When I first found short-term trading, before the internet and before the term day-trader was invented, I was hooked. I was on my way to a PhD and said “skip that”. So… I have no room to talk when I ask the question with maybe a hint of perjorativeness…. but then again maybe I do.

Back then, in 1993 – 1994, it wasn’t easy to be a short-term trader. I mean very few people had access to quotes or commission rates that would make it remotely possible. Hardly anyone outside of the neighborhood of LaSalle and VanBuren in Chicago even remotely knew what I was talking about. Almost everyone I was trading with had been on the floor of the exchange. In fact, that was really the only way into any kind of short term trading for a living. It was a small and relatively privileged group.

Enter the internet and brokers and traders who want to make some money off of teaching other people supposedly how to trade and now way too many people say “All I want to be is a day-trader”.

It isn’t for the money. The vast majority lose. So what is it?

I believe I know the answer – and it isn’t the lip-service ideas about gambling or thrill. It might be not having a boss or employees but I think it goes deeper than that… What do you think?

A few years ago I discovered Tom Alexander of Alexander Trading and finally “got” what those wacky charts with the horizontal letters were saying. The next thing I did was strip my Tradestation charts of all of their fibs, oscillators and graphics that had accumulated over the years.

Why? Well in studying various forms of technical analysis since 1994 I knew a bit about candles, EW, Drummond geometry, fibonacci’s … you name it. All seemed to have some value. When actually I finally listened to someone who understood auction market theory I realized that every thing I more or less knew about TA was encapsulated in a market profile chart.

Case in point was yesterday. I wasn’t really planning on trading but I keep my basic ES market profile chart up. I could see (and tweeted to Twitter (@traderpsyches)) that we were developing a trend day down in the AM. Each of the first four half hour periods had lower lows and lower highs … and then I saw it. I shove lower and a bounce…. right to the highest volume node (Tom calls them key reference areas or kra’s.? (He is @kratrader on twitter and stocktwits) of the day.

Now when more volume has accumulated at a price (over time), that means there are lots of traders in trades where that is their break even point. It tends to mean they will add to their trade there – or defend it – or if they were long from there, in this case, they will be back to break even and get out. Since I was going short, it basically meant we shouldn’t go too far through that price because of those traders who care about that price. If we do, well then they have been overwhelmed by another group. In short, (no pun), it meant this was a good place to be short.

I put a tight stop in at 941 (trade entered at 939). My Ninja trader platform helped a whole lot here because we did in fact trade at 941 but I was not taken out because my Ninja strategy is set to trigger the stop only if there are less than 50 trades on the offer (in the short scenario).

It took a fair amount of having to talk through the chop and slop but then around 1 p.m. (over an hour into the trade) …. whoosh…. and a basic 10 points I had.

I looked at the drop. Trailed my stop (which Ninja would do automatically I just didn’t have it set up in this strategy)? and then saw we really were at the next KRA or high volume node from two days earlier – again a place where other traders will be more willing to be involved because many of them already are involved at that price. So I covered… knowing it might go lower.

In the end, I think I covered about as well as could be expected. In other words, the whole thing was almost the perfect trade. (In contrast to Monday when I tweeted about rotating back into the range just prior to the violent move upward – and then wrote about it on Greenfaucet.com)

The long and the short of it is – market development as can easily be seen through a market profile chart and as taught by Tom Alexander hugely simplifies the process of understanding the market – for me. I suggest everyone take a look -

Alexander Trading

Ninja Trader

(btw they don’t know I am writing this and I won’t get anything for it…it just works and that trade went so well and was so public on twitter that it seemed right to explain).

btw2 – if you have trading strategies and tactics that you really understand and feel good about – PLEASE IGNORE all of this!! Please!)

“I return from holiday rested and relaxed, to quote Ben Lichtenstein, “I have tasted the sweetest Mediterranean tomatoes brought to me by dusky maidens and washed down with oaky red wine in the shade of orange trees, I have felt real warmth from the sun on my skin again.” Pulling up a chart once more, and looking at the comments to my previous post, I am full of good will. I have set aside my weapons of war and my heart has turned to love.

