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Old 03-27-2002, 06:37 PM
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Default What a Wild Ride!



What a wild ride!


Iím not going to talk about the $1100 I lost yesterday making every mistake in the bookóand I mean EVERY mistake possible. Look up whipsaw in the dictionary and there will be a picture of me with a rope around my neck.


Today was different and in some ways the same, so Iíll relate the nightmare with a happy ending. I did some things right today and some things wrong, but man, am I ever learning fast.


I sold 1 contract (S&P E-Mini) pre-market, and when the market opened I added two more. The market then proceeded to shoot up to + 90 on the Dow and I was down over $1100, but I held on. I felt we would give back, but I never dreamed I would get out almost even! The market came back 9 handles, and I got out of my position 2 ticks off of the low. At that point I was down about $150 for the day. Nice comeback. I should have double reversed, but after the minis went up one point I realized we would probably go up and test +90 on the Dow again, so I went long 1 lot and then added another 3 ticks later. The market then went up 5 handles, and I got out 1 tick off of the high when the Dow hit +85; I said thatís close enough and liquidated. I ended up making $325 for the day when at one point I was down $1100; $1400 swing! I donít want to go through that again. It looks like I got out of my long trade just in time. The trading got real choppy in the last half hour. I sold the minis at 1148.25 and they went from there in the last hour down to 1143. They closed at 1146.25, and the Dow ended up + 73. Wow, what a ride.


Some observations: I sweat every tick. When the markets run either up or down they run pretty fast. I did notice that when the bias was up the minis had trouble going down too much even when the market was selling offóand vice versa. Things get real quiet around lunchtimeó10:00 to 11:00 Pacific. The open and the close is where most of the action is. News can really move the marketsóshort term. Itís almost like the locals are expecting the news that is coming, good or bad, and trade ahead of everyone elseóthen they fade the move. It takes balls, but thatís how it looks to me.


Now, what I did right. I only made two trades! My commissions were $24.00. This is a far cry from the $197.00 and $150.00 in commissions the first two days. Ten total contracts for the day. I was more patient with my losing positions and my winning positions. I didnít panic. I was cool under pressure, and the pressure was very high.


Now, for the errors. God this is painful. I didnít cover my losing short position when the market started to run against me early in the morning. This is a cardinal sin. I let things get too far out of hand. But once I got buried I decided to let things go and just see what was going to happen. If I take a bad loss then I take a bad loss, but Iím going to do things a little differently today. Yesterday I panicked all over the place and was in and out so many times I didnít have a chance to win a dime. Every time I made a trade yesterday the market would immediately go against me at least 3 ticks. I canít see the market depth and that might be a big disadvantage. I can also see where being on the floor and watching who is doing the buying and selling (and how much) would also be some important information. I couldnít do anything right yesterday. Not to mention the fact I was completely off of my game. Today, I decided to hold onto my trades a little longer and not lose my cool. Well, I held onto my original trade too long, and it worked out, but that doesnít mean I did the right thingóIíll just have to learn from that.


Tomorrow is the last day of the week and this weekend Iíll evaluate my experiences to see if I want to continue on with this venture. Right now Iím torn. The pressure is intense and you canít blink for a second. Oh yeah, I made two major errors today and yesterday. I traded in front of news on both days. I got caught short yesterday in front of the consumer confidence report and watched the minis gap up 4 full points on me! I was going to get out before the news and then make a trade but CNBC went to commercial and when they came back it was too late. My fault, not the televisionís. Iíll never trade in front of news again. Housing sales today were slightly less than expected but still positive and the market must have liked that because it gave things a little bounce.


One last mistake: yesterday, I was long one contract pre-market. The market was chopping around and I put in a limit order to cover + 3 ticks. Then I decided to just let it go and see if I could catch a nice up swingóbut I forgot to cancel the order! Well, naturally I get hit and proceed to watch the market take off in what would have been my favor 11 full handles! I was on tilt to say the least and tried to trade all around that rally and subsequent decline. I donít think I had one winning trade. Your emotions can really get in the way sometimes.


