Looks Can Kill You: RAMOUTAR REPORT VOLUME 11

Discussion in 'Psychology' started by RAMOUTAR, Mar 19, 2004.

  1. Looks Can Kill You

    To reiterate the disclaimer:

    The ignorant and malicious are free to reveal themselves with replies that I will not acknowledge. The inquisitive and intellectually stimulated are invited to post constructive replies, and or questions.

    Zen In the Markets, Confessions of a Samurai Trader…Edward Allen Toppel (I am not promoting or endorsing this book, and I have no agreement with the author, just using it as an example)

    Until January 1996, I was a consistently profitable trader and a “so so” investor. One of All-Tech’s (a former employer) customer’s had asked me to trade with him in his account. The fear of trading with someone else’s capital was paralyzing. I could do nothing right for 3-months. Here were some of my emotional chants:

    - “Maybe I should short when I want to buy.”
    - “Maybe I should buy when I want to short”
    - “It’s a conspiracy….the second I buy a stock its stops moving, then it moves against me, I get out, and the second I get out it rips higher. Everyone on Wall Street knows I’m in. they make phone calls to each other and shake me out.

    There is no CONSPIRACY THEORY!

    The fellow I traded with gave the above-mentioned book to me. While my religion and principle are nowhere near “Zen” the book frightened me initially but made a lot of sense.

    Part I “Seeing Through Zen Eyes” (What the hell are those?)

    “It is too clear and is so hard to see. A dunce searched for fire with a lit lantern. Had he known what fire was he would have cooked his rice sooner” The Gateless Gate

    After having my *ss whipped several times by the market from January 1996-March 1996, and coming home everyday listening to Frank Sinatra “That’s Life” while drinking a shot of Courvoisier and smoking a Cohiba both of which I could not afford for that three-month period, picked up the book and read it.

    After taking off the trading cap and retreating to my lavish living room in my TWO-room apartment, that I shared with my ex-wife (whom I was miserable with) the light of demons shone upon me. I realized there was no conspiracy theory; I was my own conspiracy and enemy. The market just is…..whatever it is.

    I took a stand and made the decision that the market was not going to beat me anymore…and I would not try and beat the market, just do what it told me. Several years ago a reporter from the Star Ledger, a NJ newspaper interviewed me. She asked me how I felt about the market. My response…”I see the market as a supreme being, it has lived long before my conception and will continue on long after my carcass becomes dust. I don’t question or curse it, I just do what it tells me.” She was baffled; she expected a high-ranking analyst view of the market. None here, I was and still am dead serious on my view.

    As the book says: “you must lose yourself to find yourself” as I did. I recouped all of my losses within three months after reading the book. I recouped the losses by swinging for numerous base hits, not home runs. The book did not change my trading; it helped me change myself, which changed my trading. I have not had a losing week or month since March 1996.

    Those of you have read my previous articles know my trading mantra:

    “Predetermine entry, stop, target, risk reward ratio, rationalize and execute”

    I began that method several years ago. It has kept me away from trading dot.coms from ’99-’00 and away from the (same) dot bombs from ’00-present. I left a lot of money on the table by not trading those stocks, but they did not meet my criteria.

    You’ve seen in a previous article, “repetition…the mother of success and failure”. In many ways I am very stubborn. I don’t care to look at other software platforms…quote, execution, and scanning, etc. etc. Why? It diverts my attention; I lose focus on my plan. That is one of my trading demons. I identified the weakness and keep myself away from it so it won’t get me. As I sit and sip on a nice glass of 65-degree merlot, I use an example of a friend of mine who is a recovering alcoholic, he stays away from any environment that includes alcohol, and this helps him remain sober. I try to steer clear of situations that invite my trading demons to come out and get the best of me.

    Now back to

    “It is too clear and so is hard to see. A dunce searched for fire with a lit lantern. Had he known what fire was he would have cooked his rice sooner” The Gateless Gate

    I am mentoring two of my friends, two cases.

    Case One:

    Traded for three plus years. Rebate trader first year turned size scalper on AMEX last year. While he did well in both areas, trading size (5-20K shares) of AMEX stocks killed him. His monthly P&L was in excess of $10K, and to his surprise his AMEX fees were in excess of $10K. He put out limit order that lasted more than 5 minutes and then went to the specialist book. These orders became “billable tickets”; our friends on the AMEX floor (specialists) were charging 4 tenths or $4.00 per thousand on top of his commissions. They smashed him.

    He is my friend’s son, I devoted weeks to getting him to evolve. I have introduced him to another strategy, intra-day swing scaling. We’re in week four: 1st week- $300 losses per day, 2nd week- flat to minimal losses, 3rd and 4th weeks- net, net, net up $200 per day (avg) only one losing day ($600 on FAST 3/12, my bad), trading 400-600 share lots. It’s not luck and it’s not a coincidence. It’s sticking with a plan. The streak can only be broken if the streak of discipline and focus is broken.

