Position Sizing

One thing I find helpful about no limit poker in relation to trading is position sizing. Every hand you play requires you to decide how much you're willing to risk. Sure, you can bet the same amount each time, but, as many new players will soon find out, that does little to nothing to limit your losses, throw off opponents or maximize your gains. If you do not know how much to bet and when, you're going to be at a severe disadvantage.

The more thought and attention I give to trading, I'm finding the same to be true. If you are able to control the amount you put into play depending on the context and conditions surrounding a trade, you can minimize risk and maximize potential profit. Say you are uncertain about a specific trade. Why not cut down the amount you're willing to risk on it? There's no real need to risk the same amount on every trade. If you're confident about a trade, put on some more money. As your confidence increases, add to your position. As it decreases, subtract some off.

Being able to successfully manage risk in this manner increases your strengths and decreases your weaknesses. Put your money where it's going to win.

1/3

I read somewhere that true poker sharks play about 30% of their hands. Of course, such stats vary depending on a number of things. At first, I was skeptical. But, the more I play the more I realize the necessity of playing more than the prime hands. For one, people will begin to pick up on your hand range fairly soon if all you play are the top ~10% of hands. Because of this, they won't pay you off for those hands. They'll wait until they have the advantage with some underdog and try to get you to pay them off.

If you play a wider range of hands, however, your opponents will have a tougher time guessing your current hand among all your other hands. Such play not only allows you to benefit when the flop contains nothing for either player, but also allows you to reap the benefits of stronger hands that others may at times hesitate to play against.

Playing this way is much harder, which is probably why most will not play like this. It is hard to remain tight, as tightness requires a good ability to read hands. You need to know hold an edge over your opponent by being able to pick out what he is likely to have and how much you should risk against him or her this round. That's the only way you can remain tight while playing a wider range of hands. And to increase your effectiveness, you need to be aggressive more frequently. Say you think both you and your opponent missed the flop, but you at least have an ace high or find that your opponent folds more frequently than he should. Then bet. You have an edge; don't let it go to waste.

PS: Gotten back into poker over the last couple of days. I see so much improvement in my game, both intellectually and emotionally. I really hope to achieve this level on the trading field some day.

The Reason

I posted yesterday's post for a good reason: My main desire while trading or playing poker (or doing much else) has not been to win. I need to admit that. Perhaps it seems trivial; but, to me, it defines a major turning point in my thought.

PS: Lots going on. Moved. Hanging out with friends. School starting soon. More later.

Why do you do it?

I skimmed through several books this weekend. A part of one of those books stuck in my mind: "Why do you do it?" In the book, the author is referring to the reader's reasons for playing poker. He asks if you do it because you want to make friends. Or if you play to relax, or to get out of the house. Or, perhaps, because you want to win and make money. The author had a PhD in psychology and rightfully pointed out that many people will tell you they play poker to make money, but truly play for other reasons, likely subconscious reasons.

The reasons do not mesh well. Playing to relax and to make money will not allow you to maximize either relaxation or profit. Saying that you're playing to make money while actually thriving on the thrill of the "gamble" will hinder your growth. You have to be honest with yourself about your feelings in order to progress.

Same goes for trading. Are you really trading to "win" and make a profit? Or is that just what you say?

Interesting Fact

If since 50days after GOOG went public you traded it using a simple 50-day MA strategy you would be up 243%. All it requires is you to cover any open shorts and buy GOOG at the open, following a day when GOOG closes above its 50-day. When it closes below its 50-day, you do the opposite: sell any longs and then short. While to many traders who want to make returns like that every day (haha), it may not sound like much. But a decent gain considering the plan is simple and easy to execute. Also, that is with ~65 trades, so commission shouldn't take too big a chunk out of the person's account.

I've been using Excel (well, openoffice's version called calc) to back test various strategies. The one above was me trying to figure out how the hell to use the program. At first I had to enter all the data manually. Then I figured out you could import data from a website (such as finance.yahoo.com), which made things so much easier and more complete. The same thing happened with formulas. At the beginning I would enter formulas by hand, but then figured out you could merely drag the same formula over multiple rows and that it would incrementally change the values for you. Such is the beauty of technology.

