Trading for a Living
After my first unsuccessful attempt to trade for a living, I joined a trading desk in the largest local prop. I worked there over a year, then one day I decided to quit and give my trading a second shot. Here is a summary of the events, mistakes and experiences I had.
Being a trader is like being an Olympic athlete and having the Olympics every week. You practice the craft for years and you don’t know what you don’t know. Then you are break even and you know what you don’t know. Finally you are profitable, and you know it, but keep on practicing as if you had no clue at all.
The Day I Quit
As always there will be people to support you and naysayers. You must always decide on your own. Some people understood me, others told me I was doing a big mistake. The most important aspect of successful trading is never listening to other opinions. To me this job / career switch was a trade, then somebody is giving me advice. You get the point.
Sometimes it’s the people no one imagines anything of who do the things that no one can imagine [The Imitation Game].
First Week of Going Solo
Well this is it. You know it’s for real when you are unemployed, have no salary, insurance and benefits. You eat what you hunt, hard core. You have to take care of it all. The first week was overlapping Yom Kippur, a Jewish holiday and the markets were quite and wild in a matter of hours. I bet ya there is a correlation between Jewish holidays and smart money moving the markets. Anyway, I scratched many trades and ended up losing too much money in that week. Larry Hite once said that he will definitely make money on 100 trades. I knew my sample size was tiny, so I kept on going.
The First Month
As of my second week into the endeavor I’m -3300$ P&L. Done all by the book, but sometimes you have a losing streak (What William H. McRaven described as a ‘Sugar Cookie’). That’s part of the game. If you can’t accept it, you will never succeed.
Week three worked out. In one day I did what was given the prior week. Later on I became laser focused. The #1 goal is stop gifting Mr. Market. Once you handle that, you might grab money from time to time. I finished the week +2000$. So far -1300$ for the month.
Fourth week was loaded with heavy news (Interest Rate decision, FOMC and unemployment reports), so I stayed patient. Eventually grabbed 800$ and finished the month at -500$. I studied my stats and tried to do more of what worked and understand how to avoid the mistakes. So far had 643 trades. I decided to keep on going till I have 1000 trades.
The Second Month
My second trading month started as a wild fire. Straight from the beginning I started to lose each and every day. Couple of trades didn’t work out and I lost it. I spiced it with a little bit of execution errors, rage ‘trading’ (gambling), over-trading and not following the plan for the day. By the end of second week I was again -3000$. Needless to say I felt like shit. It took me couple of days to stop moaning and start improving. This advice is courtesy of Tom Dante.
It seems like it became a tradition to start the month with holes and then try to catch up by getting out of them. Again I did my homework, identified my mistakes and tried to avoid them. Keep calm and follow your strategy.
Eventually the second month ended by being my second worst month in my entire trading career so far. I just lost 5,500$ and felt like shit. Nothing was working out, what was working out I missed consistently. I had to reset the system, clearly I was driving the car into the wall. My account felt tiny as never before, but this is it. There is no way to fix it, the damage is done.
The Third Month
I decided to take time off. Christmas was couple of weeks ahead and it was clear no parties are planned in the markets. My bad performance forced me to stop this bloodbath and refresh my mind. Good results don’t appear out of nowhere.
It was clear I needed to spend some time in the library, so I ordered some books: Minds Over Markets and The Taylor Trading Technique. In addition, I ordered study materials for the Series 3 exam to familiarize myself with the business deeply. Finally, I’ve ordered a flight to Malta, a long lasting dream I had months before quitting my prop trading day job. It was time to take a vacation and read some books.
COVID-19
The first law of financial markets is that anything can happen. Anything can and will happen. Pandemic hit humanity and humanity revealed it’s beautiful and ugly facets extremely. People not understanding the importance of following instructions, minimal solidarity and every scratch in my ass needs to be tested. Unfortunately even people I know personally didn’t behave as expected. The madness of the crowds is infinite. Stupidity, fear and greed at it’s best and worst, what a disgusting truth.
And still people didn’t get the messages. The rushing buyers just were hand tipping. They bought and bought at any price and then they were satisfied, no buyers left. That’s when you should sell short. People living with no savings and don’t think about the rainy day. Inability to adjust and be resilient. Use the extra time to learn new skills and be competitive in the new world rather than moan and moan about the situation. Again, I personally know people that have disappointed me.
But as traders we were ready. We understand how important is positive thinking. Every day we live so that we survive and have the next day to do business. We have savings and understand the probabilities of rainy days. In general I think that traders are natural minimalists and know that less is more, in trading and in life. The sad part is that most of the people still didn’t get it, even with a gun to their head. Months will pass by and people will return to their over-consumption greedy manners.
The surrealistic times called for crazy markets. I’ve never seen a limit down/up move before. I’ve read about it, heard about it but once you see it with your own eyes, you understand the risk for life. 30% drop in equities, negative prices in crude oil and crazy swings in gold, all in less than a month. The only relatively normal markets during this period were the bonds. Although suffering wide swings and liquidity drops, still they kept on going and kept descent depth and volumes.
I miss Bloomberg Terminal. I always loved the amazing capabilities, fast responsiveness and interesting tools. To me it has been a Linux terminal into another dimension. I used to hang on the terminal for hours, building crazy spreads and learning new functions. But truly the most important features of the Bloomberg Terminal are actually chat and headlines.
The chat is basically a proof that you do exist in the financial world and you are serious, or at least you work for someone serious. Chat is a personal and unique tunnel for finance professionals to do business around the globe.
Headlines are the least biased pieces of news out there, and most importantly, all of the financial pros see them. To the outside world, you don’t have access unless you got the terminal, but I have a hack for you. From what I’ve seen Bloomberg tweets with “BREAKING:” keyword is a descent approximation. Since this extreme volatility period, I always have the breaking news feed filter turned on and loud.
Sirens
Worldwide pandemic was not enough for the people of Israel, we had to have a special treat. May 2021 was full of tensions due to the long and probably never-ending Arab-Israeli conflict. Sirens, rockets, explosions and casualties.
If the Arabs put down their weapons today, there would be no more violence. If the Jews put down their weapons today, there would be no more Israel [Golda Meir].
When people ask me how it is going and all, I always reply that we have been prepared for those situations and sadly it happens every ~5 years. Outsiders will never understand and no matter what, Israel will always be the aggressor, child-killer, blood-thirsty, war crime record-keeper etc.
