Trading misconceptions

I’m sure there is way more conjecture and misconceptions about (day) trading. These are the ones I’ve thought about… Candles

You can start (day) trading with a small amount of initial capital

This is likely the one that makes me suck the most air through my teeth. Yeah… you can…  Someone who has a significant amount of day trading experience under their belt (and doesn’t have to eat and pay any bills) could, theoretically turn $1000 into $10,000 in *thinks* a month or two. *and then vacillates* Lets say three months. I can sorta envision this as possible (albeit quite challenging…) even without having to resort to something dangerous… like the killing field that is the USD/ZAR (or similar).

Can a n00b trader do this with three months trading experience? Hm. Color me skeptical. Let say the odds are likely stacked against you.

The problems as I see them is that with such a small war-chest from which to wage stock-market conflict, your stops have to be super tight, which means you’re likely to get stopped-out quite easily, which means you need to make very solid trades that need to head (almost immediately) in the direction you envisioned. Then because the amount that you’re allocating to each trade is likely to be quite low, you have to be able to do this consistently. Which I realize is what you’re (broadly) doing with bigger amounts anyway, but your margin for error is a significantly bigger with more resources, which gives you some breathing room to get it wrong every now and then. Alternatively adjust your expectations. With $1000 if you can get to $1300 by month end, I think that’s pretty darn good. $300 is not going to cover rent, groceries though… oh yeah and TAX.

In any event, having more capital when you start out is preferable to having less. Which means I suppose you have to have made money in order to get into day trading. Which, begs the question, if you have money and are making money, why do you want to trade? If you have no money, you either have to borrow money with which to fill your trading account, or you have to save up. Neither of these circumstances speaks to your financial proficiency. Sorry. First get your house in order. Either through austerity or earning more. Then maybe look at investing. Or entrepreneurship… And then maybe trading.

You only have to work two to three hours a day… and then you’re done

Um… I suppose this is definitely possible. Although, I think this is only really claimed (and posited) by people who make Youtube videos about trading. I suppose this is broadly personality and likely also trading tactic dependent. Personally I would prefer five trades that make $200 a trade than one trade that makes $1000. In order to make those those five trades a day I need to be present. The tactics I employ to make money trading only ever really suggest four… or five solid opportunities to trade during the course of the eighteen hours a day that I’m awake. Which means I’m always near my computer. There’s a lot of waiting involved.

I usually wake up at 4am… the first thing I do is reach for my Macbook. For example, I like to trade the EUR/USD when it is range bound ie (when, in my timezone, the US markets are still closed and Frankfurt, the first real significant exchange in this pairing hasn’t opened yet)… which usually means I’ll take a trade before 6am if my prerequisites are met. 

I guess you’re either a full time trader… our a part time trader. Both come with their own significant environments.

As a full time trader there are some serious downsides to working from home. It is a lonely existence and one where you are wholly dependent on your own skill and acumen to survive. There are no co-workers to back you up. No one to bitch to when things aren’t going well. No one to blame. You’re going to have to take responsibility for all your own actions. Also the anxiety of having your fiber go down mid trade is unparalleled, ha ha. (Have an LTE backup)

If you’re trading as your side hustle… *long exhale*… well… you’re splitting your attention between two jobs and likely both are going to react adversely to this…. which sorta leads into my next point…

 

You can learn this stuff quickly and just be immediately good at it

My fall back example is always grappling. It took me forever (okay, like ten years) to become truly proficient at Brazillian Ju-jitsu. Training every single day, two hours a day. And I’m still learning stuff, still getting tapped out.

When it comes to trading we (for whatever reason) think we can be proficient after three months and we can already envision ourselves earning $100,000 in our first year.

There are undoubtedly outliers than can do this sort of thing. But I imagine its a rare skill-set/personality disorder.

Its better to learn how to trade when you don’t need the money. Needing the money because you’re broke or you think this will solve some perceived deficiency in your life, adds a lot of extra stress into the equation. And stress is the mind killer… or was that fear? In any event…

Learning to trade while trying to do another job… is also, really hard. Likely your current employer will take a dim view of you Alt-tab’ing between your trading account and your CRM system in your little cubicle when your should be filling out TPS reports (or whatever corporates actually do). Which means you have to either switch out to longer time frames and/or trade after hours.

After hours trading, can be… weird. Markets react differently under conditions of volume. It can be like splashing around in three inches of water. You think you’re doing well and so you move off to the big pool where your feet don’t touch the bottom…

Or longer time frame trading… which means you’re not… well imo, cycling through your trades fast enough to train your brain in that trading ‘muscle memory’ that is required to start identifying good entries and exits. I may be a bit bias here, because I’m (kinda) swing trading/scalping my way into profit, so I generally look at the longer time frames with suspicion.

If mastery is 10,000 trades. (I’m not sure I believe this, but lets go with it) +/-10 trades a day on a 10 or 15 minute chart… will get you there in… 5 years or so. 1 trade every other day on a daily chart… well… its going to take significant longer.

