Through the Looking Glass

Quote from illiquid:

Today there was really nothing that cried out clear and loud for an entry, yet somehow I managed to post my highest volume in a week. But actually, this is typical of my trading if I'm not careful; it's only recently I've realized the reason why my volume has a strong negative correlation with my p/l. Even if your best bet is sitting on your hands and doing nothing, being a discretionary trader, your subjective take on any situation has the ultimate say. If there aren't really any premium setups to be found, my mind tends to "work harder" in finding them -- not beer but boredom/frustration goggles. Secondary and tertiary plays suddenly seem like sure things; I throw my equity upon these at two to three times their deserved size, for lack of anywhere else go. With no true confidence in these trades I'll inevitably get shaken out easily, and promptly sucked into the next one even more readily from frustration. A bad vicious cycle to say the least. In contrast, when I'm lucky enough to exhaust my buying power early on in well-timed positions, I find there really is nothing left to do but sit and wait patiently for a decent exit. Volume peters out to nothing, my hands go limp -- I'm spent already. Now if only I could consistently register low volume on days when they really deserve it: when there is nothing to do. Realizing that the bulk of my volume comes from misguided intentions, well, that's something I discovered way too late in the game, and old habits are just that much harder to fight.
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I think it's great that you've reflected and realized a weakness in your trading. This will inevitably make you a better trader. The question is, what steps are you taking to minimize/overcome the negative effects of overtrading?
 
Part I



Not many realize there are two looking glasses; one separates traders from citizens, a second separates traders from professionals

The following are some random thoughts I pieced together to hopefully further the view into the second

One important note – I do not want to get into a pissing match or (and especially) derail this journal. These are “my” thoughts that hopefully shed some light into a very dark closet – your mileage may vary


If however you still feel a pissing match is in order – start another thread – I’ll respond



Illiquid – I respectfully and humbly ask for your indulgence Sir



Fractals
* Are patterns which repeat themselves to create an identical – bigger pattern – which in turns creates an identical bigger pattern – so on and so forth.
* The base pattern in this case is repetitive buying and selling
* Reoccurring fractals create cycles
* Multiple fractals/ cycles occur simultaneously to build even larger fractals/ cycles
* Fractals / Cycles are a result of Professional Traders (Smart Big money), Market Makers (professional operators), individual traders, and dumb big money – buying and selling at their unique discretion
* Viewing differing fractals is not the same as viewing a chart in differing time frames
* IMO smaller time frames are simply a microscopic look within a larger time frame

Cycles
* Are either Bullish or Bearish – some call them trends
* Have tops and bottoms – everything else in between is just a completion of that cycle
* Cycles occur over time, but are not governed by time
* Weakness of a cycle shows in up candles
* Strength of a cycle shows in down candles
* The direction of a cycle remains in tact until something affects and/or stops/reverses it
* A bull cycle move happens after a substantial transfer of stock from weak hands to strong hands occurs
* A bear cycle move happens after a substantial transfer of stock from strong hands to weak hands occurs
* Aka a market/ price move

Market Moves
* Do not occur on news – major catastrophes notwithstanding
* Are explained/ justified by news
* Are only caused by professionals maneuvering supply or demand (catastrophic events notwithstanding)
* Are the way professionals make money
* Are only stopped/ reversed by professionals (catastrophic events notwithstanding)

Candles
* Indicate price direction
* Represent price spread (aka price action)
* The price spread of a candle contains half the information required to read the market, the other half is contained within that candle’s volume
* Weakness shows in up candles
* Strength shows in down candles
* Always read a current candle’s spread, in relation to its current volume (the result of effort being exerted)
* Always read a current candle’s spread and its volume – within the context of the price spread/ volume that has preceded it
* Contains a Open, High, Low, Close
* Price spread is a candle’s height

Price
* Price action not only describes the price spread of a candle, but can be used to describe general price movements/ cycle direction, support and resistance – the tick by tick movement of price – whatever
* Price only moves because of a supply or demand imbalance
* Price spread is the result of effort being exerted – volume being the exerted effort
* Professional operators create supply or demand
* Resistance = ample float to short / longs are selling – more importantly professionals are selling/ establishing a short position
* Support = minimal float to short/ shorts are covering – more importantly professionals are covering/ establishing a long position
* Always read current price’s spread along with current volume – while factoring in preceding price’s movement and the volume it took to make it happen.
* As price moves – sheep are forced to follow
* Futures fluctuate above/ below cash price, but cash price will always set the limits due to arbitrage
* Sudden price moves away from cash price are usually caused by a professional and/or market makers

