Trembling Hand Trader

Present Time

OK so Santa has messed up the December rally and it seems that I haven't been nice enough for anyone to buy me a decent present so I got one for my self. A new computer. With stacks of display real estate. I have previously had three 22" screens but found that even with that amount of space I couldn't arrange it in any order that I was happy with. My old Computer was getting a bit buggy and slow and really as the only  piece of equipment that you need in this business there is no reason not to have the best. This BigBoy has cost me about $6000 which is pretty cheap when I think of the money I have spent setting up Bakeries where an oven will cost you about $60,000. Then the rest of the equipment can run into the many $100,000. So stuff it I went for the best and its pretty nice. The trading programs load in seconds where the last computer it would be a case of start  TWS & Ninja Trader then go make a coffee while they loaded.

The main piece of hardware is the Dell 30" LCD. I have to say this is very impressive. To have nine charts and two clunky IB DOMs with 80 price levels is a scalpers wet dream. I have two 22" either side of this in portrait mode to have the "other" trading stuff that I just glance at every now and again. Above the Dell I have another 22" linked to my laptop that I use for email, skype and web surfing. I didn't want to have all the all this stuff on my trading computer because I want to keep it as lean as possible.  But that creates a problem of having to turn at the desk to reach my Laptop so with a extra screen problem solved. I also have a switch to change what computer the keyboard and mouse are controlling, very handy for keeping to desk clean and uncluttered. I had to make the screen stand myself as every product I looked at would of struggled to hold the 30" Dell. I'm pretty happy with the result although I will be not be bragging to my father about it, he is a fitter and boiler maker, looks like I missed out on those genes. One thing I'm really impressed with is the keyboard it has 6 hot keys on the left side that I have set to buybid, buyask, sellask, sellbid, cancel order and chase (a ninja trader function that will move the order as the price moves away from you). these are great to scalp the bid/ask with much, faster than moving the mouse on the DOM. Especially for the nutty HSI.

So far the only down side apart from waiting a very long time for some of the top end components to come is the heat that this sucker is putting out now. Lucky I'm buying green energy from my elec. company or a couple of acres of polar icecaps would melt every time I turned this thing on.

DUMB ARSE TRADER

Yesterday afternoon I probably made the stupidest trading mistake of my life. I have been trading the Hang Seng recently and doing very well. The wild moves seems to really suit my style of quick scalping trades. Yesterday I made 55 trades on the HSI and had a very good profit by mid way through the afternoon session so I figured that would do for the day. I returned later to have a quick look at what Europe was doing on their open when I could see the the HSI breaking down. So I thought I would give it one more nudge. What a fucking dumb prick I am. It was 40 seconds before the close and I thought I had another 15 minutes. So just as I was about to close the trade the market goes dead. My first thought was the data had dropped out but unfortunately I realized what had just happened. I had got the times wrong and the afternoon session is only 1 hour and 45 minutes not 2 hours. So here I was stuck with a huge short position that I couldn't close and expecting an up day in the US. Almost immediately the UK started to run higher the Yen started to breakdown the SPi started to push up. SHIT!!. I didn't even think for one minute that it would open down today. My best case scenario was a medium loss, worst case is probably what is about to play out. I decided to try and hedge the trade by buying 1 SPI and 1 ES and they have worked out pretty well but I sold out the ES once it was 8 points up which is my best trade on the US and sold the SPI for 60 point gain but all the markets kept running. God knows how much this index will open up, but I know I am about to get pole axed. If it opens no more than 1% up I will be OK with the gain I got from the hedges but I have a very nasty feeling. I said some time last week that I was felling good about this market and that normaly is a sign of a big hit around the corner but I didn't think it would come from something so dumb. It is a nasty feeling when you have to hope a trade turns out and have no control over the loss. So all I am doing is getting that buy button ready and keeping my fingers crossed untill then.

Volatility is a problem for day traders too.

