Thursday Notes - Folding Pocket Kings

3:40pm ‘Twas in interesting day in that I pressed the accelerator at times and was wrong twice, yet apparently managed sufficiently during the day – making like a chameleon at times to adapt to the changing signals – to somehow still end with an acceptable chip gain.

The two times I pushed were on the mid-morning climb where I shorted the approach toward interim resistance, which paid for only a scalp before busting north, and after 2:30pm where I was sensing a breakout through 850 given the supporting TICK and VIX, not to mention a world of stuck shorts from the morning.

Yet both times, I had to give it up and instead eat off the menu provided. And I’m fairly pleased with how I managed both trades as I’ve been in a pretty decent rhythm lately and had strong convictions about both setups … and it would have been very easy for me not to muck the cards -- a feeling that I felt and had to fight. And it really felt at the time like I was folding pocket Kings when I knew I was beat by pocket Aces. Sometimes, you just have to make that tough laydown. And on another note, this is where trading advisory “horse race callers” can do a world of damage … it’s always about probability and the market should be the only entity ever deserving of an ego, as it and it alone is the only one who’s right all the time. Yet I once again digress.

Nevertheless, here's some therapy for all, including me: Repeat after me … “I was wrong, and I’m wrong several times a day.” At this end I was wrong a lot last year, extremely wrong on one particular day, and have been wrong during portions of every day this year … as I still await my first gross ’09 daily loss before commissions which will happen one of these days. Simply put, it’s not about being right … it’s about making money. Humility can pay big time in this business (which is why "That One Thing" post from City Slickers is one of my favorites and I encourage you to reread it). Ego on the other hand will get you crushed.

The one sequence I really botched was hesitating on fading the noon climb toward 850 on the unsustainable TICK readings. I saw it, but was slightly distracted leading up to it, and by the time I knew it was a high-probability short, my acceptable wholesale entry points had quickly disappeared as the market pulled back and I wasn't going to chase. It's always my price or nothing ... I don't haggle.

Short post tonight as it's poker night and I have to defend my Q1 1st place ranking in our local league (the winner of each quarter gets a buy-in to Foxwoods).

Let's hope I don't run into pocket Aces.

Wednesday Notes - A Telling VIX

4:15pm First, a very happy birthday to my wife Debra, who as I mentioned when I locked in the 2008 trailing stop in December, has been a lifeline for me over the years. And after having spent the last 20 years raising two kids, including one Type-1 diabetic, and also surviving a massive appendix rupture a few years ago, she has some of her own key personal goals this year. I've told her that 2009 will be her Bamboo year, and last year's results are in part allowing her time to focus on herself for the first time in two decades. That alone was worth all of the painstaking focus throughout '08.

OK, now to the markets. The VIX was the story of the day, and today provided yet more proof of its intraday power as shorting for anything other than extreme scalps in the morning was a sure ticket to frustration as the downtrending VIX (see attached chart; click to enlarge) was supporting a continued ES price climb. Until just after 1:30pm ET of course, as it turned upward and supported the ES tank. And while a trending VIX doesn't guarantee price movement in the opposite direction -- a stretched VIX can snap back just like price charts -- it sure as hell provides a caution sign in terms of trading against it for reversals.

At this end, I traded fairly well, although I had to adjust to the extent of the early PM drop as I started buying wholesale on the approach toward 830 on the extreme TICK reading and had to scamper to adjust to the plummet to 827.50. And while I could have traded that particular sequence better, the subsequent short sequences on pullbacks more than offset the "scamper" sequence. And after closing my final trade at 3:07pm, the rest of the day was a snoozer with no clear signals and I did well not to try to force things.

On the last point, keep in mind I do often fade trends on extreme emotional price and TICK movement for very brief sequences, and such provided much of the 2008 take. Yet one has to of course manage risk carefully with size and have clear signals. Gaining the spread also helps minimize risk. And it's not a reversal trade. Further, as last year's single-day October draw showed, extreme can become more extreme.

