Tuesday, September 22, 2009

Tuesday PM Notes - Keys to the Castle

9/23 Update: Apparently, based on a flood of emails last night, many of you have ranked this the top post of the entire blog ... and that's saying quite a mouthful. As such, I've added it to the "Key Post" list in the lower left margin. Enjoy.

Last night, we completed the 8th and final formal Jellie Study Session (a.k.a. Webinars), where I presented top lessons learned by the Jellies to a packed house. The lessons were authored by each Jellie, and reflected each trader's top three lessons learned over the last two months of full immersion.

In my view, it was a final test of sorts to see if the things I firmly believe form the cornerstone of highly profitable trading -- which I had beat to death day after day in terms of both running commentary and my own trades (and yes, the team saw my live trades as automatically plotted on order entry charts time and time again in addition to the live market bias commentary) -- had set hold in their minds.

And when I saw several members of the team last night comment on the critical roles that (1) Market Bias and (2) "Outliers" play in this business, I sat back and grinned as I knew then that some of the most important concepts -- those that separate losing traders from profitable traders and profitable traders from million dollar traders -- were taking root.

Specifically, here are comments from two members of the team as presented last night with respect to those two critical concepts:

Market Bias is King. This was the most important lesson overall as just this one little concept can turn your whole trading career around and make consistent profitability possible. Prior to the Jellie effort, I had been sitting here with my sister showing her a strategy and it happened to enter a trade automatically. It went in my favor to start then immediately did an about face and ran right through my stop. I wasn't mad that the trade lost, I was upset - scratch that, beyond upset! My sister saw the look in my face and wondered why I was so upset if the loss wasn't really that large. I told her, "It's just so damn frustrating that after all the countless hours I've spent researching, reading, writing code, and studying chart patterns over the last 2 years, that it still feels like a coin flip every time I enter a trade."

The tank changed that for me by allowing me to see a bias in the market that I hadn't given any credence to before and by following that bias I could stay on the right side of the trade and I could make this work.

Outliers are Critical.
In poker, it's usually best to play conservative until you get a hand where the probabilities are strongly in your favor. When trading, it's usually the same. You need to wait until the odds are strongly in your favor, and then go in heavy. Unfortunately, those conditions may exist only 2 to 3 times per day and only in windows of a few seconds where you can get in at the right odds.

Outliers are the keys to the castle. You add to your winners. Try to turn each and every trade that goes in your favor into an outlier. Get as much out of each trade as you can. Inverse applies to trades going against you. Limit your losses to the best of your ability by knowing you're wrong and scratching before the market proves you're wrong.

At the end of the day, 1 or 2 outlier trades can make up for every missed opportunity or good trade gone bad. And those become outlier days. And those lead to outlier weeks. Pretty soon, you don't have to worry about being right 70+ percent of the time. You take all that stress of "being right" off your shoulders and that in turn makes it easier to scratch a trade that's lost its premise. I no longer think that it "may come back so I don't have to take the loss" or "just try to get out here on this limit!" Who cares, scratch it. Next bus is coming. It's a heck of a lot easier to come back from a 200.00 loss versus a 2000.00 loss.


Yes, market bias is critical which is why we beat it in minute after minute, hour after hour, and day after day until people were sick of me discussing it. And double yes, outliers are ABSOLUTELY the keys to the castle, which most traders can't or won't pursue ... often under the completely wrong guise of "worsening" average cost and ignoring the concept of incremental income, or adding at the wrong times such as in range markets.

As I've mentioned from time to time, top traders -- like top poker players -- push hard and add to their bets when provided with market information that confirms their initial bias read. The millions I've earned over the last few years are the direct result of doing just that. Simply put, you have to know when to floor the accelerator and when to back off or coast, whether it be during a given trade sequence, day, week, month, or year. Like Tom Cruise in A Few Good Men, you simply have to know when to go for it. And experienced traders do just that.

The record of course shows that I sensed the kill over the last two years and thus pushed it hard. And we're talking about no-sleep, non-stop, health-affecting, hard ... in such a way where every single penny of the millions earned in recent years came at a price few would ever think of paying.

Last fall and even into this spring, I essentially floored the accelerator right through the pavement until the engine (my engine) ran out of fuel and was burning oil. So this summer, it was time to open the hood, let the engine breathe, and get a mind & body tune-up.

btw, in hindsight, my 2007-Early 2009 decisions to go for it, as well as the 2009 summer decision to pause to open the hood, were both 100% correct. Simply put, you have to push when you sense the kill, and you -- and only you -- need to make the decision as to when to do so. And don't ever let any bleacher bums critique your trading decisions, style, or self-imposed breaks in this business.

And now the engine has been rebuilt, I've teamed with a Pit Crew, and am now picking up the speed once again and racing around the track ... with a "car" that's much more lightweight and nimble, and a mind that's sharper than ever.

Yes, outliers are indeed the keys to the castle. And keys to the race car.

It's one thing when I say it.

Yet it means so much more when it comes directly from the traders.

And some day, I hope to be watching them join me in the victory lane, at which point I'd simply be content to help change their tires or dine at their castle.

P.S. Jellies - Never underestimate your potential. I certainly won't.