Thursday, January 5, 2012


                                     Make Something Beautiful

It takes more talent than trading. You need tools, patience, a soft touch, and an artistic eye to make a sculpture out of a lifeless block of ice. Somewhere in EVERY piece of ice is an opportunity to sculpture a masterpiece.

I calmly walk into the trading arena the same each day. Even after years of trading, the scenario never changes. I take my spot in the trading pit and calmly await the open, trying my best to not talk with anyone. People can see, sense, my posture of calm confidence. No matter what the day brings, nobody will ever see me sweat or panic.

I have chosen my tools carefully and with the utmost care to avoid losing days. I understand, like the ice sculptor, that there will be pieces of ice that just won’t behave and do what I want. I am ready for that because I have spent hundreds, if not thousands, of hours preparing various probability scenarios for such action. I know what to do in every conceivable situation the market throws at me. There will absolutely be no surprises.

I understand that the tools in my belt will deliver MY DREAMS. It’s simple really. That villa in the Caribbean = Discipline + The Algorithm + Action + Proper restraint and respect. It’s not about the gold market; it’s about achieving my dreams. It’s not about shaving some ice; it’s about making the masterpiece sculpture. In both cases, thinking about money is not part of the process. It adds nothing to the end product of a masterpiece. It will get in your way and cloud your judgement.

The very first time I saw a large trader bite off a couple hundred million in action, I almost wet myself. I was thinking about his money; he was sizing up his trade. His calm demeanor shook me up as I realized I was more nervous for him than he was for himself. Why? How can this be?

How can there be traders who approach a market, with vast sums of money on the line, and be as calm as a baby in his mother’s arms? Why do I think differently and what am I missing? What part of me is not getting this?

When people see a beautiful ice sculpture, they gaze in amazement. “Wow, I never seen anything like that before!” It’s been in the ice forever; the ice sculptor saw it before you even knew it existed.

I don’t look at markets in terms of money; I look at markets in terms of dreams. Your dreams should be the most powerful motivator you possess.

Today’s Action & Wrap Up

We came into today’s trading in “buy mode”. Our first signal came at 3:40 AM [Chicago time] at 1616.50. I placed a tight stop on this trade at 1614.00 for 2 reasons: 1) volatility for the day is still low from the carry over of the Asian and early European sessions, and 2) the immediate recent lows were just above 1614.00. Within a few candlesticks the stop was hit and we had a loss on the trade of - $ 2.50 / oz.

Our second trade came at 4:25 AM [Chicago time] at 1614.50. Again, like the first trade, you don’t need a wide stop here because the trade is either going to work or it isn’t. No need to give money to the market. Stop here was placed at 1611.50, right at the recent immediate low. And again, within a few candlesticks the stop got hit and we had our second loss at - $3.00 / oz. on the trade.

Meanwhile, the algorithm has gone into “neutral mode” with a new signal. We are right in the middle of a trade sequence. So, what does “neutral mode” mean? It simply means the market has no preference for new long or short positions. Both are equally probable for profits from a probability standpoint, but runs up and down [in terms of prices] will most likely be erratic.

I’m also in “survivor mode”, meaning I am down money for the day so far. So, what to do? I have always taken a consistent approach of making an attempt to get back to even and then calling it a day. From the floor I would give it 2 attempts; since electronic trading has been introduced, I am willing to do the same before I call it a day and accept losses.

My thought process was as follows: “neutral mode” doesn’t mean panic or sell or buy, it means neutral. Since I have commuted into the exchange, the day is early, why should I pack it in and just go home? I will attempt to get even. My goal of $5.00 / oz profit for the day is out the window. I’m a hurt animal here, not in the best of moods, and I will do whatever it takes to get back to even money on the day. I have my stops in place, and when the market presents to me “that opportunity” I will jump on it like a hungry dog. I’m not looking for signals, I’m looking for the opportunity to get even.

Now, I will be the first to tell you that other approaches can and are entirely consistent within the algorithm. You can just walk away from a small loss early on a mode change, or you can continue the “buy mode” until the sequence of trades either results in even money [or better], which is my approach, etc. As long as you are consistent in your approach. Don’t do one thing one time and then something else the next time.

My point is this: losses are inevitable, and how you choose to move forward through a tough day is a non computable problem. Why only 2 additional trades; why not 3, 4, or even 5 trades? Yes, these “solutions” are entirely appropriate from a logical standpoint within the algorithm. I wouldn’t choose them, but that is my decision from a risk/reward standpoint, not something that is based on market volatility or even price action.

Our 3rd signal was at 6:10 AM [Chicago time] at 1609.50. I placed the stop at 1606.00, just below the most immediate recent low of 1606.75. Remember, I’m in a survival mental frame of mind as I approach this trade. Within the next few candlesticks, we get the rally I am looking for and the algorithm called. As the market is racing up, I click to liquidate my position when I see 1615.00 bid on my screen [my breakeven point]. Within a couple of milliseconds I get filled slightly above 1615, as it is racing up to its eventual high of 1616.45.

While I now have a few pennies of profit, it sure doesn’t feel like it. The market allowed me to survive the day’s signals and is now in “neutral mode”. Time for me to back off and respect the algorithm.

Now, the algorithm manual is about 42 pages with 4 Appendices. If I was to include every single non computable problem I have faced over the years into it, it would be probably 500 + pages long and confuse everyone to tears.

In the long run, even if I had a small loss for the day, and the market never rallied like it did, it wouldn’t have any long lasting effect on my account or how long it would take me to become a millionaire.

My point in bringing this up in my post is to get you to figure out how you want to handle “these problems”. If you think they don’t exist with others who use algorithms, or trade by the seat-of-their-pants, you are sadly mistaken. Ignoring them or pretending they don’t exist is no way to make money.

So, the bottom line is that I made a few pennies on the day. Whoop-de-whoop. For the sake of the performance record, the net gain on the day is $ 0.00.

Have a nice day everyone.


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