Compliance

Since I've now begun to expropriate other peoples blogs with trading thoughts I guess I should just grow up and return to an open discussion in this blog.

That includes trading.

Either that or just delete the whole thing and go away.

Na.

What has got me talking you may ask?

Since I quit talking about trading roughly 3 months ago I have come to one very important conclusion about this business. It's nothing new or revolutionary, it is a very common issue known by all traders.

Compliance.

"In general, compliance means conforming to a rule, such as a specification, policy, standard or law." Wikipedia

We all know that you cannot trade without a plan. So we make a plan. Then we do not comply with our plan.

Why?

Why indeed.

Jules got me thinking about my Myers Briggs personality type again, and LW got me thinking about my identity as a trader.

These thoughts took me back to my very rational thoughts that should have insured my compliance issues were all taken care of. I wrote about them, therefore they must be "handled".

Know Thyself

Whose Game are You Playing?

Well, they're not "handled".

How do I know this?

I track the trade results of all valid patterns.

IB tracks the trade results of all the "patterns".

In May there was a 91 tick difference between IB's statement and my "statement".

I don't need to tell you that my "statement" was the one with the 91 extra ticks.

So being a rational INTJer I made note of this, I stated this is unacceptable, these are not the actions of a professional trader, this is amateur stuff.

I was going to make this note to self a note to you in a blog at the end of May. State publicly my disgrace and ask you to hold me accountable for the month of June.

Accountable to the plan.

Or

In compliance.

But I didn't write the post, instead I told myself to just do it. Stop being an idiot and only take valid patterns. How hard can that be? Just do it. The math is right in front of you, you are not smarter than the market, you are not smarter than the plan, you made the plan, you traded full time for 3 years building the plan, the plan works, trade the plan.

Right.

June 1.

Traded the plan. I am in compliance. Go eat ice cream.

Good boy.

June 2.

Took non valid trade.

CAN'T EVEN DO TWO BLOODY DAYS!

So, here we are. Once you enter the world of non compliance you lose all sense of right and wrong. You are now an outlaw, living on the edge, all the cool guys in movies live out here, no rules, take no prisoners, go ahead... make my day.

Today is June 5th, we've had 4 days of trading in June, my June IB statement has 21 ticks profit. My valid patterns only statement has 82 ticks profit. Those 82 ticks look nice, but we can't eat them.

My name is Solfest and I'm not in compliance.

I lie here under my desk waiting for the surprise audit. (old bankers joke)

I tell myself I'm an outlaw, women love outlaws, rules, we don't need no stinkin rules.

Except I'm not an outlaw. I'm a trader. Traders have a risk management department and a compliance department. Both are very angry with me.

There is now a letter in my file. I'm on notice, shape up or ship out.

One Result, Three Outcomes

Just for fun let us consider 3 different trading days, days that we have all lived through if we are in this business of trading. These days could happen any time in no particular order. So let's just call them all Mondays, Mondays that start off 3 different and random weeks in the year.

Monday #1) We start off our day with a winning trade, let's say net $300. We followed our system, we took the signal, and we were rewarded with a winning trade. The next signal comes along and we enter again, result, losing trade net -$100. Signal again, loser again net -$100. Signal again, loser again net -$100.

Day ends with the net result of, ZERO.

Monday #2) We sit in front of our computer for the entire day, we see no signals and we do nothing all day.

Day ends with the net result of, ZERO.

Monday #3) We start off the day with a valid signal and a losing trade, net -$100. Next signal, net -$100. Next signal, net -$100. Next signal, aha, a winner for $300.

Day ends with the net result of, ZERO.

Now you may say, Solfest those results and outcomes are all the same, all ZERO. True the results are all ZERO but the outcome I'm talking about is what happens the Tuesday after one of those random Mondays.

Let's start with Monday #1, our first trade was a winner, we have started the week demonstrating the genius we know we are. We then proceed to see all that genius disappear throughout the rest of the day. We end the day feeling defeated and angry.

Now comes Tuesday, first trade is again a winner, ya baby, the next signal comes along and.... we don't want to push the button, we remember Monday, we don't want to lose those profits again, we don't want to lose this feeling of genius again. We don't push the button. In fact we don't push the button again all day, we have our little genius in the bank and we're not letting go. What happens that day? You know, it's a given, all the signals work and you would have made thousands not hundreds.

Ok now Monday #2, we have sat for an entire day, that's right one whole day, and done nothing, nothing. It's terrible, we are a trader we should trade. People ask what you did today, answer, I did nothing.

Now comes Tuesday, again no signals, no signals, no signals, almost a signal, ah close enough, I've seen this work before, let's go, nothing ventured nothing gained. Result, loser.

