Category Archives: General

Luck Management – Using What You’ve Got

In trading, like any other endeavor, it is easy to become mired down with the mindset that we need something we don’t have to accomplish our goals.  When this happens, we tend to ignore the tools we already possess, and fail to recognize how they can be utilized to achieve those goals.

Spinning your wheels is never good.  Constant forward motion is of much greater importance than the speed at which you are travelling. The goal is to monetize the ability and knowledge you possess now, without having to acquire more of either in order to start moving your account balance in the right direction consistently.  To do this requires some self analysis to pinpoint what we are actually doing well without realizing it.  Once we define it, we focus on it and fine-tune it’s efficiency.

For example: Most, if not all of the trades that drive you crazy while you’re waiting on the target, spend a lot of that time in profit.  Think about the point in time when you started wishing the trade would just hurry up and get to that target. What if you just closed it at this point?  Where would it be?  This will give you an idea of what it is about the trade that makes you feel uncomfortable.  It could be the amount of time the trade has been open, it could be the fact that it’s only gone a small amount towards the target, or maybe what appears on the chart evokes some second-guessing.  Whatever it is, now it’s known and acknowledged that it is an obstacle.  Don’t bother trying to overcome the obstacle though, this wastes time and energy that can instead be focused on fine-tuning what the trade did before it started to drive you crazy. Focus on that part of the trade, leverage the part that was enjoyable and “easy”, and make it pay. Think of ways that you can maximize this part of the trade.  Would a different pair pay a little more money, or require less margin for the same result?  Have a tighter spread?

Now look inside this little part of a big trade, on smaller time-frames.  The entry for a trade on H1 can be executed with much greater precision on a 5 minute chart. Allowing us to further limit entry risk.  We can tighten stops, decide we’re wrong earlier.  The same patterns and behavior that appear on the longer term charts also occur on the shorter time-frames.

I begin my trading week by considering these things.  How can I maximize the productivity of each dollar in my account?  I consider them my employees.  I don’t want any of them sitting around doing nothing, and I don’t want 10 of them working on a task that 8 can do. Smaller accounts must focus on pairs that pay the most per pip, and require the least margin.

I start with the monthly and weekly charts. It’s important to know where the long-term support and resistance levels are.  Then I move down to the daily chart.  This shows me where I’ll be working for the week, and what type of entries I will be looking for.  Breakouts, range-reversals, trend-following, etc. I know whether intraday support or resistance is more likely to hold or fail.

Now, when it’s time to sit down and trade, I watch daily, 4H, 1H, 15, 5 and 1min – all at the same time.  When trade setups that I recognize form on the 4H and 1H charts, I look down to the minute charts to get into the trade. I am looking for that move on H1 to be in-progress, so that the trade is going in the right direction as I enter.  I am looking for my trade to go into profit immediately.  Once it does, it’s not allowed to go negative, at all. I’ll shut it off with just 1 or 2 pips if I must, just enough to cover transaction costs. Every trade that I take that doesn’t cost me anything, is one trade closer to the one that just runs away and pays out big-time. Since I’m not going to let it draw down at all, I can put some size on it. With more size, the trade doesn’t have to do as much before getting to the point at which I’d be happy if the day ended here. If I’ve got a $5k account, and I’ve got 2 lots on a trade that’s gone 10 pips in a couple of minutes, but now looks like it’s stalling, well that’s somewhere around $200 in profit, I’ll close it immediately. That’s a 4% gain in the account, which is an awesome day, and I’m done. No sweat, no stress, no fighting for it, and I couldn’t care less if it goes 100 more pips after I get out. I’m not going to give any of that 4% back. Time for Netflix.

I do the above each day.  Sometimes I end the day with 3 or 4 failed entries that did nothing but break even. I don’t care, because I ether lost nothing, or a very small amount.  I know there’s more trades tomorrow.  Sometimes though, because the trades are planned on longer-term charts, they will start to run away.  In-the-money stops are awesome, period.  I love being able to walk away, knowing I’ve got profit locked in, because every now and then, that in-the-money stop does not get hit, and it’s possible come back to find yourself 80-100 pips in profit.  A 4% day is awesome, but now we’re looking at a single trade that is dishing out 10 times that.  What does the year end up looking like, even if something like this happened only a few times? I call this Luck Management. I’d rather be lucky than good, any day.