I do not quite, however, see trading as some kind of sixties group hug, where there’s plenty of weed for everyone. The money has to come from somewhere after all. So where’s the love? There are so many beautiful trades, so little time. How to choose? I should explain that I am truly a romantic. I long for commitment, for a lasting relationship. I enter each trade with the same hopes, the same fervour, the same simple faith that our love might last forever, that we will trend and trend and never look back. Once the first flush of my passion is over and my first target filled, my second half is there for as long as my lovely companion continues to show interest. And I am quick to forget the sins of the past: if I have been hurt by Cupid’s arrows before, I myself have wounded too, and will happily embrace again yesterday’s lover.

On my return, I found that the languid Euro (I always see her as French don’t you?), has invited me to join her for the afternoon. Charmed, I accept her invitation, but find her at first quarrelsome then sleepy. I take what pleasure I can, but as she dozes, I notice the door push open and her pretty blond cousin from Switzerland winking at me and beckoning to join her. Perhaps all that mountain air gives her more energy, but I am pleasantly surprised by her enthusiasm while Euro sleeps, and even more so when she introduces me to a young American friend she has made, a certain Mini Dow from Chicago, who is eager for me to help her with her extraordinarily tight shorts. Naturally, we have met before. From the window I see that the fickle Miss Soy Bean has made other friends while I was away, and seems to have had a fine old time after kicking me out of her bed just before I left for my holiday. But I forgive her already. I love them all, and I know that despite our occasional tiffs, we will always make up.

Before I let my imagination go too far, or grossly offend anyone, I should perhaps say two things: first, I would like to assure you that I am neither a psychopathic killer nor a serial philanderer. This is all part of a game to engage the psyche with the human side of trading, to connect the flickering numbers and bouncing price bars with some of the real human feeling that this strange activity has such a capacity to generate. And yes, perhaps trading does touch on the darker side of our psyches. By acknowledging this I believe there is a chance we will become better traders.

Secondly, there are of course many metaphors for trading, and I certainly don’t see combat as the only one. I have found helpful comparisons with sailing (attention to currents, the tide, the strength of the wind etc), viticulture (trading is like harvesting a crop, a stroll through a vineyard in search of the ripest and juiciest grapes, much is wasted, but the wine at the end is worth it), skiing, paragliding, the list goes on. I am sure there are many ways of visualising the process, and each trader must find what rings his or her bell. Ultimately, trading is the Lottery of Babylon in Borges’s story – it is like life itself, filled with perverse rewards and punishments, a labyrinth of both startling simplicity and complexity. Recently, though, with Denise’s help, I have come to see a particular reality in metaphors that recognise the traders on the other side of my trade, and my attention to detail, my ability to use judgement to enter or exit a trade at the right moment is linked to that sense of my enemy’s strength or weakness, or of my lover’s enthusiasm or languor.

Now, you’ll have to excuse me, but I must go and get some flowers for Euro before she wakes up.”

Trader K

I love the smell of blood in the morning. To wake at dawn and find your order filled, a steady stream of red staining your screen, and as the day progresses to the inevitable climax, when at five in the afternoon your first targets are filled, and you witness the dying dreams of the bull felled by your skill, kneeling, panting, looking dolefully into his killer’s eyes.

OK, let’s not get too poetic here, but what better way to start the week than with a three hundred point fall in the Dow, with a position that took no heat even as I slept? Short overnight from the break of Friday’s low, I have had a good day. I got a nice entry, got out of half, and got to move my stop to break even, so I’m not going to get gored in the groin, even if the bull does lumber to its feet again.

Yet still it is not enough. The pleasure of a clean, well-executed kill, of dispatching an animal that behaved perfectly, is always tempered by regret. I am not just speaking about the tragedy of exits: the sadness of scaling out when it goes still further, the sorrow of the trailing stop that gives back so much. All this is the necessary regret that every winning trade must bring; no, it is worse than that. For once again, I am in mourning for the Euro, for the one that got away.

