Something strange is happening in the market right now

In the past few days, the S&P 500 (SPX) has risen to all-time highs. I mean, that’s strange given our current economic back drop. But that’s not what I’m talking about.

What’s strange about the current state of the market?

While the SPX is at all-time highs, the volatility indices have been rising as well. These indices include VIX, VVIX, and VXX.

If you don’t know what these are, that’s okay. VIX is an index that tracks the implied volatility of the SPX based off how the options for that index are priced. It is what the one month expected move in the market is, in a sense. VVIX is an index that tracks the implied volatility of VIX based off how the options on VIX are priced. VXX is an index that tracks the volatility based off the weighted balance of the first two VX futures contracts which trade.

For now, let’s focus on VIX. On August 25^th, VIX closed at 22. As of today’s close on August 31^st, it is 26.4. In percentage terms, VIX was up today 15%. (Many people don’t like quoting VIX changes in percentage terms — I don’t care).

In 3 of the past 4 days, we have seen VIX close higher than where it opened. This has happened all while the SPX has hit all-time highs in each of the past four days.

VVIX — also known as the volatility of volatility — has shown a similar trend to VIX, rising in 3 of the past 4 days. VXX — which is based off the front two months of futures contracts on VIX futures — has also steadily risen and shown similar trends.

Realized volatility is far below implied volatility options are pricing in

The volatility that is implied by SPX options is much higher than the realized volatility we’ve seen in the past 30 days. According to my calculations, realized volatility for the past month has been under 10%. Meanwhile, VIX has held strong above 22, and has continued to climb in recent days as noted above.

Why is this strange to me?

In general, you tend to see VIX fall as SPX rises. In general, there is an inverse relationship between these two items.

Today, VIX rose by 15% while SPX fell by roughly 0.3%. According to my data, this has only happened 5 times going back to 1993.

Note: The above chart is in percentage terms.

I’m not the only one that has noticed

Mark Sebastian, from OptionPit.com and frequent guest on The Options Insider Radio noted the following:

What he is saying here is that there is a huge difference between the volatility being priced the NASDAQ 100 Volatility Index — VXN — and the S&P 500 Volatility Index — VIX. This is interesting to me because the NASDAQ 100 is composed of non-financial companies and is weighted heavily towards those tech stocks. The very tech stocks which have been going parabolic in recent weeks (some may even say months).

In addition, Matt Thompson noted the following:

The 5-day average contango, which is merely the difference in the implied volatility priced in by the front month futures contract and the second month futures contract is at 16.9%, which was at the 99^th percentile since 2004. Also he noted what I noted earlier, that the VIX is much higher than the realized volatility on SPX.

What does this all mean?

This could mean a number of things. Ultimately it means there is a lot of uncertainty in the market, and options are pricing in more volatility than the volatility that we’ve witnessed in the last month.

This could mean that big money is hedging their positions with put options on SPX or call options on VIX or buying VX futures, all of which could cause the premiums paid to rise.

In addition, the VX futures for October are pricing in extra volatility due to the upcoming election. The pricing of these October futures remains elevated when compared to the September and November VX futures prices.

Investors are nervous about what could come in the next month or two. And they have good reason to be.

There is still no agreement on extended economic stimulus that the American people desperately need. Republicans and Democrats have still not agreed to a deal. As of the last update I saw, Republicans proposed a $1.3 trillion stimulus, which was rejected by Democrats. The House, led by Democrats, passed a $3 trillion stimulus back in May. They said they would be willing to lower their demands to $2.2 trillion. No deal is in sight, and that could have investors spooked.

Fact is, we are in a bubble

The last time market closed at all-time highs with VIX this elevated was during the late 90s tech boom. That was a time period which also coincided with easy Federal Reserve monetary policy and high speculation in stocks.

We are seeing similar behavior in the tech stocks and work-from-home stocks today. Apple, Amazon, Google, Facebook, Tesla, Nvidia, Zoom, and AMD are all examples of stocks which are booming right now.

But the pain for the American people is far from over. Continuing claims continue to remain above 14 million. The unemployment rate is over 10%. The economy is attempting to recover slowly. But stocks? They’ve ripped to all-time highs at a much more rapid rate. And the disconnect between those two has investors nervous right now.

