A week ago I wrote a post titled Numbers Don't Lie (Small Tweaks Can Equal Bigger Profits). In the post I mentioned using a (trend following) day-trading strategy in conjunction with the (counter-trend) swing trading strategy that I normally use. I didn't make this decision because I was greedy or money hungry. Nor did I decided to do this because I was running away from a system that didn't work and was looking for a quick fix. I did this because of A) My personal faults and B) To become more efficient as a business.
A) My Personal Faults
One of my biggest personal faults is patience, or lack thereof I should say. I can't explain why but I've always been the type of person that needs to be active, and when I have something on my mind, I want to go after it right away. Although this same drive is the reason why I'm at where I'm at in life right now, I also realize that when it comes to trading this can have a negative effect. Anybody familiar with swing trading knows that being patient is a key component to being successful. The time it takes to identify and predict a possible setup, then wait for price action to reach that mark can literally be anywhere from days to weeks. Not to mention the time it takes for the trade to play out once you're involved. When the market would be in a heavy trend or in no-man's land, presenting little counter trend opportunities I would often find myself bored and frustrated (especially if I was down money for the month). These feelings lead to me either going through a list of exotic pairs searching for opportunities, or continuing to shrink the timeframe until I found something that looked tradable. (I don't mind doing this now, since I have much more experience trading, but at the time I wasn't polished enough to be doing so). After coming to the realization that I was heading down a bad path with my overtrading/revenge trading (whatever you want to call it), I knew something had to change. While doing the daily update for my website (www.iambusiness.info), I came across a quote that hit home pretty good. I don't remember it word for word, but it dealt with not worrying so much about changing who you are as a person, rather accept who you are and work on a creating a situation that benefits you the most and will allow you to succeed. This was reason number one.
B) Consistent Profit Stream
Like most traders, a major issue that I faced as a trader was consistency. I would go through a streak of very good months, but every once in a while I would have a murderous month that would just hammer my account. Now, normally this wouldn't be a problem because the profits from the streak of good months would heavily outweigh the drawdown from the murderous ones. However, due to my financial situation (you can read my introductory post for the details) I'm often not able to grow my account as much as I would like because I'm forced to take money out each month in order to pay the bills. (Not to mention, planning for my wedding). Anyway, when deciding to implicate a day-trading strategy, I wasn't looking to avoid those losing months, because I accept the fact that, that's part of the business. However, by having a strategy that is different from my main strategy, but can be used alongside it at the same time, I would be able to salvage some of my losses from the swing trading (hedging in a way). What I was looking for was a consistent profit stream. No big winners. No big losers. Simply something I could use to earn enough to pay the bills, so I can let my swing trading grow my account.
Earlier in the year I attended a free mutli-session presentation by Todd Brown on his "Big Mo" system. I usually check out anything free that Triple Threat Trading has to offer so I started playing around with it on the hourly timeframe. After adding and subtracting filters (and back-testing of course) I was able to create a portfolio that was pretty consistent and profitable. The only problem was dealing with the signals that contradicted what I was seeing with my swing trading. I thought of two solutions to this issue. A) have separate pairs for each trading system or B) set a specific rule that places one signal over the other. I saw downfalls with both of these choices as I could see myself getting upset that If A) a perfect countertrend pattern appeared on a pair that was only to be used for the Big Mo system or B) if I suddenly caught a streak of losers on one system, I would start to tell myself "Man I would have been up so much money if only I traded the other way." Therefore the solution that I found was trading it on a small enough timeframe that it wouldn't conflict with my longer term swing trades. With that being said if I ever do face a point where I have a swing trade order pending, or am involved in one I simply don't trade that pair using the day-trading system. This is also how I'm technically following the trend and going against it, but not really. Even though the Big Mo system is a trend following system, since the timeframe is so small, and my profit targets are so tiny, I rarely see any contradiction between what happens on the 5min and the 240min. They really have nothing to do with each other at all for the most part.
The greatest thing about trading is it gives us the freedom to run our business the way we want it. There are thousands of ways to trade the market and deciding which one to use is entirely up to you. I trade the way I trade because of my personality. Once you understand yourself as a person, it makes it much easier to understand what trading style will work for you in a way that won't drive you insane when the tough months arrive.
As always thank you for taking the time to read this post, and I really appreciate all of the feedback from the previous posts. As long as you keep reading I'll keep writing.
