Monday, May 31, 2010

Memorial Day Notes - Learning By Remembering

On a day where remembering those who have made great sacrifices for our country is paramount, here are a few trading nuggets that come to mind.

Lessons from a SEAL - Many know that years ago, I had the wonderful pleasure of working with Larry Connors, having written a daily column for him over an extended period and co-producing several educational courses, simulations, and other trader tools in the early 2000s.

Larry has made a ton of significant contributions to this industry in terms of strategies, statistics, and publishing -- including having co-written Street Smarts with Linda Raschke.

And as I was undergoing a major office and psychological "cleansing" this weekend (more to come on that topic over coming days), I came across some outstanding materials from Richard Machowicz, who is a former Navy SEAL and the host of the Discovery Channel and Military Channel show Future Weapons -- and who Larry introduced me to many years ago.

These materials have helped me identify two significant hitches in my current trading "swing" ... hitches that I'll call "comfortable traps" which are always lurking around every corner, and which I must avoid on a moment by moment basis at all costs.

Coindentally, as I was rumaging through ten years of office materials (you should see the full trash barrels as I separated the absolutely critical from the completely irrlevant ... and there's no in-between), Larry's interview with Richard from a few years ago also resurfaced.  It's great reading.

So thanks to all of the Navy SEALs -- and all branches of the service -- who fight daily for our freedom.

Risky Stops - And speaking of Larry, here's another relevant post he did on why stops hurt those who focus on reversion to the mean strategies -- including those caught in the May 6 "Flash Crash" -- which includes a link to a Wall Street Journal article on the same topic.

As the Jellies know, risk management can often better be managed via size than stops ... which is my personal preference when trading reversion to the mean sequences.

Personal Remembrance - Finally, I'd like to remember Dr. Firouz Amirparviz, who was a friend and trading peer who we lost in 2004.

Firouz was a renowned cardiologist in the Midwest who once welcomed me into his home -- as he did hundreds of others. 

He and his wife Cheryl will always be in our thoughts, and my wife Debra still wears and cherishes the beautiful silk scarf that Cheryl purchased -- without ever having met her.

It was a small token ... yet one that spoke volumes about their willingness to give.

Let's hope we learn from all such sacrifices -- no matter how large or small.

Enjoy the rest of the Holiday weekend.

Saturday, May 29, 2010

The Weekend Trader - The Big Picture

Two thoughts are running through my mind as we get set to start this Holiday weekend.

The Big Picture - First, one of the things that drives me crazy in this often overly-hyped business is the focus on the short term.  The immediate. The last trade. The "I called the market right!" syndrome".

And we've discussed the concept of "time" many times in this journal, including the often quoted and syndicated Svithjod Rock post, as well as recently in great detail in my May 1 post on Delayed Gratification.

In the Jellie Webinars (which if you're new to this trek chronicle in painstaking 16-Hour detail the eight weeks of the beta Jellie Team's experience -- with a portion going to the American Diabetes Association), the first of the eight sessions references that trading is essentially the "long-term accumulation of short-term decisions".

I remember when we launched the Jellie program, that one observer commented something along the lines of, "well, just wait until he has his first blunder ... that will be the quick end of it".  Yet, I knew that years of trading and teaching experience had taught me quite the opposite.  In fact, I couldn't wait to make, discuss, and analyze that first "blunder" with the team, and that "blunders" are simply result of lesser probability outcomes -- whether it be the lesser probability of a high % chart setup, or the lesser probability that you've misread something or are simply off your game when you're on it the vast majority of the time.

And from my earliest days of mentoring traders to current efforts, realizing that trading is all about imperfection remains one of the #1 "light bulbs" for every participant ... which often immediately puts them at ease.

When I taught traders in the late 90s and early 00's, it didn't take but a few days to quickly realize that the industry -- which at the time was in its "rah-rah no one ever has a loss, but don't hold the chatroom auction caller responsible when he does" hey day -- had substantially left the terribly misguided impression that successful trading didn't include the losses, or the occasional -- yet highly necessary -- pain.  Because it wasn't discussed.  And frankly, in many cases, it wasn't allowed lest you be banned.

The result was that many people entering trading in this new era where markets became more accessible via the Internet were missing perhaps the most important piece of the puzzle.  Or in other words, they were being told all about the lock -- how it looked, its composition, its role, and how great the locksmith who made it was -- but not handed the key.  Frankly, it was sometimes because the locksmith didn't even have the key.  He just had a fancy lock.