Dark pools are not buying this rally anymore either

In order to understand what’s happening, check out the Dark Pools. According to the Dark Pool Index over at Squeezemetrics.com, Dark Pools have printed under 45% for 17 days in a row. In general, a print over 45% is considered to be bullish, and there tends to be a slight lag between dark pool prints and stock market returns.

This is meaningful to me because Dark Pools bought the rally all through April well into July. But they aren’t buying anymore.

Perhaps we will begin to see a return of selling to the market in the coming days or weeks. I know I’m on high alert for that right now and will be ready to short this market when the opportunity presents itself.

This week was rough for me

I got my ass kicked this week by the market.

It started early in the week, when I bought WORK and SPCE call options, just before the market reversed course on Monday and sold off in the final hours of the day. Because the SPCE options expired on Friday of the same week, I had no choice to cut this loser. Only to see it rip higher Thursday and Friday.

I started the week in a hole, down $1,100.

I spent the rest of the week trying to climb out of the hole, only to make the situation worse. End result, down $4,000 on the week.

How did this happen?

Getting in a hole sucks. Spending the rest of the time trying to climb out of the hole led me to making sloppy trades, overtrading, and putting on trades that I wouldn’t normally make on SPY and IWM that I told myself were “hedges” in case the market sold again.

I forgot what was working.

I forgot how I made $12,000 in a matter of weeks from May 27th to June 19th.

Nothing seemed to work.

Every trade went against me as soon as I entered it. Or so I thought.

Either way, it doesn’t matter what they did.

What did matter was my mindset sucked. I was in a bad mental state, and desperately tried to “undo” my bad trades from the early part of the week, only to have even more bad trades to “undo”.

I wasn’t doing what works for me.

I started trading options expiring this week. I started day trading more even though I very much prefer swing trading a position for 1-2 weeks.

I cut winners too soon (primarily due to short-dated options being traded).

I let losers run on too long.

I added to losing positions.

I put on positions that were not favorable from the get go.

I spent too much time this week hoping for my positions to go in my favor.

Now is a time for reflection

It’s the weekend. My trading week sucked. But I still live to trade another day.

Goal #1 and always: DON’T LOSE ALL YOUR MONEY. When the money is gone, the game is over.

I’m going to take this weekend to reflect on my trades. I will review past trades further and understand what happened and why it happened. I will try to understand what my mental state was when I entered into those trades.

Trading is hard. It’s hard to tell by all the so-called experts all over social media. They’d have you believe they make profits all day. You rarely see is the hard part of trading. The part where it beats the shit out of you and makes you question why you started in the first place.

I share this for anyone else who had a bad day, week, month, or year. It’s not easy. It’s not supposed to be easy. I knew that. You know that. So take time to reflect, take care of yourself, and objectively review those trades and improve the process. It’s the only thing I know how to do.

Why you need to get better at taking losses

If you have any dreams of becoming a trader, one of the most important things you can do is take losses.

Taking losses is admitting defeat.

Taking losses is means you analysis was wrong.

Taking losses is unacceptable.

These are myths that we tell ourselves about taking losses.

The three most costly trading errors you can make

According to Mark Douglas, author of Trading in the Zone (book notes here) the three most costly trading mistakes you can make are:

Not predefining your risk
Not cutting your losses
Not systematically taking profits

Taking losses hurts. But why does it hurt so much?

On a psychological level, you don’t want to be wrong. Being wrong means losing money, and you don’t want to lose money. Losing money is painful.

Being wrong is a hit to your ego. It means your analysis failed.

Too often traders allow themselves to sit on a losing position, waiting for it to come around in their favor. I can speak from personal experience regarding this.

For about my first year of trading, it was so difficult for me to cut losing trades early on.

I didn’t know when to cut a trade. I thought to myself “if I just wait a little longer, the trade will come back my way. I just know I’m right.”

Frame losses differently: the cost of doing business

Losing trades are a business expense.

They are the cost of doing business as a trader. Don’t look at them as anything else. They are not a reflection on your analysis. They are not a reflection of you as a person.

Losses are merely the cost of doing business in an uncertain environment with uncertain outcomes.

I’m sorry for anybody shorting this market

This is a difficult market to get a read on, that’s for sure.