Accumulation / Distribution
* At a potential cycle bottom – accumulation begins when professionals/ market makers start buying
* They will remove stock from weak hands by placing them under pressure (forcing prices down)
* They also buy as much stock as possible – while making sure they do not significantly move price up and against their position – they do this until there are few or no shares available at the price level/ range they’ve been buying at – stock changes from weak hands to strong hands
* Once no more selling pressure (resistance) exists (meaning the weak longs are flushed out / majority of the float is controlled) – then price is free to go up
* As price moves up the sheep must follow
* Accumulation is complete
* Accumulation is support


* At a potential cycle top – professionals / market makers sell
* Professionals will sell to the market and/or to the market makers (and cut a deal)
* Market makers now must not only sell their current long position, but must also absorb (agree to sell) whatever professionals have not sold to the market. Market makers will place these surplus shares, from the professionals, onto their “books” – and agree to sell these shares within a specific price range
* Market makers then must sell the majority of their remaining position, and their book, while not driving price down too far or too fast – so as not to force price to go against their own position and/or their other trader’s position (their book)
* Should selling force price down too far/fast – then selling is stopped and price is supported – giving the market maker / other traders (their book) the ability and time to sell more of their stock to the market – as price rises on the next wave (cycle) up
* Distribution is complete once the market maker and their other traders (their book) have sold the majority of their position. Support is removed and a bear cycle begins – this takes time put the pieces in place and complete the transfer – strong hands to weak hands
* As always the sheep must follow
* Distribution is resistance

Volume
* Indicates the amount of activity (effort) being exerted
* Exerted effort should result in a price spread, or not – depending on the professional/ market maker’s intentions.
* Contains half the information, the other half is contained within the price spread of a candle
* Always read volume in relation to its current price spread
* Always read volume and its price spread within the context of the volume and price spread that‘s preceded it
* Professionals/ market makers are the only ones able to create enough volume / price spread for us to read
* In an uptrend – volume showing a substantial and healthy increase is bullish
* In an uptrend – excessive volume is not good – supply may be swamping demand
* In an uptrend – low volume warns of a potential trap during an up move
* In a downtrend – volume showing substantial and healthy increase is bearish
* In a down trend – excessive volume is not good – demand may be swamping supply
* In a downtrend – Low volume warns of a potential trap during a down move
* Excessive volume – either direction – could also be categorized as capitulation or blow off
* Volume coupled with price spread tells the story

Stock
* Holds no intrinsic value
* Individual traders must always be mindful of the perceived value to a professional trader
* If you are able to buy at a better (lower) price – perceived value my be waning
* If you are able to sell at a better (higher) price – perceived value may be gaining

Part II to follow
 
Part II



Market Maker
* Must create a market
* Also trades their own account
* Can see both sides of the market
* Knows who the big players are and knows if they are buying or selling
* Knows when large blocks come across, knows how it may affect price, may trade futures and/or options to offset their current risk
* Absorbs large sell orders by selling some immediately – what ever the market can bare with out significantly affecting price in a negative way (negative to their current position that is) – then places the rest – figuratively speaking – onto their books – with an understanding they are to sell it within an agreed upon price range.
* Does the same for large buy orders
* Are able to “adjust” (gap/ move) price at times (usually early morning, late afternoons, low volume times) to benefit their current position/ book
* Knows where the stops are, and runs them – it’s easy money – plays with price to trap as many traders as possible and collect their loses / stops
* Creates price moves in conjunction with news events – which in turn allows these adjustments to occur without much notice.
* May prompt news events
* May entice news commentators to speak about that which they trade

Professional Operators/ Specialist
* Must make their profit from a price difference (movement)
* Are specialist for the most part
* Go about accumulating / distributing with precision and deliberation
* Accumulate by removing stock from weak hands under pressure (force falling prices)
* Distribute to weak hands under emotion
* Is the only reason price moves – catastrophic events notwithstanding

Smart Money
* Are professional operators/ specialists
* Are a trader or syndicate of trades who – know how to trade – controls significant money
* Think alike – can read the market alike – know the signals – no need for unnecessary collaboration (for the most part) – although it happens
* Does not want to be forced to buy at what is perceived as a high price just to maintain a rally
* Willing sells at what is perceived as a high price
* Willing buys at what is perceive as a low price
* You can add bots into this category not only because the smart money uses them, but also because they buy/ sell solely on rules – sans emotion or human fallacy

Dumb Money
* Any non trader controlling significant money – includes most hf’s, fp, brokers
* Could easily be argued all media pundits with any magnitude of a following belong here
* Tend to think independently (of the professionals) and idiotically

Individual Traders / the Herd
* Must decide either to be a weak hand, or a strong hand.
* Subject to psychological missteps that are not part of the professional’s vernacular
* Must use discipline to overcome any penchant for psychological missteps
* Must separate from the herd

* The better traders separate themselves still further

* The herd will panic after a substantial fall in price and sell – usually on bad news (ha go figure)
* The herd will become pissed off after seeing a substantial rise in price – that they’ve missed – and rush to buy (idiots)


This happens in all time frames across all markets – over and over….



