, we'll assume the edge is legitimate.

The next head-scratching part is that some sellers then even go so far as to entice you to pay some sort of recurring "advisory service" or live "trade with me" subscription after you've been sold the initial edge. Huh??? OK, I made the first leap and assumed the purchased edge was bona-fide. But if selling the edge in the first place assumes we're uneducated (one could argue "stupid"), then does paying for a guide dog assume we're also blind? Even worse, this "value-added" ongoing subscription is sometimes justified as "necessary" so we can fully understand why the edge didn't work any given time because of X, Y, or Z. Or so the "analyst" can prove his/her greatness by screaming how they "called" the market. Duhhhhh, it's called p-r-o-b-a-b-i-l-i-t-y.

Back to our ongoing poker analogy, imagine buying a book that says pocket Kings are a good starting hand. (First, I hope you didn't pay much for that quality advice!) Then when we're indeed dealt Kings, do we really need someone standing over our shoulder telling us that we have them? And then listen to them explain why they were beat by pocket Aces a few times?? And pay them to do it??? Sounds like Sears trying to sell me a maintenance agreement on socks.

Yes, I've long been outspoken on this issue over the years and as a result have taken some heat from -- big surprise -- "analysts" a.k.a. "vendors". And I'll likely take some heat for today's diary post as well. One of the better recent blog debates on this topic appeared in the comments to the December Wish List Post. And my views remain opinion as always, so there's no right or wrong. Yet simply put, I detest any part of this industry that doesn't promote self-sufficiency or whose boiler room substance is based primarily on marketing. Always have ... always will.

Now before my inbox floods again, I'll repeat that there are quality educational resources and venues out there that can help reduce the costly learning curve that is an absolute necessity in this biz. They're probably the ones making the least amount of noise and are thus the toughest to find. And if you needed an initial push, find them, ask for their detailed current trading records (not phantom "call" records; rather bona-fide results reflecting recent market conditions that take into consideration fills, order execution, transaction costs, and the mental aspect), and learn from them. btw, my guess is the "edge" you discover is incredibly simple ... but that's a topic for another time.

And while some traders may indeed trade better in a group environment, if it were me, and if I chose to care more about developing confidence and a true lifelong feel for the market than non-income producing social networking or newsletter reading for a fee, I'd make advance plans to quickly leave the nest. If the service was truly legit, they'd be trying to help push you out the door.

Then I'd take that edge ... or any edge ... and trade the hell out of it.

My guess is you'll know what to do with Pocket Kings.

Enjoy the rest of your weekend.

14 comments:

traderboy said...

Thank you for your excellent post on discussing the importance of identifying a tradeable edge in the marketplace & then demonstrating the intestinal fortitude to trade the heck out of it which more times than not comes from a trader's self-sufficiency and not some trading advisory service. Thank you for constantly instilling your thoughts on the keys to becoming a successful trader. As always, I’m looking forward to your next post. Traderboy

Michael said...

Don,

Your advice in this post is good, even if it "black lists" you in some circles! I have found (after spending $20K on "advisory services") that I really need to make my own mistakes and gain my own edge through experience and hopefully, eventually market wisdom.

Have read most of the blog now back to last summer (whew!). This may be a stupid question, but what is the 3LB indicator? I must have skimmed over it.

Thanks,

Mike

Don Miller said...

Hi Mike -

3LB refers to "Three Line Break", which Steve Nisson refers to in much of his material.

Essentially, it's a non-time based charting tool that solely uses change in price to determine whether a market is trending or not, as well as the extent of the trend.

I've found it to be a decent confirming secondary indicator during periods of strong trends, as well as a possible trigger for reversal trades.

Yet like any indicator, it's likely only useful when used in combo with others.

Don

E-Mini Player said...

Don, I completely agree with you and 95% of the services out there are junk. I happened to run across a couple of people who are genuine, and focus on education (teaching how to fish) rather than calling live trades. Their room is very small (< 20 people), but the education is top notch. If you ever have time or are curious to check it out, please let me know. Would love to hear your thoughts/review. Enjoy rest of the weekend.

Benjamin said...

Hi Don,
I know Dr Brett Steenbarger is a huge proponent of using a trading journal to try and identify and change negative patterns in our trading and work to improve on them. If such a pattern came to the surface through your own journal (blog), would you take active steps to work on improving it and if so how. You have mentioned many times that you dont hold winners long enough when you get a good entry for example

Don Miller said...

E-Mini -

I'd simply recommend due dilegence as with any forum. The internet can be a great virtual teaching tool ... under the right conditions.