Shorting the market right now is a fool’s errand. Whether you believe liquidity from the Fed is driving the market higher or not doesn’t matter.

The market wants to go higher. That’s where the path of least resistance continues to be at the moment.

Selloffs are very few and far between. You have to be tactical and quick with any shorts in this market. They can payoff, as they did for me on Thursday and part of Friday. But they stop working very quickly.

We are all waiting for the next big selloff. It may come. It may not. For that reason you have to be careful until we get there.

I learned my lesson last year

I got burned time after time shorting the market for the larger part of 2019.

I was focused on fundamentals, trade war headlines, and a seemingly deteriorating market.

So I shorted consistently all of last year. I came very close to blowing up actually. I was down 80% at one point.

It wasn’t until March of this year that my short positions paid of very handsomely and actually got me back to even despite the horrible 2019 year.

In recent weeks my trading has improved

I’m more focused on what VVIX and VIX are telling me in terms of volatility. If I believe these are trending higher, then I’m going to be biased to mix in long and short trades to capitalize on a move in either direction.

However, if VVIX and VIX are trending lower, them I’m biased to hold a majority of my positions long in the market, depending on what is moving on that given day. In recent weeks, I’ve been able to make good plays on the likes of XLF, GS, JPM, BA, UAL, RCL, CCL, F, TSLA, XOM, AMD, NVDA, VIAC just to name a few.

Take profits and cut losers

I like to play options that are 2-4 weeks away from their expiration date. Weekly options (5 or less days to expiration) are too risky for my style right now. I like to give my options a little breathing room.

I watch my positions like a hawk. When I begin getting down 20% I seriously have to consider cutting this position and taking a loss. Once I’m down 40% I cut it no questions asked.

I also try to take profits on 50% of the position around a 10% gain (or more if it’s there). Then I take off another 25% around a 20% gain (or more). The I leave the final 25% of my position to run to see how far it can go.

Last week I had a SPY put option that I let run, that went from $90 to $630 in a matter of days. In the past, I would have never let it go that far because I would’ve booked all of my profits too soon. But because I had already closed out 80% of the position at a gain, that last contract I was holding was essentially risk-free and I had no problems holding it for a little longer.

If you want to learn more about trading psychology, I highly recommend you check out my notes on Trading in the Zone by Mark Douglas.

Been playing lotto calls on big movers…

This market is insane. For that reason, I’ve been playing short-term call options on those names getting bid the most recently.

Banks, airlines, cruise lines, oil, casinos, retailers, are all industries I’ve dipped into and out of recently. I’ve traded it on short-term call options about 3-7 weeks out.

My main focus is to take of 1/4 of a position at 10% profits, another 2/4 position at 20-30% profits, and then let the remainder of the position run. Taking profits is critical to setting up risk-free trades.

That’s the way it has to be played right now.

It’s very very very easy to adopt a bearish mindset right now.

The market is going insane.

But I’m thinking about it like the tech bubble.

My main focus is to keep my holdings short. I never held any of my lotto positions past 2 days unless it was the 1/4 winning position remaining.

It’s much much easier to let winners run when you booked 3/4 of your position at a profit. Those runners have ended up making up my big home runs in recent days.

My best trade was UAL last Friday, which I booked at 361% profit. F also netted me 192% profit.

I cut losers at around 20-40% drawdown on these positions without any regrets. It’s worked out well so far. But that can change very quickly.

I was wrong

A few weeks back I was dumb enough to think selling would return to this ridiculous stock market.

I want to catch the next downturn. I think we all do.

Downturns provide opportunities for large profits.

Volatility events have been some of my most profitable times. The hardest part with shorting any market is being patient and strategic.

My gauge to short flashed

I have a few different metrics I monitor to gauge when are better times to short than others.

They began flashing on May 11 and 12, and sirens were going off on the 13th and 14th.

On the morning of the 14th, the market miraculously recovered. I felt like OPEX and VIX expiration would loosen up this market. Alast I was wrong. But, I ended up minimizing my losses from this due to position management.

Position sizing and profit taking

This is why position sizing and profit taking are key to succeeding in overcoming your emotions in the face of an uncertain future.

On May 12, I put on 100 SPY July 17 puts at the $110 strike for $0.03 per contract, totaling $300 (small bet).