For those of you thinking about trying the E-Minis I would make these suggestions. Just trade one contract for at least 1 month! Get a feel for what is going on. Set a predetermined loss on your trade, either points or dollars. Iím reluctant to set a limit on my wins but I donít think that would hurt while learning. LBJ (Lewis Borsellinoóhis book The Day Trader is very good) says to go for the 2 to 1 ratio. If your willing to lose $200 on a trade then try to win $400 on your winners. That way you can lose 60% of your trades and still make money. Itís good common sense. Focus. Do your homework. Have some kind of charting system, and know where support and resistance are. One of the reasons I didnít panic today was because I was able to look farther out at the ten and fifteen minute charts and see that we were approaching serious resistance at the top of the move and strong support at the bottom. Just looking at the one-minute chart youíd think the sky was falling. (In fact, the minis went one tick over the high point on the ten minute chart and that was the top. Yesterday I would have panicked and got out--or worse--reversed!) Let your winners run as long as you can stand it--and then let them run a little bit more.


Anyway, its been quite a ride. I can see where it would take at least a year to get in front of the learning curveóif thatís even possible. No wonder so many people blow themselves up trading. Iíve lived it in three short days! My net loss after three days . . . -$600. This will be my last post about my adventures and misadventures trading futures. Hope you enjoyed. Good luck to all.


All comments welcome.


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  #2  
Old 03-27-2002, 07:45 PM
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Default that\'s like saying move up after a week at 3-6



First of all, you made a common error by extending your position duration on the day after you got chopped up. In other words, you learned too quickly that, hey, if you hold on long enough, it comes back. Both this, and your contract size, I cautioned you on yesterday in my unsolicited opinions. You can reduce the number of trades without hanging on longer. You don't need a huge edge to make a living, only like a half point per trade, twice a week.


The next thing is the news. The floor guys no longer have any visibility, but the big dealers in New York still have some visibility when it comes to news events. In hopes to "catch" the news, their customers tell them in advance whether they are going to be trying to buy or sell stock depending on the news, and so the big desks get an idea of what the possible outcomes are, and then start loading up in the pit (possibly because it would be unethical to front-run clients directly in the cash market).


When it it is choppy, meaning when it is nothing but traders running the market in one direction and the other, you have to speed up, not slow down. See, the correct trade for me yesterday afternoon would have been super-fast trading, by selling short as soon as the down blip gained momentum, and assuming the traders would wash themselves completely down, and back up. The "fishing wavelength" is the number of traders, meaning the size of the move they expect. So you ride the gradual entry, exit, and reversal, of frontrunners, who are trading for a longer timeframe than you are trading for.


The reason I went long yesterday is because, in the event of an uptrend, all the up-trend followers riding it should have gotten washed out by 1142. So, if there is an uptrend, I get the double whammy of the resumed uptrend, plus all the uptrend traders getting stopped back in. If no underlying demand materializes, and instead the market just keeps trying to digest the stopping out of the uptrend traders, it could trigger them to go the whole way to entering on the downside - which is what happened - but I am safe, because although the extent of the down move will be unpredictable, it will have to reverse itself. And this is based on my estimation that there may or may not be buyers, but there are not sellers.


So it was a tough gamble. I could either gamble on there being buyers, and the uptrend traders getting washed back in, or I could gamble on there being no underlying buyers or sellers, and the trend traders washing themselves in and out both ways, in two complete waves. The reason I decided on the underlying uptrend was because if I was wrong I would break even, but if I traded the downtrend and it stalled, I could get chopped up, or killed if the uptrend materialized. And I was bullish, and I decided to rely on that rather then the traders being overwhelming enough to whipsaw themselves.


Today looked like worthless crap from the get-go and, other than shooting for a full-day uptrend, I'm not sure how else you could have played it. There weren't enough trades chasing it to create their own waves, and correctly so, because there weren't enough underlying buyers or sellers to really move it. What nastiness at the close!