To speak frankly, we don’t give a damn. Unless you have lived here during those situations, please shut up and keep your opinions to yourselves. IDF was doing it’s job, Iron Dome was protecting civilians and populists were working hard on making the good things their own and the bad things somebody else’s. The press was lagging behind like financial “experts” do in the markets: they were just covering what just happened with heavy bias.
On a personal level, I live in the central district. We are relatively far from the terror reach physically and most of the damage always occurs in the southern district. My planned reserve service was cancelled 1 week after the protective operation had started. Anyway, I spent this tensed period on improving my AWS EC2 instance and practicing switching my entire business to the cloud, just in case.
War
February 2022 was even more chaotic when Russia invaded Ukraine. I’ve been born and raised in Moldova till the age of 7. This conflict is as absurd as trying to kill your neighbor and is equivalent to US invading Canada.
Heartbreaking media and extreme flux of fake data. Almost no reliable sources and a nuclear threat. Essentially, it was centimeters from a world war. Needless to say, markets were chaotic as well, but had no limit up/down moves.
My grandmother died a week before the war. She was born in Tomashpol, Ukraine. Together with her sister, they were the only ones to survive Holocaust. My heart goes out to the people of Ukraine.
Flying Crocodile
After months of research and development, hundreds of trades, markets and tests, comes a day you finally have something. It happened to me during alarming sirens and interceptions of the Iron Dome in my kitchen. I finally had a good sample for the major equity indices (ES, NQ, YM and RTY). I decided to open a new live trading account with IB and start with a 10,000$ deposit.
I have decided to name my new fund the “Flying Crocodile”, because crocodiles do not fly, but as we know, in markets anything can happen, so essentially in markets we can have flying crocodiles. In addition, the attacking style of a crocodile is similar to my trading style: most of the time you do nothing, but once you got an edge, you hit like a crocodile.
The Day you Become Scared to Death
Then comes a day when you execute perfectly. The system is intact, your rituals and performance are at maximum speed. You realize how easy and boring all of this is. You make money consistently, you don’t chase and you don’t step on the traps. Everything is perfect, for real.
Then you start doubting for a second: is it real? Is it possible that after all of this bloodbath, suffering and anxiety you achieve success? I didn’t know for sure, so I decided to give it more time and larger sample size. I kept on trading effortlessly.
Trading is all about a series of trades, not a single trade.
When your edge is clear and strictly defined, everything is simple. Finally I had my edge working as a machine. Most importantly it’s super fun, and that’s so different from the beginning when it was mainly being miserable and afraid. Then comes a day you lose the fear and understand that trading is all about the series of trades, not a single trade. If you have an edge, let the large number of samples reveal it. That’s exactly what “Trading In The Zone” by Mark Douglas book is all about.
Building a Tesla
After years of working with the Interactive Brokers TWS API, losses and lessons learned, I finally settled down. My algos were performing consistently and way better than my manual trading. I decided to fully transit to algorithmic trading and pass the manual trading as the results were bad. At the beginning of March 2020 I had the largest release ever. The entire week I was coding and did multiple wide and critical improvements to my system. I’ve added more commodity markets and improved speed by reducing historical data requests via cached chunks and incremental small requests.
I could not wait to test it and eventually had no sleep that Monday. The results were spectacular. Everything worked out perfectly: entry, exits and position management. Of course we have to supervise manually as anything can happen, but from that moment trading has become a numbers game of driving an autonomous car in the markets.
The Day you Grow Up as a Trader
Then comes a day you realize what trading is really all about. Trading is not about a system, market, risk to reward, consistency nor algo. It’s not about fancy platforms, low commissions nor powerful hardware. Trading is all about mental strength. So you have the trading system/method that suites your personality. You have good execution skills and strong risk to reward ratios. You are a master money manager in terms of risk and avoiding crazy market conditions. So you got it all, and people think this is it. It’s not.
The secret is: mental strength.
The real key to success is the mental power. You will have a losing day, losing days, a losing week, losing weeks, a losing month and losing months. At least at the beginning (learning phase), it’s inevitable. The real question is, will you survive all of this? Do you have the mental stamina to withstand losses and bad periods? Do you have the mental power to do dumb mistakes and carry on after analyzing how stupid your mistakes were so that you won’t repeat them? Then you repeat your mistakes and go all over again, until you finally do it right. People, trading is all about positive attitude, confidence and mental strength. The real challenge is to beat yourself and not to give up.
Mentors
I had couple of mentors over the years. People that guide your thinking and share experiences so that others will learn. Most of the industry is top secret and in rare occasions successful individuals share some insights. Of course it’s hard to really know who is for real and who is just a wanna be. That’s up to you to decide. But here is my list.
Bert Mouler
I’ve listened to every interview on Chat With Traders at least twice, and some of them even 5 times. The episode with Bert Mouler had deeply influenced me. I decided to contact Bert and seek for a mentor. Eventually we have been speaking regularly and I was even lucky to meet him in person once.
Bert is an amazing individual. First, he is extremely right on. No fluff no nothing, right to the point. If your ideas suck, he will tell you that right away. No sugar coding. On the other hand if you bring on interesting ideas, he will listen.
Do you want to make the money or do you want to be the smart guy [Bert Mouler]?
The most important realization came to me after a call we had. He just asked me if I want to be a smart guy or just make the money. I answered that I want to be the smart guy because then I’ll make the money. Ironically I had no clue back then what trading is all about. Thanks to Bert I realized that the most important thing in this business is to keep it simple.
Linda Bradford Raschke
Linda had deeply influenced me. I’ve listened to 3 different Market Wizards books by Jack Schwager over 5 times each. Linda had the most bright influence on me. Once I quit my day job I decided to share my experiences with her, so I wrote her an email. She responded with some insights that changed my understanding. Most importantly she advised to reduce my watch-list even further.
I would suggest that you become really good at just 2–3 markets until your profitability rises a bit more [Linda Raschke].
I sent her my trading journal, homework and core ideas. She responded with a lot of wisdom. By that time I have created a full homework flow written in Python and Java. I’ve been using Interactive Brokers Java API to download historical data and Jupyter notebooks to generate reports for every market I follow. It all takes 10 minutes, then I do the homework manually and it all takes 20 minutes. Easy and fast, now you create a trading plan for tomorrow. You are unbiased and well prepared, well ahead. This idea is inspired by Linda as she mentions doing homework after markets are closed, when you are unbiased.
