Friday, April 3, 2009

Friday Notes - Increasing Sample Size

4:00pm Someone asked me the other day why I started trading Europe again after having backed off substantially for the first part of the year, and my response referenced the fact that I'm just waking up earlier naturally and trade it if I see anything.

I also mentioned that I'm simply wired such that I trade best and get more aggressive (in a good way) after getting knocked around, which is why (1) most of my best days ever start off with losses or missed opportunities, and (2) I created the fictitious drawdown concept last year which has become the cornerstone of my psyche as noted in the chart to the left and the ongoing "fictitious prior-day" column of the daily scorecard.

Yet there's another reason I prefer to trade Europe if I'm alert, and that's because it simply increases the daily sample size from which to derive trading opportunities for a trader who purposely limits his trading to one market (ES) for focus purposes ... along with either the DAX or FESX which has ES-like rhythms and follow-throughs from the prior day trade.

Let's put it this way, if I can't end the day positive by finding enough opportunities during what are essentially two complete sessions over the course of a single day, then I shouldn't be doing this.

And the DAX provided Exhibit A today as it clearly provided the better of the opening trade opportunities with a follow-through to yesterday's supports, where it first continued the existing uptrend before overextending and snapping back hard (keep in mind fading overextensions at the barf point reflect my favorite and most profitable sequences). The only problem was I slept until 6am after everything had already occurred.

Compare that to the ES general session open where pace, volume, and pattern setups were all pi$$ poor by comparison. I've provided both early session charts for comparison (click to enlarge).

And while I sometimes don't make an effective transition from the Europe "day" to the U.S. "day", like our ongoing poker analogy, you can't beat increased sample size, and I don't recall a day in recent memory where BOTH markets didn't present at least one solid opportunity.

So that left me trying to piece together a few trades in the U.S. session where I made about enough to pay for a +$2K bologna sandwich on extremely light volume and lack of interest, and simply protected the week's +$43K chip gain on what I largely considered a mental day off after missing the higher probabilty Europe open.

Oh, and get this ... I came in 3rd last night to kick off the local Q2 Poker tourney leg, and here's how I lost. While down to a three-handed game, I had 6-7 in the small blind against the big blind, and the flop came 6, 8, K. I was first to act and went all-in, having a solid read on the other guy who I'd later find out was holding A-2. He thought about it and called me, thinking I was bluffing. So I'm clearly ahead ... until the turn & river came 8-K which counterfeited my pair of 6's and gave him Kings and Eights with an Ace kicker. Sick. The good news is I played it as well as I could have. Yet like trading, probability is the ultimate judge, and this time it sided against me.

Thinking of a Foxwoods trip this weekend. Got a local cash game going tonight and then we'll see what Saturday brings.


Charles said...

Hey Don,

crappy $ gain(for you), but a SOLID post...which is just another type of "gain" anyway, so good on ya mate.


Dennis said...

Hello Don, This is my very first post. I have been a reader since I heard your interview on trader interviews.Your blog is very informative and inspirational. I have been working 15 hours a day for the last 13 months watching the ES on live and cold charts and have developed a sound methodology of a trend and Counter trend trades. Got burned in the beginning with only CT trades, vowed never again and went to trend only. But i have come to the realization I need to have a synergy of both. I have added a ADX tool to my 5 min and 15 min charts to signal me when I should follow my trend method or use a oscillator for a CT approach. I like it because it keeps from getting burned trying to counter a strong trend. Do you think the ADX is a good tool for that?? Sorry for the long post LOL. Thanks Don,

Jules said...

I've been trading the Asia, Europe and US session and find the Euro-dollar futures very tradeable during the Asia and Europe session. It definitely offers more than a couple of opportunities for a good ride almost on a daily basis. You might want to take a look at the 5min charts and do a comparison. I've been watching the other FX pairs and none is comparable with the Euro-dollar, whose pace is somewhat of a hybrid of ES & TF.

Trader Kevin said...

Fading overextensions at the barf point reflect my favorite and most profitable sequences.


Don Miller said...

Thanks Charles ... the post length was my way of trying to vent for missing Europe :-).

Hey Dennis. Yes, ADX can be a decent trend tool, keeping in mind as always that extended can always become overextended. Personally, I like using moving averages on multiple timeframes where you can clearly visually see how stretched a market is from its trend support.

Jules - Thanks. I did try my hand at currencies a few years ago and was terrible at it and figured I'd stick to the indices. Never say never though :-).


KN said...

Hi there Don

went for a 4 week break in Thailand which was great but it took me exactly 4 weeks to get back in the groove again and reminded me of a post that you did last year regarding momentum and the importance of keeping momentum up, now it all makes sense to me and what it means, thank you

What is your preference regarding your trading account, do you leave a million in your trading account or just enough to cover margins? Do you withdraw money each month or do you do it once a year/quarter/six months?



Don Miller said...

Hi KN and "welcome back".

Since I have another non-market related income stream to pay the bills, I'm just currently letting it accumulate and don't make withdrawals.

Yet keep in mind how I trade and my view of tradable capital has no relation to whether there's $100K, $1M, or $2M in the account, as I purposely choose to play tight (when I'm on my game) as if my precious little capital just took that large hit.

I've also gotten pretty good about only infrequently looking at the balance as I noted in the "Cornerstone" post.


Trader's Life said...

Hi Don,

Nice post, you really now how to write down your trading experiences
One question:

''Fading overextensions at the barf point reflect my favorite and most profitable sequences.''

Can you explain that a bit more? Maybe a snapshot of that particular moment could explain for me alot.


Don Miller said...

Hi Sebastian -

Respectfully, I just try to keep it simple and think Friday's DAX chart says it all.

Still haven't ever seen an index climb to infinity or plummet to zero in a single day at the rate of those climbs and descents.


Trader Kevin said...

Sebastian: Can you explain "Fading overextensions at the barf point reflect my favorite and most profitable sequences" a bit more?

Sebastian, at some point the market starts to get overdone. (This applies to every time frame and both directions.) If it keeps going the move becomes stupid. If it still keeps going, the stupidity turns into a parabolic move.

At the point that a move becomes parabolic a trader should consider fading 'em. "The trend is your friend...until it ends."

As Don noted, the indices don't trade in the same direction forever. But they will sometimes move in the same direction beyond the point where it's stupid, so keep your powder dry and don't commit too much too soon.

Don Miller said...

Kevin -

Thanks. You said what I meant ... only better :-).


Trader Kevin said...

You said what I meant...only better :-).

Thanks, Don. Upon further review of that DAX chart, it illustrates one of the keys to look for besides mere price extension--volume spikes.

Trader's Life said...

Thanks for your explanation Kevin and Don. Now its clear, going to chew on that for a while with some charts.

Appreciate it guys!