Short Update

Haven't been doing any trading these last couple of days. I spent some time moving and some more time hanging out with friends. Any other free time I had available went into making stock/currency price spreadsheets. I'd love to get back into trading the S&P eminis, but would like to have a much, much better grasp of the overall market before I buy/sell a contract. I'm going to be back in school soon, so I'm not entirely sure when I will get to trade some ES; albeit, there will be a ton of prep work beforehand.

On a side note, I played some poker over the weekend with a couple of friends. $10 buyin and I ended up with $13.75. I had a slight advantage even though one guy plays poker at his office amongst various options traders. Fun stuff. Live games are so much more engaging than online poker games. You just can't beat it.

Carrying a Cat by the Tail

"Any plan you develop should emerge from experience—and the opportunities that you observe during that experience." - Enhancing Trader Performance by Brett Steenbarger

"A man who carries a cat by the tail learns something he can learn in no other way." - Mark Twain

"You can't step twice into the same river. " - Heraclitus

"One must learn by doing the thing, for though you think you know it, you have no certainty until you try." - Aristotle

For the beginning trader, or even those further along yet still stuck in various forms of trading dogma, developing a plan often involves something pernicious: using someone else's ideas without personal experience. Many of the methods described in books and online tutorials can work ^[1], however, need modification depending on the situation. This requires experience. How do you know if a market has gone from bearish to bullish or vice versa? Experience. There isn't a well-defined method for making that determination (at least not right off the bat). If there was, no one would tell you. Trust me, you don't have enough money.

How do you know what effect something like the FOMC could have on markets without actually experiencing it first hand? When I started trading I didn't know what could happen on FOMC Days. At first, I experience large windfalls. Lady luck chose my side. But, this did not allow me to experience the importance of such events. Later, when the events (which I hadn't investigated much) started producing different results, I lost lots of money. You need experience in order to understand such things and their evolution of meaning. Some books out there may go into such detail ^[2], but most will not. Most may mention news offhand but focus entirely on reading candlesticks without explaining context. Some may show you Fibonacci lines ^[3] but not explain why they place the beginnings or ends here or there. Many books may only show you successful implementation of such signals--failing to alert you to the instance where a doji may fail, or a gap does not act like resistance/support.

How do you know what your mind will do with $100 on the line? $1000? $5000? $20k? Your home? Without experience, you may assume that money's psychological effect will be minimal. Unlikely. Perhaps you think you will be disciplined. Really, you do not know what disciplined even means yet! How do you learn the perfect baseball pitch when you have never thrown a ball before? Or the perfect tennis swing without ever having played? YOU DON'T! You need to play first. Experience the weight of the objects in your hands. Begin developing a feel for the various nuances. Perfecting your skill comes later.


Basically, without experience you cannot create a good plan. Even if you do, you will have trouble executing it. Furthermore, and I think most importantly for beginning traders, without experience you cannot trade someone else's plan well! I don't have enough football ^[4] experience to play much less formulate a winning plan on Superbowl Sunday! I could take one of John Madden's plays step for step, but I doubt I could invigorate the team like he can; I don't have the skill. Why are you trying to do that with trading?

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Notes:

[1] This excludes most of the sites, endorsed by someone you have never heard of (and no one else has either), with stories of overnight success, rags to riches (in a week), and with a paypal link at the bottom. Also excluded are: numerology sites, astrology sites, or basically anything without some solid logical reason for working. They may work once or twice, but prepare for the illogical to eventually leave you homeless, and the guy selling you the package rich. Back.

[2] An interesting book that explains some of the Federal Reserve actions over the years (especially the Volker years) is Secrets of the Temple: How the Federal Reserve Runs the Country. It is rather thick and probably won't benefit your trading enough to warrant such an endeavor. But, it is information for the interested and/or hardcore. Back.

[3] I'm not a fan, do not use them. I would only (and hesitantly) suggest using them like others use pivot lines. Remember: there's nothing magical about them. Life isn't that beautiful/simple. If it were, we'd all be rich. Back.

[4] Not soccer for our international friends, although it would probably serve just as well :)Back.