Now some may argue that I've overcompensated by discussing and venting about my occasional struggles more than my successes.  Or that I'm a "downer".  To that, you can ask any of the Jellies on Thursday morning when I was literally screaming my personal sequence ala Lewis Winthorpe on the early bear trap -- buying every dip-- before unloading it all on the 3rd and final push to 1094.  It was fun, and I thoroughly enjoyed and briefly celebrated it for a few minutes before closing up shop for the day.

Yet it's still all about the long term.  And such is why the live Jellie program and Webinars span multiple weeks.  Because they have to.  Do they replace the years of experience that must be developed and nurtured?  Of course not.  Yet if one is going to get formal instruction, you have to start with something that begins to emphasize that trading is far more than a trade, day, hour, or week.

Case in point.  To the right is a random sort and scatter graph of my actual trading results over a sample time span (click to enlarge).  The red line in the middle reflects zero, the dots above reflect positive days (the higher, the more profitable), and the dots below reflect negative days.

And the first thing that may surprise you is the amount of dots below the line -- including some far to the south -- which at first glace may lead many to think the net result probably is break-even at best.  Look at it.  Stare at it.  And look again at the points to the south which we'll call ... well ..."blunders".

But it's not break-even at all.

Far from it.

For the net result of this "long-term accumulation of short-term decisions" -- blunders and all -- is well over two million dollars.

Now, look again at the graph.  Note that the vast majority of dots are clustered just above the red line.  The outliers to the north and south?  They essentially offset.  It's called grinding out a living hour by hour, and day by day.

Further, as I've always said, I consider the dots below the line to simply reflect business expenses -- which is how I book them.  Necessary expenses which allow the "revenues" to the north to be generated.

And when we begin again on Tuesday?  Well for me, one fun part of this business is never caring about knowing where that next "dot" will land  -- while knowing full well what the long-term outcome will be.

Now, on to my second thought.

Who Wants It More?  After last night's Orlando Magic series loss to the Celtics, Dwight Howard referenced that at the level of the Eastern Conference finals where talent is essentially equal, it ultimately comes down to who wants it more. 

This time around, the Celtics simply wanted it more -- diving for every loose ball and giving up only the rare uncontensted lay-up without fouling to make Orlando earn it from the free throw line.  Minute by minute, game by game ... they were relentless.  And it showed in the final result.

And isn't it so true with trading.

Personally, my long term P&L is only driven by how bad I want it. Only.

And frankly, it is the only variable of which I have direct control, and will likely remain my main trading challenge so long as I choose to "lace 'em up".

So how bad do I want it right now?

More importantly, how bad do you want it right now?

Are we willing to make the sacrifices?

Are we willing to dive for loose balls?

Are we willing to buy hard after the selling has stopped and sell hard after the buying has stopped?

Are we willing to fight for those fricken "Missing Inches"??? (You HAVE to read that post of one year ago to the day and watch the video if you haven't before.  My guess is that you're leaving several yards of missing inches on the table.)

For our answer will largely determine where all future dots will land on our graph.

Over time, of course.

Have a wonderful and restful weekend.

Friday, May 28, 2010

Friday Notes - Go Celts

Taking the night off.  Back at it over the weekend.

Thursday, May 27, 2010

Thursday Notes - That Which Doesn't Kill You ...

"Shocking" as it may be, those of us who have been fortunate enough to trade at a very high % clip -- and who have made millions in this business -- still find times when we go through our own personal trading hell, which as today's video will show, can best describe parts of my last few weeks.

Yet there's something special about the market doing its best to frustrate and "kill you" -- as was the case during the recent flash crash (1,700+ YouTube hits and still climbing) -- and you somehow finding the strength to simply fight through it ("it" being everything from sleepless nights to plenty of sub-optimized trades while you again find your footing and balance) with all your might and fortitude until you come out the other end.

And while this "comeback" wasn't as pretty as some (such as the infamous October 2008 Monday hit which was recovered in only three and a half days ... perhaps age is catching up with me a bit!), I managed to once again stumble and bumble myself to a place where my eyes, head, fingers ... and that ever-so-important sixth sense ... are back working in lockstep.

As I'll mention in the video, this one -- while lesser in size -- was tougher psychologically.

