Aphie's REAL Trading Journal

Better start trading stocks with 100 shares on IB.
Forget futures for now. Too rich for that small account.
You will burn through it too fast. Trade SPY or QQQ instead.
But realize, if you can trade SPY, doesnt mean
you can trade ES.
Futures are too fast, you wont be able to think clearly
enough to react quickly enough with your current
level of emotional control (none).

Emotional control - the only way to get it is by
pulling the trigger. With 100 shares on IB.
Forget the books.... experience will only help.
This will take months before you can think straight
with even just 100 shares. Only move up from 100
shares after pulling the trigger with 100 shares
doesnt phase you at all. After a year of pulling the
trigger, I can play 1000 shares and stay relaxed.
It could take you shorter or longer to reach this level.

If you are exceptional, you will reach break even point
in about 6 months. Do the math... how many losing trades
can you have in 6 months and not blow up your account?
The PDT rule is a good thing right now. Use those 3
trades on only the juiciest of setups. You know, that
thing is that is in your PLAN.

Part of learning to trade, is not trading.
The markets will lure you into trading outside of your plan.
Everytime you do this, write it on a sticky note and stick it
to the wall behind you. Write the $loss on it.
One day you will look up at a very BIG YELLOW
expesive wall and finally quit doing that stupid shit.
If you trade on the fly with an untested system, your
simply dumb money.

Did I mention: Trade 100 shares on IB?

peace

axeman

 

agree with much of your comments...

but gee older trader, what do expect him to do with the $5,000 trading the futures? trading the QQQs or swing trading will allow alphie or anyone else to see all the trading "angles" at a slower pace, and experience the emotions of trading, also at a slower (hopefully) pace. trading 50 shares of the QQQ is great advice to a novice trader or 25 shares for that matter! .... and earning $25 by the end of the day is positive - even losing $25 is positive, and it will keep him in the game long enuf to have a chance to excell... someone trying to trade the futures with no experience and a $5,000 bankroll is not "resonable risk" (or whatever you called it) at any age; its a fools errand. continuing to step in each day and get whacked is pointless.... he will see his "trading capital" evaporate almost as fast as any confidence (false or otherwise) that he might have had. the psyche damage of getting crushed would be far worse than $5,000 in lost "risk capital." what is the friggin' hurry to trade the futures? your advice is just as valid applied to 50 shares of the QQQs as to the futures market, the newbie trader just has a better chance to succeed.

most of your advice was a condensed version of what has already been advised. the part about big whoppee on making $.25 on a QQQ trade with 50 shares is absolute b.s. at this point, money isnt the issue - its trading a plan and mastering emotions... the money will come, if one learns how to trade.... alphie lost 10% of his account in 2 days and was gunshy of the market...

and i believe that you DO get "paid for trading" in the sense that a trader can be wrong more than right and still get paid at the end of the day... a trader can be wrong and make money... but, that's probably splitting hairs with your philosophy. my point is, this is a learned condition/response and is contrary to commonly held belief that "you have to be right to make money." thats not exactly true.

nothing personal, but i disagree with some of your comments... bad advice.

 

Have to disagree on that point... I think a big reason that some fail is because they never take it seriously and / or never deal with their self deception, even after years and years at the game, and that the sooner the drill instructor's harsh words are absorbed, the better.

When I was a commodity broker, the president of the firm where I worked was (is) a twenty five year veteran of the markets. A respected figure in the industry with clients all over the world, he had been trading and looking at charts since I was in kindergarten (or maybe even preschool!).

And he can't trade for jack. As a wet behind the ears broker with stars shining in his eyes who thought he was going to be taught how to trade, I was flabbergasted about eight months in when I first realized that this sensai I was working for, this grizzled veteran who gave every appearance of being a master, who knew every phrase, every talking point, every psychological do or don't, every nuance of every market, who had five big screens and three computers and a hundred speed dials and personal contacts on the trading floors and commercial contacts on multiple continents, couldn't trade his way out of a paper bag. He was (is) a very wealthy man- but because of his major clients, not anything else. His is the house that commissions built.

This contradiction puzzled me to no end for a while. Here was someone who had literally immersed himself in trading, thought about it and talked about it and breathed it all day every day, who had access to the best resources available to any trader in the world, yet could not trade profitably after twenty five years. He gave the outward appearance in manner, lifestyle and knowledge of the veteran who slings five hundred contracts at a clip, but in actuality only kept ten or twenty grand in his trading account and used it to take flyers from time to time.

