Posts tagged ‘money management’

E-mini Trading Always Provides a Painful Dose of Humility

By , 7 November, 2011, 1 Comment

I have been on a relatively hot streak in my e-mini trading the last couple of months and my returns have been impressive by any standard.  Frankly, I have been feeling pretty good about my trading ability and consistently.  I was pretty cocky about my trading results, perhaps verging on arrogant.

I had let a few trades run a bit too far in the red, and delighted in watching the market double back my way and allow me to turn a lousy trade into an impressive winner.  I doubled down on some of these trades when I was deep in red, which further enhanced my gains and ego.  Doubling down has always been forbidden in my trading, but since it worked so well I decided that I had been foolish to adhere to my long held trading taboo of adding contracts to a losing trade.

Let’s face it, I thought, after several decades in this business, I could trade any market, any trading environment, and I had gained enough skill that the money management skills I had worked hard to maintain were no longer necessary for my success.  I felt I had the Midas touch.  I thought I could turn lead into gold, I felt I had mastered the art of the e-mini, which is always a dangerous mindset.  I had a stretch where I went 26 for 28 with my new, somewhat reckless, style of trading.

Then last week rolled around and I received a heavy dose of humility and respect for the market.

The first two days went well, and then self-inflicted disaster set in.  After several days of 4-digit losses my confidence was shaken.  I was a rank amateur again, flailing away at the market and chasing after low probability trades with fervor and hopes of regaining my past trading glory.  I broke my trading rules, I ignored long-ingrained personal money management guidelines, and I felt like it was my first day of live trading.  Worse yet, by abandoning my long standing, written in stone trading guidelines that are the basis for successful trading I lost a substantial amount of money and shattered my self-confidence.

A couple of losing days will affect your whole outlook on trading.  Worse yet, my trading and money management techniques are the core concepts of what I teach and relentlessly drill into a new trader’s mindset.  Since I trade with my DOM on the screen for the entire room to view, my embarrassment was compounded by the deafening silence as my audience watched me flail away at the market and break the very set of rules I harp on throughout the course of every day. 

It was a complete meltdown by an experienced and successful trader, and the only variable that changed was the fact that I was initiating substandard, low probability trades trying to salvage the day’s losses.

In summary, it not unusual to read about the fantastic returns trading educators feature on their websites and performance reports, but even the most experienced traders can fall into unprofitable trading patterns if you fail to stay vigilant and true to the trading principles designed to minimize losses and maximize returns.  The lessons I relearned restored a much needed dose of humility to this traders psyche and reminded me that complacency has no place in any traders thought process; and that complacency shows no respect for how long a trader has spent trading.  Great traders are always vigilant and respectful of the rules that keep us in the business and last week I missed the mark.

 

 

 

 

 

 

 

 

 

Can this Market Rally Keep Going?

By , 29 August, 2009, No Comment

The initial phase of most bull markets is usually based in speculation, though. So you might argue that we are entering a new bull market, except this run up is actually quite extraordinary when compared with initial phases of past bull markets.

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Paper Trading versus Real Money Trading

By , 15 August, 2009, No Comment

Anyone who has read very much of this blog knows that I recommend extensive paper trading on a demo account before you trade a live account.  As a matter of fact, my exact advise is to be able to put together 5 days of consistent profits before you even consider tinkering with real money.  I think this is a realistic strategy for learning trading.

You will also find that I recommend some serious reading of some of the classic authors of investment techniques and theory.   I think it is important to understand the underpinnings of trading and have a well thought out philosophy on how the market functions.   On a humorous note, there are so many different perspectives on market theory that you are bound to find one that resonates with your own particular thinking.

I am a chaos theory guy.   You don’t have to be a chaos theory guy to be successful in your trading endeavor, but you ought have some philosophical underpinning to your actual trading style.

Which brings me to the point of this post, and that is the transition from paper trading a demo account to trading an account with real money.  You would think it would be the same…ah, erm…it is the same, at least the technique should stay the same.

But, it doesn’t.

