The Persistent Foozler “t is essential that you establish rules to guide your behavior. You will need to create definition and give yourself direction. Otherwise, you will feel overwhelmed with too many possibilities. Without these rules one of the most likely possibilities is that you will create devastating losses for yourself. The big psychological problem here is, if you make up and have to play by your own rules, you also have to take total and complete responsibility for your actions as well as the outcome of your actions.” Mark Douglas, The Disciplined Trader, pp. 49-50 For the last six months, I have been working on establishing the rules which will guide my behavior in the markets. Prior to this time, I have been trading for nearly nine years without any plan whatsoever. The biggest risk to my potential for success is that I know from my experience that I too easily allow myself to become “overwhelmed with too many possibilities.” I have tended to track too many different kinds of instruments – stocks, options, futures, forex - across too many time frames, flipping through too many bar intervals, simply looking for something, anything, to trade. But that was then, and this is now. I have gone through the steps that dbphoenix has outlined in his Trading Plan/The Trading Journal threads. I “hired myself to do a job.” That job was to observe price in order to develop a consistently profitable trading plan based upon those observations. Based upon these observations, I developed a trading plan. I have paper traded that plan for six weeks, and I have just completed my third week of sim trading. On Monday, I will trade live. My plan is to trade live for this one week, and then based upon my end-of-week assessment, I will decide whether to continue live trading, or revert back to an earlier stage – Sim Trading, Paper Trading, or, if need be, all the way back to Observation. I will take this one week at a time. The Plan I have decided that this would be a day trading plan, as I do not particularly like being in the market overnight. I like being in cash at the end of the day. Also, I am at a point in my life where I would like to trade for consistent, additional income, rather than long-term capital appreciation. I have decided to trade stocks and ETF’s. I decided this because while I am a net loser on my trading activities overall, I am net profitable on my stock and ETF trades. As part of my observation period, I worked on building a profile of the characteristics a stock or ETF would have to have, in order to provide me, in the words of dbphoenix, “the range and volatility I require but also the safety that enables me to relax and trade in an objective and rational manner.” I have a current list of thirty-five stocks and ETF’s that meet my requirements. “What you want to do is become an expert at just one particular type of behavior pattern that repeats itself with some degree of frequency.” Mark Douglas, The Disciplined Trader, pp. 208-209 I really took this recommendation to heart as I undertook the observation of price action stage of plan development. The pattern that I came to build my trading plan around is a retracement strategy. For lack of a better term, I call it a “double-bottom pullback,” or DBP for short. This pattern, and my plan itself is best illustrated with a visual example. I will use a sim trade I took from today’s session to illustrate. A Summary: 1) NUGT is trading above today’s open – this is required. It does not matter whether the security gapped open lower, higher, or flat with the prior session’s close. But price must be above the open. 2) NUGT makes a high price for the session, and pulls back from that high. 3) Price then rallies, but fails to make a new high. 4) Price again pulls back and tests the low of the initial retracement from the session high. In this case, price under cut the initial low. This is not a requirement. Price may under cut the low, equall the low, or form a higher low, and still fulfill the requirement of the DBP. In this case, price finds support just below that level. I enter on a buy stop above the market, and I am, in the words of nodoji, “swept into the trade.” Initial stop loss is below the low of the DBP. 5) NUGT continues to rally. I trail my stop, and I exit near the end of the day as NUGT “double tops.” That is my plan in a nutshell, so to speak. This particular example happened to be a “textbook” example. Not all trades proceed as favorably as this one did. My true challenge is sticking to the plan, not allowing myself to be distracted by looking for trades elsewhere other than the securities on my list, and only to take trades that meet my plan’s criteria. I will post a review each evening starting on Monday.