The only other error you made was your silence yesterday. When you didn't post, I knew you had gotten killed. You can't act differently when you win and when you lose. You can't even tell your wife when you win and when you lose, because on the days you lose she'll freak out and dump you, and on the days you win she'll buy plane tickets to Paris. So if you only tell her on the days you win, you'll go broke, so you can't tell her anything. And this only happens when you have condfidence whether you'll win or lose over the long run, and that only happens when you adjust your strategy slowly over long periods of wins and losses, rather than celebrating then quitting.


In conclusion, today could have been a trend day, and you were lucky it came back. You had no reason to believe anybody would be dumb enough to get stuck long, or that it would chop around on a wide wavelentgh. Notice, the wavelength was narrower today, and that runup was the real deal, it held. In summary, I mistook yesterday for today, you mistook yesterday for Monday, and you mistook today for yesterday. Or something like that...


Just don't "learn quick," rather, assume other people do. Assume other people are making the mistakes you made, and fighting yesterday's battle.


eLROY
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  #3  
Old 03-28-2002, 07:59 AM
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Default Great Post &Questions?



I was considering doing the same general trading you are but am a complete novice. Could you elaborate on the setup and actual how you make the trades. Such things as what type computer, type of internet service, any software, what charts and news services you use, what trading firm, how and how quickly the trades are executed. Also what other books(besides Borsellino) or publications were helpful to you.


Thanks again for the great post!
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Old 03-28-2002, 09:19 AM
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Default Re: What a Wild Ride!



Since you watch the market a lot you must have some ideas about times of day that certain types of trading tends to develop. I hear a lot of recommendations like fade the opening half hour, market runs counter the day trend in the second last hour of trading, in the last hour the market trades with the day trend, etc. Also I would think you have some ideas where the market might reverse course course on a short term basis. Sounds like a lot of fun and I like your idea of trading 1 contract breaking in.


.. Itís almost like the locals are expecting the news that is coming, good or bad, and trade ahead of everyone elseóthen they fade the move. It takes balls, but thatís how it looks to me. ..


They probably hedge somehow I would think but it does seem like you should be able to think of some way to bet on volatility when the news hits.
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Old 03-28-2002, 10:19 AM
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Default Re: What a Wild Ride!



Thanks for your posts. I have found them really interesting. I also think eLROY's responses have been great, and I have learned from them. I can assure you that I have made every mistake you have made in trading the eminis, and more. It is not easy to stop making the mistakes even once you have made them. (That said I am still trading and still making a living, so I guess it is not impossible.)


I think that holding on to your mistakes is the worst thing you can do in the emini game. The problem is that frequently you can get away with holding on to your mistakes, as you discovered yesterday. The chop in the market is so intense that sometimes you can luck out. More frequently, however, you do not "luck out".


I figured out a while ago that I tended to hold my losers longer than my winners. Not doing this takes a huge effort of the will. I have thought about this in relationship to some reading I have done in psychology, and come up with the following insight. Kahneman (sp?) and Tversky have noticed that people have asymmetric risk preferences when facing losses and gains....we are more risk loving when it comes to avoiding losses than we are than we are faced with prospective gains. In other words, it is human nature to rely on chance more to get us out of losing situations than we do when we are in winning situations. This is why it is hard to fight the tendency to let your losers run. I think this is particularly intense in the emini market because it is so volatile.


Thoughts?



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  #6  
Old 03-28-2002, 10:47 AM
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Default Re: What a Wild Ride!



One more thing--


This is the list of questions I keep on my desk. I try to ask myself these questions before I make every trade. Maybe they will be useful to you.


1. Do you understand what is going on?

2. Is the pattern clear?

3. Are you trading with the trend?

4. Do you have a defined entry level, target, and stop?

5. Do you REALLY understand what is going on?


Asking myself these questions is my technique for avoiding trading on tilt.


Sometimes it actually works [img]/images/wink.gif[/img]!
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  #7  
Old 03-28-2002, 10:47 AM
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Default One more thing



One more thing--


This is the list of questions I keep on my desk. I try to ask myself these questions before I make every trade. Maybe they will be useful to you.


