I am only posting this because I am likely going to be going to the new j-o-b (did not reach my internal goal, which was quite frankly impossible anyway...) but will continue to trade. So I figured I'd document what I actually do and if you are a retard like me, you can probably follow this and be at least break even if not profitable.
First decide why you want to trade. I'm not going to lie, for me it was literally this:
Of course I can be a profitable trader, I am so smart
So many people have no idea how to trade because they are trying to be smart. The amount of times I see some idiot on twitter getting angry about this recent stock rally (especially today, lol) was amazing. Even the professional CNBC commentators are flabbergasted.
I am/was the same. I have to constantly fight against the training you get in school of "being right". My entire journey was from the middle of this meme to the right (left?) side of this meme. You will notice this post will follow the same journey because that's what I needed.
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Basics => Theory of trading
Let's develop a theory of how to trade the market. We will start with basics.
Size of the various markets
Let's start with the basics:
* ES dollar volume: $393,622,031,900
* CL dollar volume: $72,802,821,000
* Gold dollar volume: $33,992,897,400
Altogether in these 3 contracts, that is a total of about $500 billion. Almost a half trillion. Of course, a lot of this is leveraged, so let's say there is a 0.2% leverage requirement and about 35% of trades are leveraged this way. That takes it to about $325 billion in leveraged+unleveraged trades across everything, obviously the big one in the futures realm being ES. That's REAL money being moved every day.
Why does price move?
Most simply, price goes up because there are more buyers than sellers, and vice versa. This sounds tautological, but it's important to know.
A sustained uptrend means buyers are exhausting sellers, or sellers believe they will get a better price later. And vice versa. In a MUST HAVE commodity like oil, this can mean sustained uptrends. In stocks it's probably just "the fed is printing".
Why do people buy asset X?
People buy stocks because they want the future cash flows at a discounted rate and the yield on that is better than anything they can find currently. With stuff like gold and oil, the math is a little different. Oil is a commodity, so people buy it because they absolutely have to, or conversely when there is no demand. With gold, they want it if they think the entire financial system is going to collapse, which apparently happens every few years (thanks Fed.)
This is the only macro analysis I will do, or be aware of. Stocks are overpriced? OK fine. It doesn't make me short the market anyway. Stocks are underpriced? OK fine. It doesn't make me long the market anyway (although for a long term portfolio, that probably makes sense, a la Buffet.)
Corollary: You are a little fish in a big pond, the best way to be
Your 2/10/20 lots mean nothing even if it feels like they are stop hunting your specific stop. It took me some time to understand my real power here. To me, an in-trade drawdown of $1000 isn't that big of a deal, but that same $1000 might be $50,000,000 to some big fund who cares (probably wrong, but who cares, the idea is right.)
From hereon in ((they)) = the big fish.
Your job, your only job is to catch a piece of the action. Not all of it, just some of it. You have zero edge otherwise. Once ((they)) decide they are doing something, you get in until ((they)) decide to stop.
Corollary: Time is your friend, and ((their)) enemy
The longer ((they)) experience drawdowns, or miss out on rallies, the more antsy they get about their positions because their bonuses, boners and divorces with alimony depending on the 3 best years of their earning depend on it. That means rips get sold, and dips get bought.
Conversely, it costs ((them)) a lot to move the market. The longer ((they)) have to do it, the more the tradeoff will become relevant.
Corollary: ((they)) cannot enter entire positions in one go
If ((they)) think fair value of an asset is $100 +/- $1, they will likely want to buy below and sell above. Support and resistance. It shows up in the chart. But ((they)) can't enter it in one go because a market order for $250 million worth of some mid cap stock will probably disturb the price. So they have to buy below VWAP, or whatever dumb shit they do.
Conclusion: ((they)) move the market
You with your dinky 2 micro ES will never move the market. I actually had a friend ask me once: do you think if I go in and buy $300K worth of FB that I can move the market. No friend, you cannot. Your PnL is going to be even more red.
Long or short?
Obviously, this is the hard one. What if I go long and this is the top?!!! What if I go short and this is the bottom?!!! OMG!!!
You aren't going to buy the top or sell the bottom every single day, unless you are a complete idiot. Some days the dip will keep dipping and the rip will keep on ripping. Them's the breaks.
If you are still learning, then perhaps you have no choice. You are only allowed to go long.
The Theory Of How To Trade The Market
Buy as long as ((they)) are buying, sell as long as ((they)) are selling. If ((they)) have been buying, ((they)) will likely continue to buy. If ((they)) have been selling, it is likely ((they)) will continue to sell.
It is best not to assume that you know whether ((they)) are buying or selling a particular area, best to wait for proof if you can. For example, RSI cooling down at the top of a range is something some people use (I don't.)
PAY CLOSE ATTENTION TO HOW WE DERIVED THESE THINGS SOLELY FROM THE SIZE OF THE MARKET AND A DUMBASS HYPOTHESIS ABOUT WHY PRICE MOVES. NOTICE HOW UTTERLY STUPID YET OBVIOUS THIS THEORY IS.
Risk management and probability
This is the most important. This is the most easy. And this is where everyone fucks up. I will include my secret sauce below. It's really easy. And therefore not really secret. No one will use it or they will use it wrong and then they will complain.
Most simply: the only thing you can control is how much you will lose. Everything else is completely luck. A little bit of conditional luck perhaps, maybe better than 50%, but it is still luck.
How much to risk?
Every trade you enter has a non-zero chance of being wrong. Therefore, risk only what doesn't bother you. Roughly, I would estimate this risk as "the amount of money I can earn in one day of work in my career". So if you are earning $15/hour, then you can risk $120. You'll be aiming for earning $240/trade.
