FOLLOWING THE AUCTION – STOPS

Continuing with our series, Following the Auction, we’re jumping around our Glossary going over many of the terms. This time we’ll look at Stops.

A Stop is a type of order that becomes a market order when triggered by price action reaching the stop level. These orders are most often used to protect an existing position but they can also be used to initiate a position. Example, in the first scenario, I buy 1 e-mini S&P contract at 1950 with the hypothesis that profit would be taken if price reaches 1975, however if price moves lower, 1947 invalidates my trade idea so this is where I place my protective stop. As price moves in my favor, I move my stop higher to lock in profit. If price moves lower, my stop is triggered at my pre-determined risk level, and I’m out of the trade. In the second scenario, I have placed a buy stop above the 3 minute balance and a sell stop below that balance on the Russell. If price breaks out of balance to the upside, my buy stop will be triggered and I will be long however many contracts indicated on my buy stop. If price breaks out of balance to the downside, my sell stop will be triggered and I will be in a short position.

Much like the popular HBO series, Game of Thrones , in which the noble families of the Lannister’s and the Stark’s battle violently for the control of the Iron Throne; the Bulls and the Bears battled for new highs vs new lows. Traders saw stop runs in both directions. Great for the nimble futures traders, a bloody mess for the rest!

Game of STOPS!     Click chart to enlarge.

After forming a 2-day balance at the all-time high-

• Monday opened gap down, forming a market profile ‘b’, meaning long liquidation.
• Tuesday saw the market down another 10 points and with a late day break, closed on the lows.
• Many saw red and thought Wednesday would see follow-through selling only to be met by a painful short covering rally, taking out the previous days’ stops for shorts, inviting… the long perspective.
• Thursday saw a big break, taking out all the long stops… so of course…
• Friday… rallies!!! Game of STOPS!

Enjoy the trading week… remember… we can only control risk, that’s why we use stops!

 

FOLLOWING THE AUCTION – BALANCE

In this series, Following the Auction, we’re looking at many of the terms covered in our Glossary, found through the link on the home page.

This week we’ll look at Balance. The term balance means buyers and sellers are evenly matched within a trading range. A balance area represents ‘fair-price’ or ‘accepted price’. When price moves out of balance it is because it has been deemed to be ‘too cheap’ and explores for acceptance higher or it has been deemed ‘too expensive’ and explores for acceptance lower. Remember the market moves lower to find buyers, and higher to find sellers. The balance range may be referred to as a bracket, a consolidation area or some may describe it as congestion. Balance is what markets exhibit most of the time; however, an important caveat is time frame. Markets can be in balance in one time frame while trending in another. This is why trend is best associated with a specific time frame.

The S&P has been in a long time-frame bullish trend that’s easy to see when looking at a monthly chart. Dropping down to a 120 minute day time-frame chart, it’s easy to see, the accumulation,  which happens during balance, break out into the trending markup phase before balancing once again during the distribution phase, ending with the trending decline phase. Please click on image to enlarge.

This market behavior, of moving from balance to trend, back to balance (on all time-frames) is defined as fractal. Straight from Wikipedia, A Fractal is a natural phenomenon or a mathematical set that exhibits a repeating pattern that displays at every scale. To better visualize fractals, enjoy this creative and beautifully rendered 3-D animation short movie inspired by numbers, geometry and nature.  Trading is both… art and science!

The disciplined trader makes observations to determine what time-frame appears to be dominating in the market. Knowing whether one is trading balance or trend determines the type of trading for the day or period. Balance before a large news event is a trader’s dream and defines risk.

Have a great week! Take one good trade… then another, watch risk and let the profits roll!

 

 

 

Following the Auction – The Auction Process

In this series Following the Auction, we will look at many of the terms covered in our Glossary, illustrating them with charts and visuals using current market conditions.

First we’ll look at the Auction Process. This is the process by which price is determined. Bids and offers come together in an open market environment. Bids in excess of offers exhibits demand and creates rising prices while offers in excess of bids exhibits supply and creates falling prices.  A market that trades within a range over a period of time is considered balanced and represents ‘fair price‘ as it is accepted by the market participants.  When there is a lack of buyers the market will move lower in search of a price that’s ‘too cheap‘, bringing in a wave of buyers whereas if there is a lack of sellers the market will move higher in search of prices that are ‘too expensive‘ bringing in the sellers. A trending market is one that has broken out of balance in search of the next price level where there are participants to conduct two-way trade. Market profile charts organize this information via time. Volume profile charts organize this information via volume.

In our chart below you will see both the alphabet TPO’s which represent Time, Price, Opportunity, overlay-ed with volume-at-price displayed as the blue horizontal bars. Click on the chart to enlarge.