Akil L. Stokes
For More, Including Daily Inspirational Quotes Check out: www.iambusiness.info
I usually don't write multiple posts back to back because I don't want this one to take away from yesterday's but I feel as if this one can be used as a learning experience to other traders.
Yesterday I had a trade setup that I simply just choked on. No excuses, no stories I just became a deer in headlights and it's all because I didn't follow my I.P.D.E. (Identify, Predict, Decide, Execute). I actually had this trade on my radar for a while when price action was trading sideways. I had two potential opportunities identified depending on which way the market decided to break structure. Yesterday morning it broke towards the bearish side so I adjusted my fibs and lines and identified a potential reversal zone. Originally I called it a Gartley pattern because it met all of the qualifiers, but there was a double top that weirded me out some. But I told myself whether I define it as a Gartley or not, I still had a good ration trade setting up. That was my first mistake. I should have looked through my trading plan to see if I should actually define it as a Gartley that I trade or not. Reason being is because I trade all advanced patterns with an aggressive entry, while if I'm simply using my Combined Technical Score (CTS) to trade ratio's and harmonics I have different rules depending on how high the score is.
However for some reason I didn't do this. I probably told myself that I had a long time before price action reached that level so I could worry about it later. So although I identified and predicted correctly, I left out the decision part. I also forgot to write it on my whiteboard which I use to keep track of which pairs I should be watching closely. Later that night I happened to check the chart right when the market moved into the zone that I predicted it would go to, but because I never identified how I would trade the setup I was caught off guard and had to go through my mind on what to do. Because I never properly identified what I was trading earlier I had no plan of entry and it was that hesitation that cost me. What's ironic was at the same time I was missing this trade, I was reading a chapter in a book that was specifically talking about missing opportunities and how you have to take everyone to be successful. Talk about feeling like an idiot. This hesitation caused me to miss my entry. Now you're probably asking yourself how come I just didn't enter market when I saw that price action was in my predicted zone. Well then answer is I've made the mistake before of having a large reversal zone and entering market without a plan and it didn't end well. Since then I told myself I would always have a plan before entering a trade. So in hindsight it would have been a profitable move to enter market, but to me it's the principle that matters the most. Let's say I do enter market and the trade goes on to be very profitable as it was, then that opens up my mind to thinking that I can get away with trading on the fly like so and I know that will eventually kill me as a trader.
The lesson learned from this is that if I would have properly went through my I.P.D.E. when I first saw the setup, I would have had my limit orders set up well in advance, and would have been filled by the time I looked at the chart. Or even if I wasn't filled, I would have known that I had orders set and the market just didn't hit them (which stinks but I can live with that). However because I didn't I'm stuck with the worst feeling a trader can have. Missing a profitable trade knowing that I should have been in it. Even if it didn't win, simply knowing that I missed an opportunity is harsh enough because trading is a numbers game. I feel like you're always going to have a certain amount of wins and losses no matter what so if it's a loss you might as well get it out the way so another win can come. In this case I missed a win which means that I missed making up for two losses.
The ideal trading scenario would be this: We enter a trade, it immediately shoots in our direction and hits our first target. then, after moving our stops to breakeven it continues to move in our favor as we trail profits in a risk free trade. However, if you've been trading for a while you surely know that this is often not the case. It seems that many traders often remember the big winners but it's the accumulation of the average and "boring" winners that will make you a successful trader in the long-term.
I am mainly a counter-trend swing trader that uses ratio's and patterns to identify buying and selling opportunities. However earlier this year I added a day-trading system to my repertoire (Todd Browns Big Mo System). For those familiar with the system you're probably asking yourself why would he add a trend following system, if he's a counter trend trader? I won't get into that now I'll probably explain my rational in a post later on this week (or you can ask me directly. Anyway, I trade this system on a low timeframe and my goal is to catch small moves in the market, grab some profit, protect my active balance by moving my stops to breakeven and then continue to trail stops. I hate to use the word hope in trading but, after my first target is taken out which may be as little as single digit pips, I'm hoping for the market to continue in my favor and have my 2nd target be a much larger winner just as in the example above. This strategy has worked fine and although it seems as if I'm not earning too much per trade, after adding up all of the small winners it does create a pretty good and more importantly consistent profit per month. As with anything I'm never content and this weekend I asked myself (as always) "How can I improve" (Kaizen, for those who read my last post).
