Slow Trader

Author: Buzz Lightyear

  • Trade entries

    Trade entries entered the most are:

    (1) On-limit entry trades that don’t activate, lead the way; this means we did not get the price we were prepared to pay for the trade. And that’s fine. (on-stop entries are not part of our strategy)

    (2) Next, with a similar number, are break even or near breakeven trades; usually these are trades that did not provide the follow through we anticipated. A difficult area of a trade and a clear strategy statistically works best here.

    (3) Further down the score are trades that make target.

    (4) Those trades that are profitable but are exited before target due to price action, rather than nerves, are similar in number to those that hit target.

    (5) Trades that hit stop or are exited early due to price action are fewer than those that hit target, thank goodness! (importantly, these trades are smaller than the target hit trades)

    (6) However, the big leveler on trade entries, and the difference between a consistently profitable trader and everyone else is limiting, zero would be nice, the amount of batty entries. By batty we refer to ego or tired entries, but more often than not they are miss read market reversal entries; a low risk, low probability trade that invariably ends up being vastly more expensive than anticipated.

    The simple conclusion is: read the market cycle and price action and stop batty entries.

  • One strategy at a time

    Patience is a virtue, is a phrase that is true in trading.

    Trader seminars often provide many strategies based around a trading method. An attendee then looks for a trade, from all of the strategies provided, all of the time.

    A recipe for a series of stressful losses.

    From all of the strategies taught at the seminar, probably only a few are worth the risk; and of those a single strategy might stand out.

    It is better to find that ‘one’ strategy and work it until we’re consistently profitable.

    Only then are we to consider another strategy.

  • Conflicting emotions – from notepad mistakes

    We always see opportunities to exit a trade before target.

    We see that we’re ‘in the money’ and worry that a reversal will take our gain away.

    So, we exit early, grab what we can and then justify that to ourselves.

    On the other hand, if we are out of the money, we more often than not hold until our stop is hit (to exit early is an acceptance of any loss against us and we are in hope that a reversal of price will minimise that loss).

    That is our nature, but makes for a poor strategy.

    We need to reverse this tendency and help to balance the equation.

    We need to discipline ourselves to: (1) hold until target and (2) exit a losing trade early if probability favours the stop being hit.

    Sounds easy, but probably one of the hardest things for a day trader to do.

  • Introduction to ‘notepad mistakes’

    As a continuance of my post on ‘learning from mistakes’ I thought that I ought to share some of the mistakes I’ve made (and occasionally continue to make).

    We pay a lot of money for our mistakes, so we may as well learn as much as we can from them. I would like to think that ‘once’ for each mistake would be sufficient, but no, daft as it seems, I can make similar mistakes many times over.

    The best way for me to learn was to write out the mistake, and lesson it provided, in a note pad. At least that way I’m acknowledging and taking responsibility for the mistake and, hopefully, I will refrain from repeats.

    Such posts will be called ‘note book mistakes’. There may be some lessons here for others (albeit I wouldn’t expect the Slow Trader fund investors to gain solace).

    The mistakes are based on short-term trading with a price action bias. However, they are broad in context and may apply equally to any trade duration or system.

  • “We seem to be living in the riskiest moment of our lives”

    Richard Thaler, a behavioural economist, received a Nobel prize. Speaking by phone on Bloomberg TV, he said:

    “We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping, I admit to not understanding it.”

    From our fund point of view, we have a couple of lightly traded shares awaiting conclusion, otherwise we are 100% short-term (both long and short) trading of a chosen currency pairing.

    We have traded GBP/JPY, changed to USD/JPY and currently we trade GBP/USD. Another consideration for us is AUD/USD.

    We moved from GBP during Brexit and for the months after.  With regard to price, JPY is consistent, a requirement of our strategy; unexpected volatility is not, therefore the decision, for the time being, to move back to GBP.

    We do not hold overnight, so poor liquidity during this period, and an increased probability in a spike in price, is not a consideration.

    Trading equities can be very different to currencies, specialization is appropriate.

  • Is it time to worry?

    The Economist have an article this week that asks “prices are high across a range of assets. Is it time to worry?”

    Before the 2007-08 financial crash I managed to cash-in everything that would have been exposed to the crash. This, I’m sure, was luck. I was, at the time, financing a business build; fortuitously, I went much further than cashing-in assets required to support the business.