The hard part about trading, is not giving it back.  To trade this way, you MUST embrace break even as a sort of “win”, and accept multitudes of go-nowhere trades.  If you go looking for huge profits, if you’re searching for 40% trades, you end up taking huge risks to find them. These risks start the count-down to account-obliteration.  But they can appear out of nowhere when you’re not looking for them. This is why the long term charts are so important to me, even though I’m actively trading on the 5 or 1 minute charts. I stack the odds of getting lucky in my favor, then I get out of my own way and allow it to happen.  That one big lucky trade gives me considerably more power tomorrow, because I’m still not going to let anything go negative at all, but can put even more capital to work.
Small accounts NEED these massive infusions of profit to really grow into accounts that can produce measurable income without getting “lucky”. The equity curve should be smooth and rise slowly with huge leaps here and there.

For now, do what’s comfortable.  Make THAT pay you, and ignore everything that makes you crazy.  Avoid altogether the conditions that negatively impact how you feel.  The better you feel, the better you perform, which makes you feel even better… a positive feedback loop that leads to easily accomplishing things that once felt impossible.  As the account grows, so will your ability to step out of the comfort zone and take a little more risk – leading to even greater rewards.

Allowing for Allowance is Allowed

rasha-let-go-and-allow At the urging of Mr. Booker and The Traders Podcast, as well as a shock-and-awe campaign unleashed on my Twitter account that would make H. W. Bush proud, I offer more of my views on the concept of allowance, as introduced in my Don’t Push the River post. In Episode 238, Rob asks if the idea of constant improvement is a myth, and whether or not it gets in the way of achievement.  Oftentimes the result of efforts to constantly improve are seemingly opposite of what is desired.  While the very concept of constant improvement seems counter to allowance, the two coexist and function quite harmoniously together.  I am definitely a “constant improver”, and when I find a way to improve, I allow that improvement to remain constant.  In simpler terms, when I find something that works, I get out of it’s F’ing way.  I do not, ever, try to ‘fix’ or improve it.  It works remember?  The degree to which it (whatever it is) works, is largely irrelevant.

Rob gives an excellent example of a common trader pitfall.  You have an trading system that is profitable, but you really want more trades than it produces.  You set about your efforts to increase the number of trades the system takes, obliterating any profitability the approach had to begin with.  Usually, the whole thing gets tossed out as fast as mucking with it vaporized your equity.  From profitable “trader” to “veteran new guy without a plan”.

Instead, I say this:  If you’ve got a trading system that’s profitable… Wait.  Stop.  Stop right there.  If you have a trading system that’s profitable, then well, you have a trading system that’s profitable.  It works.  Forget how well it works, or how often it works.  Get these irrelevant illusory measurements out of it’s way and allow it to do its thing.  If you’re not satisfied with the number of trades it’s taking, then by all means, go about your search for additional trades; but do it while leaving this thing alone! At the very least it’ll give you some padding as you spend your precious capital on your continuing search for more frequent trades.  Think in addition to, rather than in place of.

Here’s a personal example.  I am a short term trader.  I mean really, really short term trader.  Many of my trades last only seconds.  This is the way I like it.  I like to be out, so I trade on 1 and 5 minute charts.  However, I’ve got a particular setup on the one our chart that I take whenever I see it.  I do so knowing full well that it’s probably going to take a frigging week to play out.  That’s the thing.  It plays out.  Nearly always, it plays out.  In this case, whether I like a trade that lasts a week is irrelevant.  I’ve seen it work enough times, why would I not allow it to make a deposit into my account?  It’s not a matter of do I want to trade the 5 minute or 1 hour chart.  It’s not a question of scalping versus swing trading.  It’s a matter of allowing myself to benefit from something I know works.

Everyone knows I’m a huge proponent of process.  Allowance is definitely not a definable process or procedure, but it’s the final ingredient to any process.  The last step in every procedure.

There’s actually a process for process:

    1. Design the process
    2. Follow the procedure
    3. allow for results

It’s really easy, and only natural for human beings to intervene between steps 2 and 3 of the “Process Process”, in an asinine attempt to elicit results that exceed what is expected or reasonable in accordance with the procedure.

My idea of allowance, is actually an augmentation to a very deliberate approach to life. It is a perspective. I endeavor to have a very specific reason and intent behind every action I take.  Again while this may seem a little bipolar, there is a Yin and a Yang to it, a careful balance.  I take deliberate action, then allow the result to unfold.  What this means is that I don’t worry about too much.  I’ve mixed all the ingredients and I’ve put it in the oven.  The only thing left to do is allow it to bake.  We have much less control over our own existence than we would like to believe.  In other words, while we may have some degree of say in where we travel on the road of life, we are most assuredly NOT in the drivers seat.  Life can be a crusty old cabbie that doesn’t take direction too well at times, so I prefer to just give him a general direction and let him take me for a ride, enjoying the scenery along the way.