    His current weakness is being too conservative and trading with scared money. While those are two very valid and potentially good weaknesses, they cost money.

    I had him following me on many trades. We predetermined EST and RRR and executed the trades. Did awesome on most of them, risk reward ratios were a 1:2 minimum with scale ins at more favorable ratios.

    When I didn’t have contact with him (intermittently, several hours here and there), he fell off of the path. Why? His emotions got him. By no means is he a dunce (one of the brightest guys I have traded with), but he was searching for a fire with a lantern.

    Case Two:

    A friend. He has been paper trading for several weeks now, hoping to go live soon. Like case one, I am very proud of him. He is very disciplined and able to separate his emotions from his trading, to a strong degree. Within the same age as case one, we all have many things in common.

    Several times it seemed like he was a contrarian on several of the trades that case one and I were in. I challenged him on many of the trades, and in a few cases his calls were correct. However, he didn’t have a substantial reason for entering some of them. I called him on a contrarian trade he made today, asking him why. Initially the response was, “I just want to see what happens.” I became very aggressive with him, and later the trade worked in his favor. I had case one go on the other side of the trade to take a 4-cent loss of 200 shares.

    Case two became very angry at the end of the day, slamming the desk and walking off of the trading floor, a promising indication that he’s taking paper trading seriously. Based on his performance so far, I believe he wil be an outstanding trader.

    At the end of everyday, I request both cases (individuals) to perform post-mortems on the best and worst stocks they traded. After we conclude our market wrap discussion, they perform the post-mortems and then scan for the next day’s stocks.

    At some point next week I will release our trades along with the 1 & 5 min charts, I believe they will really help you.

    What’s the conclusion?

    - Predetermine entry, stop, and target, risk reward ratio. You can never predict the outcome of the trade; you can only minimize the outcome’s impact on you.
    - Face and accept the fear (risk) face and accept the greed (reward)
    - Execute the trade and manage it until stop or target is met.


    We cannot control what the outcome of the trade is going to be, but we can control the impact of the trade’s outcome on us.

    I know it’s very hard to separate your emotions from your trades, but it can be done. Start by using EST and RRR.

    - Paper trading if done properly can produce losses
    - Live trading if done properly can produce gains
    - Focus on sticking to your plan, not making profits. Adhering to the plan will result in profitable trading.

    I hope to have all of the trading blotters and charts available to you next week.


    You may find previous reports at these links:

    Volume 1 – Fear an the Market

    http://www.elitetrader.com/vb/showt...&threadid=19559



    Volume 2 – Switching Timeframes

    http://www.elitetrader.com/vb/showt...&threadid=19881

    Volume 3 – Elements for Successful Trading

    http://www.elitetrader.com/vb/showt...&threadid=20208

    Volume 4- What Are You Looking At?

    http://www.elitetrader.com/vb/showt...&threadid=20285

    Volume 5 – Building Your Trading Stable

    http://www.elitetrader.com/vb/showt...&threadid=20510

    Volume 6 – What Really Drives Prices.

    http://www.elitetrader.com/vb/showt...&threadid=20998

    Volume 7 - Trading Is War (typo as Vol 6)

    http://www.elitetrader.com/vb/showt...&threadid=21849

    Volume 8 - To Adapt and Evolve is To Succeed

    http://www.elitetrader.com/vb/showt...&threadid=22821

    Volume 9- Knowing When Enough Is Enough, and When It’s Not Enough

    http://www.elitetrader.com/vb/showt...ramoutar+report

    Volume 10 - Repetition...The Mother of Success and Failure

    http://www.elitetrader.com/vb/showthread.php?s=&threadid=27061&highlight=ramoutar


    If you have any problems with the links go to search, and type in Ramoutar report, or PM me for links.

    You may also find me at www.esignalcentral.com
     
  2. Thanks again for a great post. I noticed in another thread that you stopped using RealTick last summer, and have been using eSignal along with some other systems. What's your opinion so far? Will the charts that you intend to share be esignal charts?

    TIA
     
  3. I look forward to seeing the trades and the charts.
     
  4. This imply to be able to determine the target or exit, that is to say to make a prediction (even if it is a prob curve it stays a prediction and the prob curve can be completely false as it is not obvious - if it was obvious ...). Also this implies that there is an implicit probability attached to it (even if you can't determine it, its existence is unescapable as its origin is your complete or partial ignorance of the outcome). If you use a stop - which is practically obligatory in futures trading or you would get killed almost surely - then this probability is not even obliged to be equal to 50% it can be much lower so that the edge can turn negative (prob * gain or loss).