    Some lost up to 50% of their worth during the 2007-08 crash. (I learnt recently, on their son’s visit to the UK, that this had happened to someone who I had known very well and who now resides in Australia.)

    As the Economist alludes, should we be concerned now?

    I spent nearly a year in the development of fundamental formulae based on Benjamin Graham’s ideas. His method principally determined a ‘margin of safety’. As the Economist article explains: “the price paid for a stock or a bond should allow for human error, bad luck or, indeed, many things going wrong at once”.

    In my technical trading, which is the only trading I now do, ‘margin of safety’ is everything: (1) I do not carry a trade overnight and certainly not over a weekend. (2) The risk of each trade does not exceed a maximum. (3) I cannot multi task, so I trade only one thing, watch it in the moment and with awareness of what (news) might affect it.

    Not many have the will, the time or the inclination to do what I do. I understand that. So we use traditional fund managers.

    Graham’s ‘margin of safety’ was buying a share at a 50% discount or better. can we get that deal today? If not, fund managers may become increasingly incautious in their dealings.

    Buffett said this week, as reported by the Economist, “stocks would look cheap in three years’ time if interest rates were one percentage point higher, but not if they were three percentage points higher”.

    In the meantime, for my fund investors, I’m very happy to take ‘margin of safety’ into my own hands.

    P.S. My articles are few and far between currently as I work on a strategy e-book and of course my trading.

  • Learning from mistakes

    Part of the start of the story

    “Since I have traded full-time, I have gained a lot more experience, mostly by making mistakes and learning from them. I learned that failure is, on the whole, due to not accepting and successfully dealing with realities.

    Achieving success, on the other hand, is a matter of accepting and successfully dealing with all my realities. I believe that great financial traders become great by looking at their mistakes and weaknesses and figuring out how to get around them.”

    The story

    Under the heading of ‘how to make a living trading the financial markets’, and password protected, I recently started to present what is for me an exciting yet simple financial trade strategy. Exciting because it works.

    However, strategy alone did not tell the whole story. If strategy is part of the middle then to be complete the story needed a beginning, the rest of the middle and an end.

    My trading principles, lessons, stratagem and guide are all gifted from mistakes. It is nearing completion. I feel it would be a mistake not to get it finished and get it out there.

  • How to make a living trading the financial markets

    After the holiday season, and over several posts, my aim is to show how to make a living trading the financial markets. I will try to show:

    • How to harness gut feeling, the most important of instincts.
    • How to turn most trades into a positive outcome, a decisive strategy.
    • And, finally, how to make the leap.

    That is the challenge, join me.

  • The twenty minuters

    … “Why are you called the Twenty Minuters”? Was Captain Darling’s question to Lord Flashheart in a Blackadder series.

    Major Bill March, a historian with the Royal Canadian Air Force, is quoted as saying of the early pilots “they used to call themselves the 20-Minute Club because the life expectancy of a new pilot in combat in 1916-17 was 20 minutes.”

    I understand that in the early part of the war pilots were being sent into combat with less that 9 hours flying time – basically, they knew how to take-off. But of course, we all know that there is a lot more to it than that, being able to land is probably optimistic, but useful if the need presented itself.

    In financial trading, many strategies in price action trading are sold through seminar attendance, or online packages. But we are sold the equivalent of the take-off lesson only.

    And actually that is fine. To know how to apply such things as a morning star pattern (and its many siblings), maybe throw in a good understanding of trend (much more difficult than it sounds), the use of the important support and resistance including pivot points, round numbers, possibly fibonacci levels and moving averages, then we are ready for trading action.

    But only in none intra-day trades. Meaning daily or weekly bars only. If we stay with that we have a chance…sort off.

    The problem is that we encourage ourselves, and possibly by the seminar or online package, to dive into the intraday bars, the ‘exciting’ day-trading stuff.

    This, however, is very wrong. At this stage we are not (and maybe never will be) equipped to deal with lower time frame trades. We may get away with the 4-hour bar chart and, at a pinch, the 1-hour, but moving lower with the relatively limited knowledge and experience we have gained we risk joining the traders equivalent of the twenty minuters.

