Wednesday, March 11, 2009

Wednesday Epilogue - Upon Further Review ...

Important epilogue to today's earlier post:

While I obviously use this diary to vent, which I did today, I feel I should more fully explain today's comments to those new to looking over my shoulder.

For those new to this journey, today's missed opportunity and reference to last year's home run wasn't about greed ... which couldn't be farther from the truth. Instead, it was about what drives the long-term P&L in this business ... and that is many small (and a few large) losses that must be offset by those occasional home-run gains -- in addition to the steady modest daily keep -- to drive a significant long-term bottom line. And this point is precisely what many scratch traders miss and is often the missing link that separates them and part-time hobby traders from the tiny minority that make significant long-term income from trading.

Of course the concept is similar to (1) my trading day where much of the day's income is made from a few trades amidst the 20-30 sequences, as well as (2) poker where cash players make their keep from those rare large hands, or tournament players who make their keep from the small # of high-placing tournament results. The rest is usually offsetting chop. Or as has often been said, you can't eat like a bird and crap like an elephant.

Said another way, you have to be like Tom Cruise in A Few Good Men, who went for the jugular when Jack Nicholson was on the stand when he sensed everything lined up and the time was right. Who could ever forget:

Jessep (Nicholson): You want answers?
Kaffee (Cruise): I think I'm entitled to them.
Jessep: You want answers?
Kaffee: I want the truth!
Jessep: You can't handle the truth!
Later ...
Kaffee: Did you order the code red?
Jessep: (quietly) I did the job you sent me to do.
Kaffee: Did you order the code red?
Jessep: You're goddamn right I did!!

If you recall, while Kaffee had prepared to push the issue and get Jessep to admit he ordered the Code Red, he was only going to push it hard if he sensed he had Jessep on the ropes. And so it is in this business as well. You had to recognize heading into Wednesday's open there was a world of stuck shorts after Tuesday's action who had to cover on any initial drop ... which was also clearly evident during the overnight Globex trade. And that is why the morning after a monster trend often provides very high probability opportunities, especially if the first move is toward the most recent trend support. As with poker, it's not about your hand ... it's about the other guy's.

100% probability? No such thing. Yet it was darn high and like being dealt pocket Aces and seeing A-A-K hit the flop. And you had to be at the table to get dealt the dang Aces.

Yet perhaps last year's daily profit distribution explains it better in pictures than I can say in words. Note the "tail" of the curve to the right is what drove a significant amount of the bottom line (7-2 ratio for # of days exceeding +/- $40K), and currently if I were to draw a 2009 curve, there would be one large loss to the far left (albeit the sole loss of 2009), and none to the far right ... the exact opposite of what I need to see. And this is exactly what is separating my 2008 vs. 2009 performance ... not going for the jugular when the probability is right.

So it's not about greed. Not at all.

It's about not falling into the trap of a scratch trader, and instead driving the long-term bottom line.

It's about "handling the truth".

I'm out of my isolation chamber now and have reactivated the comments. Thanks for respecting my privacy.


JEB211 said...

Thank you for your insights. I am new to reading your blog and I can already see that you have a very different approach to trading than the vast majority of traders.

E-Mini Player said...

This post highlights a crucial point in regards to profitable trading. Most traders I know feel worse about missing opportunities than they do about taking losses.

Well put!

Ziad said...

I totally hear you Don. I had a similar type of day that you did yesterday. Based on how I trade, there was $36K readily on the table for the taking and yet I took out only $16K from it. Now many people may ask how the hell can you complain about $16k, and in fact a family member asked me the same thing, saying that most people need 3-4 months to make that. However that completely misses the point. The absolute number means nothing; it's all about what was there for the taking. And so I replied to the family member that this isn't a 9-5 job where I always get paid. There are losing days and draw-down periods that need to be more than made up for when the opportunity is there. We all know that the market doesn't hand out profits on a consistent and smooth basis and thus we have to really press when they're there. As such, 16k out of 36k represents only 44% efficiency in taking advantage and that's simply not good enough. If you want mediocre results it's fine. But if top-notch returns are your goal, you can never be satisfied with such a day, no matter the hard $ numbers.

A lot of traders seem to let up when they're up a decent amount, and that's certainly the natural inclination we have, but I think that's when we should press if things are clicking, because we can't forget that just around the corner may be frustrating times where our account goes no where.

Anyways, just wanted to say that I totally understand where you're coming from, and I absolutely agree that it has nothing to do with greed- it's simply the way the game must be played if you want those great results. And so here's to those great results... the important thing I keep reminding myself however, is that while it's ok to be disappointed and strive for better performance, you gotta forgive yourself and move on after you take the lesson. Harboring continuous thoughts of regret will bring on yet more poor performance as you very well experienced yesterday in trading the rest of the day.

All the best,


Trader's Life said...

Hi Don,

First i have to say that i really love your blog. Learning alot about the emotional aspect of trading. I'm trading myself the YM. right now on technical basis but learning more and more about price action.
Is there somehow you can give me/us a glimp of how you trade? Based on what do you make your disicions? If not, i understand...
after all this is only a blog to write things of your chest.

Don Miller said...

Welcome to the blog Trader's Life.

My particular style should become apparent as you scroll through the nine months or so of blogging and occasional chart captures.

You also may find the "Providing Liquidity vs. Speculating" post in the Key Post section near the bottom left margin helpful.


steve said...

Ziad, great comments. I personally have gotten really good at taking only one point out of a 3-4 point move.

Don, I think there's just something about this week! I've had more distractions this week than in the last several months.

Anonymous said...


I follow your blogs closely since I stumbled on it through
I have been trading Equities/Options for the last 3 years and recently got into the E-mini world.
I work and live in Chicago and hold Series 3 which was required while working for a non-profit agency.
I never utilized this certification or thought of taking into life application until now.
I have good understanding of the market and have established a system that works for me.
Couple questions that I have, hoping you can help:

•What platform do you use and what is your commission rate?
•If you trade for yourself, what is the best structure to trade with minimal tax obligations (S-Corp, C-Corp , LLC or something else)
•Do you report your taxes quarterly?
•What book/website do you recommend to read pertaining to E-minis?

Your advice is greatly appreciated.


Being said...

Your epilogue comments hit me right in the heart. You nail the difference, the reason missed opps are more painful than the small losses. And Ziad articulates it well too.

This weekend i was poisoned at a wedding lunch, so it's been a challenge to just show up at the screen in the morning. The weak link in any trading methodology is usually the trader.