Tips and Tricks
Here are some things that have been working for me so far. I change the thresholds from time to time but the core ideas remain the same. It took me years to collect them. Mister market is the best teacher of all. I am sure you will find those ideas relevant, and they will save you tons of money and mental health points. I got so many lessons by losing my own money, trying stuff and working in prop. I can’t count or write them all. Take the most important ones.
Homework
There is no way to succeed unless you become strategic and well prepared. Preparation can be five minutes or hours, depends on what works for you. I have seen profitable traders do it in a minute before market open and others take hours, excel spread sheets, Bloomberg Terminal or Python. Again, what suites you and remember that less is more. Anyway, you must have a plan. Know your key points of control (Volume Profile), important levels: gaps and weekly kickoffs, PDH (Previous Day’s High), PDL (Previous Day’s Low) and open price. You will be surprised how often you meet your levels during the trading day. You will respect it more and more, so that eventually it will become your lighthouse.
System Written Down
Your trading system must be simple, clear and written down as an algorithm. You have to know it by heart and be able to explain it to anybody. This note is always in front of my eyes, it’s my lighthouse.
It’s pretty straightforward but let me elaborate. Impulse with good volume is a must for all successful trades. No impulse, no big players, markets are easy to move (slippage). Mind economic news and session open times, I think that actually most of the time you can’t trade! 3/10 signals are inspired by Linda Raschke and enlighten the trading arena. Retracement to/away from EMA is a good indicator of short term forces. Ideally bull/bear flags will guide your entry. Good risk to reward and a decent potential for the trade and risk you take. You always want to risk when the potential reward is very high (X5 for me). Be sure that price is not flirting with some level (Open, PDH, PDL etc.). Look for fast neglects of levels, not flirting with them. Most importantly take trades that are in line with your plan, you know the homework from yesterday: are you a buyer, a seller or a breakout player for the day?
Estimate the Probability
Always try to estimate your probability of success. It’s not exact science but you must have a feeling for how good or bad is your idea. Following my compliance rules for entry, I just count every rule that qualifies and assemble the estimated probability.
I write every entry manually to go over the pros and cons before entry. This forces two very important phenomena. First, it forces you to use System 2 (Kahneman, described later) and prevents chasing or rushed entries (System 1). Second, it makes you way more comfortable with the trade if you decide to take it. This simple process can clean up your entries and leave the good stuff. From time to time you will miss a good trade because it took too much time, or your estimation was wrong. It’s OK, it’s statistics. On the other hand, many times you will actually prevent a loss because the estimated probability is low. Success takes a large sample, always try to take the best ones. Don’t ever rush to take a trade because you are eager to, most of the time it won’t work.
To satisfy all of the rules is impossible, but a vast majority is a good sign that your trade might work. Here is an example of a trade that had a decent probability according to the rules and eventually worked out.
Gold had a clear impulse with good volume, big in office. Note how brutal the volume difference is since 07:00 CT. Check for the impulse rule. Clearly it’s a good time to trade plus we had no news ahead. Check for the good timing rule. Although not plotted, originally there was no 3/10 signal nor retracement to EMA. No checks for those rules. The trade had a good risk to reward. I was expecting a 7$ move in gold and risking 1$ move. Check on the R/R rule. Price had strongly moved away from the open price. It has been flirting with the open price for the previous session, but now it wasn’t anymore. Check on the not flirting rule. Finally from my homework the night before I planned to be a buyer for the day. Check on the plan rule. To summarize we had 5 rules passing the tests out of 8 which leads to 5/8 or 0.625 probability.
Of course I would prefer 0.75 or 0.875 but sometimes 0.625 is good enough. High probabilities are rare, nothing is even 80% in markets. The most important benefit of this simple task is that it filters the bad trades and avoids impulsive trading.
Volume 8000
There is an easy way to classify interesting/boring days. To me it always has been the first minute bar volume reading in the ES (E-mini S&P 500). If the volume is above 8000, usually it’s an interesting day, which means a lot of players are out there so you might get some volatility and opportunities. Days that fail to jump above the 8000 contracts height are usually dull.
Avoid Heavy News Days
My journal revealed to me that I am a 100% sucker on heavy news days. Like seriously, I made no money on Interest Rate decision days. Over time I learned to let it go. Why give money away? I just stopped it. Don’t play when your performance is sub-optimal. At least one week a month (combined) will be loaded with heavy news. Just do something else, like work on your edge.
Market Making
My experience as a market maker worked out very well. First I never buy the ask nor sell the bid. It was taboo in prop. You never do that unless you must. You always play for limit orders to buy the bid and sell the ask. That’s how you make money in market making and get free commissions as a retail trader.
Always try to scratch the trade on the bid/ask, this way you will scratch for free (including commission). Market making is all about being there and providing the service. For a moment think like a market maker and try to be the liquidity provider. Just put your limit order and leave it out there. From my experience I’m able to scratch for free 95% of the time. Be patient and strong, let the market come to you.
Opening Shakedown
Don’t ever place stop orders before market open. Markets can open wide and you will be shaken out. Protect your capital. If you want to learn the lesson try placing a stop-limit order in grains (ZS, ZW or ZC) before NYSE open (grains have a break before). Place your order in between the previous session close range (check the book for bid/ask and place at mid), risk 100$. See what happens with your own eyes. I believe you will never do it again after that lesson learned.
Same goes for major markets. Unless you trade without a stop/have huge stop, I recommend flattening your positions before market open (NYSE open / big boys). Markets tilt like hell because of the big players. You better wait a little to see what the big boys are doing.
Market opening is like Yamaha passing by a bicycle.
Statistically I have never had my targets reached if the position was taken into the open, I was always stopped out. Then I stopped it, I take what is out there right before and it works for me. Just try it but be aware of the opening shaking. It’s like a Yamaha passing by a bicycle.
Poker Face
The best traders I’ve met always had a poker face. You would never know if the guy was up or down on the day. Funny, laughing and kind at any time, no matter what happens. Don’t brag about the winners because losers will come (and you know it). Keep a poker face.
Here are some things that you can brag about (and the profitable traders did). Brag about taking the loss before the stop loss (experience). Brag about not being manipulated by the big and not getting sucked into. Most importantly brag about scaling up when the trade works out your way. Those are the moments where one day can make the week or month. If you got it, kudos to you and respect. If not, keep on working on your edge and understand what went wrong and why. Be humble, ego is a trader killer.