At first I was wondering if I could add another filter to the system than would make things better but then the little moderator in my head that stops me from making bad choices (lol) slapped me in the face and said "Why fix something that's not broken?" After my reality check I decided to go through some of my data from back-testing and was able to find a really simple way to increase my profits without changing the system and sacrificing something else. All I had to do was adjust my profit targets. After doing some math, I discovered that taking all of my profits out at target 1 was more profitable than trailing them and waiting for the big pop, because even though I caught some really big winners, most of the time price action would come down and stop me out for breakeven. Although it didn't change things by a life-changing amount it was more efficient and after all that's what Kaizen is all about.
This seems like a very simple change to make, but I assure you that many people have trouble sacrificing the small battle for the big war. Meaning, you have to ask yourself this question, "How will I react the first time I close out my full position for 20pips only to watch the market rally 100 more?" Most people would wine and moan saying "man I knew I should have stuck with how I used to trade, now I missed that big winner." This is why you have to trust your numbers and trust the boring big picture over the exciting moment.
In no way am I encouraging you to switch your targets or anything like that, I'm simple stating that for this specific situation this was something that worked. The point is, if you're looking to improve it doesn't always mean an overhaul of your entire trading strategy. Maybe there is something very small and very simple that can be tweaked in order to improve your trading. If you keep good records and are detailed then it may only take a look through them to find a pattern.
For a more in depth view of my trading check out my daily trading journal at http://iambusiness.tumblr.com/
Kaizen: Japanese for "improvement", or "change for the better" refers to the philosophy that focus upon continuous improvement applied to the workplace.
After the 2nd World War, Japanese businesses implemented this philosophy with the goal of becoming more efficient and eliminating wasted time/energy in their businesses. To put it simple they wanted to make the most out of their time and by becoming slightly more efficient each day, they would be able to become a lot more efficient and productive in the future. (There is a much more wordy way to explain it, but I think this gets the point across.)
Ever since I learned about the word Kaizen (from some trading DVD way back when) I made a conscious decision to try and base my life off of this philosophy. Since trading is a major part of my life, I apply the same method of thinking to it as well. After all trading is your business, so why wouldn't you want your business to be as efficient and productive as possible. Every day I ask myself this question "how can I become more efficient today?" Personally, I have a lot of things that I need to improve on as far as trading goes. However, the key is not to try and change everything at once. Just like Jason's teachings go, when you first start out trading start by using one system on one market. I don't look to go from ordinary trader to super-trader in one day. Rather I focus on improving a little each day, knowing that if I keep it up I will eventually get there.
It's this same mentality that allows me to not get overly upset when I make a trading mistake. I mean we all make mistakes don't we? Isn't that part of being human? Of course, the key is to learn from those mistakes and not to make the same one twice. (One thing I find helpful is taking a snapshot of the chart on which you made the mistake on and labeling it. Then the next time a similar situation arises, take a look at the previous chart as a reminder of where you goofed).
The one thing that can stand in the way of the Kaizen philosophy is pride. In order to fix or improve something you have to first be able to admit to yourself that it needs to be done. Many people, especially traders have a difficult time admitting that they're either flat out wrong, that they've messed up, or that maybe they aren't the level of trader that they claim/want to be. Reality checks hurt but they pave the way for success. Say you're on a hot date with the celebrity of your dreams and you're having engine problems but don't know how to fix it. You can A) pull over and call for help, or you can B) just keep on riding. If you chose (A) then your pride may take a little hurting as you wait for someone to come help, but at the end of the day you'll reach your final destination with a much smoother ride. If you chose (B) then you may make it for a while longer but eventually it'll stop working and not only will you destroy your car, but you'll lose the celebrity date as well. (Not my best example, but I think it makes the comparison I was looking for.)
I've recently started reading Mark Douglas's book "Trading In The Zone" which has a lot to do about trading psychology and the reasoning's behind why we think the way we do. I'm only about half way through so I'm not sure how deep he gets, but it has done a great job of allowing me to identify with many of my flaws as a trader. He doesn't give any quick switch solutions on how to change, but identifying the problem is at least 3/4's of the battle.
My challenge to you is to try this way of thinking for a week. Take 30 seconds at the beginning or end of your trading day and make it a goal to identify one way that you can become a better trader the next day. Write it down, then at the end of the day or week go over your list and see if you have improved at all. If you can improve on one thing per day, you'll be low on things to jot down in no time.
Thanks for taking the time to read my post,
Akil L. Stokes