On May 13, I took off 20 contracts at $0.06, for a total of $120. That was a 100% profit from the previous days price. Now, my cost minus proceeds received from this sale is $180 ($300-$120).

On May 14, I took off 20 more contracts at $0.10, for a total of $200. That was a 233% profit from the previous days price. Now, if I take the $180 above, and take off the $200 here, my cost minus proceeds now equals -$20 ($300-$120-$200). This means my remaining position is risk-free.

Risk-free? No way…

Yes way. I had 60 contracts left that could literally expire worthless, and I would have still made a profit on the entire trade. This is why it’s important to take profits along the way on any position you’re playing

Turned out I was wrong. But I played my signals, managed around the situation, and came out with a small profit (which actually turned into a small loss because I later added to it…).

But…I ended up with a smaller loss because I managed around an unknown future. At times in the past, I would’ve ridden the entire trade from top to bottom and loss damn near my full investment.

The return of selling in the stock market

I believe we are about to see heavy selling in the market once again.

We have seen the return of some selling, with the S&P 500 down 4.7% this week as of my writing on May 14th.

Why do I believe this?

Coming into this week, I expected a calm week with usual options expiration (OPEX) week behavior. From my observations, market makers can usually move markets and control price action more strongly some weeks than other.

Market makers can influence markets especially in times when volume is low and volatility is low. This week, the market has seen more selling than usual during OPEX week from my experience.

Not only that, but we haven’t seen the drastic moves in the S&P futures contracts overnight. Last week, it felt like every day we were seeing moves higher after a day of selling off during regular trading hours. See tweet below:

on moves 5-14-20

The last time I remember feeling like this during an OPEX week was for the trading week ended February 21, 2020 and we all remember what followed over the next month.

What are gamma levels saying?

On May 11, 2020 I noted that $2.2 bn in positive gamma was coming off books this opex Friday.

tweet 5-14-20

Now these options could have been rolled out or closed altogether. We never really know. But I expected much of this gamma exposure to be moved in a manner that would bring us closer to zero gamma.

With all the selling this week, gamma levels have now turned negative across the board according to spotgamma. This is not good if you are bullish equities right now.

spotgamme 5-14-20

While component gamma is still positive, per Squeezemetrics, and DIX signals that Dark Pools continue their buying binge, I can’t ignore headwinds that we are going to face in the next week or two.

squeeze 5-14-20

What headwinds are we faced with?

Will we see a second wave of infections?

What businesses are going to go out of business for good?

How many of the now 36 million lost jobs will actually be recovered?

What will be the recovery time of those lost jobs?

What kind of demand shocks are we in store for over the next year or two?

How far is the Fed willing to go with their monetary policies?

Will the Fed buy equities?

With all of these questions unanswered, it’s very difficult to be bullish right now.

I hate this rally, but…

I hate the current rally in the market.

Why?

Because it’s all liquidity driven.

But, this is the market that is presenting itself.

Expecting volatility to decline and the market to continue to drift higher seems to be the play right now. That’s how I see it. I don’t like it, but that’s what I feel from the price action in conjunction with the actions of the Federal Reserve.

The Fed has basically backstopped the entire credit market. It’s created some odd distortions in the market. I don’t trust that this rally is rational, but it’s happening.

A blowoff rally is a possibility at this point, in my opinion.

Why do I believe that?

The credit market is backstopped by the Fed. Interest rates are near zero. Profits need to made somewhere. The carry trade could thrive, which would mean short volatility should go well.

This would be violated when something else in the market, credit market or some other market, breaks. The cause could be inflationary, but would more likely be deflationary in nature, which could create a black hole effect.

Timestamp: originally posted on 5/4/20 at 5:47 pm. Purpose of timestamp is to help me review my opinions and see where I went right or wrong.

Trading in the Zone – Book Notes

I recently finished reading Mark Douglas’s book, Trading in the Zone. This book found me at an opportune time, as I’ve been going through a rough patch with my trading and especially my mindset while trade.

If there is one book I highly recommend you read as a trader to get your state of mind right, it’s Trading in the Zone. Here are my book summary notes below. Note that my summary notes are not short. It’s over 2,500 words of the best wisdom I pulled out of the book.

Book Summary Notes

Have confidence in trades.

Focus on opportunities.