1 Lot Baby
The first day I stepped in the trading desk, my manager told me that trading is all about handling well one contract. He told me that if you learn to make money with one lot, you won’t feel the difference when it comes to 100, 500 or 1000 lots. Back then I thought it’s ridiculous, but after couple of months I realized how true it is, particularly in Interest Rates futures trading. Try it and you will see, start small and scale beautifully. Thanks to the micro contracts by CME you can trade 1/10 of ES via MES and the markets are awesome too.
Learn to make money with one lot, you won’t feel the difference when it comes to 100, 500 or 1000 lots.
Resist Your First Entry
I was listening to Thinking, Fast and Slow by Daniel Kahneman and realized that trading is a beautiful combination of the two systems he mentions. In short, Kahneman explains that there are two systems of thinking labeled System 1 and 2 respectively. System 1 is faster and more impulsive (pull the trigger and get in or out of a trade). System 2 is slower but more logical (resist the impulsive entry after news or a tape bomb).
Essentially all day long we incorporate both systems whenever we do something or required to decide / take action. Successful trading is mainly about using the appropriate system on purpose depending on the market conditions. Entries must be engineered to perfection (limit order, stop and take profit levels, size etc.) which is pure initiation of System 2. On the other hand, when there is impulse, volume and timing you must enter the market (market order / pull the trigger), which is an initiation of System 1.
Big Lie
Since 07:00 CT, or 1–1.5 hours prior to US RTH (Regular Trading Hours) open, the big will suck you in one direction and then take the market the other direction. It happens almost every second day in any market. Take a look at 5m charts for any good market (ES, GC, CL, 6E, FDXM or FGBL) and find it yourself. Risk 100$ in the direction of the trend prior to open. See how you provide liquidity to the big and then it turns around and you are stopped out as a sucker. It won’t work on consolidation days or when price is flirting around key levels (next), but be aware of the alligators in the water. Try trading with the big, not against them.
Here is an example of Gold trading one hour prior to open. The big move the price hard down to create panic, then they just smack the market up like an atom bomb. Don’t be the liquidity provider for those situations, join the party. Also note how precise the pivot points are: 95% of the time it’s +-5 minutes on every 30 minute bar.
Flirting Prices
Watch out for price flirting with PDH (Previous Day’s High), PDL (Previous Day’s Low) and open price. It will suck you in and you will provide liquidity. Look for strong moves away from those. Anything else is just gambling. The market decides whether it likes this level (consolidation around it and even more flirting, probably for the rest of the day) or not (strong move away with good volume and impulse).
Here is another example how technical all of this action is. Euro-Bund (FGBL) opens at 170.89, then goes to previous day’s low. The entire EU morning session price is flirting with this level. Nobody commits to move the price away so the flirting goes on till the US players get in (and may move it). From the night homework it was a breakout day which means we are expecting the price to trend away from previous day’s high or low.
Know When the Party is Over
It’s very common for the US morning trend to end when the Europeans shutdown the party (insight by Linda Raschke). More specifically usually 11:00 CT the trend is over so you can easily join the new party as the train goes reverse from there. Then noon comes and pretty much the day is over (for me at least). After noon everything else is risky and has no descent risk to reward (again personal taste).
Pay No Commissions
It’s funny that nowadays all of the brokers provide free commissions for some products. Robinhood pioneered the idea, they were the first. But people don’t get the lie behind it. Are you familiar with the SALE discounts in shopping malls? 20% reduction, oh sure on a super over-priced product. It’s just the same idea, it’s fluff. It all depends on how tight the market you get and how likely your orders will be filled. Order flow is a juicy business. Controlling what you see has always been a profitable business like with Google, Facebook and the ads industry in general.
Let’s make an experiment. I’ll give you two options to trade, which one you choose? Broker A: 100 X 100.01 market. Bid 100, ask 100.01. It’s a tight market (1 cent). Commission is 0.01 for side. No free commission here. Broker B: 100 X 100.02 market. Bid 100 Ask 100.02. That’s not a tight market (spread is 0.02), but this one gives free commissions. So mathematically it’s the same, but it sounds way better to get free commissions. We are humans, we love presents and FREE stuff. So keep it in mind. The most important issue is of course the probability of a fill which is more complicated but again keep in mind that free commissions mean worse execution. I think it’s actually good to pay commissions.
Anyway if and when the trade moves in your favor always move your stop at least 2 ticks above/below your entry price. Depends on the trigger method of your stop (last/mid) but when the stop is triggered you will probably be filled 1 tick lower/higher (buy/sell) and not 2 ticks (at the trigger price). This way you won’t pay for commission as 0.5 tick is enough to cover commission for most of the products. If it’s not the case, please immediately change you broker.
15 Minutes Countdown
I like 5 minute charts for entries. I find them amusing as you can identify visually large volume spikes and action gaining speed. In addition it’s easy to write algos that will spot those patterns in data and notify you when it happens. This way you won’t become tick junkie and get ahead out of the noise. 5 minutes is enough time to get data and calculate anything you need (even for retail traders).
If the trade doesn’t work 15 minutes after entry, just get out. To me it’s been a guiding rule. When the impulse is strong, the continuation is stronger. If it’s not, you just missed it. Scratch the trade and go look for other opportunities. Of course sometimes it takes a bit longer but most of the time it takes up to 15 minutes. Again, just check it out yourself. Find good impulse with high volume and check out how long it takes for the continuation to arrive.
Watch Out for the Hot Plate
When big come to play, there will be a lot of plates around. Most of them will burn you, so don’t touch them. Market openings, news, and pre-market hours are the most volatile occasions. On the other hand those are moments of truth as people reveal their intentions and start moving things around.
Here is a beautiful example of pre-market (1.5 hours before US open) test and reject of the PDL (Previous Day’s Low) in gold. Huge volume takes market down, rejects the level and immediately gets back. The price proceeded higher for the rest of the day, a classy “hot plate”.
Ideally, price will reject some level and retreat with good volume and impulse (potential entry till next level). Other scenario is the strong penetration away from the level, and trending for the rest of the day. The most annoying scenario (and economically inefficient) is when price flirts with a level or makes a double bottom/top. Smooth flirting with a level may fool you and costs a lot. The double bottom/top usually will pay for the mess. Experience and screen time are invaluable here. Unless you see, feel and learn (lose), it won’t work.