How did I miss thee? Let me count the ways - I should have been short on Friday morning, from early in the European session. My setup was coming together in multiple time frames, I was relaxed and confident, and had a little extra time on my hands. I thought I would watch the market review offered by a well-known and likeable commentator who was cheerfully bullish on the Euro. A shadow passed over me. I don’t listen to others when I trade, I know that I have often found myself in conflict with this other trader’s analysis and come out on top, and yet it is curious how little it takes to sow the seeds of doubt in your subconscious when you let your guard down. Once the intellect and the rational arguments of others had started to interfere with my judgment, my resolve weakened without me realising it.

I should have left my orders in place and gone about my business. Instead I scratched my chin, looked at a couple of e-mails, and decided to make a nice cup of tea and to shave. Perhaps my pattern was not as clear as I thought. Why not leave it for a little bit to mature like a nice Camembert (it was a Euro trade after all)? Nothing would happen in the next 20 minutes, and I could be back at my desk before whatever dull news announcement there might be at half past.

Of course, what with one thing and another, it was more like 40 minutes before I was back, the Euro had rolled over along with the other currencies, and my entry was gone. The pain is doubled by the fact that this is the second big Euro trade I’ve messed up in the last few weeks.

So how did it really happen? Was I unconsciously repeating the previous experience in order to relive the pain of the unrequited trader? Was I afraid of the trade, and looking for other reasons to be elsewhere? Did I let the fellow who wanted to be long get under my skin? Well, I haven’t had a chance to talk to Denise at length about it yet, but I suspect all of these, and probably something else too. Whatever it was, it bugs me far more than today’s success. And to make things worse, I cut myself shaving while I should have been trading. So there really was blood that morning too.

Trader K

…because a few have asked where on the blog they can find info yet I would prefer to keep the blog as a discussion, here is the link to the info on the new self-driven study course.

http://traderpsyches.com/selfdirected.php

A more complete description and the download of an introduction is available here.

Merci beaucoup for inquiring – DKS

I have to start by declaring my genius. This is no place for false modesty. I am the bee’s knees. The caterpillar’s spats. I was long 30 year Bonds last Wednesday before the Fed spoke, from 124/13, and exited the second half of my trade at 131/16.5, lower than I intended, because my charts locked up after the Fed belched the latest piece of news on to the world’s financial stage provoking a reaction like a teenager overdosing on speed and Viagra. And I got pretty much the whole monstrous day’s range.

Of course, you, my dear readers, want to know my secret. Well, it all started with a weekly chart, that looked promising above 127/11, and somehow didn’t seem to want to make new lows to me. But we were far from that level last Wednesday morning. The 60 minute chart was bobbing about doing nothing, but that prickly feeling in my upper arms told me, along with something close to my normal setup, that a break upwards was worth holding for the longer term. A cheeky little bar popped up and teased me into action, along with the tickling up the back of my neck and the slight increase in heart rate as I leant towards my screens, sat straighter, visualising the blood of those on the other side of my trade dripping from my trading knife, and I was in, expecting to hold for a week or so. I was prepared to stalk the kill for a while, but it was quite a surprise to be gutting the great beast in front of the fire a couple of hours later.

More than a surprise: my euphoria was overwhelming: I immediately celebrated by looking at what my other markets were doing. The pain a glance at Euro futures inflicted on me was at least as great as the pleasure of the Bond trade: I should have been long from 1.2653; as I write, that trade is just over at 1.3514, over $10k per contract. I was in the trade at the start, and with the help of a migraine and a sleepless night, I over-managed it and stopped myself out for a nice little loss right at the beginning and quite senselessly ? fear, and a feeling of vulnerability and inadequacy brought on by my headache, made me quite incapable of staring at the possibility of a modest loss: I took a certain, smaller loss and a huge lost opportunity instead. About the same time I should have been long ES and missed it for the same reason.

So how was I to celebrate? The Euro upset me so much I took a quick impulse long at the high of the day that cost me a few points. At last I had the sense to turn everything off, and share the tale of my extraordinary deeds with my wife. Used to bringing back rabbits and the odd antelope to the family cave, I had dragged a full size woolly mammoth home to feed the family. I encouraged her to spend as much as she could on clothes the next day while I stayed off the charts, drank beer and generally basked in my astonishing prowess. And yet, the Euro still gnawed away at me?