Good Losers Usually Lose

"Competence precedes confidence: Winning mind-sets result from mastery, not the reverse." - from Enhancing Trader Performance by Brett Steenbarger.

Deals quite a blow to traditional trading literature, but is something Dr. Steenbarger finds among all peak performers. Solid mindsets come from solid action. You need to develop successful habits before you can become successful. Unfortunately, The Secret isn't going to make you a trader (hint: lots of practice, failure, contemplation, more failure, testing, improvement, research, experience, etc will). More on this later...

Anyway, I haven't done any trading. I watched the FOMC and am glad I avoided it. Otherwise, I've been reading, watching various markets, testing out ideas and working on new ones.

Back at it

Traded the AUD/USD and EUR/USD today for a 4.7 pip gain in AUDUSD and a 13.3 pip gain in EURUSD. That brings me up to $43.94, a daily gain of ~4.3 %, or an overall gain of ~57%.

I haven't been trading much these last few open days. Most of my time has been focused on reading and researching. In addition to Golf is Not a Game of Perfect, I would recommend Super Trader as referenced on Kirk's site here. I've gotten started a couple other books, but I'll hold off talking about them until I'm done.

Also, I added some poker blogs to the far right column (below that long "sources" list). Those listed here play a wide range of limits and types. Definitely check out a few if that's your thing (probably just Black Bottle, haha).

Edit: I put 1.33 pips instead of 13.3. Was thinking in terms of dollars. Corrected.

Dreaming Big

Several times this week I listened to the audio book of Golf is Not a Game of Perfect by Dr. Bob Rotella. Just about every piece of advice he gives pertains to trading. As Sandy stated in the comment section a couple days ago, many comparisons arise between trading and any solo performance-based activity, even life itself.

Dr. Rotella starts the book off strong with what he considers the most important aspect among those who excel to their heights: dreams. He states, "A person with great dreams can achieve great things. A person with small dreams, or a person without the confidence to pursue his or her dreams, has consigned himself or herself to a life of frustration and mediocrity."

At the heart of everything Dr. Rotella works on with patients resides dreams. Dreams that excite people from when they wake up until they go to sleep (and perhaps in their dreams as well) give people life. A want to do great things and to improve can propel even the lesser talented person further than anyone would expect. Without this drive, Dr. Rotella argues, people will not reach their heights.

Of course, to merely have a dream will get you nowhere. You have to act on those dreams and build those dreams. However, the dream will make the work not only bearable but enjoyable--it'll give you a point of meaning and a joy. While others may put in a weekend of golf practice, you're also putting or chipping after work. While they take breaks, golf itself is a break. It has become a joy and a challenge.

As you practice you begin to develop habits. In order to succeed you need to develop habits that encourage trust. Trust is at the heart of success. You need to make that putt enough that you have no emotions blocking your ability to perform. Trust means you allow yourself to do what you need to do. Fear will cause you to second guess, or change your swing (tactic) multiple times mid-game, thus reducing your potency.

Trust leads to focus. And an ability to focus allows one to perform at the heights of his or her abilities. He speaks of players who have similar talents, but who consistently place higher or lower in tournament play. Those who seem to lose their talent tend to constantly question their abilities. Internally they lose trust and when that occurs, they falter.

Furthermore, when the pressure heightens many people begin to focus on what could go wrong to the detriment of all that could go right. Dr. Rotella speaks of players whose fear of hitting a ball into the water or forest leads them to do exactly that. Conversely, those who focus on a healthy target do much better. As he states, "Negative thoughts are almost 100% effective."

One of my favorite stories he presents has to do with a young golfer rooming with another golfer. Each day they come back and the first golfer says how much he loves the grass they played on today. The other hates it, cannot stand how coarse it is. The next day the first golfer states that he loves the grass again. This drives the second player, who again dislikes the grass, to address the contradiction; today's grass being smooth. The first golfer says something like, "I always love whatever grass I play on."

The same attitude will be a great boon to any trader looking to reach for his or her heights in the markets. Love the challenges that the current market presents you.

And most of all, have a dream that will propel you to achieve greater and greater competency each day.