Fundamental analysis is the study of finding supply and demand of an investment based off fundamental information.

Technical analysis is based off patterns in an investments’ historical data.

Technical analysis is more “in the moment” than fundamental analysis. You react in the moment to changes in prices.

Good traders have rules for entry and exits.

Accept risk before putting on a position and never assume you are correct. Be quick to admit you’re wrong.

Accept the possibility that you will lose money so that you can objectively manage a position.

Good traders aren’t afraid because they have effective management strategies to enter and exit trades.

The four primary trading fears are:

Being wrong
Losing money
Missing out
Leaving money on the table

We blame the market for our losing money.

How you view the market affects the consistency of your results.

You can never know the myriad of ways the market can make you lose money.

Accept that the outcome of a trade is unknown, and that one trade is not a reflection on you as a trader. Failure to accept this leads to costly decisions.

Doing more market analysis will not make you a better trader. Acceptance of what the market is will.

Accept the risk you take on with every trade, and you will no longer be afraid.

Trade without fear, and have rules to prevent reckless behavior.

The market presents you with unlimited possibilities, and this can challenge those not equipped to deal with this fact.

Desires are generated internally, but must be fulfilled externally.

Once we identify a desire we are drawn to fill that desire externally. Denial of this opportunity to fulfill a desire leads to pain.

Accept that trades are a probabilistic outcome, and define how much risk you are willing to take on this probability.

Prices always move. Your entries and exits last as long as you want.

The market will not make you exit a trade. You must do that. Don’t be a passive loser. Actively lose by defining your risk.

Trading gives you ultimate freedom. This can be a curse because you have no structure to follow.

Most of those who get into trading initially struggle to create a set of rules to follow.

That which draws us to trading is the same thing that makes us resist creating trading rules.

Your impulses hinder your ability to trade well for psychological reasons.

You must keep yourself responsible for the way you take profits and take losses.

If you play probabilistic edges, you must be consistent in how you trade them and not get thrown off by a few losing trades.

Don’t get hung up on any single trade.

Adapt to your environment and create rules so that you can adapt appropriately.

Winning early as a trader can hurt your long-term performance.

Trying to “understand why” the markets do something can hurt you in the long run.

Your mental attitude will produce better results than analysis alone.

Trading can be a simple pursuit in which you don’t need a ton of skills, but rather a winning attitude.

Operate from the belief that trading losses are a natural part of trading and should be considered as your business expenses.

We feel pain when reality fails to meet our expectations, especially when they are unrealistic.

Losing traders blame markets for their losses.

You blame markets for your results if you don’t accept the randomness of markets, have rules to protect you against this randomness, and take responsibility of your results.

Your goal is to extract money from the market, and the markets’ goal is to extract money from you.

Markets owe you nothing. Don’t blame them for your losses.

Take complete responsibility of your trading. Otherwise you will view the market as your adversary and you believe that your problems can be fixed by better analysis.

Every entry and exit on a trade is an opportunity for you to act in your own best interest.

You are never fighting the market, because it owes you nothing.

Learning about markets isn’t bad, but it can give you a false confidence that you know what will happen next and ignore the randomness inherent to markets.

Learning more about markets isn’t going to eliminate losing trades. Don’t take losing trades personally.

Accept your losses and you will no longer view market information as painful. You will view it as it is, information.

Our bias to avoid pain makes us ignore or alter information that the market provide us.

In sports there is a more discernible connection between one’s focus and results. It’s harder to see this connection in trading.

Leaving money on the table can be more painful than taking a loss because you know you missed out on a large profit.

Make winning and consistency are states of mind.

Make yourself available to what the market is offering you.

Our biases make us interpret information that is favorable to our own egos, even though it can hurt more in the long run.

Fear causes 95% of the errors you are likely to make.

Think about trading in a way that keeps fear at bay so that you can continue to focus on opportunities.

Let the market unfold and make yourself available to opportunities with a clear mind.

Accept risk and you won’t have anything to fear.

You see what you’ve learned to see, and miss that which you haven’t learned to see.

Every trade is an edge with a probable outcome. Know this to define your risk, and eliminate your fears.

Perceive the market objectively. Don’t project your own feelings on the market.

Your emotional mind links your current state to your most recent trading experiences, which can be painful and create a fearful state of mind.