Technical Analysis
* Anything on a chart (including price) – imo
* Utilizes tools to identify the professional train and the direction it’s headed so we may hop aboard
* At times any, every, all tools will work – at other times any, every, all tools will fail

* Best to be a professional, or at least – be inside a professional’s head – imho of course



RN
 
Count me in your thread if you start one RN. You are the first person since Ive been on ET to post the only information any trader needs to come out ahead at trading. I wonder why that is.....
 
Quote from ammo:

we think what ever we want and then rationalize it, making it true,losing over and over ,.... we eventually weed out the more painful behaviour or beliefs, assume you have 9 trades per day in your gun,.... choose them wisely ,because this disciplinary game has rules that can't be broken,9 trades ,thats it. Even if you see a tenth ,twelth,u cant take them because your are out of bullets, try it for 2 weeks, you will learn to be very cautious and trade only the setups, you probably wont need more than 3 or 4 trades a day
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I usually cannot fully apply and stick to a rule until I absolutely comprehend the logic behind it, the "why" of it. If for example I find that I almost always lose money on Fridays, or between the hours of 12-2, or trading after hours -- I could never just declare a day or time of day off limits without delving into the real reason behind it. This need to understand the "whys" is how I came about learning a great many things about the markets as well as myself.

Yet more and more as a discretionary trader I'm beginning to suspect the value in certain arbitrary rules, if only for the fact that in the end they save me money. Stopping after a certain number of shares, an amount gained or lost, or banning a symbol just because I've never, ever been able to keep a profit in it -- these are all tough calls as rules, and yet they do "work". It's a bit of a leap of faith for me in applying them and just assuming that over the long run I'm doing the right thing, while knowing that full comprehension may never fully come. I may just have to face the fact that certain things are just too elusive -- and not to mention expensive -- to have the luxury of understanding.
 
Quote from Kassz007:

I think it's great that you've reflected and realized a weakness in your trading. This will inevitably make you a better trader. The question is, what steps are you taking to minimize/overcome the negative effects of overtrading?
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Like ammo mentioned, I really do try to tell myself each morning that all that I need is *one* good setup each day, to not push or force anything when nothing is there. Truly believing this is the foundation to remedying the issue. I'm also trying my best nowadays to restrain myself from the more "difficult" trades and restrict multiple attempts at an unclear situation. It's now an instinct of mine to keep getting smaller with each subsequent losing attempt; I may often try too many times, but if size is reduced dramatically the impact is similarly lessened. So as usual, first I need the psychological impetus behind what I'm trying to resolve, then it's easier to apply real-world practical "rules" if you will.
 
Quote from Redneck trader:

Not many realize there are two looking glasses; one separates traders from citizens, a second separates traders from professionals

The following are some random thoughts I pieced together to hopefully further the view into the second
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RN,

Tis an honor to have you lay out your mental framework here. Again I need a day or two to absorb all that you've written. Everyone is welcome to ask questions of redneck and hold discussions here. I do think you may consider starting your own journal-thread, I know I'd be one of the first to suscribe.
 
one of the best threads i've seen this year. it gives me a reason to occasionally stop by ET.

i would say the OP has a better chance then most of "making it" in trading due to their honesty, and at least what seems like, self - responsibility.

also great insights by RN, as usual. and NoDoji as well. plus others.

someone, i don't remember who, wroter in this thread that that psychology does not play much of a factor in their trading....but then they went to to say

and i don't remember who wrote it here, but i can relate very well to the phenomenon of getting "loose" when the ol' account is on the up swing, something i have to always guard against. call me a freak....but i find it helpful to reduce my size after a big run. others will often increase their size thinking that they have it all figured out....and i can honestly say that although i know what to do (reduce my size),i don't always do it fast enough. thanks to my little friend, ego.

for me, trading requires constant effort directed toward managing myself as much if not more than managing the trade.

it is late...i'm tired...and for now i will add only that newbies should read and re-read this thread over many times. ET has a few, very few, peals of wisdom that can be found among the anger, frustration, paranoia, idealism, and perfectionism so typical of most threads and posters. this is a pearl.
 
Quote from xxxskier:


someone, i don't remember who, wroter in this thread that that psychology does not play much of a factor in their trading....but then they went to to say


oops....never finished the sentence......too tired and going to bed.
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