Having said that though, the much overused and misunderstood "trend is your friend" concept should probably be replaced with a more relevant "wholesale opportunities are your friend" notion. For how many times have you traded with the trend and generated a loss due to poor entry points, a shorter-than-expected continuation, or getting caught up in the emotion of the move?? Happens all the time. And while I of course prefer to trade with the trend currently in play, such is another missing chapter from most Trading books.

Bottom line is someone has to be willing to step to the plate and provide liquidity when people are bailing in mass, and do you think we do it intending to lose money over the long run? As with anything in life, timing is everything. 'Nuff said.

Anyway, I've updated the scorecard to the left for today's results, and now it's off to the most important event of the day ... a birthday celebration.

I'll post and respond to comments later tonight.

Tuesday Notes - Going the Extra Mile

5:30pm Well, while today will go into the books showing only a modest, but respectable chip gain, I'm going to rank it as one of my better "managed" trading days in a while despite the fact that I had to trade remotely in the afternoon. And here's where the "life" part of trading must be addressed which also happens to be one of those chapters left out of all those "How To Trade" books thrown out there by everyone putting up a shingle in the cottage industry of the late 1990s.

It started last night when I already knew I wouldn't be at my trading station for the 2-4pm period due to a prior commitment, which given how the market had been developing over the last few days, I figured would be a fertile time for a breakout of the 810-830 logjam. So my plan heading into the day was to (1) short scalp any morning initial approach toward 830 if we got it, (2) sit tight for much of any consolidation that would likely take place intraday, and (3) make darn sure I had access to the market on a remote basis after 2pm if indeed the market broke the range.

#1 was accomplished within 15 minutes after open as I finally found some morning rhythm. Check. #2 was also accomplished as I stayed out of trouble during the midday chop. Check. And finally, #3 was accomplished when I made darn sure I had access (thanks again Sony Vaio and Sprint PCS) to the market in the afternoon when ES indeed broke the 830 barrier on decent volume. Check. And while I purposely kept sizes light given my circumstances, I ended the day with a few decent sequences -- amidst a rather choppy breakout pace where the market closed well off its highs -- to nip any chance of a consecutive day losing streak in the bud. And I hate losing streaks ... that single 3-day streak last year still doesn't sit well with me.

And while some gave me grief for trading remotely a few weeks ago, I contend that "just being there" is often 90% of the job. Sure it wasn't a home run as I couldn't size as I would have liked under the conditions. Yet it was a couple of solid base hits when the alternative was to not bat at all.

Most who know me -- including likely those who follow the blog -- know I'm extremely critical judging my own trading. Today was simply one of those days where I had the option of not going the extra mile and earning nothing, or making sure I was prepared ahead of time and giving myself a chance to earn something.

In hindsight, I think today was a strong example of what separates those serious about the markets from the "hobbyists". You simply have to go the extra mile. You have to want it more than everyone else, and then work even harder.

Over the years, I've learned firsthand that many pursuing this business are lazy at heart. Thus providing fertile ground for the "advisory service" and chatroom fleecing of the flock. They want others to tell them what to do, often use the slight inconveniences of life as an excuse not to be prepared, and then complain about their own results while telling others who do well that they're "lucky".

Someone asked me last year what I thought separated the tiny minority of Million Dollar traders from the rest. Included in my response was, "a helluva lot of hard work that most won't bother to pursue".

You have to go the extra mile.

Monday Notes - Lack of Market Emotion

4:15pm Like sports and poker, trading can be intriguing in that often the end score often doesn't reflect one's performance. (Tell that to the Cardinals though!) And I actually felt good about today's trade even though I'm slightly negative after commissions to the tune of a whopping -$158.

Yes, it will go in the books as the first net chip loss of '09. And I'm glad that's finally out of the way as it was starting to toy with my brain, although the # will only show on the P&L in terms of commissions exceeding the daily gross gain as I continue to await the first gross loss.

Of course the daily #s continue to mean nothing except in aggregation 332 days from now, and so we'll continue to focus on instead evaluating mindset and execution. And once again, the afternoon performance exceeded a morning loss thanks to short scalping the 2:15pm mini-bull trap retracement toward resistance ... which again ended up on being limited to a mini-trap as once the high-probability extension occurred, the market refused to cave further.