1. Do you understand what is going on?

2. Is the pattern clear?

3. Are you trading with the trend?

4. Do you have a defined entry level, target, and stop?

5. Do you REALLY understand what is going on?


Asking myself these questions is my technique for avoiding trading on tilt.


Sometimes it actually works [img]/images/wink.gif[/img]!
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  #8  
Old 03-28-2002, 12:19 PM
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Default Re: What a Wild Ride!



The afternoon stretch is rather long. This makes buyers you are front-running tough to pin down to a time. So if 10 traders are front-running 10 buyers, it is very easy for those ten traders to all get out and back in, by self-triggering, before the buyers show, which of course adds new buyers at the low on the traders' way out.


If there have been exacerbated selloffs towards the close a few times in the last couple weeks, a slight down blip may be all the justification buyers need to postpone their orders the whole way to the close. This leaves trend traders flailing in the vacuum, which just reinforces the buyers' arbitrary decision to postpone.


As such, when real sellers show up out of the middle of nowhere, mid-afternoon on an up-day, it's a very tough read. The best way I have discovered to make this read is to watch for where the buyers who missed earlier in the day might be getting filled.


In other words, if the downtrend is being exacerbated by their postponement, there shouldn't be a lot of "two-way" on the way down. If there is two-way, and the lower price holds or resumes, that means the buyers got filled. And you can either choose to assume there are still more sellers, or that it will be chop.


So far as the opening range, or half hour or hour, that is a constantly-changing beast. As fashions in trend trading change, the popular way to interpret the first hour, and therefore the correct contrarian way to interpret the first hour, vary. In general, the pockets of underlying buyers and sellers in the first hour are huge, so you can't not scalp them, just because everyone else does.


If any of you have ever raced sailboats, the first hour is a lot like the starting line, a congested madhouse, but worth the effort. Where I start to look at it is the morning tail. Meaning on a day that goes anywhere at the open, eventually the number of traders riding it may shake itself down to a final, sort of longer-term number by mid morning. And then I like to see if the price goes sideways and they either stay in or get filled before lunch or, if they end up marking it down on themselves.


So far as how to "trade volatility" when news hits, most of the time the reaction is about right-sized, and it can't be done. I think it is only when the news is really surprising that a fast-trading opportunity presents itself. I generally am so terrible at trading news, to where my final conclusion is almost to just do the opposite of what I normally do when news hits.


The most reliable way to predict major turning points is by major turns. This may sound silly, but often the best way to call the end of a trend is by the size and speed of the pullback relative to prior pullbacks in the same trend. Meaning, your signal is so expensive in terms of the amount you have to give back to get it, a lot of people are reluctant to take it, when only a moment before they could have done so much better.


eLROY


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Old 03-28-2002, 08:25 PM
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Default Re: Great Post &Questions?



"I was considering doing the same general trading you are but am a complete novice. Could you elaborate on the setup and actual how you make the trades."


My broker is Interactivebrokers.Com. They provide a trading "platform." This is an interface that shows you real time prices, (bid and ask) along with bid and ask size and a few other things. Stock trades are .01Ę a share, options $1.90 a contract (no minimum) and futures are $2.40 a trade. You simply click on the bid if you want to sell and the ask if you want to buy. A box comes up and you can fill in the blanks. You can make limit or market orders and you type in the size and click on transmit to send in your order. If you make a market order you will usually get filled instantly.


"Such things as what type computer, type of Internet service,


I built my own PC. It's got an 800 Duron processor, 40 gig hard drive and 250 megs of ram. Plus I have a dual head video card. I wouldn't use much less than a 500 MHz processor and you'll need lots of ram if you keep a lot of open programs like I do. Oh, I would also recommend an LCD flat panel monitor because you want something that is geometrically correct and easy on the eyes. The bigger the screen you can afford the better. I have a 15" which is big enough for now, and when I get my second monitor it will be fine--but I wish I had a 17".


"any software, what charts and news services you use, what trading firm, how and how quickly the trades are executed."