Like with grappling, spending time on the mat wrestling a variety of opponents is the only real way to get better. Sure you can read books on grappling, watch Youtube videos, practice sprawling and arm-barring a dummy… but nothing compares to actual mat time with someone who wants to triangle choke you into unconsciousness.

I can trade ANYTHING… its all kinda the same thing.

Woah… woah…. woah. It really isn’t. Stick with like… three things. Maybe even two. One thing might even be the best actually. I am always amused when I see all these traders with… some of them have a ridiculous number of screens in front of them. I have NO idea what they are looking it.

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Take this guy. Youtube guy. Lol. (and actually there are loads of people with way worse than this) That’s a lot of charts. I suppose maybe… if you’re trading stocks… and you’ve got your four that you’ve identified as potentially interesting for the day… and you want to… I dunno… I’m reaching here. Really, you need a laptop. And maybe another screen. All this other stuff is just vanity, consumerism and really, totally superfluous.

I suppose I should point out that I don’t trade individual stocks. I find them overly reactive to asymmetrical threats. I like boring stuff. Like stable pairs and indexes. Maybe you do need more screens trading stocks? My instincts still says no. *shrug* anyways…

Lots of people want to flip-flop between currency, crypto, commodities… (I wanted to alliterate more here)… cannabis! I feel like you should stick to a couple of things and get really good at those specific markets.

 

Trading is glamorous

Eh…

Its actually a lot like grinding for trophies or loot when you play a video games and you’ve already won. Also if you had any existential crisis about your previous job being meaningless (in the grand scheme of things) trading will definitely not fix any of your psychoses. (apparently that is the plural of psychosis. Looks weird to me)

But you know… if you’re successful you can pay for therapy and fill your abode with shiny knick-knacks that can help deaden pain somewhat. Also people will like you. If you’re not successful you will feel like a complete failure who just sucks at EVERYTHING. Also you will be broke.

Fake-doom

Meghan Markle has gone into labor. This makes me laugh, because it appeared on my trading feed. Just before the market started tip toeing towards the edge of the the gravel strewn cliff as some sort of portent. (NYSE opens in about 10 minutes) It’s been a choppy day so far. I’m above water, but its been a hard day grinding it out (as evidenced by the heavy metal on my headphones and the lack of any other open tabs). I’ve positioned my shorts in anticipation of opening bell about an hour ago. So nothing to do now but watch and see what happens. (might as well blog)

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I know everyone has their own theory on Donald Trump. Personally he reminds me of a less sane (and less capable) Jean-Baptiste Emanuel Zorg.

Which if you’re not familiar with the name, is the bad guy from the Fifth element…

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…who wants to break stuff (in service of his dark master) because… well… in his opinion chaos is profitable. It’s actually the part of Donald Trumps personality I find the least the odious, the randomness I mean. Assuming this facet doesn’t destroy the world (its not necessarily a given that we all survive). I suppose this may need some back story, DT tweeted more trade war stuff with China… on Friday night (I think) which markets didn’t necessarily appreciate and since today (Monday) is the first real day they can demonstrate their agitation its been a relatively grim day for some. Especially EM (which I trade).

(About twenty minutes later)

Hmm. *Joey having closed the last of his positions* Well… that was totally less dramatic than Bloomberg led me to believe. Did the trading algorithms not get the memo? (vaguely he wonders what he should do now, having worked himself up into the frenzy of anticipation)

Its a boy! (again how is this news worthy… also, damn… did that baby just parachute out of her uterus, because that seemed especially expedient?)

This trading day has been the equivalent of a premature ejaculation. All build up and no mutually beneficial climax.

Sigh. I mean it happens to the best of us. We will attempt to be better tomorrow.

 

Gold. Gold. Gold.

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I used to be a commodity trader. True story. My forte* was more aluminium than gold. But I’ve always had a soft spot for the much maligned gold bull. (insofar as I feel a bit sorry for them) Gold is literally the realm of the crazies and fringe loonies. Historically always has been, and is likely to remain so.

*I use the word ‘forte’ quite loosely.

In any any event I thought this was hilarious.

Trading rules

I believe self imposed trading rule-sets and methodology are very much personality dependent and that there is no generic one size fits all. Trying to emulate someone else is often just smashing a square peg into a round hole.

While I hate definitions, in this case it is likely important as it ‘frames’ the rule-set.

I started out as a scalp* trader on 1 and 5 minute charts (which in retrospect is quite a masochistic enterprise). I have never really with great enthusiasm ventured near the longer time frames. I had this puritan belief that scalping was the only path for me and having survived (although maybe not always thrived) here I was loathed to stray from what I knew (that the violence of the shorter time frames can become a comfort zone is quite weird)  

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*literally it was the word ‘scalp’ that appealed to me. With an inflated sense of self, a (not always metaphorical) tomahawk in hand, this trading ideology was going to be my tactic come hell or high water. (of course this meant I got trapped in my own head which stunted my development something fierce and for a really long time I wasn’t able to see the forest for the trees) 

I consider myself more of a (well rounded) trader now, in so far as these sorts of wordy explanations matter. I have now eased myself comfortably into the ten minute chart (a time frame I find suites me very well) and my trades now vary from the infinitesimally short to (occasionally) several hours in duration (in the classic ‘day-trader sense I close out all my positions before the end of the day). 