As far as saying that being willing to try is what's important, I can tell you from firsthand observation that some people try every system under the sun and they are losing traders until the day they quit or die (who knows, my old boss may change one day and turn net profitable- but after playing the same game for 25 years into his late 50's I doubt it). -edit- Being willing to try is a necessary but not a sufficient condition imo.

After pondering it for a while I concluded my old boss had these issues:

1) he didn't really have 25 years of experience, he had maybe 2 years of experience repeated 12 times over.

2) in spite of telling his clients regularly that there was no holy grail in trading, he was still searching for one himself after all those years.

3) he did not have the will to face his own self deception and remains gripped by it to this day.

For someone starting out as a trader, I think the faster they "wake up" the better off they will be. It's typical to start out with all kinds of illusions and softheaded notions, everyone does it- and then after blowing XXX dollars, a light goes on in your head. You realize that even though you thought you were trying your hardest, you were really kind of screwing around, and that getting your head right is going to take much, much more effort and blood and sweat and tears than you thought.

Some people "wake up" very quickly and stop mucking around after a few months. Others flush $10K, 20K, 50K, or even a few hundred K down the drain, if they can afford it, before they realize they weren't taking things seriously and that half assed self deception was hoovering dollars from their pockets. And still others like my boss tend to sleepwalk their whole lives.

I think a lot of unprofitable traders secretly doubt whether the markets can be truly beat- or at the very least, they secretly doubt whether the markets can be truly beat by THEM. But the game attracts them like a Vegas casino and so they play and play and in the long run never win, just as tourists drop bankrolls in Vegas year after year. Vegas is fun- the flashing lights, the excitement, the emotional thrill, the possibility of a lucky score- and the markets are the same way.

The way I see it, harsh words are kind words when it comes to this game. And the faster that the "wake up" happens, the better. They serve the purpose of asking "Do you really know what you are getting into, what it will require of you? If so, move forward. If not, decide what you really want out of this and what you are willing to do."

 

Just wanted to throw my two cents into the ring. it sounds like your highest probability for success has been in the spy/qqq's. you even mentioned maybe focusing more on them. i am just curious, why not? are they too boring? not enough bang for the buck? only can do a few trades a day? these all sound like great reasons to focus on them!!! i can not agree more with the traders on here that said make it boring. boring is GOOD. you really need to realize you are not going to make money consistently for awhile. you need to learn while keeping your cost down. .....i also agree that seeking approval on this board will only hurt your trading, but i think you will have to learn that lesson the hard way.

Good Luck!!!!! congratulations on getting in the game.

 

I don't take any comments made here personal. We all have a viewpoint, and certainly none of those viewpoints are any more or less valid than any other. They are all just opinions.

That said, I still don't agree with the idea of trading 50 shares of QQQ, unless I am mistaken about aphie's goals. Here's what I mean: trading QQQ on a swing basis in no way prepares you for trading futures on a day trade basis. Nothing wrong with swing trading the QQQ by the way, in fact, my wife swing trades the QQQ periodically in her IRA. But a swing trade in the QQQ in no way compares to daytrading the future.

I learned to trade by "swing trading"....although we didn't call it that back when I started. It was just short term trading. We traded that way because commission were too high to day trade. When index futures arrived on the scene, it changed everything for me and many others. Suddenly we were able to trade differently than we had ever traded before. And believe me, I had to learn new tricks all over again. Was I helped by my short term trading experience? In some ways yes...in that I knew something about stocks, the indicators, etc. But day moves are different and more "unforgiving" than a longer term perspective. And therefore new habits need to be learned.

On the other hand, I know lots of guys who started trading futures with 1) little to no experience and 2) small capital. In fact, futures trading is probably more easily learned when you have no bad habits formed from "swing trading". You know, this isn't rocket science....it's trading.

You know, things never really change. I remember when I opened my first commodity account.....1969. I tried to open it at Merrill Lynch....they told me I needed $50K! Can you imagine having $50K in 1969????? I know I didn't...I had $3K.....still not a paltry sum for the day. And frankly, I lost most of it "swing trading" sugar.

I think what you'll find is that most of the successful traders around started with smaller sums of money, and probably not a whole lot of experience. And yes, alot of them lost that first chunk, but not all. Fortunately, when you're young, that's the time to take these risks. Losing $5K is not the end of the world! But the futures market gives aphie a chance to do something with it if he develops a plan that makes sense. He does not have to lose.