Yet I now consider that market "loan" to have been repaid in full, and I'm now out to collect both interest and "punitive" damages.

As has often been said, that which doesn't kill you does make you stronger.

Nice try market.

You had your chance.

But you should know by now how the story always ends.

Now, where were we before May 6 at 2:40pm?

Monday, May 24, 2010

Week of May 24 - Blog Break

Posts will resume later in the week.

Saturday, May 22, 2010

The Weekend Trader - Trading vs. Competing

Please note I updated several parts of this post -- including the ending -- on Saturday A.M, so I encourage you to re-read it.

Also, thanks again to all Jellie Study Session participants as we've now surpassed $17K in donations to the American Diabetes Association!

There's "trading".

And then there's "competing".

And while it may be obvious to the astute that trading IS competing, it's been my experience that most don't view the two as being forever linked ... which is probably why the vast majority of this zero sum game give their capital to the small minority who consistently win over time.

At this end, when I'm in a rut or losing, I'm "trading".

On the other hand, when I'm in the zone and profitable, I'm "competing".

Take Friday for example.  After the early morning sequence -- which I'm still analyzing as my undersizing the trade hasn't sat well with me -- I vented and complained in the Jellie Tank for at least 20 minutes.

Some think I'm too hard on myself.  Others probably muted me (I'm doing more running audio in the room now), and I know at least one person left the Tank -- most likely because they didn't want to hear it.

But here's the deal.  When you trade alongside me (with the teaching hat off between formal new Jellie training efforts), you have to realize that I'm not trading for "fun" or looking for social interaction, nor am I trading "casually", as a part-time "hobby", or to make some "supplemental income".

In fact I'm not "trading" at all.

I'm "competing".

What does that mean?

It means I do everything in my power to "feel" the market, as well as to motivate and push myself -- including getting simply fed up when easing up on the accelerator in terms of trade size during one of those 1-2 days a year where the market is a screaming buy ... complete with our classic opening "all clear" signal that we had on Friday.

And while the attached auto-trade capture chart shows I absolutely nailed the opening sequences (to refresh your memory, the triangles are the opening and closing of sequences, and the dashes interim trades which may be adds or decreases; blues are long sequences and reds are shorts), what it doesn't show is the size ... which frankly sucked. 

And my plan to add heavy all the way up toward 1060 and then dump it on the move toward 1070?  Well, suffice it to say that I ended up using a trowel instead of a Bobcat.

Now as a quick autopsy and to ease up a bit on the personal frustration, the reads were solid, I had been trading well since the 3AM Europe bell, and the last minute pre-open Globex tank required I make a few quick adjustments on the fly, which is probably why I eased up a bit.  I also made sure I got "something" on, and sure as hell didn't short it.  My main "issue" during the heat of the battle was continuing to buy six to eight points above my initial purchase (stupid rookie mistake ... like the market cares about my position or prior entries or exits) upon confirmation, and I figured I'd have another chance to load up.  Then again, those are lame excuses. Fortunately, I didn't let the frustration result in taking any subsequent stupid trades.

In fact I did a quick survey of various trading venues around the Internet tonight, which confirmed the industry's continued silence in terms of discussing the overwhelming importance of trade size.  Instead, it was all about chart patterns.

As I've stated time and time again, the big winners in this global competition know it's ALL about trade sizing, including adding to clear winners in a volatile market to help fuel the action in light of the ridiculously clear confirming coil break triggers where risk is clearly minimized.

And the winners also know that they can't ever have one iota of doubt creep into their mind when putting on a trade, knowing that high probability will do the heavy lifting over time and they simply need to execute.

And such is why I choose to "compete" instead of "trade".

Let me be blunt.

While I don't normally discuss my wins as I choose to share more about the losses for many reasons, I made over $30K over the last few days and am pi$$ed beyond belief.  Because it should have been $60K.

And please understand -- it's not greed.

Rather, it's the recognition that this is a business like commercial fishing where you have to use a net when the fish simply show up and not a damn fishing line.

And patting oneself on the back when achieving anything less than your fullest potential does nothing to further continual self-improvement.

So I'm fighting mad.

Finally. (What took you so long Don??)

And the last time I was this mad?

No, it wasn't the May 6 flash crash hit, which didn't anger me as I simply "accepted" that part of this business.  Hell, watch the video ... perhaps my lack of anger was a huge red flag.

It was December 2007.

