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The Strategy Incubator

I had a good week of trading this week and overall, I am feeling on top of my game at the moment. I just need to keep reminding myself not to get overly confident but instead, simply continue doing more of the same.

This has also been a good week because I may have developed a new strategy that is showing a lot of promise. I am still back testing a few different scenarios but so far, it is looking very promising. For my impatient side, I am working on a scalping strategy that trades relatively conservatively but only targets a handful of ticks in a period of 3 minutes or less. 

Perhaps it would be interesting to share the rules behind the strategy on the blog to see if others could help me make it better and then we could all share in it's glory. The biggest downside to this would be the few who don't think for themselves and simply trade it blindly. I'm not a fan of that type of collaboration. Now that I think of it though, it would be interesting to share strategies with a small or even large group of traders with the purpose of developing strategies together; call it a strategy incubator. I have a few strategies that have hit a dead end but maybe a fresh perspective or two could add some tweaks to make them work out and then everyone could benefit by it. I'm sure many of us have partial ideas that could use some outside thinking so it could turn into a trading think tank for the purpose of creating a small portfolio of trading strategies. Maybe this could be done in a private blog to keep all the dead weight out? I don't know, just a random thought...

In the meantime, here is an equity curve for this week's trading:

 

Have a good weekend!

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Proof I Still Trade...

If only I had a dime for every time I thought about blogging a new post - I'd be a rich man and could trade for the love and not so much the necessity.

The good news is that I am a better trader than blogger but not by much. And to prove that I actually do trade, here is my latest equity curve for the last month of trading. You may note however that the first day of November is included and that's because I cheated to make the objects in the mirror appear closer than they really are (or something like that). I like this trajectory but in reality this only means one thing: disaster looming!

Cheers!

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Then Don't Trade

I've been reading a lot of blogs lately and the common theme I am hearing has to do with confusion. People are unsure of what is going on in the market, are we in for a deep correction, will the market continue to climb, is the recession over, etc. For many there seems to be more questions than answers.

Unfortunately, I've also noticed that many people continue to trade even though they have so much uncertainty about what is going on with the market and many are losing money as the result. Some even continue to hold on to long positions even though the market seems weak and prices are continuing to fall as the result. Now is the time when poor investors and traders alike are prone to get poleaxed. Smart and unemotional traders are doing three things right now:

1) Closing out of weak positions, regardless of their P&L. Based on technicals and/or fundamentals, some positions need to be liquidated if they are not working out as originally planned. I am not saying to jump ship too early but if your original thesis for entering the market is no longer valid based on current indications then only a fool would keep the position on. In other words, cut your losses short.

2) The brave and equally intelligent traders are taking small positions in strong names that have a high probability of taking off should this turn out to be a mild pull back from recent highs. However the wise are not building their positions at once. Instead, they are carefully scaling in to their positions little by little, as per their PLAN while remaining willing to quickly admit if they are wrong by selling said positions before taking any large losses.

3) Many traders are simply sitting on the sidelines until they get a better sense for what is going on.  There is nothing wrong with not doing anything when you are unsure of yourself and/or the market. Protect your capital and simply don't trade; just wait it out a while.

The following chart of the VIX will suggest that while fear and volatility are increasing, there is still more room for it to get worse before it gets better. Again, perhaps it is worth waiting it out a little bit before putting any money at risk

As for me and my day trading, I am trading cautiously by trading light. As an intra-day trader focusing on a 3 and 15 minute chart, I am not all that concerned with the big picture. I am aware of it of course but I am not overly concerned by it since it does not directly impact my trading time frame. However I am trading light and conservative in the event I enter a trade that goes hard against me. 

My longer-term portfolio is in cash at the moment other than a few option trades that I am taking that can turn a profit regardless of market direction.  I just need enough volatility in price to get through my break-even zone but I am willing to take that risk in this environment. Otherwise, I am not choosing a direction at the moment because I am personally unsure of what might happen. But this is just me.

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Understanding Price Action

Just like many traders I am sure, I have fallen into the trap of thinking/hoping that there is some indicator out there that can offer me an edge.  I do believe that indicators are very useful for trading but I don't believe the indicator itself is what offers an edge as much as it is your ability to read and understand price action, relative to that indicator.

Being able to read price takes a lot of patience and practice and I don't believe it can be replaced by some "guru" trading class or special indicator.  Sure, those things can help point you in the right direction but ultimately, successful trading is all about being able to read what price is doing so you can accurately forecast what price is likely to do next. Mastering this skill simply takes time and a lot of it.

Only recently have I started to understand what this really means as I've been able to get a sense for what price is going to do next, simply by watching what it is doing and has been doing on my charts.  Instead of waiting for my indicator to tell me exactly what to do, I've been more willing to pay closer attention to what price is telling me and then acting accordingly, regardless of what the indicator is saying. Now, I am not suggesting we throw our indicators out the window (however less is more in my opinion) but in my experience, relying more on price when making decisions is superior to relying on an indicator.

Understanding how to read price takes practice and lots of experience.  I still have a long way to go myself but lately I've really started to notice the benefits of all of the experience I've been accumulating over time. Most importantly, my bottom line is also starting to reflect this reality and this is the point in the first place.

Buying Dips & Shorting Bounces

At this point in my trading career, I believe one of the best things I have learned so far is the virtue of buying dips and shorting bounces. This obviously is not the only way to trade but it certainly is very effective once you learn how to do it properly.

I think many traders, especially new traders fall in to the temptation of buying on new highs or shorting on new lows after a lot of momentum has already been pushing price to those points. This is different from break-out trading, which I also think is very effective. But with breakout trading, you are buying at a point where momentum and volume are just starting to take off once price has pushed through a meaningful support or resistance area. But entering the market after price has already asserted iteself in a particular direction is not the best strategy.

I think a great example for this was this past Thursday and Friday when the DOW was passing through 10,000. There was already a lot of momentum and volume in the market, and a lot of emotion and I am sure many people, again, especially novice traders were jumping on board when the pros had been entering in the weeks before while price was dipping again. Friday as we know, was a down day, so some people instantly lost money by getting into the market too late. Perhaps there is still some more gusto left in the short-term but from a probability standpoint, I believe the odds are higher that we will see a temporary pull back before another push higher by any meaningful amount.

This said, waiting for those dips in this current run up is a better strategy for entry. This takes some patience and fortitude but can certainly pay off in the long run.

I see this time and time again in my own trading where I almost excllusively focus on buying on the short-term pull backs away from the prevailing trend. Or as they say, buying the dips and selling the rips. I find it much more profitable to be trying to exit a trade when the masses are placing their market orders to enter. And it is much easier to get in to a trade when fear is high and people are willing to take anything just to get out of a trade.

Just like any strategy however, there is always a risk for loss so that is why proper money management strategies come in to play and this where I am currently focusing most of my efforts. I feel like once I master my money management and risk control, I will be in a position to make big and consistent gains. I can feel it getting closer and I am excited but not impatient.

It will be interesting to see what the market decides to do in the next few weeks but hopefully, it will present some great opportunities to enter on some nice dips that will take our profits even higher.