Suffice it to say that today's trade paid primarily to the early gap buyers, range traders, and 1st pullback micro-trend traders who were on their game. Breakout mavericks and second pullback traders likely drew down.

Not much else to say as we await a break out of the 810-830 ES logjam to stir at least some semi-violent emotions to provide more fertile ground for those of us who maximize opportunity by trading off others' emotions.

Right now, it feels like a market full of androids.

The Weekend Trader - Super Sunday Thoughts

Some thoughts on this Super Bowl Sunday:

Prior Day Comment Responses - A reminder for all that some of the best discussion on this site takes place in the Comments sections of prior day's posts, and I encourage serious onlookers to always go back a few days and see if there's been new discussion or follow-up to recent posts. The last few days are good examples.

My Readings - One recent comment asked me what market material I usually read. My response was Briefing.com during the day, two sections of Barrons on Sunday, and an occasional peek at Dr. Brett's site. Other than that, I have no interest at all in reading anything that might provoke thoughts that would interfere with consistently applying a proven methodology reflecting a decade of work.

K.I.S.S. - And speaking of Dr. Brett, he had a good post last week discussing 3 basic trade setups. It was great timing considering I mentioned in last weekend's post on "Trading an Edge" that trading edges are usually incredibly simple. Continued note to self: Keep it simple, stupid.

My Trading Screen - For those new to the blog, there's a good pic of my trading screen embedded in last year's August 15 post. The only difference now is that I'm using eSignal charts instead of Tradestation, but the layout and placement of screens, including the DOM order entry window overlay on the chart, remain the same.

Trading Small Accounts - There seems to be a growing perception that I can generate the results I have simply because I have a large account of over $2M. The best way to put that to rest is that while I can trade close to 500 contracts based on current contract margin requirements, my typical trade sequence size usually ranges from 15 to 60, and I don't recall ever having 100 contracts on during January. And 15 contracts only requires a $93K account (15 x $6,188 initial margin = $92,820). For me, it's simply a matter of chipping away with lots of singles and doubles and letting the countdown clock to the left do most of the work.

Now to anticipate questions on this (heck, I'm a trader and it's my job to anticipate), why haven't I increased size? Four primary reasons:

First and foremost, as I've learned over the years, "Why fix what isn't broken?" I'm very comfortable trading lots in multiples of 15 or 30 [over and over again of course] and it works for me. And thinking back to my trading career and Golf is Not a Game of Perfect where Seve Ballesteros tried "tinkering" with an already successful game which all but ruined him, I'm well aware of the dangers of trying to improve something that works. Remember how we ended up with Coke Classic after the "New Coke" bombed?? I also hate the new BMW styles which is why I'm going to try to keep Grace (born 2004 and adopted 2007) for years to come.

Second, it allows me to put less of my capital at risk over time, which provides me with a huge psychological edge as time goes on. Again, as pointed out in yesterday's post, I'm only interested in profit ... not ROR.

Third, I've seen the dangers firsthand of using large capital to increase size above acceptable risk proportions by fading perceived market extremes (remember, most of my trading is about fading extremes ... extreme pullbacks or extreme unsustainable emotional spikes). Last year's day from hell -- which by the way gets a large number of hits daily (must be like why many watch NASCAR ... for the crashes) -- is a prime example where having the large balance caught me. Simply put, deep pockets can hurt as much as help, if not more so.

And fourth, keeping sizes to comfort levels allows me to maintain an ongoing untapped "future" challenge in my hip pocket should I decide to ever focus on increasing size substantially. That alone will require substantial focus and dedication which I'm not currently ready to pursue.

Again, there are no absolute rights or wrongs in this business ... only lots of grays and personal preference.

To me, Trading will always remain an art. And as I've mentioned in the past, I believe we all have a blank canvas and can choose to paint by numbers or go freehand. We can listen to computer programs or someone screaming over our shoulder telling us how to paint, or we can go into a quiet corner and become a self-sufficient artist.