    So for me the mantra above corresponds to a SPECIFICATION, I mean it corresponds to what you WANT (I don't mean you personnaly it's a generic you :) ), and not necessarily to what you CAN. By this I want to refer to the CONCEPT of TOLERANCE of a SYSTEM and the danger of OVERESTIMATING its CAPABILITY which will conduct to LOSS which could follow for example the TAGUCHI loss function (which is used in quality/risk control in classical industry I won't affirm that it is exactly this curve in trading but on principle the LOSS should be somehow also QUADRATIC that is to say accelerate when the tolerance is far from spec)
    http://www.elitetrader.com/vb/showthread.php?s=&postid=394133#post394133

    <IMG SRC=http://www.maaw.info/ArtSum5.gif>


     
  5. And why is it so difficult to estimate this prob curve in short term trading ? because all classical theories like Market Efficient Frontiers (see for example the link I just posted http://www.elitetrader.com/vb/showthread.php?s=&threadid=14365&perpage=6&pagenumber=8) are based on CONTINUOUS PROB CURVE whereas the problem in trading is more about DISCONTINOUS OR DISCRETE PROB CURVE (I don't even take into account the unproved assumptions about utility curve or risk preference of operators that these kind of models use) corresponding to a few scenarios. That's what Ralph Vince in his "New Money Management" was trying to quantify but I find that he fools himself as you cannot invent probability which is conditioned by the market's model he totally ignores. he said that he asked many academics to help him and none could: I'm not astonished that they can't for the reason I just mentioned.

    P.S.: I don't say that Market Efficient Frontiers is craps, I say that it is not adapted for short term style trading with huge leverage and high volatility (although the problem in fact is more the heteroscedascicity of vol that than the fact it is high. Real risk comes from that, some economist use the term uncertainty to say that it is "riskier" than (classical) risk :D but still too confusing term for most people : the concept and risk terms given at school should be revised to eliminate these fuzziness).

     
  6. to caricature the thing it's a bit like inventing prob numbers to justify some belief like "67% chance that God exists" no joke see :D
    http://www.elitetrader.com/vb/showthread.php?s=&threadid=29966

     
  7. Jai-

    Good post.

    Glad to see you're drinking your red wine at it's proper temperature.

    Trade well.

    uptik2000
     
  8. Harrytrader, I find your posts very intriguing (after I'm able to understand them :) )

    I'd like to address the first paragraph of your post...

    This imply to be able to determine the target or exit, that is to say to make a prediction (even if it is a prob curve it stays a prediction and the prob curve can be completely false as it is not obvious - if it was obvious ...). Also this implies that there is an implicit probability attached to it (even if you can't determine it, its existence is unescapable as its origin is your complete or partial ignorance of the outcome). If you use a stop - which is practically obligatory in futures trading or you would get killed almost surely - then this probability is not even obliged to be equal to 50% it can be much lower so that the edge can turn negative (prob * gain or loss).

    Target and exit are very obvious to me. If I had a good handle on the probability of the trade's outcome, I wouldn't need a stop. I gave up on trying to predict probability years ago, but too some degree analyze the price action adn momentum indicators while I'm in the trade. The use of a stop IMHO, is obligatory in any trade. Since I'm not able to figure out probability, the price action I concern myself with rests ini the range of entry, stop and target.

    I look forward to trying to get my arms around the rest of your replies on this thread. Phew!!! :)

    Thanks for the insight Harry!
     
  9. ...is a member on this board, "chenz_trader" http://www.elitetrader.com/vb/member.php?s=&action=getinfo&userid=21470

    and he has invited you to PM him with any questions.

    Case One:

    Traded for three plus years. Rebate trader first year turned size scalper on AMEX last year. While he did well in both areas, trading size (5-20K shares) of AMEX stocks killed him. His monthly P&L was in excess of $10K, and to his surprise his AMEX fees were in excess of $10K. He put out limit order that lasted more than 5 minutes and then went to the specialist book. These orders became “billable tickets”; our friends on the AMEX floor (specialists) were charging 4 tenths or $4.00 per thousand on top of his commissions. They smashed him.

    He is my friend’s son, I devoted weeks to getting him to evolve. I have introduced him to another strategy, intra-day swing scaling. We’re in week four: 1st week- $300 losses per day, 2nd week- flat to minimal losses, 3rd and 4th weeks- net, net, net up $200 per day (avg) only one losing day ($600 on FAST 3/12, my bad), trading 400-600 share lots. It’s not luck and it’s not a coincidence. It’s sticking with a plan. The streak can only be broken if the streak of discipline and focus is broken.

    His current weakness is being too conservative and trading with scared money. While those are two very valid and potentially good weaknesses, they cost money.

    I had him following me on many trades. We predetermined EST and RRR and executed the trades. Did awesome on most of them, risk reward ratios were a 1:2 minimum with scale ins at more favorable ratios.

    When I didn’t have contact with him (intermittently, several hours here and there), he fell off of the path. Why? His emotions got him. By no means is he a dunce (one of the brightest guys I have traded with), but he was searching for a fire with a lantern.
     
  10. Cheers! :)
     
    #10     Mar 20, 2004