Thank you, Tonkadad, and also to you, nodoji (you chose not to receive my PM so I could not reply to yours ) lol As I prepare to trade my plan live tomorrow, I wanted to reflect upon those behaviors and attitudes that have thus far prevented me from succeeding as a trader, and the changes that this process has led me to implement. A sort of "Ghost of Foozler Past meets Ghost of Foozler Present." The Ghost of Foozler Future has yet to make his appearance to me. “To be a successful trader you need to trade without fear … when you use fear as resource to limit yourself, you will create the very conditions you are trying to avoid … However, you will need some resource to limit yourself so that you don’t get reckless. Getting reckless is exactly what people have a tendency to do if they don’t feel any fear … The resource you need to limit yourself is self-trust. You will gain that self-trust when you establish a set of rules and guidelines to trade by and know that you will always follow those rules without hesitation, regardless of the temptations to do otherwise.” Mark Douglas, The Disciplined Trader, p. 202-203. The purpose of this journal is to allow me to take responsibility for my interaction with the market and to correct my own behaviors which have prevented me from succeeding as a trader. During these last several months, I have, for the first time as a trader, really pursued a high degree of self-reflection in order to find out for myself what my own personal obstacles to trading success have been and continued to be. Here is what I have determined: 1) The problem has not been my ability to accept a loss. I have from the very beginning of my interactions with the market had no problem cutting trades at or (as a result of slippage) near a predefined loss level. I was no doubt many times wrong as to whether an opportunity to trade actually existed or I was mistaken as to whether my stop loss was well-placed, but I have not had a problem predefining where I thought, correctly or incorrectly, that my current trade was a loser, and then pulling the plug on the trade if price reached that point. And yes, price very often did indeed reach that point. 2) I have, however, ruthlessly cut my profits short. I have come to understand that this is itself a form of fear of loss. I have tended to focus on evidence that would indicate the market is about to reverse against my position to the exclusion of evidence that price is likely to continue in favor of my position. My paper trading and sim trading have helped me to identify price action that indicates that I should anticipate continued favorable price movement. I have greatly improved my ability and willingness to stay in my sim trades. I will need to redouble that effort as I commence live trading. 3) I tend toward recklessness and impatience. I have chased entries. I have over traded. I have revenge traded. But the most harmful and pernicious behavior I have identified, the root of my largest losses: I have been extremely impatient to be in a trade. I look for (and take) opportunities everywhere, even when and where there really is no well-defined opportunity. This tendency has been harder to shake than I would have thought, even during my initial paper trading sessions. This "compulsion to trade," as Mark Douglas would characterize it, is also the result of fear. So, what I have I done to put myself on the path of change? First, as a practical matter, I closed my long-time Interactive Brokers account a few months ago and I opened an account with Scottrade in order to limit my access to markets other than the short list of equities/ETF's I have selected to trade. I did not even have the new account approved for options trading, so for now, I have at least removed my ability to act upon any wayward trade ideas I may have other than those that arise amongst my chosen list of trade candidates. The initial reason for choosing Scottrade rather than one of the others available to me was simple: Scottrade is one of the few brokers remaining where I can be free of the siren's song of futures and forex. Second, I have developed a trading plan to establish the rules by which and the conditions under which I am to engage the market. I have limited my plan to one particular, well-defined pattern of market behavior. I have established rules to guide my participation in and interaction with the market. Thirdly, I am making a conscious effort to focus on learning how I must change my behavior vis a vis the market, rather than on making money. I am focusing my attention on following my rules and learning what I need to learn and how I need to adapt and change my behavior to interact more successfully with the market. As Douglas says, “as a trader it is more important to know that you will always follow your rules than it is to make money, because whatever money you make, you will inevitably lose back to the market if you can’t follow your rules.” Mark Douglas, The Disciplined Trader, p. 203. My goal is to trade objectively, without fear, and to execute only those trades that are signaled as opportunities by the rules established by my trading plan. I am not focused on how much money I may win or lose, but on my skill at executing my trades properly, from entry to exit.
An observation relevant to my performance today: “Let’s look at [an] example of a trader who is afraid of losing … In a winning trade, his fear of losing causes him to exit the trade early for a small profit regardless of whatever the possible profit potential was in that trade. Once he is out, if the market continues to move in his original direction, he will agonize over the profits he left on the table and wonder why he just couldn’t hang in there just a little bit longer, not realizing his fear of losing actually caused him to lose all those additional profits. In a winning trade, the fear of losing will cause us to focus our attention on information that the market is going to take out profits away, compelling us to get out early … Staying in a winner is not a choice if we are consumed with the fear that the market is going to take out money away.” Mark Douglas, The Disciplined Trader, pp. 118-119 Grading My Progress I am focusing on the degree to which I follow my trading plan and allow my behavior to be directed by its rules. Toward that end, each trade will be graded on a scale of 0 to 3, with 0 being an utter fail, and 3 being a complete success. Success and failure is not related to profitability. One trade might score a perfect 3 and still have been a loss, and another trade might have been an utter failure, and yet resulted in a profit. The scoring is as follows: One point for identifying the opportunity as being according to plan and for properly executing an entry; one point for placing a predefined stop