Before the self-imposed lockdown and exile that led to a 15 month zone of all zones.

That was the competitive commercial fisherman with the net.

The good news?

My market feel is as strong as ever, the entry and exit points have been consistently solid, the sea will still be there on Monday, and God gives us a world of tomorrows for a reason in this world where humanity trumps perfection.

Oh, and I found my net.

Frankly, I'd forgotten how big it is.

Enjoy the weekend.

Friday, May 21, 2010

Friday Notes - Back in Saddle

OK, I wasn't sized appropriately (no jokes, please) and the Jellie room will tell you I was irked beyond reason with undersizing a 10 point trade off the opening gift barf.

On the other hand, I must say it felt good to nail the 9:28AM 1052.50 buy, and my rhythm is as good as it ever has been as I close the best week of the year and start to once again string together multiple consecutive 5 digit days ... which frankly has been a huge necessity in terms of confidence as I continue to simply "keep walking" after the infamous flash crash.

Yet there continues to be plenty of room for improvement, including adding to winners in a market which should be a no-brainer in light of the increased volatility and confirming coil triggers.

And while I'm not satisfied with current performance in terms of optimization (a good sign), I suppose I should enter next week's personal trading retreat on the ocean with at least a positive frame of mind with ...

Thursday, May 20, 2010

Thursday Notes - Payback Time

I'll let the classic Trading Places movie cover -- especially the bottom comment -- speak for me tonight.

The Super Bowl of Trading continues tomorrow, and I'll be hitting the sack early to try to sustain the current level of focus.

No other comments tonight as I prepare for the overnight and morning sessions and continue to collect on the recent flash crash loan to the market.

Rest up Jellies, and DON'T get complacent based on today.

Wednesday, May 19, 2010

Wednesday Notes - Lessons From Gustavo Dudamel

Tonight's video discusses similarities between Gustavo Dudamel's directing of the Los Angeles Philharmonic (he was featured in Sunday's 60 Minutes program) and my approach in trading -- both as an individual and in trying to optimize the Jellie results.

Tuesday, May 18, 2010

Tuesday Notes - Blog Break

Posts will resume on Wednesday.

Monday, May 17, 2010

Monday Notes - Stalking the Outlier

From my perspective, it should come as no surprise that the September '09 "Keys to the Castle" post -- which summarized the major take-aways of the beta Jellie effort as told by the traders themselves -- ranks as one of the top posts of the last two years in terms of onlooker feedback and trader career-changing content.

This is because in my view, stalking and effectively managing positive outliers is one of the most critical aspects of trading that pattern gurus fail to address.

What do I mean by positive outliers?  Those one or two trade "sequences" over the course of a day, week, month, year, or career ... that skews the P&L to the "P" side, while buying you (1) bait for subsequent "fishing" trades and (2) time to stalk the next trade.  You can do a blog search in the top left corner to find several posts addressing outliers.

And it's key on both a micro and macro perspective.

For example, on the macro front, we need look back no further than between late 2007 and early 2009 where I essentially bought over twenty years of six-digit income in about 15 months. 

And on the micro front, today provided another solid example, when as is usually the case for me, it took a while to get my Monday motor running before essentially earning today's entire net on the single trade sequence on fading yet another noon push as noted on the attached time-based P&L chart (click to enlarge) -- which btw I've really found often best illustrates my trading day.

So whether it be one highly dedicated period of time during a career, or one trade sequence over the course of the day, it's all and only about stalking the positive outlier.

Of course, negative outliers will occur -- including the ultra-rare recent black swan which is quickly becoming a distant memory for this trader -- but good traders work their tail off to ensure they're few and far between.

Oh, I could have traded better today, including both increasing the results of the noon outlier and taking a few other trades which I read well as the new week's engine was getting cranked up.

Yet as the Celtics will tell you, I'll take today's somewhat sloppy win to continue the "in-tank" trading streak, and simply come back on the court again for the next game.

The only difference is that in trading, the cumulative scores of each game do count in the standings.

In fact, the cumulative scores are the standings.

Saturday, May 15, 2010

The Weekend Trader - Continual Renewal

Today I address those traders in the ongoing Jellie networking room in terms of the need for continual renewal and rededication -- in trading and life.

Friday, May 14, 2010

Friday Notes - Tidbits From the Jellie Tank

In today's video, I share some tips we discussed in the Jellie room today, as well as use the attached time-based P&L chart (click to enlarge) in terms of describing (1) today's market flow, (2) my style -- which despite last week's black swan won't change, and (3) the need to adapt on the fly.