Normally I love times like we have seen recently. The large volume on the SPI, the large moves, the gaps down and quick hits up against the open. I love it. But this time I have not really made much money out of the whole week. Friday was a good day for me but by the end of the day my head was in a mess although I made money. It took until late Saturday to unwind. After reading this article on TraderFeed I'm feeling a bit better about last weeks trading. The last month I have reduced my trades setups to just a couple of more high probability trades. Watching all the action last week and trying to stick with my new trading plan has bent my head, my new plan was obviously not suited to the volatile market, but at least I have not bent my account. This kind of thing happens so often, just as you change your plan to suit a certain type of market the market will frustrate you and also change!

If your head is a little out of whack at the moment you are not the only one, don't throw out you plan just dig deeper. Find what is good and what needs changing. Just like the market has gone through a change recently, whacking the highly leveraged and long and transferring money to the liquid and patient. Now is a time to work harder and refine your plan find what is good and what will work in a changed market. Now is not the time to give up. Speaking of Trader Feed if you want to know how great traders think and develop have a read of this Enhancing Trader Performance: Proven Strategies From the Cutting Edge of Trading Psychology (Wiley Trading) its a ripper.

Gaps down no indication of the days moves

If the market gaps down you would expect that it would work in your favor to trade short that day but the SPI has gaped down on the open more than 0.3% 133 times since January 05. It has closed that day higher than the open 67 times (50%), if you got bearish on an overnight gap down and were intraday position trading by the end of the day you would be at a loss 50% of the time. If you take a gap of 0.5% down on the open which has occurred 78 times it has again closed higher than the open 40 times being 50%. An opening gap down has not been an indication of the days trend. Sure their will be shorting opportunities but there is also just as many opportunities on the long side. With this data I ran a scan for a trade to the long side as follows

Go long on the open with a stop 10 ticks below the open if it gaps down more than 0.3%, hold to close.

133 occurrences, stopped out 86 times 860 lost ticks, not stopped out 61 times total points gained by close of day 1363. End result 1363 - 860 is 503 ticks X $25 is $12,575 profit less brokerage.

Done in reverse that is go short on the open with a stop 10 ticks above the open if it gaps down more than 0.3%, hold to close.

133 occurrences, stopped out 92 times 920 lost ticks, not stopped out 41 times total points gained by close 1321. End result 1321-920 is 401 ticks X $25 is $10,025 profit less brokerage.

Only a slight advantage getting long on gaps down yet still enough for me to think down open = go short is not the way you should play. This is only a simple example that really isn't a trading system but its one reason why you need to be trading with what is ahead rather than whats happened in the rearview mirror. Sure there will be shorting opportunities on gaps down but I think there is just as many on the long side. You are unlikely to trade this way but it does seem to have a better positive expectancy than getting bearish. I will run some more trade ideas on this data in the coming weeks to see what else it can show.

The Bull is in the Gaps

Most traders I know, including me, will start the day by figuring out which way the market will be trending during the day. A part of that planning will involve looking at what happened during the overnight sessions in Europe and the US. As I have been saying last week getting bullish or bearish on the overnight moves to me seems trading by looking in the rearview mirror. If you are getting bullish/bearish on an intraday basis or even long term, based on the overnight gaps you would be placing bets that are baked into the market right on the open. Since January 05 the SPI has gained a sum total of only 241 points during the day trading session. While the market has gone up 2500 points!!! All of the gain has come in the overnight gaps.  Most of the day moves are filling and fading around the general trend i.e. Bullish since January 05. If you are a longer term trader reacting to overseas moves is going to just shake you out of the trend and make you place bets anticipating a short term move that is not going to play out during that day. So don't flip your trades if the longer-term trend is in your favor. If you are a long-term trader you get rewarded for the added risk of holding overnight.  But for an intraday trader it seems that in a raging bull market the trend is someone else's friend. Buying the open and selling the close would have you up only 241 ticks, less brokerage, in two and a half years. It is obvious from this that a daytrader needs different strategies than the trend in an end of day chart. I will have an example later today and more in the coming weeks on this data.