loss and not moving it other than to decrease the potential loss; and one point for letting profits run and exiting the trade for sound, objective, observable reasons as defined by my trading plan, rather than emotionally-driven “rationalizations.” Day 1 – Assessment and Review Today I placed five trades. Trade 1 BIDU: Bidu was trading above its opening price and had pulled back from its session high. However, I did not await for it to put in the “DB” of the “DBP” and I entered early. Feeling guilty for not trading an opportunity according to plan, I then foozled the stop loss, and I was stopped out by the price action that did set up a DBP. 0 points for identifying and properly executing the opportunity, 1 point for pre-defining the risk with an appropriate stop loss, 0 for letting profits run. Grade: 1/3 Points -.59 Trade 2 TSLA: 1 point for identifying and properly executing the opportunity, 1 point for predefining the risk with an appropriate stop loss, 0 for letting profits run. This was a morning trade, and therefore my plan would have me managing the trade in expectation of a trend day. This is exactly what developed, though my old habit of ruthlessly cutting my profits short arose. I didn’t merely cut them short – I hacked them to death. Grade: 2/3 Points 1.13 Trade 3 QLD: 1 point for identifying and properly executing the opportunity, 1 point for predefining the risk with an appropriate stop loss, 0 for letting profits run. Same as Trade 2 TSLA I managed this like an afternoon double top trade and not a morning trend trade. Grade: 2/3 Points .35 Trade 4 TSLA: Same as trade 1 BIDU – entered early, and again it cost me. 0 points for identifying and properly executing the opportunity, 1 point for predefining the risk with an appropriate stop loss, 0 for letting profits run. Grade: 2/3 Points -.88 Trade 5 TSLA: Of course the lower low that stopped me out of Trade 4 TSLA was the DBP I should have been waiting for if I were trading according to plan. This is an afternoon DBP, and so I am trading for a double top target. I use an OCO Stop Loss/Limit order, and as price gets within the range of the profit target that is smaller than my initial stop, I move my trailing stop higher. In this case, the high of the rally was 198.58, which put it within 42 cents of my 199 Double top limit order. This had my stop loss moved up to 198.16, and positive slippage had my order filled at 198.24. This was the only trade today were I executed everything according to my plan. Grade 3/3 Points 1.64 Grade 10/15 F Points 1.65 The numbers do not lie – My actions as a trader today receive a grade of F in spite of the day’s profitability. Given that 40% of my trade attempts were not even “in-plan,” I could have just as easily finished the day with a much larger loss. I score a miserable 60% on properly identifying and correctly executing my entries. I knew that the two out of plan entries were out of plan. I wish I could say I had made a couple of mistakes, but I didn’t. In both cases, I knew that the requirements of my set up had not been met, but I traded anyway. I score an abominable 10% on managing exits for profitability, and so I “agonize over the profits I left on the table and wonder why just couldn’t hang in there just a little bit longer.” I score 5/5 for predefining my loss, but that has always been easy for me. What is obvious is that my impatience to have a position on and my fear of losing accrued profits are still strong forces acting upon me and directing the way I interact with the market. Here is a table of today’s TSLA trades with an annotated chart. And here is a table showing all five trades from today:
Sorry, shut down my mailbox because I'm going to be on hiatus for a while. I have this printout laying around and I have no idea who said it, but I love it: "When you know, and you know that you know, your confidence turns what some people might deem as high risk into a simple matter of probabilities. You have learned through the pass of pain to train your rational mind to consistently execute a predefined systematic response, when your emotional mind may be trying to compel you into doing something else."
The BIDU trade and the second TSLA trade both resulted from my not wanting to miss the next rally. In each case, I allowed myself to think that the respective pullback had ended, and rather than wait for the re-test of the pullback low, as per my plan, I initiated longs. I do not know why I do this. I know that even if a trade is not signaled according to my plan that another will be along soon enough. And I do not "miss" them - I track a list of 35 stocks and ETF's and I am now able spot these set-ups all day long. Right now I want to limit myself to no more than three open positions at a time (and even that may be too many), but there is no shortage of opportunities. So there should be no need on my part to take a substandard, out-of-plan trade. As to why I cut my first TSLA trade and the QLD trade short, either I have not yet gotten past my fear of losing what profits the open trade has accumulated, or, I was so disrupted by having entered that BIDU trade out of my plan that I just wanted to be relieved of all my positions. In either case, I failed to control my behavior in my interactions with the market. What disturbs me most is this: I do believe that it is up to me to take whatever the market has to offer me. I believe I want to be successful. I believe I want to trade according to my plan. And I do believe that this plan will give me all I want and more if I just trade it as I have written it. But if I believe all this, then why is it that as soon as I put real money on the line (and an embarrassingly small amount of money at that - I am trading in only 50 share lots right now) why do I revert back to the behaviors that I know have caused me the problems in the past? I don't know if I have the answers as to why. I know what the behaviors that cause me to fall into the profit gap are. But I am not sure I as yet have completely figured myself out. Especially as I was truly executing my trading plan so well during my three weeks Sim and the weeks of paper trading before that - effortlessly, nearly flawlessly, with patience to wait for the proper set-ups and then the patience to let my profits run. I know that the key to this is mental. And I know I am closer to achieving consistently positive results than I have ever been in the nine years since I funded a trading account. I simply must follow my plan. It is a good plan for me. Over the last six weeks, I have seen what it can do for me on paper and in sim. So what do I need to do to convince myself to stick to it?
Well, surprisingly, the key to it is not all that mental. I may have missed this somewhere but have you gone into detail regarding your backtesting?