NB: when I wanted to publish my script on TradingView, they literally did not have a category for risk management. What does that tell you?
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Practicalities
How to set up your charts
Timeframe: 30 minutes. This is mostly to do with psychology and win rate. A smaller time frame usually means trends are weaker, so you won't necessarily be able to capture huge moves until you become good at it. So use a larger time frame to avoid too many stop outs and get a decent win rate.
EMA: 200 period EMA.
I also add the 50/100/200 daily SMAs for index futures because other people may care about them but I only use them as levels of potential interest, since I am not trading on a long enough time frame for them to really matter.
Risk management: This is my own script. It is a giant mess, but it works. for me.
https://www.tradingview.com/script/v7RR4jst-ATR-based-stop-for-noobs/
The basic idea here is you decide how much you are willing to risk, and parameters. These are my favorite parameters to use but occasionally, they don't really work and I have to use a fake order in TradingView to figure out the sizing.
Notice the part I have circled. Remember I said earlier how I have to constantly fight my own brain? This is an example. Do I REALLY need that complex SWING bullshit? Nope. Couldn't I just use the daily bars? Yep. But I still have it. Because I am a fucking idiot. The best part it is it doesn't work properly sometimes (see it on USDJPY) and it was designed to always work properly. Probably a bug somewhere, I dunno.
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Your chart then should look something like this:
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How to trade the market using this chart
Recall: Buy as long as ((they)) are buying, sell as long as ((they)) are selling.
Question 1: What direction is the EMA trending?
If flat-ish, ((they)) are not sure => range trading.
If trending up, ((they)) are buying dips.
If trending down, ((they)) are selling rips.
Question 2: What is my sizing/stop?
Size of a trade is a function of the stop and $ risk.
$ risk is a function of size and stop.
In my example above, you can see if I use my favorite settings, my stop is 0.00362 and my sizing is 887K. This works out to a CAD loss of ~3500 which when converted to USD is ~2500. It's probably wrong, I dunno. I'm bad at arithmetic. But I get 2500 somewhere eventually so it's probably right.
Question 3: Where do I enter the trade?
This is pretty easy too. All you do is look at the chart and say "hmm, if price goes here it's probably not going to keep going if my theory is correct". You are literally TRYING to top/bottom tick the swing move, the extreme levels. Sorry, that's just how it is.
So, you'll look at highs/lows of bars, or areas with a lot of trading and put your entries there.
An example from CL (this is a real trade I took last week, but unfortunately it's not showing up on my IB chart so I have to fake it):
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EMA direction: flat
Sizing, stop: learn to read
Where do I enter: since the EMA flat, I have to expect a lot of whipsaw around the mean, be very picky
Ultimate profit: ~15K between Friday and Monday
It's a little more difficult and requires practice when the EMA is flat to decide where to enter because it could be a trend change. But in this case, oil had been on a downtrend so I was comfortable shorting the rip.
Unfortunately, figuring this out well is an art, and I often just look at the chart with zero indicators before I enter a trade to make sure I am doing the right thing. This way, you might see that there are 3 possible entries to choose for a short on CL.
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Why did i choose the third level and not the second one? We had a small uptrend of higher lows. Good chance of a higher high coming, even if slightly. I absolutely got lucky on the trade.
You can also see from my first picture that I went about $1600 in the red before the trade went my way. I was ALMOST stopped out.
So let's imagine I did get stopped out, what would I do?
The first question I'd ask myself is: did I get stopped out because I was wrong on the trade?
If the answer is yes, then fantastic, I just learned a lesson about something, maybe.
If the answer is no, then I got stopped out because my entry and the volatility were not good friends. In this case, I MIGHT re-enter. However, in this case, I will switch to the 5 minute time frame, wait for support to break and have a tighter stop (so I don't get double fucked.)
What about trades where I just get fucked right away?
These are the trades where you get stopped out immediately.
In my experience, this mostly occurs when I am lax with my entries which happens with FOMO. I rarely get fucked immediately otherwise, nothing really comes to mind that stands out.
Trade management
OK, now you are in the trade, you haven't been stopped out and it is going in your direction.
You have the choice of going to break even or leaving the stop in place. If I'm really confident, I'll leave the stop in place. But if I am trying to catch a turn, there is a really high chance I'm wrong, so in that case I will put the stop at breakeven right away.
Any time I feel uncomfortable about a trade, I nuke it, or set the stop to breakeven.
How to ride a trade as long as possible.
This is an art, rather than a science, but it is also a science.
The same way that you entered, you'd exit. So you're looking at extreme levels. If you catch a trend continuation, there is a good chance you will break levels so don't necessarily put an exit right at the obvious level.
Still, I will mostly just put an exit in the most favorable, easy exit I can that I can be proud of. I don't want it to be too hard for an extra $500/contract.
I will always move my stop to breakeven when price goes to another level, or I feel uncomfortable about it.
OK, I'm tired now. I don't really care if anyone reads this but maybe it helps someone.
To recap:
1. Use the above simple chart setup
1. Enter at extreme points only
1. Use a volatility based stop. No guarantees with my script!
1. Use a target equal to your stop to start but eventually you should be able to consistently hit 2x the stop.
1. Risk only one day's wages. With forex, you can literally risk 1 hour's wages if you want.
1. Move the stop to breakeven as soon as price moves significantly in your direction.
1. If you feel uncomfortable, get out or move to breakeven just in case you get lucky.
Oh and here is the most important one:
NEVER MOVE YOUR STOP FURTHER THAN THE VOLATILITY BASED STOP.
NEVER TRADE WITHOUT AN APPROPRIATE STOP.