The “secret” to trading well is four items:

Trade without fear OR overconfidence
Perceive what the market is offering clearly
Stay focused on the “now moment opportunity flow”
Enter the “zone” and believe in an uncertain outcome with an edge in your favor

Great traders don’t let emotions of recent trades influence their process.

To be a consistently successful trader one must learn adapt.

It can take years for most traders to figure out that consistency trumps picking the occasional winner.

The best traders cut their losses without hesitation if the market tells them it’s not working.

The three most costly trading errors you can make

Not predefining your risk
Not cutting your losses
Not systematically taking profits

Thinking that you “know” what will happen next is the cause of most trading errors you will make.

The most effective trading belief you can acquire is “anything can happen.”

Every trader acts on their own belief about what is high and what is low, and collective behavior pattern is displayed in the price at that moment.

Every trade you make is unique from every other trade you’ve made.

Train your mind to think in probabilities, and have actions that you take to deal with these unknown outcomes.

Don’t ever convince yourself you’re right when you enter into a trade. Instead, define the risk.

When you think you know what will happen, you are effectively thinking you know the future actions of every single individual and how they will move prices.

Markets are unique, anything is possible. To ignore this fact is foolish.

Your beliefs are shaped by your expectations. These beliefs cause you perceive market information that confirms your bias, and ignore market information that conflicts with your bias.

Market information that goes against our position is ignored when we find it too painful to acknowledge.

We focus on information that helps minimize our pain, which is destructive to our trading.

We lose out on opportunities when we choose to ignore what the market is telling us.

Our pain-avoidance mechanism shields us from seeing information that is not aligned with our beliefs.

Traders must learn to be rigid in our rules, and flexible in our expectations.

There are five fundamental truths you must accept to think probabilistically:

Anything can happen
You don’t need to know what will happen next to make money
Wins and losses are randomly distributed for any given edge
An edge is an indication of higher probability of one thing over another
Every moment in the market is unique

When you put on a trade, your only expectation is that something will happen. That’s it.

Define a stop loss for every trade. This should be some point where the odds of success are greatly diminished in relation to the potential profit.

Losses are the cost of doing business in the course of finding winning trades.

Each moment in the market is an opportunity to do something on your behalf. You always have an opportunity to:

Scratch a trade
Trade profits
Cut losses
Add or detract from a position

Expectations are beliefs projected into some future moment.

We can’t know what to expect from the market because other traders are always there to enter and exit trades based off their own beliefs about the future.

The only thing you should “know” in trading is what an edge looks like, how much you need to risk, and a plan for taking profits or losses on a trade. You can never know if any one trade will work out.

Don’t have an agenda when you trade. Make yourself available to the opportunities the market makes available to you with a clear mind.

Emotional pain is a response we have when the world expresses itself in a manner opposite of our beliefs.

Don’t expect the market to make you “right” or “wrong”.

Don’t expect to market to go in your favor forever. Establish rules for taking profits.

Gathering more information to predict if a coin will flip heads or tails is silly. Why would you expect it to work in the markets? Remember that every trade is probabilistic.

Every moment is unique, and therefore you will never “know” what will happen next.

Don’t try to change your beliefs. Remove the energy behind that belief, and channel it towards better beliefs.

It’s hard to make new discoveries when your internal beliefs conflict with those discoveries.

The underlying cause of fear in trading is interpreting market information as threatening.

You must believe that every edge has a unique outcome in order to trade without fear.

You must believe you don’t know what is going to happen next.

Train your mind to expect a unique outcome in order to see market information objectively.

Believe that each moment is unique in order to achieve mental freedom while trading.

Trading is a pattern recognition numbers game. Identify patterns for some edge, define your risk, and take profits consistently. Some trades work and some don’t. Don’t take it personally.

Trading is one of the hardest things to do because the more you think you know, the less successful you’ll be.

Manage your expectations as a trader and align your mental environment with the five fundamental truths.

Trust yourself to operate in an unlimited environment
Focus on flawlessly executing a trading system
Think in probabilities – the five fundamental truths
Create a strong belief in your consistency as a trader

Your primary objective as a trade should be to produce consistent results. The way you do that is by following your trading rules with unshakeable confidence.