Is there a worse result then a non signal loser? Yes, a non signal winner. That leads to more non signal trades as I am now smarter than the market, smarter than my system, I am a genius discretionary trader. I have read about these people, they can feel the market.

Right?

Wrong, the result ultimately is a string of losers with no rational thought behind any of the trades.

Lastly, Monday #3. We followed our plan and we were rewarded. We took our losers and we stayed focused and "traded our way out of this mess". Surely this means I have arrived as a trader.

Now Tuesday. First trade loser, second trade, loser, third trade, loser, fourth trade, loser, fifth trade, loser, BLOODY STUPID MOTHER OF ALL &!&@%$&!%. Solfest smashes new 24 inch monitor with coffee cup and quits trading for a month, or changes the trading plan for a month because it obviously doesn’t work, or does any number of other juvenile things.

Of course the next month would have been the most profitable month his system has ever seen.

So, our 3 Mondays all had the same result, ZERO, but our 3 Tuesdays all take different turns based on the different ways we got to ZERO on the previous Monday.

Sound familiar?

What do we do?

Hire LW to trade our plan for us? Yes he has had his emotion chip removed so that would work. However I asked him and he said no as his gardening keeps him very busy.

So now what?

I have often thought that I could hire a 12 year old, train him to follow the blue bars, pay him minimum wage to sit there for the 5.5 hours, offer him a $20 bonus for every valid signal he takes, and deduct $20 from his pay for every non valid trade he takes.

I think the 12 year old's trading results might be better than mine. (gasp)

So maybe what we need to do is frame our trading success or failure outside monetary results. Not a new idea I know. The question is how? I have tried to grade the day based on how well I followed the system. But soon I stopped the grading and just looked at the money.

Maybe it has to be tangible, remember humans are stupid. We like shiny things, but they cost alot of money. Hmmmm, what else do humans like?

Sex and food.

That's it, no sex on days with non valid entries. (Freudian slip)

Ah but that would be punishing your innocent spouse, hehe, only a man would say that.

Ok then, food.

Every day I follow all signals perfectly I go out and buy myself an ice cream treat of some kind. That starts the anticipation chip in our brain, we want the ice cream at the end of the trading day. The kicker is we must deny ourselves the ice cream if we fail to follow the plan.

So that’s my new reward system. Like a dog, do a trick, get a treat.

Its "stupid" enough it just might work.

'I Can See Clearly Now'

So as we all sit staring at charts I'll bet we all think we "clearly" see what is important. However as the experiment above demonstrates it's evident that we can all be looking at the same thing, yet each of us could see something different.

Interesting.

Wake up, Drink coffee, Open charts...

This is a great job. Trading. Every day provides something different, just when you think you know what to expect the unexpected happens. That's why biases will kill you in this business.

You have to start each day with a clean slate, no opinions required. In fact your opinions about what the market is going to do today will only get in your way. The market is going to do what it wants to do, and it doesn't care about your opinion.

That's why I love day trading. Each morning you venture out into the pit and at the end of the day you count your money, put it back in the bank, then go home and forget about it. Tomorrow is another day, and it has nothing to do with what happened today.

Speaking of which we had the crude oil inventory report today. That report comes out at 8:30 my time (MST) and there usually is not much action in the morning before the report.

Usually.

Today for whatever reason all the crude action happened before the report. Don't know why and don't really care. It just did.

Tomorrow something else will happen, don't know what, don't care why, I just watch the chart and do what it tells me.

Most of the time. :)

2 Minute Crude Oil Chart

Beautiful

2 Minute Crude Oil Chart
Those are some nice signals. Right? The first one was a stop out but the other 2 are things of beauty. Right? Solfest the "genius" must be counting his crude dollars. Right?

Wrong.

What happened? Remember how smart you were yesterday. Yes I do. In fact that was the problem. Recency bias reared its ugly head yet again, recency bias, we place more meaning on the most recent events rather than our historical results. Remember yesterday I was bragging about my brilliant reading of the ADX. So did the ADX let you down today you ask?

No. The ADX levels were through the roof. The problem was I didn't take it in. I saw it but I traded like I did yesterday. I moved stops too soon today. In yesterday's weak trend that was the right move, but today, in the monster trend the thing to do was hit the entry button and let the pre programmed stops do there thing.

I didn't do that. I let my "recent" success from yesterday cloud my decision making today. Result being I hit my daily stop and had to shut it down.

Trading is hard. :)

Why you should not be a trader

Before I answer that statement let's have a look at why people want to be traders.

1) They can't sleep.
2) They just got fired.
3) They have never been hired.
4) They want to make lots of money.
5) They know a guy and he.......
6) They don't like their boss.
7) They don’t want to be "corporate".
8) They want to work when they feel like it.
9) They can do this work from the beach.
10) Women love traders.