I'm also very satisfied with reuniting with the Jellies in the ongoing networking room, and have put in three days of successively increasing profit since my return ... further confirming my feeling of sharpness and focus when there. 

And while I still need to ramp up the aggression, the market reads -- or adapting when wrong as discussed in the video -- have been solid.

Lastly, here's an article about the "whodunnit" trader who helped wipe out all of the ES liquidity during last week's meltdown.  Thanks to Ric from the Jellies for the link.  Now I can finally replace Bill Buckner's name on the office dartboard.

Please note I forgot to switch on the headset microphone in the video, so it was recorded via the webcam mike and is why it sounds as if I recorded it at either the Grand Canyon or the home of the Cleveland Cavs at about 10:30pm last night :-).

Thursday, May 13, 2010

Thursday Notes - Blog Break

Posts will resume on Friday.

Wednesday, May 12, 2010

Special Post - Priceless

The Dow Jones nose-diving 1,000 points as the result of a once-in-a-lifetime electronic trading malfunction: Cost - $55,000

Your daughter providing one of the most inspiring performances you've ever seen in your life: Priceless.

In March, you read about Chelsea's journey and how she overcame her struggle with diabetes to reach the stars at the age of 17.

Now listen to what God has done with her life as she gives her senior high school farewell performance in the form of a violin solo of the theme from Schindler's List at the 2010 Dennis-Yarmouth Pops Concert.

P.S. I didn't shed any tears on Thursday.  I did tear up tonight as I was recording this. 

Wednesday Notes - Trading Losses

Today's video responds to a few recent emails and comments addressing trading losses, while floating the idea of beginning an effort to track and log $100K in trading revenues using modest sizes and capital.

Tuesday, May 11, 2010

Tuesday Notes - Trading Environments

Following up on Sunday's post, tonight's video addresses why I currently feel most comfortable (and profitable) trading in the Jellie networking room vs. solo or in a smaller collaberation.

Monday, May 10, 2010

Monday Notes - The Black Swan Concept

Some thoughts on preparing for and dealing with "black swan" events.

Sunday, May 9, 2010

The Weekend Trader Part 3 - Learning From Tylenol

When we look back at history, EVERY single setback has led to greater heights and advances.

Many may remember years ago when J&J turned the Tylenol recall fiasco "lemon" into lemonade, and we can point to countless similar instances where setbacks have propelled people to something great ... including this trader's life and career.

For example, most know that on October 6, 2008, I took a $94K hit -- the largest dollar hit of my career -- which woke me out of slumber and led to my best month, quarter, and year ever.  And the February 2009 "Nine Lives" post, which appears in the key post list in the lower left margin, addresses the number of times I've been "woken up" in a similar manner.

So as this unprecedented third weekend post is logged, you can probably tell that I've been continuing to soul search and pour over  Thursday's events over the last few days in a way I've never done before.  Ever.

For despite the minor scratch which could have been far worse, and despite the unprecedented market liquidity collapse on Thursday which contributed to the extent of the decline, there was one key factor that should have alerted me to shut down the liquidity portion of my business which had been so very profitable up to about 2:30pm ET on Thursday.

And every one of the dozens of Jellies (especially George!) and hundreds of Webinar viewers will know exactly what I'm talking about with three letters.


Yes, the VIX, which serves two purposes for us.

First, it's one of our PRIMARY leading indicators.  And second, at worst, it's a solid SOOT (Stay out of Trouble) & seatbelt clue.

And I'll go on record to all of the Jellies and thousands of onlookers to say I simply missed seeing the 1:20pm ET break (see chart below; click to enlarge) when I made my initial long entry.

That's correct ... I didn't see it and am still scratching my head as to why not.  And it was well before the ultimate breakdown, which provided plenty of time to close all long positions, lest consider reopening others until the later capitulation sub-1100, which could then have been bought hard without regard to managing prior positions.

It's on my screen, I've preached it for years, it's a main theme of the Jellie training, and I'm always watching it.  Well, Thursday's events told me apparently not "always". 

One of the Jellies has essentially made it his #1 indicator.

Which brings up a very intriguing question in terms of trading solo, which I'd been doing for much of the past few weeks to essentially get other student-trader "voices" out of my head for an interim period and "buckle" down in terms of focus.