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When you accept that you’re not driving, you can take your hands off the wheel, and your eyes off the road.  With a little freedom to look around, you begin to see all kinds of “points of interest” along the way that you were oblivious to before.  It is exploring these opportunities along the way that will lead you out of your comfort zone.  Out here is where all the magic happens, out here is where you’ll allow all sorts of new and fortuitous experiences into your life.

Allow change.  You deserve it.

Change can be a real bitch.  We desperately need it, we’re decidedly terrified of it.  It’s what you seek, and it’s what you run from.  Human beings thrive on change, yet we seek to insulate ourselves from it at ever opportunity.  I am certain that there’s something you’ve wanted for a long, long time, that you don’t have.  Maybe you’re even beginning to give up, to just accept that you’ll never have it, or aren’t meant to, don’t deserve it, aren’t qualified for, etc..

Your actions communicate your intent.  There’s no magical force out there that wants you to fail.  Earl Nightingale points out that we will always gravitate to our dominant thought.  If this dominant thought is wanting, you create more wanting.  Never exiting the state of want, and never recognizing what you have.  Try taking a good hard look at what you’ve got as opposed to what you want.  If you allow, whatever you’ve got tends to grow and change into things you may not even know you want yet.

The Pond Theory

A fantastic post Mr. Campbell. There’s some high level Pip-Fu in here. Indie-fish unite (for margaritas and music)!

big-fish-small-pond

I’ve been reading this book by Malcolm Gladwell titled David and Goliath…. The book attempts to bring to light the perceptions of advantages and disadvantages and how being the under dog may actually be the best starting position in any competition or pursuit.

The most interesting part of the book to me was chapter 3 which discussed in depth the theory of small fish:big pond vs. big fish:small pond. More specifically, was there an advantage to either and the example the book laid out was college selection. Was it better for a science major with above average test scores to to enter an Ivy league school, the little fish big pond, or take those same test scores and enter a “lesser” school but in doing so be the big fish in a smaller pond.

So which is better?

It’s best to weigh all of our options before I decide so…

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I’m a genius, an idiot, and neither one.

samuel-goldwyn-producer-give-me-a-smart-idiot-over-a-stupid-genius-anyI’ve experienced a bit of blow-back from my Take your profit and run post here.  First, let me tell you, this is awesome. I love feedback, it’s how I grow.  I especially love contrarian feedback.  It get’s even better when that contrarian feedback comes from other traders.  Apparently most traders don’t do too well, so when people disagree with me in trading, or business in general, I take it as a sign I’m on to something.

After publishing “Cut your losers fast, and let your winners run (right into your stoploss)“, I was told it was the best advice I’d ever given.  Then I was told it was the worst advice ever written.  I was called a genius, and I was called an idiot.  Multiple times in multiple ways. Some readers were relieved to read that someone else was content with single digit pips, others felt dumber after reading it.

Which camp are you in?  Is this guy Matt, who actually trades, with real money, to pay real bills and support a real family with two real kids about to go into a very real college, an idiot or a genius?  I’ll tell you right now that a genius I am not.  It seems to me that being a genius would be a lot more work than I’m really interested in.  I’m not an idiot though either.  I understand simple concepts like 4 is bigger than 3, and they’re both bigger than zero.  I also understand that this is about as much understanding as I need to make a living trading.  Most importantly however, I understand that what I’m trying to do is make money.  I’m not interested in being a “bad-ass trader”.  I don’t care about picking a trade from top to bottom, or calling a high to the pip.  I don’t care about timing entries and exits perfectly or setting personal pip records with each trade.  All I care about (in trading anyway), is making money.

Yes, money is made in this business by letting losers stop out and letting winners go to their targets.  Money is also made in this business by closing the losers before they become losers, and closing your winners before they hit their targets, because, well, it’s time to go to dinner, or go outside, or write a blog post or…  For me, winning is just a side-effect of not losing.  As long as the balance isn’t going down, it’s going up, and it’s easier for me to influence the speed at which it goes up with size rather than distance.  Again, I am not after pips, I am after money.

I’ve lost track of this before.  In a past-life I was so consumed with “learning to trade”, that forgot about making money.  I’d take trades I didn’t want to, because the “rules” of the “system” I was using said to.  I’d pass up opportunities the “system” said were not opportunities.  I’d create rule after rule, attempting to refine and improve the “system”.  What I didn’t realize, was that with each rule, I was also creating an expectation.  In case your own trading account has not slapped you with this realization yet, the human psyche is particularly vulnerable to expectation, especially when they are not met.  These expectations blur the line between what we want and what we need.  Do you need a hundred pips, or do you need a thousand dollars? If you need a thousand dollars, would you reject a $20 bill? Do you want bragging rights or do you want more money in your account than yesterday?