Embrace the Unexpected
It’s widely known that when equities go up, bonds and gold go down. Always think about it as scales with finite and equal amount of money for both equities and a mixture of bonds and gold. So when the equilibrium is broken money flows from risk free to risky investments or vice versa. Broken equilibrium situations are easy to spot and they happen almost every day. Watch closely ES (E-Mini S&P 500) and GC (Gold) for 30 minutes when US opens and you will get it.
With great volatility comes great profitability.
But actually the most interesting things happen when this bias is broken. Situations when ES is stalled but GC is trending. Or when FDXM is stalled and Euro-Bund is trending. In addition usually bonds will move the same way (ZN, ZB, FGBL) but sometimes one is stalled and the other is moving. Finally the most ‘outrageous’ situations when ES is stalled or trending up, CL is going down and same does GC (or vice versa). Those are the situations I like the most, because it’s when every market shows it’s own personality. There is no correlation bias and the volume is real with no correspondence to the other market in the equation (scale). Those days provide a lot of trading opportunities. Unexpected days bring a lot of volatility and opportunities.
Be Patient
Sometimes you get a good entry and there is a void to fill. Time will reveal how good your ideas are, but once you got in and your setup is good, just let it do the job. We always like to improve and touch but usually it’s better just to wait and let the trade work out. Move your stop to a good break even point, set a target and just let it be.
One of the toughest things in the daily boring routine is mastering patience. We want to do stuff and feel the progress. The truth is profitable trading is boring as you have to wait for the fat opportunity. Everything else will make you bleed money. You will be miserable and the pain will suck every aspect of fun out of it. Don’t rush, just wait for the big ones. When the volume is aggressive you will see the big players out there leaving pieces for the medium-tiny traders as myself. It took me a lot of time, money and pain to finally realize that. Unfortunately, I don’t think it is possible to understand that unless you feel and overcome it yourself.
Many talk about how important is to take all of the trades and the chance of missing one trade that will make the week. I’ve been there, and it made me super anxious, and very inefficient. I tried to trade too many markets, systems and mainly worked for over 12 hours a day. As I’m based in Israel, we can easily trade European markets and the US markets. There are many pros to this timezone, but it can be very addictive too. Eventually I let it go. I no longer care about a single trade, because I know that taking 100 trades is going to work out. As the outcomes are random, I can’t know or control the result so I just keep on the process.
There is No Pure If-Then-Else in Trading
Stop looking for easy rules and ideas that can be expressed as an if-then-else statements. Stop dreaming about AWS instances that will run your software while you drink cocktails in Ayia Napa. It took me 6 years during my studies towards a Master of Science in Computer Science degree to understand that.
Markets are time-series of non-correlated distributions with random noise.
I’ve tested any possible setup out there: technical indicators, Machine Learning and all of the buzz words. I tried it all and eventually realized that market data change every minute, and it never repeats itself. Financial data is a time-series of distribution with a random factor. Humans make it this way, and there is no bounded solution to represent humanity. Which leads to the simple advice: less is more.
A Bottle of Concentration
Think about your available concentration for the day as a bottle of water. The bottle is finite and valuable. Now suppose that you must survive a day with only one bottle and you have to exercise that day. Clearly you can’t just drink it right away, you must split your bottle and use it wisely. Same goes for your concentration and trading.
So many distractions nowadays. Mobiles, coworkers, external noise and more. You have to master your ability to concentrate. To me it’s been 50/10 minutes modified version of Pomodoro timer. (timer app, mobile is silent, no vibration and face down aside). In between I try to refresh my mind (audible, meditation, breathing techniques, push-ups, sit-ups, juggling, Rubik’s Cube and more). Concentration is limited and you can not peak perform every minute. As a matter of fact, we can concentrate way less than what we think. Mind this issue with huge respect, otherwise you won’t survive.
5 Bullets
Now think about a weekly battle having only 5 bullets. You only have 5, so you must use them wisely. Try at least at the beginning to trade once a day. I know it sounds crazy but your performance will be amazing. At the beginning I used to have no less than 10 trades, then I scaled to 20 and some days had more than 30. Nowadays, 80% of the days it’s no more than 3 trades and 20% of the days it’s no more than 8 trades. It’s a personal thing and market dependent, but less is way more.
Breathe: 5s in , Hold 2s Out 3s
Just breathe when stressed or not. I had many unpleasant experiences losing money. Usually it was my money, sometimes it wasn’t. I learned to calm down and be present and positive no matter what.
Mindfulness is the practice of purposely bringing one’s attention in the present moment without judgment [Wikipedia].
There are many techniques, guides and audio books out there for meditation, better sleep and mental strength development. Just pick one and go with it. The principals are the same and you will get used to it. Then you will initiate those techniques instinctively and it will help you to deal with any stressful situation in life. Check out the work of Jon Kabat-Zinn and the great Coursera course.
Paper is Always Easy
I don’t believe in paper trading at all, I wish it didn’t exist. The only way to learn to trade is going live and losing money. Nobody started right away with a straight equity line. Paper accounts don’t teach a lesson.
Thanks to paper accounts we have bunch of “Market Wizards” out there with the 1,000% returns on a demo. Seriously, have some decency. I lost more than 3,000$ because of software errors: wrong orders, prices and stops. The same software was running on paper way before and I didn’t known about all of those spooky situations until I hit the live account and lost some bucks. Paper accounts don’t teach you to appreciate risk and money, contrary they make you loose and delusional.
I strongly recommend starting small but live, even learning to use your software should be done on a real account. The differences between live and paper accounts will surprise you when most unnecessary. For instance buy stop-limit orders in IB (Interactive Brokers), with different stop and limit prices, will fill on paper, and will be cancelled in live account due to exchange restrictions and rules. This minor difference may cancel your best trade for the month. Again I learned it only when traded live and missed a good trade.
Admit Mistakes and Move On
You must admit mistakes immediately and adapt. I’ve spent thousands of hours on ideas that eventually ended up as non-relevant and not practical. Thousands of research and coding hours eventually were trashed. Not all ideas are brilliant, quite the contrary, most of the ideas suck. The process eventually led to successful ideas. Progress is trial and error, there is no other way.
Be free to admit that you are wrong and just move on. The pain of losing money taught me so much. I never was afraid to admit my stupid mistakes. I never tried to hide them or make them sweeter. Trading is a very painful endeavor at the beginning. You can’t learn it from a paper account or reading books. Embrace the mistakes as they are your ticket to success, as long as you make enough trials.