Trading 50 shares of QQQ will not teach you to trade futures. In fact, aphie can't day trade because he doesn't have $25K in the account. Then too, trading small sizes like this become a problem when factoring in commissions and slippage. Pretty much have to swing trade....which is not going to teach day trading at all.

Now if aphie wants to learn to become a swing trader....then I think your plan makes sense.

The futures market is still one of the last financial frontiers: it's really a place where a young guy can come and make a fortune. But not for "free". The requirements are that you are BETTER than most everyone else, and that you take risks that many won't take. Is aphie that young guy? I don't know yet, and neither does he. But I know I'm trying to show him a way. Trading 50 shares of the QQQ gets you on a cruise ship with my Grandma (if you're good at it).

OldTrader

 

and not only is it not particularly useful to the beginner, it is not even a useful description of reality (read: "not true").

if a person attempts to learn, but fails, he simply didn't learn. this can be rationlized by saying "ah shucks, i just didn't have it in me", but what useful purpose is served by holding to the idea that someone either "has it" or he doesn't? NONE! if anything, it simply helps a person QUIT! is that a desirable? HELL NO!

 

True- it doesn't provide any material information that the beginner can use and thus isn't useful in a knowledge sense. Except to highlight priorities and recognizing the low influence of advice in the big scheme of things.

And perhaps it's more of a fire in the belly type of thing. Throwing down a friendly gauntlet. Reverse psychology encouragement?? I am the type of person who is more geared up by a challenge then a pep talk.

From my perspective, the SOB from Full Metal Jacket or the coach from Remember the Titans gives more inspiration oomph than Tony Robbins and the positive thinking crowd.

p.s. i think it also comes down to the simple notion that the conditioning has to match the challenge. would you drop someone in the middle of the australian outback with a ranger survival kit and tell them to think positive?

Springsteen said it well: stay hard, stay hungry, stay alive if you can- and meet me on the banks of this hard land...

 

OldTrader, your opinion on this please:

Trading is not a favorable game in most circumstances and that is what we must use as our assumption in trading. The big mistake made by traders is thinking and expecting trading to be a favorable game.

You have execution costs or slippage when getting in and out of a position as well as commissions as a cost factor to be subtracted from your winnings or added to your losses. The market spends much time in an unpredictable mode. Trends both short and long term do exist but not one hundred percent of the time.

The correct way to control positions is to only hold them once they prove to be correct. Let the market tell you your position is proven correct but never let the market tell you that your position is wrong. You as a good trader must always be in command of knowing and telling yourself when your position is bad.

The market will tell you when your position is a good one to hold. Most trader do the opposite of what is correct by removing positions only when proven wrong. Think about that. Your exposure and risk is much higher if you let the market prove you wrong instead of your actions removing positions systematically unless or until the market proves your position correct.

Let me give you an example before we state the first rule. Today let us say you sold beans just like your plan said to do at 630 on the open. If that position did not prove you correct you must in order to reduce risk remove it. You decide what is correct according to your plan. (Example) let us say you expected hedging to come in early and the price to drop from 5 to 8 cents in the first hour.

It didn't even drop 3 cents so you remove the position. Say you removed it at 629. Just because it showed a profit of 1 cent when you got out did not declare it a good position. However, your exit is a better exit than if you made the market tell you the position was wrong. When you remove the position because the market proved you wrong, it is always a higher loss and on stops it is usually with higher slippage also.

This is not the same as removing the position because the market proved you wrong say buying back at 645 on a 642 stop. By making the market prove you correct in order to hold a position is acknowledging that trading is a losers game and not a winners game. If you only remove your position because the market proves you wrong you are acknowledging that trading is a winners game.

You never want to be in a position, which is never proven correct. If you only get out when the market proves you wrong it is possible to have higher risk due to the longer time period required to prove your position wrong. We will further clarify these thought for you further into the book.

Here is rule number one!

RULE NUMBER ONE

IN A LOSING GAME SUCH AS TRADING, WE SHALL START AGAINST THE MAJORITY AND ASSUME - WE ARE WRONG UNTIL PROVEN CORRECT! (We do not assume we are correct until proven wrong.) POSITIONS ESTABLISHED MUST BE REDUCED AND REMOVED UNTIL OR UNLESS THE MARKET PROVES THE POSITION CORRECT! (We allow the market to verify correct positions.)