In the end, whether I am a genius or an idiot, is irrelevant.  What’s relevant is that I make money, I sleep like a baby, and every day is awesome.

Awesome trading.

mlacoco54(at)gmail-dot-com

Don’t push the river. It’ll carry you if you allow it.

confucius_yellofan_cut“At the Gorge of Lu, the great waterfall plunges for thousands of feet, its spray visible for miles. In the churning waters below, no living creature can be seen.

One day, K’ung Fu-tse was standing at a distance from the pool’s edge when he saw an old man being tossed about in the turbulent water. He called to his disciples and together they ran to rescue the victim. But by the time they reached the water, the old man had climbed out onto the bank and was walking along, singing to himself.

K’ung Fu-tse hurried up to him. “You would have to be a ghost to survive that,” he said, “but you seem to be a man, instead. What secret power do you have?”

“Nothing special,” the old man replied. “I began to learn while very young and grew up practicing it. Now I am certain of success. I go down with the water and come up with the water. I follow it and forget myself. I survive because I don’t struggle against the water’s superior power. That is all.””

I don’t know about you, but my life is a lot like that waterfall, and the raging waters beneath it.  You can fight the current until your exhausted and smashed against the rocks, or you can kick back and allow it to carry your where you’d like to be, or at the very least a great deal closer to it.  As with the rest of life, this too is reflected with considerable magnification in trading.  That price chart is a river baby, and what’s driving it is a force of nature way beyond your influence.

We all deal with experiences that are difficult.  Sometimes it even feels like our entire world is crumbling around us.  Somehow, against all odds we persevere.  We get through it.  We look back, and usually, nearly every time, we realize the whole ordeal wasn’t quite as bad as we thought it was.  In fact, natural optimists that we are, we usually even find a “silver lining”.  We may even feel a sense of pride in how the situation was handled, often with the realization that we are in a better position afterwards than we were before.  We continually marvel at how things end up working out in the end.  Until the next crisis, when we again hurl ourselves into a pit of despair to wallow for a time in in self-pity, frustration and anger.

I say stop it.  Get off this merry-go-round and take a red pill.  That is, accept the reality that you have a lot less control over your own existence than you want.  Even more so than your existence in general, you’ve got absolutely no input on which direction that price chart is going, or how far.  Now, this doesn’t mean you can’t have what you want, it just means you don’t get it just for wanting it.  You’ve got to make a plan, and take action (preferably a series of simple and repeatable actions we like to call process).

You have a want, a desire, a place you want to be.  You make a plan.  You take deliberate action according to this plan.  Now what?  Nothing, that’s what.  These actions have communicated our intent to the universe.  Now it’s time to push that want, that desire, that place you want to be out of your mind.  Earl Nightingale reminds us that we always gravitate to our dominant thought.  If our dominant thoughts are of wanting, we create more wanting.  We will not have, but remain in a state of want.  Expectation creates more expectation.

The Chinese have a saying, “Don’t push the river”.  Bruce Lee put his own spin on it when he said “Be like water”.  You’re mom even told you when you were a kid, “honey, just go with the flow”.  This doesn’t mean to be a cork in the river, utterly at it’s mercy.  It does mean to understand the flow and work with it to maximize it’s usefulness to your own ends.  Let the current do the work, harness it’s limitless power rather than subject yourself to it.

Have a little faith that things usually work out for the best, but this time don’t wait until after to find the silver lining.  Take a deep breath and trust the plan you’ve made, and the action you’ve taken.  All that is left is to get out of the way and allow the results to happen.  You can either trust what you cannot see, or struggle against it.   You’re not driving, so instead of fighting with the driver about the destination, kick back and enjoy the scenery along the way, knowing that no matter where the driver takes you, it’s going to be closer to your destination than you are now.

In Jet Li’s Fearless (what an amazing film), our hero has an wonderful conversation with his adversary about varying grades of tea.  During this exchange, the point is made that when one is in a good mood, the grade of the tea is irrelevant.  If the grade of the tea is irrelevant, a low grade cannot deteriorate ones mood.  The tea is just tea.  It is we, who grade it high or low, good, bad or somewhere in between.  The fact is the tea has no concept of good or bad, high grades or low grades.  It is perfectly happy being tea.  In years of drought, it doesn’t bother fighting to produce epic quantities of tea leaves.  It is perfectly content to work with what it’s got at the time. 

Will the real orange Gatorade please stand up?