Now let's have a look at what I think it takes to be a successful trader, or more precisely to become a successful trader.

1) A complete understanding and acceptance of risk management.

That's it?

Ok let me flesh that out a bit. I used to work as a lender in a bank. Banks have a department called risk management. The people that wind up there usually did not do so well in the sales (lending) side of the business. I wonder if they still call it sales? Never mind that's another topic.

Where were we? Oh yes risk managers, risk managers are generally men who are old, bald, ugly, have no friends, and don't do all that well in social situations. They are most comfortable in their 17th floor cubicle where they do not see any human life form other than their comrades.

What does this have to do with trading?

Nothing I just like making fun of risk managers.

No no no bear with me here. So I as the lender in the bank meet a client, the client tells me a very long story about why they need money for this great business idea they have. I fall for it hook line and sinker and spend the next 2 days writing up a credit request that I send to risk management.

Now the fun begins.

One of my "partners" in risk calls me up to "discuss" this proposal, they start out nicely enough as they have been taught to do after the Johnson incident. Then they forget all that partner crap and really start laying into me. Insufficient net worth, no current ratio, no experience, tough industry, won't withstand a cyclical downturn, debt service ratio too weak, why would I send this piece of crap down here and waste their time, how long have you been in this business you stupid moron.

All righty then.

Is there a point to all this?

There is, I have to stop crying first. Ok, I'm better now.

Let's get back to trading.

So I'm all set up, charts, broker, front end, Mark Douglas in hand, and now I see a "trade", WHAM I pull the trigger, SLAM hits my stop in 3 seconds, WHAM go again, I am a day trader and I am fast baby, SLAM hits my stop in 7 seconds, and on and on we go.

Now let’s add risk management. Remember all those annoying questions? How much capital do I have equals my position size. How many losing trades am I allowed to take? How many winning trades before I stop? What is that based on? What are my stops? When do I stop trading, daily stops, weekly stops, monthly stops, and on and on we go.

This is the reason why you should not be a trader. You are the risk management department. In banking the lender cannot be the risk manager or bad things happen. In our business the trader is the risk manager, and, bad things happen.

YOU MUST PRESERVE CAPITAL.

In my opinion that is the first and last thing all traders must think about. Not charts, not set ups, not what will I do with all my profit.

Capital preservation. It's not sexy, it's not fun, it's not exciting, and it has rules, rules that must be followed or you’re fired. In other words it's everything that you hated about your other job.

If you want a fun, exciting, and sexy job try on line poker.

If you want to be a trader/risk manager shave your head bald, insult all your friends until they leave, stop bathing, wear polyester, and sniff constantly.

There, you're ready to go.

Running Money

Being a day trader is an exciting job. You are plugged into the market, feeding off the ebb and flow of billions, no, trillions of dollars.

Right.

Or, you wake up at 6:30 MST time, scrape material from eyes that really shouldn't be coming out of human eyes, look outside to see a fresh blanket of snow, turn on outside lights as it's still pitch black out, go out and shovel driveway, come back in, blow nose, make coffee, wipe more stuff out of eyes, turn on charts, read news, log in to the EIT's chat room, annoy them with what you think are really witty comments, watch charts, watch charts, watch charts, watch charts, watch charts, read someone else made a profitable trade, wonder why I didn't, question wisdom of trading plan, watch charts, watch charts, watch charts, respond to man who loves rain questioning my lack of blue bars, watch charts, continue to banter in chat room, banter becomes increasingly bizarre cumulating in solfest asking the EIT to just shoot the market, shoot it dead, EIT responds with "bang" posting, man who loves rain leaves room in disgust, watch charts, watch charts, BLUE BARS on 5 minute chart, watch charts, watch charts, renko chart confirms short trend, blue bar on 1 minute chart, second bar fails, third bar fails, fourth bar turns down, turns blue, take it, full stop, market closes, read LT's rambling comment on last post, wonder if I'm up to the task of answering, whatever, still snowing, go shovel snow again.

One day my 10 year old son asked me what I was doing as he watched me stare at charts for a while.

"I get paid to wait" I responded cleverly.

"How much?" he asked.

Sigh.

Crude Oil Sale Over

No more idiotic crude oil predictions from me. The beauty of day trading with the trend remains, I don't need to know where crude oil is going, I just follow.

Always a nice day to trade when there is only one direction.
(click on chart for better view)

An American and Iranian skirmish at sea set the price of crude oil up today, however it could not get over $120 a barrel. We shall see if that remains as resistance or if we move back down to the 34 EMA (white line).