In rule 1 it is important to understand we are saying the one criteria for removing a position is because it has not been proven correct. We at no time use as criteria for removing a position the fact that the market proved the position incorrect. There is a big difference here as to how we treat all positions from what most traders use. If the market does not prove the position correct, it is still possible that the market has not proven the position wrong.

If you wait until the market proves the position wrong you are wasting time, money and effort in continuing to hope it is correct when it isn't. How many traders ever hoped it wouldn't be proved wrong instead of hoping it was correct? If you are hoping it is correct it obviously wasn't ever proven to be correct.

Remove the position early if it doesn't prove correct. By waiting until a position is proved wrong you are asking for more slippage as you will be in the same situation as everyone getting the same message.

What makes this strategy more comfortable is that you must take action without exception if the market does not prove the position correct. Most traders do it the opposite by doing nothing unless they get stopped out and then it isn't their decision to get out at all as it is the markets decision to get you out. Your thinking should be - when your position is right you have to do nothing instead of doing nothing when you are wrong!

I don't mean to repeat and repeat but in this case you will better understand the more you read it. It is very critical in your success in trading. Over time it has proven to be the rule which keeps the losses small and keeps a trader swift and fast to take that loss. A person thinking when the market proves a bad trade is counter to what is productive.

By using the rule properly you are productive and don't have to face the demoralizing affect of the market when you have a proven wrong position. This enables you to continue to trade with the proper frame of mind. You are more objective in your trading this way than letting a negative re-enforce your thinking. This way you only let good trading re-enforce your thinking and actions.

ALS - Phantom, Not everyone is going to agree with your first rule. There will be traders who don't feel this is a good rule for them.

POP - Look at it like you would buy a new car. The dealer says you can drive the car which you think you want for a month and we will give you credit toward another car if you don't want to keep it. Ok after a week you decide you don't want this car because it just isn't right for you. You take it back and the dealer says you only owe eighty dollars for rental.

You don't buy the car and keep it until it proves to be the wrong car for you, which could be months from now. If you did you would lose more of what you would have to pay for the car. Most traders keep their position until it proves to be wrong for them. I say don't keep any position unless it proves to be correct.

ALS - Yes, but who is to say a position which was not proven correct turns from a bad position to a correct position?

POP - That is the kind of thinking most traders have. They fear being wrong when they get out and that the market will show them they should have stayed with the position. If they don't take early losses it becomes more difficult to take a loss as it gets larger. However, the market assumption you must make is that big losses will eventually take you out of trading.

My rule one is to address the swiftness needed in keeping your losses as small and quick as possible. It won't always prove to be correct but you will stay in the game this way.

Which would you chose? You have an opportunity of a ten- percent probability of making money in the long run if you take a position until you have lost ten- percent of your equity or made ten percent. Or take the opportunity to have a ninety-percent probability of making money if you only keep a position for three hours unless they have proven to be correct by that time. It is pretty clear which choice you would make.

It is that most traders don't know what their choices are when it comes to assumptions of what is possible in trading. Keep in mind that traders are usually unaware that trading is a loser's game. He who loses best will win in the end!

Why not make a time proven decision to change your behavior to trade the method, which gives you the best long-term outlook. Trading is not gambling! Treat it as a business where you only want the best merchandise for the shortest possible time in order to have the maximum profit with the least possible chance of failure. That is what rule one does for you.

ALS - I can see the need for much discussion and review on your first rule.

Phantom - It's critical to have rule one in force by next surprise day. The one thing, which teaches most traders to take a small loss, is a big loss.

continued...

 

...continued

ALS - Yes, but that is expensive behavior modification. My wife, Karen just gave another parallel example of your rule one. She points out that you don't go buy clothes, take them home and wear them until they prove to be wrong for you. Instead you try them on and make sure the have a proper fit and look before you buy them. I like her thoughts along this line.

POP - You can see in ordinary life you try and spend the least amount of money and have the least amount of waste. Why should you do it differently in trading?

ALS - The answer is surely that in trading there are human elements which take over. Everyone knows them and most likely have come face to face with them. They are fear and greed.

POP - We must remove the emotional element as quickly as possible in trading. If you can do it before you put a position on, you have a good start.