    I trade the lower charts and I wish someone had told me this those many years ago, it would have saved me a lot of money and frustration. There is an easier way than the one I chose: simply never come below reading daily bars (New York close, of course) until we’re ready.

    In financial trading we want to be like this chap, he looks like he knows how to land!

  • Don’t fiddle

    I’m sure there are few things that provide more frustration than that of financial trading. The need, that we often have, to make the price on a chart move in a desired direction. We try to move price by will alone. The same as when we see a golfer on the TV try to move the path of a ball after the swing with body language.

    We therefore commit, but constantly fiddle as we go. We do this in sports, we’ve done this in our professional lives – If we do this with our trades we don’t do so well.

    Maybe it’s because we consider price, and therefore the chart, to be predictable and considerate. But the chart is active through the cumulative input of lots of lives, (not true, it’s mostly computers but they’re programmed so stay with me) built-up from inputs from multiples of institutions, agencies and individuals, each making their own interpretation of the outcome of price, working from multiple time frames and criteria.

    Price is therefore without emotion, price does not care about our trade. Self pity about a failed trade is pointless, other than the valuable lesson it generally always provides.

    Moreover, price is a ‘zero sum game’, meaning that price will only move if enough institutions, agencies or individuals are on the other side of the trade to accept the alternative trade, which builds uncertainty.

    Therefore any plan for price that we have is going to seem, at some point or other, more often than not, floored; a pure fantasy. However, if we don’t trade to a strategy then we will be in and out of trades like a jack-in-the-box with small to medium losses that destroy our confidence, our resolve and our account quicker than we think possible.

    So, what is the answer? Well, maybe: clarity, boldness and acceptance help.

    Clarity is clarity of strategy, which means a way to trade that is so clear to us that we’re almost embarrassed to mention its simplicity. Anything more than that is too complicated and unclear to us that we will dither when we need to take a trade.

    Boldness is boldness in our commitment to a strategy. No questions asked. Commit to the risk and no half measures… like reducing (or much worse increasing) the stop position, or exiting before target without good reason.

    Acceptance is acceptance of change. We cannot win every trade. To try to do so clashes with clarity of strategy and boldness and the loop will quickly collapse. Acceptance in our strategy, acceptance that it works most of the time; or at least some of the time.

    And if we manage correctly (rather than fiddle) then that is enough to be profitable.

  • Slow Trader Fund Update

    I was keen on a 30% increase in the fund this year, and I still think we will do this. That sort of increase for a normal fund is very good, if done consistently it can be outstanding, but I’m after achieving a lot more. I also want control of risk.

    When I trade longer term charts I do very well for a while then get hit unexpectedly. It is this uncertainty that prevents me from investing in the traditional sense.

    My passion is day trading. This has come about only over the last 3 years or so. Previously I used a similar trading strategy but with different time frames. The Slow Trader Fund would be traded say from the daily or 4-hour charts, meaning a trade would be held for several days or weeks, and I would concurrently day-trade a small amount of personal money.

    This has changed in that I’m shy of holding money over longer periods in a trade. I’m much more comfortable watching a trade, and be in and out again several times in the day, and never holding overnight.

    The reason that I’m now doing this is that I like to be in control. Particularly if I’ve been given responsibility for other people’s money. To say that I’m day-trading, rather than using a sensible medium term investment strategy, because of my consideration to risk, is barmy to traditional investors. Because they’ve always understood that day-trading is risky.

    They are correct, ordinarily. But it’s like fishing with a rod and line from a boat or free diving with a spear gun. We are not going to survive the first dive if we jump in and are expected to hold our breath for several minutes. We’d be better off and more successful fishing from the boat. But to the conditioned free diver the ability to catch fish from a free dive is far more precise and consistent.

    Cynics would say ‘get a net’. But when the so-called ‘medium risk’ investors with a net hit a storm they can lose the lot. So when they think they’re medium risk they are actually not.

    The day-trader will trade small and often. In contrast, for the medium-term trader the exposure is usually larger and over fewer trades. Rewards from day-trading can be exceptional. But it takes time to learn. This may have been gathered by regular readers of this blog. Like all things, I think worth the wait.

    However, I appreciate that investors may have other ideas. As I’m moving the fund to 100% day-trading the funds are available for transfer at no notice. Well, one day’s notice.