I use Lycos.Com real time charts for my chart service. I'm sure there are better, but for $12 a month including exchange fees these guys are hard to beat. You get real time charts for stocks, options and indexes. If I can access other commodities like corn and oil I haven't figured out how to do it yet. Customer service is kinda bad. I can't even find a place to send them e-mail! But I like the charts and they suit my purpose. You can use 1 minute 5,10,15,30,60, day, week, year and quarterly interfaces. It has a news button so if you are charting Microsoft just click on news and you can see if anything is happening. But for news I like Yahoo.Com a little bit better. It has a good finance page, news, earnings reports, splits, option chains, message boards etc. If you want even better there are some inexpensive subscription sites like First Call. The Street.Com is also good for around $15 a month. Also try TradingMarkets.Com, but I don't know about their fees. I use AOL for an ISP. The 7.0 version is much improved over other versions and pretty fast, but it's still AOL. I'll be getting a cable modem soon. Two monitors is a big plus, but you'll need a dual head video card.


"Also what other books(besides Borsellino) or publications were helpful to you."


Go here and have fun. On this list I have read numbers 9,19,21,22. Maybe others can make recommendations from these lists. Personally, I would like to read all of these books, but I just haven't found the time. (The Electronic Day Trading books aren't the best--the one where they interview successful traders is OK though.)


http://www.amazon.com/exec/obidos/tg...149044-3613704


And here I have read: 9,18,19,20


http://www.amazon.com/exec/obidos/tg...149044-3613704


Other books I have read and liked:


Digital Day Trading by Abell


Day Trade Online by Christopher Farrell


McMillan on Options


Liars Poker is a good read


There are also two autobiographies written by women. One was written by Linda Radke and the other one I can't reamember the name of the book or the author, but she was the youngest options trader at the CBOE and one of the first women. Her account of the crash of 1987 in the options pit is especially interesting. These are the kind of books I really like.


There are many more books and all of the ones I've mentioned might not be great books, but you pick up something from everything you read and everyone you talk to. See what your library has and then go to Amazon and just buy some that look good. Here is a list of books on trading that I just love:


Market Wizards and

The New Market Wizards


Reminscences of a Stock Operator by Edmond Lefevre


God in the Pits (Author?) [Excellent account of the Gold and Silver spikes of the late 70s and how the Hunt brothers tried to corner the silver market.


http://www.buyandhold.com/bh/en/educ...hunt_bros.html]


Methods of a Wall Street Master and

Principles of Professional Speculation by Victor Sperandeo


Options as a Strategic Investment (well written, but reads like a textbook but--must read if you are going to trade options.)


Trading for a Living by Dr. Alexander Elder


Pit Bull by Marty Schwartz


The Day Trader from the Pit to the PC by Lewis Borsellino


How I trade for a living by Gary Smith


How to Make Money in Stocks by William O'Neil


24 lessons for Investment Success by O'Neil


Investors Business Daily (William O'Neil publisher) is a great newspaper and a must read especially if you are trading stocks.


CNBC is a necessity


There are more I'm leaving out that I just can't remember. Others here might have some good suggestions.


I haven't read that many books on trading futures especially the S&P's, so I need to get busy in that department myself.


"Thanks again for the great post!"


No problem. Good luck!



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Old 03-28-2002, 08:35 PM
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Default Re: What a Wild Ride!



"I figured out a while ago that I tended to hold my losers longer than my winners. Not doing this takes a huge effort of the will. I have thought about this in relationship to some reading I have done in psychology, and come up with the following insight. Kahneman (sp?) and Tversky have noticed that people have asymmetric risk preferences when facing losses and gains....we are more risk loving when it comes to avoiding losses than we are than we are faced with prospective gains. In other words, it is human nature to rely on chance more to get us out of losing situations than we do when we are in winning situations. This is why it is hard to fight the tendency to let your losers run. I think this is particularly intense in the emini market because it is so volatile."


There is an excellent treatise on this very subject by the psychologist interviewed by Jack Schwager in Market Wizards. Some of the traders he interviews talk about this as well.


Basically, I believe we are risk averse when it comes to letting our winners run because we are subconsciously attempting to sabotage our success. We are risk seeking when it comes to losing because we expect to lose and this fulfills our expectations.



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