Well, the buckle apparently got jammed.

Now most know I've been on both sides of the fence right on the issue of group vs. individual trading over the years, and have continued to vacillate big-time.  And I've found that over the years that traders -- including the Jellies -- have been spilt over preferring to trade amidst other influences, even if the group thinks alike.

And as I mentioned, I personally chose over the last few weeks to go back to trading solo, although I reconnected with one trader that day ... although we didn't stay together all day.

What's further ironic is when I facilitate the live Jellie training, I'm discussing the VIX live, along with every other key indicator.  Call it a talking chart.  And had I been either teaching or in the ongoing group room, there's no way in hell I would have re-engaged the liquidity business on the long side -- even in a partial position.  And some of the Jellies took full advantage of the signal -- as they should have.

In his book, The Great Eight (How to Be Happy When You Have Every Reason to be Miserable), Scott Hamilton says the following:

"Don’t face problems alone. Men’s figure skating is a solo sport, but I still needed a coach to get the most out of my abilities. Life often seems like a solo sport, too, but finding a coach -- a spouse or a friend with whom we can share our problems -- will make our attempts to solve those problems more enjoyable and more successful. Humans are social animals, as my coach, Don Laws, used to remind me. We’re not designed to face problems alone, so we shouldn’t try to do so."

Well, in addition to addressing visual and audio chart alerts at this end, I'm going to use the events of Thursday to completely rethink, and potentially restructure my views on the dynamics of group trading, whether it be a sub-Jellie group of two, the full Jellie group, or something different.

Yet for the moment, all I know is this.

A group of one didn't cut it on Thursday.

And I'll never forget the words of our former-NFL quarterback Jellie, whose coach would often tell him, "You can do far better than that".

He hated to hear those words.

As do I.

But he'd be damn right.

For while I managed well once I was in the middle of oncoming traffic, I could have stayed on the curb.

The Weekend Trader Part 2 - Market Crash Laugh of the Week

Here's the market crash laugh of the week for this trader in the context of excerpts from tonight's Saturday Night Live "Really!?!" segment with Seth Meyers and Amy Poehler:

Seth - And what is going on with technology in general?  On Thursday, the Dow fell 1,000 points because someone entered a billion instead of a million. How is that possible?  How is there not a backup system??  When I delete a picture on Facebook, it asks me if I'm sure!  Why is Facebook more squared away than the Dow??  I mean, really!

Amy - Yea, really ... one guy can do a billion dollar transaction and a manager doesn't have to approve it??  If I'm trying to pay with a $50 at Starbucks, it turns into a four man operation!  They have to call corporate headquarters.  I mean really!!

Of course, it sounds better with video & audio, so here's the video link.

It's often been said that laughter helps the healing process, so thanks to the SNL gang.

Enjoy the rest of your weekend.

Saturday, May 8, 2010

The Weekend Trader - Continued Crash Autopsy

11:25PM Post Addendum -- The voice of the Pit crash replay referenced below is that of Ben Lichtenstein of TradersAudio.

Most know that for a number of reasons too numerous to mention, I typically try to avoid doing two things in this business: looking back (whether it be charts or my own performance) and reading industry "press".  

Instead, I prefer to simply show up each day and go to work.

Yet Thursday's historic market action has me doing both in order to assess recent events, learn from them, and share my views.

So in one of my longer posts, here is one trader's continuing perspective to the market meltdown.

Thursday's Post - I'll start with feeling it was important to get Thursday evening's blog post and video out as quickly as possible.  While I'd backed off on posting frequency and discussing my own trading recently, I felt it critical -- as well as personally therapeutic -- to get my candid thoughts out quickly, despite the tough personal day ... er, I mean 15 minutes.

I did so because it seemed in line with my diary mission from day one, which was to show everything in an industry where too much is left unsaid, or simply purposely hidden. For too often, analysts and rah-rah cheerleading "put-your-money-at-risk-not-mine" advisory services run and hide when things don't go well.  Plus, few bona-fide traders -- especially those on the liquidity (house) side -- ever want to talk about their (a) performance, especially when bad, and (b) strategies, less it ruin any real edge.

btw, in my searching, I'm still looking for liquidity providers -- any -- to publicly discuss their Thursday bruises, although some have indicated they simply shut down to prevent further losses.  Having said that, I do realize and respect the fact that none of us ever have to disclose private info.  Nevertheless if you come across any interesting reads, feel free to share via comments.