A great definition of the Auction comes from James Dalton, author of two books, Mind Over Markets and Markets in Profile, both highly recommended for increasing your understanding of how market profile organizes market generated data as well as strategies for trading using the profile.

The Auction Process by James Dalton

• Price advertises all opportunity.
• Time regulates all opportunity.
• Volume determines the success or failure of the opportunity.

Have a great week! Watch your risk, use a stop and happy trading!

 

MOM’S TRADING RULE # 10 – THE UNBREAKABLE RULE

Here we are at Rule # 10, the last rule! It’s been a journey through Lewis Borsellino’s self-made commandments. Based on nearly 20 years of trading experience as the top local in the S&P pit and many more years since on the screen, his rules provide guidance for the common mistakes all traders encounter at some point in their development. Behavioral changes, both to build successful trader routines, as well as suggestions aimed to combat the many psychological pitfalls traders experience, rounds out his holistic approach. 

“You can break a rule and get away with it once in a while. But one day, the rules will break you. If you continually violate these rules of trading, you will eventually pay for it with your profits. That’s the unbreakable rule. If you have trouble with any of them, come back and read this one. Then read it again.”    Lewis Borsellino      

Challenge # 10 – How do I pull all this information together?

Lewis’s approach is holistic. We looked at his rules one at a time moving through body and mind, covering both psychological and conceptual trading paradigms. He notes trading is 90% psychological. Yes, you need risk management, good analysis but without the right mindset, the other 10% doesn’t matter. This is why all of Lewis’s rules contain a psychological component, making his ‘10 Rules of Trading’ a timeless classic. “One thing is for certain: Where there is a market, there will be a trader. Where there is risk, there will be a hedger. Where there is opportunity, there will be a speculator.”  These rules will be as true and insightful in 20 years as they were 20 years ago.

Lewis says “I became a successful trader because I knew myself. I understand both my strengths and my weaknesses. I mastered myself with cast-iron discipline that allowed me to stomach risk and handle failure.”  Inexperienced traders think they are making a commitment to a business; what all traders who survive and then thrive discover is that the process of becoming a successful trader is actually much more than a business decision and more of a journey of self-discovery. While anyone can participate in the business of trading, only a small percentage will find success as traders.

Lewis says he can handle failure. Imagine one of the most successful pit traders in the world explains his success in trading partly because he had the ability to handle failure. This seems to be a common trait among successful people, whether it’s Michael Jordon, “I’ve missed more than 9,000 shots in my career” or Thomas Edison, “I have not failed. I’ve just found 10,000 ways that won’t work.” Successful people are not afraid of failure but rather see failure as a necessary part of success. Can you handle failure in order to achieve success?

Solution # 10 – Understand moving from novice to expert is a process.

There is a learning model I studied while at Rush University Medical School that details the psychological states involved in the learning process and is as applicable to becoming a successful trader as it is to becoming successful in any endeavor.  There is a natural progression from novice to expert. The novice doesn’t know a problem exists, the expert has mastered the problem and no longer thinks about the process.  Below are the stages we either become mired in, falling short of our goals, or work and progress through to achieve the goals we set out for ourselves. You will learn all the rules of trading while in level 1, but you will not have fully integrated their essence until you’ve reached the highest levels.

Level 1 – Unconscious incompetence, you are not aware the problem exists.

Level 2 – Conscious incompetence, you’ve become aware of the problem. Making mistakes is part of the learning process at this level.

Level 3 – Conscious competence, you find the solution for the problem. Heavy concentration is required for the steps in executing the solution. Practice is repeated.

Level 4 – Unconscious competence, you are living the solution. The solution has become ‘second nature’ and is easily preformed.

A later addition to the model is the 5^th stage and refers to an overall mastery where instinct and reflex is all that’s needed for execution, as the holistic integration of the parts results in the successful trader.

Next time you sit down at your computer to trade your plan, remember, it’s a learning process and it’s not over till you are satisfied you have reached your highest level of competence.

We hope you’ve enjoyed learning Lewis’s 10 Rules of Trading and found them helpful. Be safe, use a stop… and happy trading!!!

Resources – The Day Trader, From the Pit to the PC by Lewis Borsellino is a totally inspirational and enjoyable read with great trading wisdom found throughout the book. Why will you enjoy this book? As Lewis says and every trader I’ve polled can confirm, “It’s what I call ‘trader empathy‘. Nobody can understand the exhilaration of the win or the agony of the loss like another trader.” In Lewis’s own humbling way he tells his story of achieving Stage 5.

Here’s a website with hand signals used in the pit. Pretty cool stuff.

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