Avoid Distractions or Do NOT Trade
Don’t try to synthesize trading with day to day tasks such as electricians, UPS deliveries etc. They will break your concentration and daily flow. Schedule them outside business hours.
One day I had an electrician upgrading my lighting during the trading session. It only took 1 hour prior to Europe open but my trading session was broken. I missed two good opportunities, all of my hardware and software was down because of the power break so I rushed to get it all back and the entire session I was behind the race. From that experience I never mix business with utilities.
On another occasion the electric company awarded us with a power break for the entire day. Probably it was fixed in 30 minutes or less but the randomness of when it starts and ends didn’t allow to work from home. I was forced out to my institute’s library. Although it was very nostalgic, the firewall blocked everything, so eventually I was connected to my mobile phone. Here I am sitting in the library, connected to my personal hotspot, running algos and trading. The laptop overheated and turned off on me twice. Once with a position out. Some girls asked to help with a problem in Algorithms and Data Structures and I could not resist the cool books on Bauhaus. Somehow I made money and did a good sample of my edge. The wise move was just taking the day off.
Multiple Time Frame Analysis
The importance of multiple time frame analysis has been mentioned by many. Always keep your eyes on multiple angles of the same landscape. With today’s software it’s very easy to have multiple charts. In addition for mechanical systems the data can be transformed into other time frames. I love working with 5m bars and transform them into 10m, 15m, 20m and 30m bars. One historical data request is all you need, and again, even the retail trader can do that.
Here is a breakout day on multiple time frames. Entries can be done on zoom in scale and the major daily trend analysis is left to the high time frames. Note how a trend day is awesome on every possible chart. Just a reminder that it’s never too late to join the party once you realize what’s going on.
Old School is Good
Writing prices, drawing charts and building Market Profile yourself is an amazing way to increase your understanding. It’s awkward that we have become so dependent on our trading software.
For almost 6 months I was manually drawing Market Profiles for every market to be traded. It’s impossible to describe the importance of this simple ritual. It has improved my market reading significantly and helped me sharpen my edge even further. Eventually I stopped the manual drawing because my software already does it (way faster) and I have learned to build the Market Profile in my head just from watching the 30 minute bar chart. I strongly recommend repeating this exercise.
Hard Work is Not Enough
Sorry to poop the party but hard work won’t do the trick. I’m a workaholic: during first months of my endeavor I’ve averaged a 14 hour workday. Trading European markets since 09:00 IDT till US market close at 23:00 IDT. Vital breaks here and there, but mainly screen time. Weekends were full of writing Python/Java code and working on my edge. It won’t do the magic, quite the opposite, it will harm you and your performance.
Burning out is very dangerous because you are not objective and don’t see it. You might get hints (bad performance, sloppy execution, missing mechanical entries etc.), but you won’t admit it. Hard work is essential but working too hard is bad.
Letting go is mandatory. I read a lot about people with edge that actually work 2 hours a day. I didn’t realize it was possible. I always had a strong feeling that hard work will do it for me. Nowadays I stick to 1 hour for the Asian session, 2 hours for the European session and 2 hours for the US session. Less is more, I learned it the hard way.
Trading in the Zone
In the famous book by Mark Douglas he proposed an amazing exercise to teach you that trading is a game of probabilities. Basically he encourages us to write down our system and just trade it as is but in chunks of 20 trades. The random sample will reveal that we can lose 5, 10 or even 20 trades in a row and vice versa (anything can happen). It’s the entire 20 trades collection that is important. On the other hand, a bad outcome implies that there is no edge. Needless to say that the book is a must read, and you must do the exercise immediately.
But I could not understand why the hack he insisted on 3 contracts. The risk rational: being OK with losing all of the trades and liquidity requirements are clear. But why the hack 3 lots, can’t we just trade 1 lot instead? It didn’t leave me alone, I was thinking about it for a couple of days, no opinions on the web and then I just decided to simulate the outcomes. My explanation is based on one of the 7 principles of consistency that Mark describes in his book: “I pay myself as the market makes money available to me”.
So here is my interpretation for why 3 contracts is better than 1 contract assuming we can handle the risk. Assume having a 10K$ account, trading ES (E-mini S&P 500) is bad idea. Even with a 3 points stop loss and 5K$ margin, it’s less than 33 trades and a possibility of losing half of your account. Needless to say that you can’t trade 3 lots. Now consider 3 lots of MES (Micro E-mini S&P 500). Risk the same 3 points but now it’s 45$ risk per trade. The margin is 1.5K$ and suddenly you can handle at least 150 trades, or multiple trials of the 20 samples idea. Eventually you realize that you will have to reduce your size so that you can survive and have a decent sample size.
But there is more to it. Trading with 3 lots is way more flexible and efficient. Let us examine how the three lots could work out. We start with a total risk per trade of 45$ and 3 lots, 15$ risk per lot. Now assume you got in with 3 lots and your take profit equals the risk. For MES it means 3 points risk, or 15$ per contract, and the take profit is also 3 points per contract. The following table presents the possible outcomes. Right upper corner is the risk to reward ratio (R/R).
You start with 3 lots and a full risk of 45$. If the trade doesn’t work out immediately, you will be wiped out and it’s over. Now assume the other possible outcomes. Because your take profit is 3 points, you might consider dividing your exit strategy into three stages via the 3 lots you have. When you reach your first target (1 point) you take 5$ profit and your risk is now reduced to 30$ because you have only 2 lots left. In this moment no matter what, you lose no more than 25$. Let me repeat that, when you reach your first target, you reduce your risk by almost half! Now assume you reach your second target (2 points), take a 10$ profit and your risk is reduced to 15$ because you have only 1 lot left. So far you reached two targets, a total of 15$ (5+10), and your risk is 15$. No matter what, you have no risk (5+10–15). By this moment you will usually even adjust your stop and many times it will be in your favor so there is no risk on the 1 lot left, leading to implied 15$ profit. If reached the third and final target you get 3 points, or 15$ and the total P&L for the trade is 30$ (5+10+15) and you are flat.
Assuming the 1 to 1 risk to reward, the total possible P&L is 30$ for a 45$ risk, which is not spectacular. Of course having all of the lots reach the 3 points will give you 45$ but it’s harder to get in terms of probabilities. When you insist on R/R ≥ 1.5, this approach outperforms the standard method. Waiting for 3 to 1 setups is superior as by one target we reduce the risk by three and the total potential is still high. This simple trick shows how powerful profit taking can be.