Market Hour Range

I noticed something the other day when I lost a handful of pips before regaining it. If I had put in a little more time studying it prior to trading I may have escaped the loss or at least would have had a better understanding of the action. It has something to do with market activity.

As you may know, the forex market is open at all hours between Sunday at 5 pm EST (10 pm GMT) until its close on Friday at 5pm EST (10 pm GMT). But that does not mean that each moment of trading is equal during that time. Some times are quiet and some times are much more active.

According to Baby Pips the London trading session has the largest pip range, nearly 20% greater than either the Tokyo or US sessions. The London session opens from 3 am EST to 12 pm EST. The reason it sees the largest range is because of the session overlaps that occur during this time period. Tokyo closes at 4 am EST, after London opens, and the US opens at 8 am EST far ahead of the London close. The overlap means a greater amount of traders in the market pushing it one way or the other.

There is, of course, a lot to be gained from being in the market at the correct hours. Knowing when new players are likely to enter the market can be a great boon, especially if those players may have a slightly different world view and thus a different disposition towards your favorite pair.

Just send him to his home

After yesterday's post I've been feeling a little like Happy Gilmore:



(me: "Don't you want to go to your home, trade? COME ON TRADE! ANSWER ME!")

Anyway, started the session off with a significant loss I took right when the market turned. Luckily, after quickly opening and closing another losing trade, I managed to get my wits together and place another short. I held and sold it for a nice gain and then placed another when I saw more weakness develop. Once my original loss of about 20 pips was covered I jumped out. I had been sitting waiting for that breakdown. I could just feel it coming. I thought it would go to 1.319 but I just couldn't hold on. It's okay, I did slightly better than breaking even, 0.9 pips, which is always nice after being down a significant amount. Better trades tomorrow.

Dr. Rotella and a sport I've only played twice

Gotta love Don Miller's top three favorite books. The first two don't contain the word trading within their pages. The last one is one of Dr. Brett Steenbarger's (of Trader Feed). I've mentioned one of Don Miller's favorite books, The Tao of Poker, which I heard of by reading Miller's blog circa 2008. And, I find Dr. Steenbarger's writings extremely helpful.

Anyway, I had never read the other book that he recommends. Quite frankly, I didn't think it would help me much because it is about golf. However, before I started playing poker in early '09, I didn't think The Tao of Poker would have anything to teach me about trading. I am surprised at how much I have learned about trading and myself by playing poker.

Well, this morning I listened to the audio book of Golf is Not a Game of Perfect by Dr. Bob Rotella. I haven't played more than two rounds of golf in my life. They weren't even the full 18 holes (I was fairly young). Despite that, I can see why Don Miller recommends this classic. Nearly everything in here is applicable to trading and any endeavor in life.

I'll post a little more about Dr. Rotella and Dr. Steenbarger when I've formulated my reactions to this title. I just thought I'd encourage others to pick it up, especially if they you ignoring it due to "golf" being in the title. This isn't a "golf" book, per se; it is far more than that. A true gem.

Two days in one

Made this 22.7 pip trade today (well, yesterday and today). It had a little more drawdown than I would like (~3:2). My entry could have been better. Perhaps much better. Anyway, took profit at the 1.320 mark, although I don't see why the EURUSD couldn't trade even higher sometime in the future.

22.7 pips puts my account at $42.05 or an overall 50% gain (141 pips). I doubt I'll be able to keep this up, but at least this gives me a little more of a cushion.

PS: Looks like the bull-flag breakout will still continue higher. And, no, my computer is not at risk. I'm actually running WinXP and FXCM in VirtualBox on my Linux laptop. =)

First Trade of the Month

I know I said I was going to take a hiatus from pulling the trigger, but I just couldn't help myself. I did a little correlation research and read thirty (plus) of Dr. Brett's TraderFeed articles over the weekend. I'm trying to stay in the groove. Anyway, made a 10.8 pip trade. I got in a little early (should've waited for more red candle confirmation). I'll take the money, though. Account at $39.78 with this ~2.8% trade (based on previous balance).

Free money from FXCM

Saw this link on a banner ad earlier today: click here to get a free $25 FXCM micro account. I don't get commission, but I figured some of you could benefit. Good luck!