Here is the SPI200 data I used with a contract roll over two days before expiry.

The real cost of free CFD brokerage

As it seems that there is an ever-growing number of CFD providers offering accounts to retail /novice traders, I was wondering if people really knew what they where up against when they sign up for one of these. I think there is a total lack of recognition by CFD traders of who is on the other side of their trades. It’s not the ‘market’ but the CFD provider in the Market Maker (MM) case. Why are they on the other side? Because over time, 90% of traders lose money. People have filled hundreds of books about why traders lose, but one tactic that the MMers use is having you buy at the offer and sell at the bid if you are trading intraday. Looking at 10 to 20 point ranges this is going to greatly affect your long term expectancy.

Let me run some examples for you:

Intraday trading system. Lets assume you trade 4 times per day looking for 10 points per trade and you get them all right (yeah, I know, I wish) The SFE orders are ‘Limit’ and filled
SPI200 SFE futures contract $25 per point	CFD equivalent with two point bid/ask spread
Brokerage $5 per trade $10 per round trip	Brokerage $0
10 points x $25 x 4 trades = $1000 less Brokerage of $40         = $960.00 profit	8 points x $25 x 4 trades Less no brokerage your profit is $800.00
Difference is $160 in profit or 20 % more profit for todays effort

Why is the profit only 8 points? Because you have to buy/sell ‘@ market’ for your ‘free’ CFD you lose 2 points for the same move. It has to go up 2 points before you even get to break even. By that time the SPI trade is $50 in the money. You could say but maybe your Limit order doesn’t get hit, and that’s true. It could be even worse as you may need an extra 1 point move higher in the bid than someone who trades limit orders as they can get hit by people buying @ market. Which would mean if you sold when the SPI200 trader gets hit you could lose another $25 per trade or $100 from this example!!

What about a loss?

Intraday trading system. Lets assume you trade 4 times per day with a stop loss of 10 points per trade and you get them all wrong (it happens). The SFE orders are ‘Limit orders’ to enter and market to sell.
SPI200 SFE futures contract $25 per point	CFD equivalent with two point bid/ask spread
Brokerage $5 per trade $10 per round trip	Brokerage $0
10 points x $25 x 4 trades plus Brokerage Is $1040.00 loss	12 points x $25 x 4 trades Less no brokerage your Loss is $1200
Difference is $160 less lost or 20 % smaller loss for todays effort

Why is the loss 12 points in the CFD example? Remember you are already down two points as soon as you enter without any change in the SPI. If the SPI drops 10 points you are down 10 plus your 2 point handicap.

If you are still not convinced, what about this? Let’s assume you have a win/loss ratio of 60% with the above figures.

This is a 1 month estimated results

Spi

80 trades (4 per day, 20 days)

60% winners 48 x $46080

40% Losers 32 x 33280

Total gain $12800 not a bad month.

CFD (4 per day, 20 days)

80 trades

60% winners 48 x $38400

40% Losers 32 x 38400

Total gain $0 a total waste of a month!!!!

I know that these are not real world trades, and you can argue about the limit order fills on the entry, but one thing for sure is you will not get that 8 points on the CFD if the bid on the SPI has not moved up 10 points and taken out all Limit sell orders.

You can also say yeah, but I aim for 20-point moves or 30 points. Great, but we are talking about average trades. I haven’t seen a trader whose average trade is greater than their target. And over time, trade after trade, after trade it’s the averages that count. Remember -

Expectancy = (Probability of Win * Average Win) - (Probability of Loss * Average Loss)

Remember who is on the other side of your trade?

Someone that knows the above formula.

Someone who is happy to give you a “Brokerage Free” trade. They are not philanthropic organizations trying to give newbie’s a leg up at their own expense. They are in the business of making money.

The best bit of Advice

This post at Aussie stock forums (the third one) is without doubt the best bit of advice I have seen in any forum. You want to be a good trader try this. I think I will open a dummy FX account and practice.