Energy Redirection
Another important insight coming from Mark’s book is that two completely different (negated) thoughts can exist simultaneously in our mental system. In the book he gives us a thought: Santa Claus is outside the door. A 5-year-old has energy in this thought, while we don’t. Both thoughts actually exist simultaneously in our mental framework. The question is where the energy is? As thoughts are intangible, we fully control where the energy is and therefore control the outcome of our beliefs. This generalizes to anything in life.
Anything Can Happen in the Markets
I had some uneasy experiences in my trading career. In just three years I learned the hard way that anything can and will happen in the markets. The more you expect something, the lower the probability of it happening. If you start thinking about how much money you will make on the trade when it reaches your target, I can guarantee you the stop will hit and you will end up a loser. And vice versa, the less you expect some level to be hit, the higher the probability it will get there. Murphy’s laws get extreme probabilities in the markets, watch out.
Physical Delivery
I had an unpleasant experience of going into physical delivery. So I trade with Interactive Brokers and they always protect you with physical delivery of commodities such as crude and hogs, but with currencies you actually can get into the delivery phase. And it happened to me.
It was the last trading week of 6J futures (Japanese Yen). Front expiration is September and the volume has already shifted towards December. I had a good trade that I kept over the weekend which even worked out a little bit on Monday. So I fixed it and had another trading setup for 6J. The problem was that I didn’t make the roll in my software so my setup was still considering September, so I entered 6J on September expiration once again. When I decided to scratch the trade as it didn’t work out as expected, I could not. There was no market. Suddenly I check the contract details and noticed a red bold notification: “Trading Has Ended”. My heart rate doubled as I know the contract impact is physical delivery of 1,250,000 JPY which is approximately 115,000 USD. Back then my account balance was 16,000 USD so I was scared to death.
Always roll on time.
I’ve tried to reach support, no luck, read the CME docs on delivery but it was not clear. Luckily I was long so I realized I will get physical delivery but not deliver, so it kind of gave me a relief. The next day I got the delivery, my account balance had 115,000 USD equivalent of JPY and eventually the broker just landed me the money to hold the position. I immediately fixed the position and the loss was only 350$ (commissions and rates).
The lesson is never get to the physical delivery because it’s extremely unhappy situation to be in. From that day I check expirations every day and never trade contracts with at least 3 days to the last trading day. Better skip the trade than pay extra.
Don’t Jump to Conclusions
Hard to spot, but with some experience you will be more careful not to jump into conclusions. Screen time is king, no book or mentor will show you what you will have to find out by yourself. After some descent screen time you might be familiar with tape bombs and sudden sharp moves. Most importantly you won’t lose money and provide liquidity to the big players on such occasions.
At the beginning you will naively jump into the market with the strong urge and feel of missing out. As you grow up, you realize that you will get a better entry price if you wait. As a matter of fact, the longer you wait, the better your entry. Of course waiting too much and you will indeed miss the train. Experience grows as time goes by.
Here is a classy lie that the algos utilize, an example where it was relatively easy to spot. The upper chart is the usual chart we all used to and love so much. It’s 1m bars, some indicators and we see a drop of 10 ticks in ZN (10-Year T-Note) from 139'100 down to 139'050. The lower chart is a constant volume chart where every bar is made of 1000 contracts traded. The same drop, but note how symmetrical the selling and buying is near 139'050. The algos accumulated many long contracts first by driving hard the price down, then buying back with more volume (because it took longer, and every bar is a constant 1000 contracts traded). This way they averaged a better buying price probably around 139'070 with way more contracts than the initial drop down. Nice and smooth, then they dropped it back as it was near Europe equities close and it’s done.
What’s obvious is obviously wrong [Stanley Druckenmiller].
Yet another example before news announcement. Again 1000 volume chart. Note how approximately 15 minutes before the announcement the algos drove price up, causing panic and urge to buy disguised as a trend reversal. Then they distributed many contracts around 137'275 and drove price down back to 137'220, averaging way more short contracts at higher then market price.
Many times in such occasions I used to sell or buy the urge and provide liquidity to the big. Afraid to miss it or be left behind, lost money every time. Nowadays I know how risky those bombs are, always avoid them and look to do the opposite right away.
Be Brave and Face the Stress
When you realize that trading is mainly all about psychology and mental power, you will get interested in the topic more. If you still think that trading is all about the holy grail setup or reading price action, that’s OK, you still have time to grow up. I have read a lot about psychology in trading and I can summarize it to you in one sentence.
Be positive, be brave.
Being positive is key to success in life in general. It has been mentioned by many successful traders. Moreover, you can clearly see that successful traders are positive folks. It’s easy to spot negative people and the difference is straightforward.
Being brave is just facing your position when it goes against you. Watching your stops hit, having a losing streak and eventually being OK with that. It’s part of the game. If you can’t handle it, your pain and stress will deteriorate your performance, you won’t survive. This idea is related to Prolonged Exposure in psychology for dealing with PTSD.
Another aspect of being brave and advancing towards your success is managing a honest trading journal. In his “The Daily Trading Coach” book, Brett N. Steenbarger encourages the reader to add many vital rituals so that you improve. The best idea that helped me was managing a honest journal, and writing my thoughts down. It’s the only way to deal with and fix your mistakes, and it takes a lot of courage and time.
Lower Your Expectations
The faster you lower you expectations, the faster you will succeed. When I started this endeavor I had a daily 500$ goal. My first few weeks had such days, but my account was too volatile. Earning 500$ then losing 1000$ and eventually my account was tiny. Then I reduced my daily goal tenfold, and it started working out, gradually.
Don’t eat like a bird and shit like an elephant.
My typical week nowadays consists of 5 business days. One day you will make money. Assuming you execute and follow the plan, this day will probably pay you for the entire week. One day you will be miserable as hell, thoughts of quitting and getting back to being employee will try to sneak in. Big players don’t move the markets and you end up providing liquidity to tiny fish like yourself. One day you will feel stupid as much as possible. You had this plan, and the market followed but you didn’t perform. You chickened out / didn’t sleep well / had sex and woke up late. The plan was good, you saw the opportunity, still you missed it, you idiot! Finally you will have two days which basically pay you nothing for working the most. Many trades, plus, minus, you are even or end up with a tiny loss. Such days are not worth your time, but you didn’t know until it’s over. Holidays or heavy news days are covered by those two.