I suppose the same can be said for athletes, as has recently been the case when the press has tried to find David Ortiz after games to explain his sub-.200 batting average and complete loss of any resemblance to his former self.

So I came up with the silly idea a few years ago to launch this online diary.  Does that make me better than anyone?  Of course not.  It simply seemed to be a void in the industry then, and a continued void now.  So I babble away trying to educate, motivate (myself and others), and create a lasting chronicle of one man's journey and lessons.

btw, before I posted that night, I did have my usual Thursday massage and poker night just to "keep the feet moving", although as I look back, I don't remember much of either ... except I do remember telling one poker buddy that the day for many was like having someone tell you your uninsured house had burned to the ground, causing you to sell it quickly to an unknowing party to salvage SOMETHING, and then having the person who told you the news, say "KIDDING!!".

Post Feedback - Naturally, the post subsequently and quickly resulted in a flood of emails and industry chatter, which ranged from the 1% "Like Tiger, I like Miller better when he's been humbled" to the majority of supportive emails including one highly accurate reminder that we're all simply temporary stewards of God's assets. 

Which brings to mind why it's essential for traders to continually balance humility with aggression and confidence.  For like athletes, show me a passive trader and I'll show you missed opportunity and a losing P&L.  Talk to any Christian athlete, and they'll likely tell you of their daily struggle to balance the two.

Regardless, I couldn't help but to check the site traffic -- more of a curiosity than anything as I've never had a goal to drive traffic -- which as I mentioned yesterday spiked to all-time highs.  Perhaps Kevin's comment to yesterday's post explains it better than I did.  Sorry if I sounded a bit cynical.  And the YouTube video is now at 1,200 and climbing.

In part, what I believe may be happening is how crises in general tend to bond and unite traders.  After all, we're all in the same "fraternity".  And so to all and new friends, welcome (or welcome back).

And here's an incredible replay of the Pit action during the freefall as provided by a few onlookers.  The voice is that of Ben Lichtenstein of TradersAudio.

Debacle Autopsy - OK, back to Thursday's trade.  As of this writing, I'm still not sure whether to be perturbed or elated over how I handled the day.  Yet perhaps the best description is a rather ironic combination of disappointment and satisfaction.

This is because I could have (a) avoided the blindside hit (the disappointment that I didn't), (b) handsomely profited from it (another disappointment), and (b) gotten killed (the satisfaction that I didn't).

First, let me say that one regret is I wish I'd captured and printed the day's actual TT trade auto-plot chart, which I didn't amidst the closing chaos, and they reset each day.  But I do have my trade log and will walk through the sequence of events.

As I mentioned in Thursday's video and in several past posts, I have two business strategies - Providing Liquidity (the Casino "House") and Speculating (the guy walking into the Casino).  And as I've also said in the past, there's a fine line between the two and they actually tend to blur.  Suffice it to say that Speculating typically reflects longer-term trend type holds where I'm the aggressor.

Anyway, up until 2:30pm ET, I'd actually had a strong day going, keeping my sizes relatively light and providing liquidity on the long side near each barf point and exiting into the resistance.  Then, with ES down 40-50 points and charts signaling what is usually extremely high probability, I began to step in to provide some short-term liquidity with a teeny (for me) 30 contract size on the long side near 1120, with a second teeny 30-contract size just north of 1100, so my average price was around 1110.

Now one important note about this strategy.  As I teach, this was NOT doubling down.  Rather it's scaling into wholesale market points with very partial pre-determined sizes, and not putting a larger wholesale position on UNLESS the market confirms the expected move.  Further, I purposely chose for this sequence to manage risk via partial position size vs. a hard stop, which is one of those elements that most "hang out a shingle" non-trading analysts never discuss.  It's a strategy that in the long run and despite the rare hit like this, has earned me well over seven figures.

Now I will say that looking back, I'm not quite sure why I only had 60 on, because my current "standard" trade size is 120, with a maximum of 480.  Perhaps it was some inner feeling that it just didn't feel right, who knows.  Yet there were no bottoming signs warranting anything more than a toe in the water, and thus was in line with my plan that if 1100 HAD held after an initial probe south and rebound, I would have put the other 60 on upon confirmation with a hard stop then on a further break.