    To a certain extent, I trade at an amount proportional to the fund. That is the intention. But my own competency is the principal measure. For all of this year I’ve traded small. However, the trade amount, when it moves, will increase substantially.

    For instance, risk per trade has recently moved from a few pounds to £150 per trade, and will very soon be £300 per trade. The next step after that is to £600 per trade, where it will stay for some considerable time. I will take half a dozen or more trades per day. Moreover, I will trade twice within the same risk where appropriate.

    If we’ve mastered the day-trade then the potential is clear.

  • What I expect from a chart

    I’m often asked, with reference to my ‘fighter pilot’ days, if I ever miss it? Meaning, do I miss the flying. Mostly I don’t, and the person asking the question seems surprised by my answer.

    That is because they didn’t ask the right question. Flying the aircraft, once learnt, is the easy bit. The operation, leading the 8-ship of fighters at ultra low-level through heavily defended areas to engage a target hundreds of miles away to within a margin of a few seconds, is the hard part.

    And, it is the operation that I miss. Okay, not true, I watched the Red Arrows perform at Holkham this week and lived the moment, briefly.

    Technical trading has similarities, albeit only two-dimensional. Familiarity with a chart, and a chart that does everything we want of it, is like flying an aircraft – when we can fly one we can have a confident go at flying anything. How to trade, develop and implement strategies is the operational equivalent.

    I lost some confidence in my usual chart and broker last week when I was unable to exit a trade after the price moved rapidly, fortunately in my favour. With high volatility occasionally a broker is unable to provide a desired exit price and leaves the trade open. This, however, was not that. I was simply locked-into the trade. In hindsight the initial clue that all was not right, was the breakdown in the representation of some of my charts that I monitor on a higher time-frame.

    Why, as I was in a favourable direction, was it a problem to be locked-into the trade? It is disconcerting, moreover, I had tried to exit with a scalp, and before the bar bounced, and then would have held a portion of the trade for a swing target. When I discovered that I was ‘locked-in’ my whole concentration was on getting out (completely) which I achieved some way up the bounce. This was for a profit but a good way short of the target potential.

    Because of this, several days were taken to revisit other brokers to find a stable platform that does everything I want. Time consuming, but a worthwhile exercise. As a day-trader on lower time-frame charts the following are important to me: (1) spread; (2) reliable, clear charts linked to the broker that provide on chart dealing – importantly on-chart ‘limit’ entries with the ability, on chart, to set target and stop positions (3) as well as a chart zoom capability, I like to be able to grab and move the collective bars so I can quickly view stop and target positions (4) and, finally, the only indicators I use are a 21 and 55 exponential moving average but I do like a couple of easy to apply tools namely: my GLEM and a rule. (My GLEM is a modification of a fibonacci retracement tool and the rule, preferably, has to have a mirroring capability).

    The above provides everything I need for me to happily trade within my strategies. Anything less is a compromise. I tried most brokers and charts and a great way to do this is to open a demo account, load the charts and try them out. I got to the stage of finding a possible contender and opened a live account. This account provided some great additions over and above. Such as: being able to part exit a trade (i.e. take some profit off without closing out the whole trade); bid/ask lines on the chart; and, the ability to simply change between single and multiple chart screen presentation.

    However, after much perseverance I came back to my original broker and charts. I made many fresh tweaks to my layout and technique that were generated from my doing the exercise.

    The best fighter I have personally flown would be the F-16. Okay, it’s a single engine fighter and if that engine misses a beat every now and then we could be in trouble, but (operationally) it still beat the socks off everything else – I now feel the same way about my original charts!

  • Trade by rules, not emotion and intuition

    Those of us that want to technically trade the financial markets for a living, or simply make a profit doing so, have undoubtedly invested a lot of time, money and emotional effort into the process.

    There are, however, certain aspects that, no matter what our chosen trading method, seem to be hurdles for us all.

    Trading, for example, is full of contradictions: we need to hold our winning trades, but we need to know when to take profits; we need to make a traders equation, but we need wide stops; and we need to wait for a clear signal, but the so-called clear signals often don’t work.