You must lower your expectations and realize that you won’t ever be able to buy the low of the day nor sell the high of the day. Consistency it’s key. You are not a trader, you are a professional athlete. Not every day you will be at your peak performance. You will have few golden opportunities a month, so just relax and reduce your daily profit target tenfold until you are consistently profitable.
Topstep Trading Combine
Topstep is probably the best way to start trading. It is always better to start with your own capital (if possible), but starting with too much is very bad. Remember that you will kill your first account so it should be tiny. Topstep gives you a feel for losing moneys but with less pain and solid guidelines (which we all lack at the beginning). I wish I knew about their programs years before (could have saved lots of monies).
Let’s address the main reasons why Topstep is actually a good place to start trading. First they provide strict rules for everything: trading hours/products, daily/weekly loss bounds and P&L targets. Those things might seem obvious, but they are very hard to set and follow at the beginning. Eventually it will be all natural to you, like there is no other way. If you don’t setup strict rules, you will lose ten times more than you have ever wanted, and it’s all gonna be very fast and painful. Additionally, they have multiple platforms available and nice web based platform via Tradovate.
So we have already covered that paper trading is a waste of time, how is it different? The difference is that there is pain involved. Let me explain. Trading without risking money is a waste of time, but trading without boundaries is too risky. Topstep program is bridging the gap. You have a monthly subscription ranging from 150$ to 300$ and every reset is 100$ (believe me you will have a lot of resets as you break every rule at least once, and they add up). But still, it’s better than start trading with 10,000$ and just flushing it with a couple of trades. You can go the stubborn way and lose a lot, or you can start in a paid simulator and learn gradually. It’s up to you to decide, but I strongly encourage everybody to start trading with Topstep.
Roll Periods
I’ve made money and lost money over a large sample size, but I’ve never made money during roll over periods. Every quarterly expiration: March, June, September and December we have multiple important expirations (aka triple witching). It is always the third Friday at the end of the quarter and a very bad period for the retail trader. You see, institutions wait on the sideline for the contracts to settle and roll to the next expiration, while retails traders provide liquidity. If you want to survive and thrive in this vocation, know that you have predefined holidays every two/three weeks on the next roll month. Unless you are running a market making business, you have low probabilities of success out there during those periods.
Juggling
Learn to juggle 3 balls. Yes I’m serious, no I’m not kidding. Juggling is fun and very efficient physical activity that quite sums up trading. It’s all about technique, practice and a lot of failure. It’s a good physiological and mental refresh exercise during the trading day. Stress and pressure sometimes get amplified during the day, it’s very easy to skip breaks and pause the action, juggling is a perfect break. Tons of videos out there to jump-start, start with socks, move on to pro balls. Warning: it’s very addictive.
Karate
I’ve been practicing Shotokan Karate since 2013. During my service at the IDF I had this strong urge to learn and practice a martial art. When I finished my service, I read about every popular martial art out there, and decided to go on with Karate. Kara — empty, te — hand, do — way: the way of the empty hand. It was pure luck, but the decision was correct. I found a local Dojo (hall) and joined a team of awesome folks throughout the journey of continuous and never-ending self improvement. Little did I know how crucial and vital daily exercise is. I encourage everybody to try it out, it will definitely make you stronger. I am extremely grateful for this art and the energy, vigor and tranquility it brings to my life.
Things that take years to achieve are just a beginning of a greater journey.
It’s a coincidence that I’ve found multiple edges at the same year I’ve earned my black belt in Karate. Both reminded me that most things that take years to achieve, are just a beginning of a greater journey. Edges will come and go, you will have to monitor, adapt and constantly work on new ideas. Karate practice will never get you to a superior level, you will practice as long as you can, trying to improve every day. Both are static and dynamic arts at the same time, mastering the art is a vocation.
Karate is yet another reminder for traders particularly that things are very hard at the beginning (from buying the market till lifting your leg for a front kick [mae geri]), but with practice, endurance and a little bit of enthusiasm, anything is possible. Then comes a day that both trading and the front kick become natural and mechanical without any effort at all, and once again you know that it’s never gonna be the perfect kick/trade, all you strive to do is do better each and every time.
Music
Music is essentially a voice of the soul. No matter what happens, music can always cheer us up. I’ve been a melomane since childhood, music touched and inspired me tremendously. I’ve been playing the guitar since 2001. Started with classical guitar, but later learned to play electric, jazz and bass guitars as well. In between I learned some basic piano and harmonica just fur fun. The point is, learn to play an instrument or listen to various kinds of music.
Years ago I bought “1001 Albums You Must Hear Before You Die”. Since the beginning of this endeavor, I started listening to every album in the book. It helped me explore new artists and many new musical styles that I have never known. I’ve listened to over 700 albums in three years. The book is essentially a time travel. You realize who inspired who and who was the first. Many artists became famous by luck although they were not the first to invent a style. Others were neglected and did not reach the stars. Every decade presents a radical shift in many aspects: tempo, instruments, voices, lyrics and sound quality.
Finally, playing an instrument is similar to trading. You will never play the piece perfectly nor buy the lowest low for the day. You can know sheet notation but play poorly. Similarly, you can know the contract specifications by heart, but lose money. Continuous improvement steps in again, it’s a journey where every day you try to do better then yesterday.
Summary
Trading is a journey. Every week you learn new things (thanks to the markets, audible, Coursera, edX, TED, podcasts and YouTube), but then again, you can’t actually summarize what trading is or all about, because it’s evolving.
Being a trader is like being an Olympic athlete and having the Olympics every week. You practice the craft for years and you don’t know what you don’t know. Then you are break even and you know what you don’t know. Finally you are profitable, and you know it, but keep on practicing as if you had no clue at all.
Every day you strive to be better than yesterday. Every day you try to find new ideas and insights. Every day you try to do no mistakes, or at least do as little as possible. It never ends. Once you are in, you can easily cover every year of your life in the trading business with a Medium story, because it’s so different and fresh every time. That’s exactly why I’m so grateful for this journey.
It took me 3 years to write this story and earn more than I did working as a Data Scientist. Don’t underestimate the time it takes to develop an edge [Linda Raschke].
Hope you’ve learned something new, feel free to contact me with any question at kreimer dot andrew at gmail dot com.
P.S. My Market Profile course is available on Udemy, just in case.