My workspace is still very boring. I only have two screens (so I can game on the other one). I’m inclined to believe that on the shorter time frames oscillators are… mostly a waste of time. I use exponential moving averages (9, 20, 50 , 100, 200, 300 and 400) and pivot points, and then at the bottom of the screen I have the MACD (with the default (12, 26, 9) settings, RSI (default 14) and volume. All of which I routinely ignore when making decisions.

I don’t have a lot of rules. Probably because I have an incredibly short attention span and more than three seems like a lot to remember. This is what works for me…

1. ‘Stick to the fucken plan…’

It’s a quote from Grand Theft Auto V… that I saw on a Day Trading subreddit once. I realize quoting Grand Theft Auto as your #1 trading rule… probably leaves much to be desired… but I don’t think I can phrase it any more succinctly than this and I often have to say this out loud to myself whenever I start mousing over the buy/sell button.

For me at least this is meant to curb MY most dangerous and insidious tendency, the boredom trade. It’s easy to say ‘Don’t pick at it’… but… you know how it goes… sometimes its choppy out there and good support and resistance levels are hard to find. While I hating quoting Warren Buffet or Charlie Munger…

The big money is not made in the buying and selling… but in the waiting – Charlie Munger

In any event. Waiting for your stars to align is likely one of those things that you have to experience viscerally before you really start to believe. ‘Stick to the fucken plan’ also flows into rule #2 which is…

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Actually no… while I wish I could make this work… and likely quite a good rule in CQC… my trading rule #2 is actually…

2. Quit while you’re ahead (or getting head)

The two most problematic psychological states (for me anyway) are greed and hope. Neither is desirable. In order to counter this I tend to take profits relatively quick. The reverse is also true, if I feel a trade is starting to go against me I prefer to just cut my losses instead of getting stopped out a little while down the road… go find another candle to trade.

I have a daily number that I like to trade towards. (that how-do-you-eat-an-elephant idiom)

When I’ve made my target I’ll often ease up a bit, zero out my stop-loss (when it seems reasonable) and let the trade run a bit longer than I often would… But really, in my experience, it often feels like I should have probably just taken the profit. *shrug* Personal preference.

Taking profits also helps me deal with my ego. (which brings us to rule #3)

3. Leave your ego at the door.

I try not to discuss my trades. This theoretically keeps my ego in check. This is also one of the hardest rules to follow, because, well, day trading is quite lonely. And I am also naturally competitive. But as soon as your start to compare yourself or brag about what a hotshot trader you are is when things start to get murky. Also no one really cares about what you do (at best they are humouring you and at worst they secretly want you to fail)

Good trade, bad trades… they’re done and in the past. I see no benefit in reliving your glory trades through embellished narrative. Or indeed, on the converse, beating yourself up about trades that went ‘bad’ on you (unless of course you didn’t follow your ruleset in which case you probably should be chastising yourself). Treat each day as a fresh start. You are not the continuation of yesterday. This is also part of the reason why I close out my positions at the end of the day, a clean break or maybe compartmentalisation. Whatever it is, I find I’m better going in every morning fresh and having to get a feel for things anew.

 

 

 

A note about information consumption

While not a rule… I believe traders and market analysis peeps are… for the most part… (how do I put this delicately) motherfuckers. I don’t think any other industry peddles so much bullshit. I very rarely follow the news cycle (sometimes I’ll go have a look, post event, to see what caused the market to tank)… and I’m inclined to lump Technical analysis (with a skeptical raised eyebrow) into the same category as homeopathy and chiropractics. Ie. I don’t believe it works. (you can likely make a case for the placebo effect of technical analysis… but really I don’t have the energy or enthusiasm for this). I will occasionally draw in a support or resistance level to help me visualise where people are lining up to buy and sell… and this one time I tried to draw one of those triangle thingies… but really its mostly because everyone else thinks these things matter… that I guess some times they do matter. Maybe some familiarity wouldn’t go amiss.

Be super wary of anyone offering to teach you how to trade or any form of subscription service. Anyone who needs to subsidise their trading income by running a website or service… I’m weary… and my spidey sense tells me there is (usually) something else at play here. Either they are placating some form psychological need (like ego) or this is their side hustle.. which makes me wonder about their ability to generate trading income. Same goes for people posting trading stuff on You-tube. 99% of it is dangerous bullshit (and potentially evil)… I think you’re much better off with a free demo-account and trying to figure it out on your own.

The Candle-stick Rorschach Test

Staring at Candle-stick graphs all day is the modern day equivalent of watching clouds and imagining dogs.

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One day (when I am big) I will endeavor to create a Candle-stick inspired Rorschach Test for Day traders that have burned their shadow into the wall behind their work station. The correct answer (insofar as Rorschach tests have correct answers) is of course gently swaying boobs.

Although maybe this just tells you I played a lot of 16 bit games when I was younger and that my brain automatically converts pixels into things I like.