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 February 5, 2004
Commentary-
Today I will follow up on yesterday's theme
by showing some mini trades from today that didn't turn out to be big winners.
It is a great sequence showing the reality of trading. My style of trading is a
lot like professional poker. If you watch the World Poker Tour on TV you will
see the similarity right off.
When you watch these guys, they fold, check,
check, fold, and on and on. Then they catch something and they play it for all
it's worth. It's clear that the whole tournament can be won because of just a
few hands. Many people have analyzed their trading and said that they got most
of their profits from just a small percentage of their trades.
I find that
to be the case in my trading. The main difference between my trading now and my
trading when I started is that now I'm infinitely better at checking and
folding, as opposed to raising every hand when I have nothing. I'm trying to
just 'hang out' so that when the trade comes that's a big one, I'm already
positioned. That's what I am trying to do all the time.
I never
thought that way when I first started as a trader. I thought I could tell where
the big trades would set up. To me, now, at the experience level that I'm at
now, I see that that would be like the poker player saying he knows which hands
will be the winners, but saying it before any of the cards were known, or at
best when the two hole cards were known.
This is not a perfect analogy
because when you know the hole cards, you know what your starting odds are, and
they vary depending on the cards. Assuming all setups that you would take would
be roughly equal, you don't change your bet based on the setup. (In reality, I
do just that, but I only vary the play size to a small extent.)
The point is,
I have no idea which particular setups will 'play out'. I feel that there is no
way to know that. It's a probability game. So I try to check, fold, fold,
check, and wait. I want to be there when the big one comes. I'm spending a lot
of time on this, but it really is a huge part of what I feel jumped me up the
skill ladder.
If I call my potential trade areas correctly and wait for
confirmation, I almost always get a 'pop' out of the gate. If I scale out of
part of my trade on that first thrust, I can move my stop up at that time, or
shortly after that. I'm now in a no lose situation, with 'no lose' defined as
breakeven, very small loss, or very small winner, barring a market shock event
at that instant.
This is where I want to be. I'm in, and my 'theoretical' risk is
essentially gone. Check, fold, check… Then some percentage of these trades
will take off and I'm in. That's where all the money comes from, in my 'Trading
Plan'. In 'the old days' I had big targets, the targets that I laid out based
on if the trade 'worked'. I then held firm to my stop, and got stopped out at a
reasonable sized loss.
The problem was, I got stopped out a lot. I hit the big
ones because I was in, but the 'small' losses just added up to more than the
winners. I had a favorable reward/risk, but the winning percentage just wasn't
enough to be net positive. I never was able to get the winning percentage high
enough to overcome all the stop outs. I used to focus all my time on improving
that winning percentage (see my free article The Myth of Predicting the
Market.)
Then I started to develop what is now the Kane Trading methodology.
Now I have few losses to make up. I have a lot of breakevens, a lot of tiny
losses (by comparison to a full stop out loss), and a lot of small winners.
Then I have a few trades (on a percentage basis) that I really catch. It's not
glamorous, but it's the only style that I've really found that I can work
with.
This style may not be for everyone. I'm showing it because it's
what works for me. I suggest readers look it over and experiment with it, and
see if it can help you. A perfect example is the FDX trade. Let's assume for
the sake of this example that FDX didn't gap up and I got in near the potential
trade area.
In 'the old days' I'd still be sitting on a full position in that
one, holding tight to my stop, which perhaps would have been moved to break
even. I'd be out, or ready to get out, with nothing to show for it. If I had
left the original stop in place, I'd be set up to let a winner turn into a
loser. Instead I take some off and move my stop up, and then take the rest off
as it falls, and walk away with something. Check, check… It wasn't this
one. It was VTSS, though. PDLI, fold. Deal the next hand,
dealer.
Let me show a few charts of my morning's poker playing. I won't
show the afternoon, the ramp up, what I did there, or anything. I'll just show
three shots I took in the morning. I'm not going to show the groupings or
reasons for my taking the trades where I did. I want to focus on the
approximate areas that I got in, and what I did from there.
I will use a
1-minute ES chart, just so the detail of the price action will be visible. I
was actually trading the 3-minute chart, with the 13-minute for context, and
the 1-minute to fine-tune my entries.
Before I start on this sequence let me point
out that the arrows I am using on these charts are at the approximate areas
described in the following commentary. It's nearly impossibly for me to get
them in the exact spots I want them in. Sometimes I try four or five times just
to get them as close as they are. Their purpose is not to show an exact trade
sequence to the tick, but to help me show the overall gist of my point. With
that said, lets look this over.
The first arrow represents my entry area. I
scaled out of a small amount when it stalled at the peak. I didn't feel that it
should have been slowing there. Based on my feel for the ES and the indicators
and such that I was watching, it wasn't acting right. The second arrow
represents where I capped the rest of the trade. Check, fold. That trade netted
a very small amount. Next.
The first arrow represents the entry area. I
got a nice pop and scaled out of some on the plunge bar down. The second arrow
is the area where I closed it out. Check, check, take a very small pot down.
Next.
The first arrow is the entry area.
I scaled out of some on the thrust. The second arrow represents where I closed
the remaining amount out. Check, check, small pot again.
So, net
overall, I got three very small winners. I was fine with that. Totally
fine. This is trading reality. When you see those flyers I show, this type
of action precedes them, over and over. Check, fold, fold, check, BAMM!! Dealt
two aces and caught two more on the flop.
This is how I trade. I thought this
was totally clear, but lately I'm learning that what I think is clear is only
clear because I'm writing it; I know the whole story. I hope this look helps
clear some things up. And what happened in the afternoon? See how this game is
played, at least on this end?
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