Perfectly normal, intelligent people go absolutely brain dead when real money is involved.  I cannot explain this phenomena, I can’t even describe why it happens…but it does happen in an alarming number of cases and sometimes in a highly catastrophic manner.

Is it greed?

Is it fear?

Does real money make people trade different?    The answer, at least in many cases and in the early part of a traders career, is unequivocally YES.   I warn people of this and they vehemently deny that THEY could succumb to this sort of silly stupidity.    A very good friend, who I personally helped in his emini training and was absolutely gifted when we traded together, (he on paper, me with a real account) started trading and promptly lost 25,000 dollars in two days.  I had instructed, and he had always followed, the strategy of trading one of two contracts, and to use tight stops, when traded.  Boom, 25 grand disappeared as if we had never spoken.

When I asked him what went wrong, he was unable to explain his dilemma.  “I lost my mind”, he said.

And I have seem it happen so many times I felt it necessary to forewarn new traders, the transition from paper to cash is a quantum leap.  Be extra conservative, if anything.  Use the technique you perfected on paper and don’t overtrade or mismanage your money.

Okay, ‘nuf said…but don’t say I did not warn you.

This article is an eye-popper

By , 30 July, 2009, No Comment

Europe’s banking system is in far worse shape than the US. The losses may be bigger, and their capital to meet those losses is certainly less. Europe’s banks have been much more aggressive in funding emerging-market expansion than US or Japanese banks. Western European banks have lent $4.5 trillion to various emerging-market countries, businesses, and consumers.

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“Bailout” by Merle Hazard…This too funny

By , 27 July, 2009, No Comment

Steep Slowdown in Stock Trading this Summer: Will the current rally flop?

By , 26 July, 2009, 1 Comment

The number of shares traded on the major exchanges has begun to slow to a trickle, when compared with past years. It is not unusual for trading to slow in the summer. In fact, the volume and number of shares traded generally is less in the summer, as opposed to the beginning of the year. But this year the trading has been especially slow.

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A Little More Information on Leverage and Emini Contracts

By , 14 July, 2009, No Comment

A week of so ago I wrote a brief article about leverage and how emini contracts have highly leverage relative to their individual stock counterparts.  I recieved a number of emails to further expound on this because it is a very important concept to understand.

As an emini scalper, I do not hold any emini contract positions overnight.  The reason is simple, I do not want to participate in a volatile move to the upside or downside while I sleep, especially if I am on the wrong side of that move.  It only makes sense.  I also trade exclusively by watching charts and chart indicators, so my sleeping hours do not allow me to to do this.  In short, I am just more comfortable scalping the emini that trying to swing trade the contract.

The leverage on an emini contract goes something like this for daytraders: (We’ll use the ES contract as an example)

Each point on the ES contract (the S and P emini) is worth 50 dollars, and lets say the ES emini contract is trading at 900.  The math is fairly simple.

900 x $50= $45000

So, in actuality, you are controlling 45K worth of contracts when you daytrade.  How much will the average futures brokerage house ask you to post as margin on a single contract?  Usually about $500, but some have recently raised their daytrading margins considerably higher because of the volatile nature of the market of late.  But there are still plenty of brokerages at the $500 dollar level.  As you may have surmised, this is a fantastic level of leverage and create extraordinary profits on a good move in the market. But it is a two edged sword…it can also create tremendous losses on a good move in the market against the positive you are holding.

Obviously, a good technique for employing stops is needed and I have recently written one that fully explains my position on this topic.

Think about what leverage has done for you with your home. If you buy a home for $250,000 and you put 10% down ($25,000), you will double your money if your home simply goes up 10%. You’ll triple your money if it goes up by $50,000. This is the magic of leverage.

But as you know, this same leverage can bite you. If your home depreciates by 10%, you have lost all the capital you have placed in it. This is why protective stops and correct positions are essential, especially when leverage is in place. But when correctly used, the leverage in the E-mini markets allows your capital to rapidly accumulate at a far greater pace than the leverage offered to you in stocks.

The same principle holds true for trading emini contracts, remember it’s a double edge sword and you need to wield that sword judiciously.

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