Benjamin -

Yes, I've found the journal helpful at times in isolating problem areas, and the '09 experimental color-coded scorecard is my way of trying to strengthen its use even further in terms of helping me see what I need to work on.

The entry/exit management item in intended to specifically bring my attention to how I'm managing that part of the biz.

Don

pkmaui said...

Hey Don,

Greetings from a fan from Eastern Europe Bulgaria…

I heard you on the Interview, went to your blog, watched many of your videos, and realized that I’m not THAT crazy!

So many things you say make sense to me especially the relationship to playing poker- the game has improved my trading also.

The trading journey feels like 1 never ending poker tourney. I want to know your thoughts on this: It seems much easier to determine the edge and how to play your hand in poker -compared to making the same decision WHEN to bet big on the trade. The poker feels more definable compared to a trade. It seems there are many more variables that can happen on each trade then each decision before and after the flop.

Do you think this is because I feel more confident playing poker? How do you see it?

Thanks Don,

Pk

pkmaui said...

Don,

A follow up comment/? :

How can u rate a trade and determine the probability as well as you can when U get a strong starting hand? Their seems to be more judgment/feel/experience in taking and handling of each trade compared to the poker.

But on the other hand, I don’t see the “Bad Beat” on the river in trading- the worst thing being you get whipped out trying to keep it longer (but still make a profit) Trading feels to me a total game of skill. I even got to ask T.J Cloutier here in BG, and his opinion was poker is 75% skill- 25% luck.

Any thoughts?

Don Miller said...

Hi PK -

Well, I never said I wasn't just a bit crazy :-).

Yes, I do think confidence has a lot to do with betting size. I pretty much know when I "have Jacks or better" on a trading setup, and also realize that it may not always pay and be one of the times it doesn't go my way.

I agree the river bad beat may not occur much in trading. Perhaps one difference is that unlike poker, trading is not a "take or give up the entire pot" proposition as one can take partial profits and/or decrease capital at play "during the hand" through scaling in and out which I almost always do.

Not sure about skill/luck percentages. My guess is poker is about long-term skill, short term luck ... with the luck factor being greater in tournaments vs. cash games. Maybe that's why most pros prefer cash games for consistent income and tournaments merely for occasional home runs (unless playing small tournament games against each other where they know each other's betting patterns).

Trading may also be similar as luck can certainly play to your favor if you're positioned strong and the market surges on news, or if you happen to come back from a break and are dealt Aces and flop A-A-K on the first "hand".

Thoughts anyway.

Welcome to the blog.

Don

MACDOW said...

I found after spending a lot of money there are many scammers who tout services and especially SOFTWARE!!!
My edge is very simple, works in almost all markets and it cost me (ecxcluding the scammers in the beginning) very little.
My edge is years of learning from my initial mistakes and then applying those mistakes every day.

Don we need more people like you to talk up on the scammers because there will always be a new batch of hopefulls comming into the retail trading environment. If the newbes could see they are being ripped off buying things they dont need maybe they could concentrate more on themselves on finding their own edge. After all what works for one person might not work for another!
Great post - Keep them comming.

pkmaui said...

Don,

I love those trading/poker analogies…thanks!

As were not “forced” (blinded) to play and can wait, would you say that most of your trades are the jacks or better type? And should I only take those type trades vs the 9-10 or even 3-7 fades?

It always seems to me that when I take these worse “hands” it’s not as easy to get out of it quickly-like in the poker. When these trades work-its great but when they don’t-they seem to move much faster against me vs taking the strong hands that don’t work..as im still able to scratch it/take a small loss + seems very hard to bury myself when I play the best trades.


So for the past few months Ive ben waiting for the right hand.

Do you have any general comments?

Your videos and words are very inspirational to me

Thanks Don…

Don Miller said...

PK -

I think it's safe to say that poker has helped me become a more disciplined trader over the last few years in terms of waiting for "Jacks or better".

In the past, I've admittedly struggled with that a bit in terms of letting marginal hands bleed the P&L ... something the Tao of Poker book that I've references discusses nicely.

I'll probably be working on that, as well as my patience, until the day I decide to hang it up.

Don

Chuck said...

The irony of trading "educators" is that you don't discover how useless most are until well after you've been in the business a while and have already spent considerable time and money only then to realize that your edge can actually be found in a $20 book. That's the final "aha moment" that all that money has bought you. None of us wants to be one of those chumps who trades without a plan. So where to learn? Few of us have a succesful uncle who trades who will take us by the hand and show us how to get started. So we are left to find our "uncle" in the back of a trading mag or at a "only $750 for all this" website.

Don Miller said...

Chuck -

Kind of like that saying "Everything you need to know you learned in kindergarten" :-).

Don