    A few trading conditions that I struggled with, and still do from time to time, include: not holding the trade all the way to target; entering on a whim of a signal, or worse no signal at all; and, my unfortunate favourite, trying to reverse a trade too early.

    The latter is probably the single reason most traders struggle. I have an example trade from yesterday where (this time) I correctly held the trade from the currency pairing USD/JPY.

    Firstly, I have to say that context is a big part of my trading strategy. When I show these snips we are not showing the overall context. That is: what price was doing leading up to the few bars we show on the chart. Five minute bars in this case. In this instance over the last two days the market had been in a steep descent, or bear trend.

    We can see that the market turned bullish and went long in what seems to be three pushes (marked on the chart). After three pushes the market often reverses. For me the market was always in long after the 1st push and I looked for opportunities to get long.

    At this point a novice trader, influenced by the prior two-day bear market, and not trading in the moment, would be entering short at the top of both push 1 and 2 hoping for a resumption of the bear.

    I exited my long at the blue arrow marked ‘a’. Choosing the exact exit from my long position was, of course, fortuitous. I thought, correctly this time, that price may reverse early and before price could hit the green channel line which I’ve drawn.

    However, price did not pull back as expected and at the yellow circle, which I’ve marked on the chart, I re-entered long. I exited that long, at a measured distance of the previous leg, for a reasonable additional profit. This turned out to be a ‘final flag’ long.

    Reading the chart correctly, with the whole chart available, always seems obvious. However, reading bar by bar in a live trade is another thing altogether.

    We are wary about entering long because of the steep bear trend on the higher time frame chart; and, to continue long when the bars are in the top right hand corner of our screen, provides its own psychological block.

    To trade, as in this example, is often counter intuitive. Whether we use price action, indicators or a combination of both we can only make a profit if we trade by (expert) rules and not by emotion and intuition.

  • Most important, but often ignored

    Probability is something we understand very clearly when it comes to sports, but it seems to be a concept that we struggle with as a trader.

    We realise (because it’s been mentioned a few times) that the difference between a trader and a gambler – if we where to picked one thing – is adding or not adding probability into the mix of reward and risk.

    Some sports lend themselves very well to the example of probability. Basketball, tennis and (particularly) golf come to mind. I mentioned basketball last week because the point scoring matches well the traders multiples of reward to risk.

    In basketball we can score 3 points from a shot taken from outside of the defenders area; 2 points from inside the area; and 1 point from a free shot, if the opponent commits a foul. As a trader we often look to achieve a minimum target that is 3, 2 and 1 times our actual risk. (I like this to be planned risk but it is actual risk that the traders equation depends).

    We could suggest that a basketball shot taken from outside the defenders area has a probability of success that is low (it’s a long way to throw it!); however, the risk is also low as the defending team have little chance of a quick, undefended, attack in reply.

    A 2-pointer attempt is medium in probability as the (6’7″) defenders are there with us in the shooting area. It is also medium in risk as it is a dynamic manoeuvre and often with the full commitment to the shot from most, if not all, of the team; a quick steal and counter attack is possible.

    A free shot is never available in trading, therefore, I’d equate the 1-point attempt, in basketball terms, to the lob up court to a teammate in the hope of a quick score. The risk of interception is high but the probability, if our own team member catches it, of scoring quickly is also high.

    All well and good, but where does this take us in financial traders terms? As a trader, and regardless of which timeframe of chart we trade, we’re all looking to take trades where the probability, reward and risk make good sense. To do otherwise is, as we’ve said, gambling.

    As an aside, as a trader we’re always participating in the basketball equivalent of the NBA championships because the trading professionals (institutions and the like) make up most of the opposition and in this ‘zero sum game’ they’re always-in.

    In our basketball match, if we lob the ball up court but we don’t have a team member to receive it we have given the ball away; if we take a 3 point shot at basket when we have no defenders between us and the basket we have merely reduced our probability for no good reason.

    Our judgement of probability in sports is generally very good – instinctively making a workable probabilistic assessment; but as a trader we often ignore this all important aspect.

    Technical trading is a financial ‘sport’ where we can only participate against the professional league. At that level we cannot get probability, reward and risk confused. To do so is the same as chucking the ball up court without a receiver.  As want-to-be traders however we seem to do this all the time (ignore probability) and wonder why we don’t win.