We can certainly pay for some initial lessons and even some continuing education from quality and proven instructors (I'd of course first certainly want to see the actual pictures they painted ... but don't get me going) -- nothing wrong with that. Yet in the end, the final picture is a reflection of our own personality and soul.

The next blank canvas and brushes arrive tomorrow.

Enjoy the big game and rest of your weekend.

The Weekend Trader - 2009 Goals and More

Some thoughts on a Saturday morning as I'm waiting for Grace to come out of the shop. And if you're not familiar with the trading story of my car "Grace", I encourage you to check it out.

The Rate of Return Dilemma - As I've received several questions lately related to Rate of Return -- including in comments to yesterday's January summary -- I thought I'd try to help clarify my views on the topic.

Imagine you were a professional poker player with roughly $2.5 Million in "available" bankroll, and had to decide each day how much of those funds to allocate to the game to earn your daily keep. Essentially you have three choices: (1) Bring all of it and put it all in play and at risk (assuming the house rules would allow you to); (2) Bring all of it, yet only place a portion on the table and keep the rest in reserve; or (3) Bring and play with only a part of it.

Then let's assume you varied your allocation over the course of a year, depending on a combination of varying table regulations, perceived table conditions, and simple personal preference.

Then assume you earned $1.0M over the course of a year, and then someone asks you what rate of return you earned as the result of your poker playing. What is the correct answer?

A. 40%
B. 200%
C. 1000%
D. Possibly any of the above.

Some might quickly respond "A" ($1.0M / $2.5M). My answer on the other hand -- without hesitation -- would be D, which helps explain why I think Rate of Return is often completely irrelevant and abused when it comes to analyzing performance, and is why many poker and independent trading pros don't track it. The plot thickens for tournament situations where a player buying into a satellite tourney for $100 ends up winning $2.0 Million. What was his ROR?

And while I realize that such a benchmark can help compare fund and manager performance in the public sector, and even used it as a "fun" personal benchmark during the 2008 race just to see what I could do, it remains largely off my radar in terms of personal goals and performance because of the complexities noted above.

Essentially, I'd define allocation of my trading capital as similar to #2 and #3 above. And while I used the conservative industry definition of #1 above (net profit divided by total account capital) in benchmarking against CTA funds last year, some could argue the figure was actually understated since I usually employed strategy #3 throughout the year, trading only a modest portion of the of the accumulated capital as I never really increased betting size during the time.

Such is why like many independent "trade for ourselves" traders, I'm really only interested in one number: Net Income. It's simple and clear. Or said another way, I view trading income as a salary. Raw dollars.

2009 Goal - OK, it's set. And it remains similar to last year, with one twist in that instead of looking solely at Jan-Dec 2009, I'm going to also continually track my most recent 12-month performance. And both goals will be set at $1.2 Million, which reflects a slight increase over the initial $1.0 Million 2008 goal, while also allowing for downtime as the result of non-market and personal priorities and obligations. It also results in a nice round number of $100K/month, which so long as I hover around there, will tell me I'm on track without having to focus on distracting analyses.

Like anything, it's subject to revision up or down (the beauty of trading for ourselves ... we get to make up all the rules), but that's where my head is currently at.

Sure, I could be Archie Karas or Stu Ungar and put it all at risk (Option 1 above). But I'm not going there. I'll be 48 in a little over a month and want to balance pushing and motivating myself with enjoying the prime years of my life.

And if I miss the goal and "only" earn $750K? You certainly won't find me jumping off any bridges.

Personal Requests - I've received a few comments recently asking me if I'd be willing to enter into a coaching/mentoring or money management arrangement, which I purposely haven't posted (some have asked the comments to remain private).

My general response remains that I don't have any current plans to go back into formal coaching, and I'll likely never trade anything except my own capital as I'm most comfortable having manager and client in the same body since "both" know each others style and tolerance for risk very well.

Blog Evolution - Having said that, I haven't given up on further enhancing this continuing blog effort in a big way. Those that know me know I'm always looking to do something that's never been done before (call me a maverick) and challenging the status quo and industry hype. Chatrooms and advisory services are all but dead, and there's something out there that remains untapped.