Note: In order to give some insight on Phantom's rule #1 several traders have indicated their experience with it as presented on the traders forum. The following is a copy from one such trader.

Author: M T

email:

An anecdote about Rule #1

I've read phantom's postings about rule #1. The price action must confirm the position or get out quick. What I have done in trading is to enter a position, and have a chart position that is a good spot to exit if price moves adversely. This would usually either be the previous swing point, which if violated would be a signal for possible new trend and would definitely be the signal for me to exit my position, or the first 15 minute high (resistance) and low (support), if it was violated adverse to my position.

So that meant that there were times when I entered a position and the price action was flat or slightly adverse but not so adverse as to violate my predetermined chart exit position.

I would stay in because there was no violation. I thought this meant I was following rule #1. I was staying in, not because the price action "confirmed" my position, but because the price action did not "confirm" my stop loss chart signal. I was thinking that this is what Phantom means. I have to tell you that with this strategy I was keeping my losses small, just by the nature of my plan.

But I was unwittingly violating Phantom's rule #1. I thought I had modified my behavior but in reality I was "behaving" incorrectly. It's a very subtle thing, I believe.

Then, last night, in a restless sleep thinking about my trading, an inspiration came to me.

(don't laugh too hard). A lot of my losses had come after I had been in a trade for an hour or longer, where price action was mostly flat, but my stop point was never touched. I realized I would have been better off if I had just gotten out in the first 15 minutes. It would have been a loss, but it would not have been as much of a loss as my chart stop point would give me.

Then I realized that is what Phantom means. My position was not confirmed in those first 15 minutes! It wasn't violated according to the nuances of my plan but it also was NOT confirmed. Get out.

Well, low and behold I went back over the last 3 months of trading and using the exact entry points (fills) that I used every day and reviewed what would have happened if I had followed this 15-30 minute confirmation rule. Let's just say it made a huge difference. I know backtesting is not completely reliable but it was significant.

Anyway, thanks Phantom. I'm still learning. I'm still here trading. Started with only a 5K account, daytrading, and I'm still alive w/o following your rules even. I'm below breakeven. Let's see if I can change that. I'll keep you filled in. Once again, many thanks. You once asked for rule #1 stories. Well, there is mine.

Cheers

Note: The following is an excerpt from a message which Phantom had presented to help understand rule 1.

Behavior modification is knowing the limits. Let us use basketball shooting as an example. Say you shoot and see after 1000 shots you average less than 50% baskets made. This means you have a better chance of missing than hitting. With practice let us say you now hit 55% of your shots. You would expect to say when you shoot that you have a better chance now that the shot will go in than not. Same in trading, you must know what the limits are!

In trading most of you have a greater chance of being wrong than right! Trade accordingly which means expect the limit (being wrong more likely) in your trading.

How can you come out ahead? In the short run you can only with luck but in the long run luck tends to evens back the other way. You must trade in the long run! So what is a trader to do in a losing game? You must trade in the long run!

How can you trade in the long run? Only way I know is that you must keep your losses small and take more small losses than small winners to come out ahead. This often means washing a position for the sake of being able to keep in the game.

Theorem being now to assume your position is wrong until the market proves what you positioned is correct. Keep your losses quick and small. Don't ever let the market tell you you're wrong. Always let the market tell you when your position is correct.

It is your job to know you are wrong and not the markets job.

The other side of the coin is that you will get positions, which are correct. You must be bigger at that time. This will require a rule 2, which is designed around adding to winners in an unfavorable game to come out ahead in the long run. When you are correct, you must continue to use rule 1 to keep losses small.

It's ok to be wrong small but never ok to be wrong big if you expect to trade in the long run. Trading is not easy. Most traders just let the market do its thing. The correct way is that you do your thing and control your positioning. You control you positions by using rules, which keep you in the game. Rule 1 is the most important rule in any trade plan. Rule 2 will be the other side of the coin, which must be dealt with if you are expecting to remain in the game in the long run.

Learn to be wrong, fast.

"IN A LOSING GAME SUCH AS TRADING, WE SHALL START AGAINST THE MAJORITY AND ASSUME - WE ARE WRONG UNTIL PROVEN CORRECT! (We do not assume we are correct until proven wrong.) POSITIONS ESTABLISHED MUST BE REDUCED AND REMOVED UNTIL OR UNLESS THE MARKET PROVES THE POSITION CORRECT! (We allow the market to verify correct positions.)"
---POP