Denise has written persuasively about the fear of missing out being the worst fear of all. Having missed out in a big way last week due to physical feebleness and incompetence, at the same time as getting rewarded massively for a mixture of intuition, timing and an awful lot of luck, I am struck by the longevity of the pain of the former set against the ephemeral nature of the pleasure afforded by the latter. Coming up for a week later every glance at a daily Euro chart is torture: I need at least five minutes with a punch bag to overcome the urge to revenge trade again whenever I look at it. The glow from the Bonds is fading, but I am still mourning my lost Euro trade.

The fact is, every day there is a new opportunity to experience fear, disappointment and elation. How to deal with it all? From one day to the next I’m still not really sure, but I know that sooner or later, if I acknowledge my own weakness and frailties, keep sharpening my spears, and ensure that when I enter battle I am prepared mentally and physically for anything, most of all my own limitations, that prickly feeling will come again, the blood of my adversaries will flow once more, and another great beast will meet its end at my hands.

Brett and I may not agree on our core ideas about trading psychology but this is an EXCELLENT description of reading price action intraday. Clearly in my mind, this is Trader-Steenbarger speaking … and thanks to one of our readers for asking me to comment.

http://tiny.cc/i1r2e

Within the words is the real question everyone actually cares about – is someone going to pay a different and better price than me in the future? Many traders forget that this is the only game they are playing. It isn’t about the ema’s or the fibs or any other interpretation… it is only about predicting the behavior of other smart humans in whatever timeframe you are in for. You need to have your probabilities yes but to that you must remember to ask – does my gut tell me this is right. The ultimate skill in trading is to be able to integrate both kinds of data – one is mind based, the other is feeling …. and this is the science and art of trading.

Fear … well of course fear. But what is the other one?

Frustration.

In fact, tell me if I am wrong. The emotions most difficult to deal with are

1) fear of missing out on a move

2) frustration that you did miss out or got stopped out

3) fear of losing money….. IN THAT ORDER.

Trader after trader after trader tells me it is #1 that is the most troublesome i.e. causes the most losses. I have even heard a quant from a big hedge fund admit to feeling that way. (Quants have feelings?) ….

In fact, a few moments ago, I fell prey to #1 and #2 – and you know why? Because I was tired. I just finished reviewing the new self-driven workshop and I just reviewed the research that says if we are tired we take greater risks… and I guess I felt obliged to prove them right. Now I am my own self-inflicted victim of #2 because I acted out #1 because I broke my BIKB rule – and traded when I was tired.

Idiot.

Every now and then someone calls me and asks me to recommend a “prop” firm and now I can just send them to this article -

Surfing the Tsunami, New York Mag, Feb 2 issue

Evidently this is news to the magazine but from my vantage point, this is no different than the desk I ran or the early firms I traded with – Bright Trading, Schonfeld and ETG. There were others, lots of others, in the 1990’s – but the idea is the same – exactly the same. It is funny to read about head and shoulders patterns in New York (not to be confused with The New Yorker) but it is also a bit instructive – favorite stocks, last minute moves, the thrill of the chase….

The markets are ALWAYS a bet against what other people are going to do and Milman, the trader in the magazine, gets that.

The atmosphere is also the same as I remember it at all but Sharpe Capital where my desk was housed within a true market-making firm. Or at Schonfeld… where the wallpaper (and lunch) was amazing.

Entertaining and instructive… when you want to know who you are trading against.

…that is always how Fed afternoon strikes me. All of us short-term, high-frequency traders staring at the screens ready at least to watch the fireworks. Sometimes I find myself laughing at 2:14:30 Eastern time. Some of us love it (me) and some of us think it is insane (me too) but we watch …. wait and watch and then maybe play.

I wonder really – how many “day-traders” there are. Does anyone really know? New York magazine has an article this week about the return of “professional traders”. It sounds exactly like the scene at Schonfeld when I left in 96 to run my own desk of the same in NYC.

Any way – like always it pays to have a plan – and to acknowledge the anxiety that goes along with 2:16 pm. The latter makes the former go much smoother.