And while I still haven't put my fingers the next evolutionary step, I firmly believe we can grow this network in a way that will knock each other's socks off and continue to serve the collective good. And this is where I could use your input.

One of the things I'm seriously considering is hosting a live roundtable session on a weekend in the Northeast should there be sufficient interest, as well as establishing a small ongoing trader support group in the Boston area. If there's enough interest, I'll consider it, but I'd want to keep it under the radar and non-commercial. Maybe we'd even play some poker.

Online blogs and chats are great, but like poker, there's something to be said for sitting around the fire in person talking shop. I'm also still considering resurrecting the online after hours PalTalk lounge.

As always, comments/ideas/input are welcome.

Enjoy the weekend.

Friday Notes - An Imperfect Month

4:00pm Let it be said that I probably made more mistakes this month than I've made in a long while. And if you scan back through many of the January blog entries, you'll see that while I began the month with some mental R&R (trading each day, but lightly), I haven't been satisfied with recent results.

My early morning performance -- traditionally a strength of mine over the years -- has generally been poor and has often resulted in my needing to make more midday adjustments on the fly than I'd like. Too many. And such was the case again this morning when I was just enough out-of-sync to suboptimize the classic morning-after-trend oscillations, although I again did OK with the midday short sequences to more than offset the early sloppiness. Trade sequences have also been sloppier than I'd like as I continue to work on re-establishing a consistent, non-hesitant, crisp trade execution flow.

And yet, as we peek at the chip score for the first time this year, I'm still awaiting my first daily chip loss of the year. 21 trading sessions, 21 chip gains. 23 overall in a row. I almost wish it weren't true, as the P&L on the other hand leaves a lot to be desired. If stacked against the '08 months, it would rank a mere 10th of 12, although certainly a decent improvement over December where I essentially locked up the year mid-month, and not that far off from January '08. And I'm traditionally a slow starter.

Yet this is why I hate statistics and pay little attention to them. As I've said ad infinitum, I care about one number: Net Profit. 21/21 means nothing, aside from a general view of consistency -- including possibly consistently mediocre. And while those new to the blog continue to try to calculate and make sense of all sorts of stats such as win/loss %, average points per trade, etc., I'll go on record once again saying such analysis in my view is a highly irrelevant after-the-fact statistic.

I also don't care for Rate of Return analyses, despite last year's benchmarking effort which was more for fun than anything. I'm a bottom line guy, period. Plus, too many games can be played with RORs in terms of moving balances around, purposely and effectively trading only a portion of tradable capital for risk control, or growing tiny amounts of capital with extreme high-risk leverage. It's simply not important to me, and I'd take $1M annually with a declining ROR every year in a heartbeat.

Yet we'll take one final and brief look at January, before forgetting it as soon as the virtual words are typed:

January 2009
Daily Gains: $119,259
Daily Losses: $0
Commissions: -$17,084
Overheads: -$3,271
Net Profit: $98,904
Daily Win/Loss %: 100%
Contracts Traded: 34,788
Pace:
- Projected 2009 annualized: $1,186,848 (Careful with this; it's annualization of only one month.)
- Last three months annualized: $1,448,396
- Last twelve months actual: $1,630,942

My only comment about the pace figures is I don't like the declining #s from largest timeframe (12 mos) to the most immediate timeframe (1 mo), although Dec & Jan include an intentional slowdown so I can't make too much of it. Still, I'd rather see the three figures trend the other way.

Now, it's history and forgotten. The foundation for the rest of the year is now set, and it's time to build the house.

And I have to decide whether I'm truly going to get serious about the '09 trade. I've said I'm now ready. I've said I'm now well-rested. I've said last year is now fully and completely behind me and forgotten.

But as always, talk is cheap. I'm going to have to prove it again. Not to anyone looking over my shoulder ... just to myself. I'm my toughest critic and it will always be that way.

It was a very imperfect month and I have a lot of work ahead of me.

It's time for less talk and more action.

The wall studs go up on Monday.

We'll "chat" more over the weekend.