Consistency should be your primary reason for trading.

Making mistakes will happen until your beliefs are in harmony with your desires and your beliefs are consistent with what works from an environment’s perspective.

Don’t think less of yourself when you make mistakes.

Mistakes should not hold negatively charged energy for you.

Beliefs must be in alignment with goals and desires to eliminate any conflicting energy.

You must create the belief that you are a consistently successful trader.

Don’t make it a goal to guess correctly. Make it a goal to be consistent with your techniques.

Tell yourself, I am a consistent winner because:

I objectively identify my edges
I predefine the risk of every trade
I accept risk and am willing to let go of trades
I act on my edge without hesitation
I pay myself as the markets make profits available to me
I monitor myself for my susceptibility to make errors
I never violate these principles above

To be an objective observer, think from the market’s perspective. There are always unknown forces waiting to act on price movement so that every moment is truly unique.

The typical trading errors are:

Hesitating
Jumping the gun
Not predefining risk
Defining risk but not taking a loss
Exiting a winning trade too soon
Not taking profits on a winning trade
Letting a winning trade turn into a loser
Moving stop too close to your entry point
Trading too large a position in relation to your equity

You can change your identity by changing your desires.

Losses call for larger % returns in order to be profitable. A 50% loss requires a 100% return to become profitable again.

Divide your position into thirds or quarters, and scale out of the position when taking profits.

Take off a portion of a winning position whenever the market presents you with the opportunity to do so.

In a three contract trade, establish a stop loss, and take profits by scaling out of the position one contract at a time.

Scale out of positions to create “risk-free opportunities”. These are positions where you have taken profits to the extent of max loss allowable on the remainder of the position, therefore guaranteeing a break-even trade at a minimum.

Try to achieve a risk to reward ratio of 3:1, which means you risk one dollar for every three dollars of profit potential.

Success or failure of a strategy should be based off a sample size of 20 trades or more.

An edge is merely a snapshot which captures a limited portion of all probabilities.

Be willing to make 20 trades on a strategy before making a judgement of its effectiveness.

Follow your trading rules and focus on the five fundamental truths in trading.

If you can go through 20 trades without allowing your emotions to influence you adherence to rules and probabilities, then you discover that thinking in probabilities is a functioning part of your identity.

Conclusion

Again, if there is one book I highly recommend you read as a trader to get your state of mind right, it’s Trading in the Zone.

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We are all at the mercy of news trading algos

It’s become commonplace for news stories to drastically and instantly influence the movement of stock prices. This has become more observable in the past two years, with China trade deal news dominating headlines seemingly every day.

According to Larry Harris (Trading & Exchanges) there are four kinds of informed traders, with news traders exhibiting the second most influence on the market. According to Harris:

News traders collect and act upon new information about instrument values. They try to predict out instrument values will change, given new information. News traders try very hard to discover material information before other traders to.

Unlike value traders, news traders do not estimate the value of an instrument from first principles and all available data. Instead, they implicitly assume that current prices accurately reflect all information except their news.

It’s difficult trying to day trade or swing trade around the drastic changes in stock prices that are triggered from a single headline.

Many algorithms are programmed as news traders, which read news headlines or tweets and have some pre-programmed objective-based method of interpreting the sentiment of those headlines.

Algorithmic trading has been of much chagrin of people in Wall Street such as Jim Cramer. Earlier this fall, Cramer said the following about machine trading

Cramer blamed the errant jumps in the transport stocks on machine trading, calling the buying “robotic.”

“Real human buyers wouldn’t pay up eight points for FedEx on no news, unless they think there’s going to be some sort of takeover, which there probably isn’t. Real buyers work an order. They wait for sellers to come to them,” he said. “Instead, these machine buyers they blitzed all the sellers all the way up, and you have to believe they didn’t even attempt to try to get a good price for their customers.”

The dreary truth

We have to accept the fact that algorithmic trading is a part of the market as we know it.

As a day trader you will always at the mercy of algorithms suddenly going against your positions which makes day trading harder than it already is.

If you’re a swing trader, you can ride out the waves because news headline trading tends to smooth out over time (unless it’s something dramatic like a President Trump tweet tantrum).

So we must deal with it, must learn from it, and must learn how to trade with or around it. It’s up to you what you do.