Ironically, in hindsight it still would have worked ... except the 40 point plunge below 1100 made it difficult for me to conceptually re-buy when it finally traded back above 1100, as it would have been 40 points off the low.  If liquidity hadn't taken its once-in-its-history 10-minute near-death experience that required defibrillators to restart, it would have been a very profitable trade.

Now those of us who have been around for a while have of course seen illiquid markets before, especially in the context of surprise interest rate cuts, employment reports, & FOMC decisions (the latter two being anticipated).  And we know some of the most illiquid markets can occur during the overnight trade.

Yet few, if any of us have ever seen instances where liquidity was breached intraday to a point where some stocks momentarily lost ALL of their value (can you say Accenture?) amidst the electronic trading chaos.

So, how do I feel I handled it?

Perhaps the best analogy this poker playing trader can reference, is losing quad Aces to a Royal Flush.

We'll start with what I did well.

- Partial sizing.  Huge safety net.  Who knows what I might have done if sized larger given the emotion of the situation (btw, I was keenly aware of the intraday P&L during the plunge ... I just tried to not let it affect my decisions.)  And despite the above trade plan rationale, why I didn't instinctively bet the Quad Aces harder before the final plunge will perhaps forever be a mystery. 

- Not barfing it out at the lows for close to a 5% hit, and instead waiting for a 30 point rebound to bail.  Don't get me wrong ... it was and still is a bit painful and will take some time to heal, but if you had to make a choice between losing a sure finger versus a possible arm under extremely pressing conditions, the choice seemed clear.

Here's what I didn't do so well:

- Trading the afternoon.  I normally don't, due largely due to lesser probability and increased pattern uncertainty.  Plus, I'm usually tired by 2pm and simply either call it day or trade incredibly small for fun.  That was probably my largest mistake.  Yet I sensed opportunity and usually have pretty good judgment in terms of when rules can be appropriately bypassed.  I just didn't count on the Royal Flush.

- Not putting a trailing stop on my strong intraday P&L.

- Selling all 60 on the initial rebound instead of only 30 which I should have held to get more info on what was going on.  Again, risk would have been managed via sizing.  If I had done so, I would have had the option of selling the other 30 at a higher price or putting the other 30 back on after realizing what had happened.

btw, in the heat of the battle I did consider buying the 1060-1080 area, yet had a concern of possible CME busted trades lingering in my mind given the extraordinary conditions.  That coupled with an impossible tape/DOM read at the time kept me from doing so.  I was also concerned about the possibility of a 9/11 type market halt or the lock limit kicking in around 1050.

- Not having a longer-term speculative short trade on to hedge the shorter-term liquidity trades.  Yet the risk/reward on doing so and getting decent wholesale entry prices simply seemed poor the further the market fell, so that one's not a big issue.

- Scaling back my aggression a bit on Friday morning. I was a too apprehensive on Friday's MATD as I simply wanted to let the dust settle when I'd normally trade it hard.  And I left far too much money on the table in doing so, and as a result will extend the recovery period.  Yet I got back on the horse the moment I got up, so that's a plus.

In summary, some larger draws are the result of poor judgment, others the result of the lesser probability happening in which you only incur a small ding, and still others the result of some once-in-a-lifetime black swan.  And if I had to weight 10 points to all three elements this time, I suppose I'd give the black swan a 7 or 8.  Yet responsibility still lies with the trader to deal with the swan, and I still remain accountable for my actions from a stewardship perspective.

# # #

So I guess that's it in terms of looking back for now.

In my daily job of providing a liquidity service for other traders, I lost a finger ($55K on about $2.9 Million in trading capital or 1.9%).

The bright side?  Well, consider that the worst case of an ill-timed & fully-sized "leveraged" 480 contract position at my average purchase price barfed out at the lows would have cost me $1.2 Million. 

In the course of careers, traders get dinged like hockey players lose teeth.

Yet nothing in this business worth pursuing comes without risk.  And as Charles Sanford pointed out (a must read if you missed it), playing it safe over the long run is often more dangerous.

It's called the cost of doing business.

Fortunately, with nine fingers I can still type ... and trade ... and the comeback has already begun.

And in this business, the finger does grow back ... but you have to protect the arm and hand.

For those who aren't quite as fortunate, I hope that remembering that we are all only temporary stewards of whatever capital we have will provide some measure of relief.

We simply do the best we can.

A wise man once told me that.

He's my father.