I was a pretty active kid, and drank Gatorade by the gallon.  There was something special about the taste of this magical elixir, scientifically engineered not for any normal thirst, but for that serious, Deep Down Body thirst.  Everyone had their favorite flavor, and you had a one in three chance of guessing anyone’s preferred thirst quencher.  It was either Red, Orange, or the original Radio-Active yellow.

Today is hot.  Hot enough to make me thirsty, and I’m talking about that Deep Down Body Thirst that could only be quenched by an Orange Gatorade.  As I walked into the convenience store, I thought “How convenient! They have a whole cooler section of Orange, that’s awesome”.  Thoughts of my kids complaining about never being able to find their preferred flavors were fleeting.  After all, there’s orange, red is over there, and look there’s a bunch of RA-Yellow right in the middle.

I don’t lose a second when I get back into the car.  I can’t get the cap off fast enough.  I mean, it’s really hot.  I steady myself though, because I know that watery, bland, tastes-nothing-like-an-actual-orange goodness is milliseconds from my lips…

Well, it took copious swishing of scalding hot coffee to burn the foulness out of my mouth after that first huge swig.  These days, it seems you must specify exactly which Orange Gatorade you want, because there’s approximately 6,463 (ish) flavors of Gatorade, which are orange in color.

I’m not sure what it was supposed to taste like, but I think they were going for Cantaloupe.  Sure, I’ll take responsibility for not reading the fine print where it reads “Fierce Melon”, but who in their right mind thought this was a good idea?  Oh, and if you’re buying Gatorade for your kids, and they want grape, it’s not purple any more.  Apparently “Grape” has been replaced with “Fierce Grape”, which is blue.  Unless they’re looking for “Frost Riptide Rush”, which you only thought was grape because of the purple color.  If the new blue “Fierce” grape still isn’t the right grape, they might be wanting “All Stars Grape”, which is also blue.  And don’t worry if you’re still coming home with the wrong flavor… there’s only one more that might be the “grape” you’re looking for, and that’s “Berry Rain”.  While it’s actually purple, it’s more of a translucent, “laboratory-grade” purple than anything resembling a piece of fruit.

Now that I’ve spent a good deal of my first post ranting about Gatorade’s triumphant squaring of Baskin-Robins flavor count, I’ll get to my point.  My quest for quenching brought to mind a recent conversation I had with my good friend Shonn Campbell (@planteautrader) at our favorite cigar lounge.  Indicators.  Like Gatorade, you better be sure you know what flavor that squiggly orange line is, because it may or may not be the the orange you think it is.

Clearly, this is a sell signal.

Traders use indicators for everything.  We use indicators to get into a trade.  We use them to get out. We use them to know when to move our stops and where to take profit.  If we could, we’d have an indicator to tell us what to have for dinner.  New traders especially, fall victim to deceptive flavoring and color scheming of indicators.  Don’t get me wrong, I’m not one of those “naked chart” guys, and I wouldn’t know what to do with “table” mode in my platform.  What I do know however, is that there’s not a single indicator that gives buy or sell signals.  It’s up to the trader to interpret the seemingly arbitrary information provided by the indicator, and chances are most people can’t even determine why that particular information is relevant to their trades, let alone figure out whether the Bollinger Bands with a -30 shift that are applied to the Stochastics on the RSI of the MACD are saying buy or sell.  To top it off, while we spend all this time looking at, and trying to interpret 16 indicators on our chart, we completely lose track of what the actual price of the instrument we’re trading is doing.  Odd, considering the only thing that determines whether we accomplish our objective or not is a change in price.

Speaking for myself, I can say with absolute certainty, that I have lost money I didn’t need to lose, while searching for that magical indicator that was going to earn me 10,000% by next Friday.  I never did find that one, and it’s not because I didn’t look.  Now, if you’re an experienced trader, consistently taking profit from the market, then you probably know what there is to know about the indicators on your charts, if you even have any.  However if you’re a new trader, learning the ropes, you’re probably thinking that an indicator is going to give you an edge, and eight edges must be better than one right?  Wrong.

So if you’re having trouble with consistency, do a quick review of the indicators on your charts.  Is the information they provide relevant to your strategy (you’ve got a strategy right)?  Are multiple indicators giving you redundant data with mixed signals?  Are you buying tops and selling bottoms because RSI and Stochastics told you to?  If you’re not happy with your trading, you could very well be blocking your own path to success with that huge pile of indicators.  Take a deep breath, clear your charts, find some good support and resistance levels on a time-frame not measured in seconds, and try trading price for a week or two.  The results may just surprise you.