A trading session

I'm going to post a trading session I had with my mentor in Feb, 2006. It's very interesting to me as I haven't read it in about 2 years. Part of the reason for posting it is to show how a professional trader thinks and approaches trading. After 3.5 years I now have a much deeper understanding and appreciation for what he was doing that day than I had when it was happening. Professional traders aren't supermen, they just have a plan and they usually stick with it. This a chat transcript that's fairly long, so I'll put it up in two or three posts. I would appreciate some feedback on its usefulness. If people think it's worthwhile I'll post some more chats I had with him.


Feb, 2006 Trading session


Steve: just sent you an email asking where you plan was
Bob: Hi ya
Bob: didn't do one
Steve: why not
Bob: I looked at everything, but I didn't write it up
Steve: why not
Bob: I don't know
Bob: It's not that I didn't have the time or anything
Steve: explain
Bob: Well, I mean I had the time, I came home and did everything I normally do, I just didn’t write anything because nothing changed from yesterday
Bob: Just more verbiage about what everyone expects from Bernanke today
Steve: well do you have any trade ideas for today?
Bob: No, and this is the problem, I can't come up with them
Steve: alright hold on
Bob: I’m watching the Yen and I doubt it's going to go up and hit the trend line
Bob: I’m looking at alternate counts for it
Bob: Have you looked at the Cot for the Yen? The comms are long, but it's futures so it means they think it will get stronger, right?
Steve: well that was only an ideal scenario. You have to make scenarios for it going straight up, straight down, etc..
Steve: The comms are short $/Y
Steve: Ok I see the problem
Bob: look at this then, please
Bob: http://www.softwarenorth.net/cot/current/charts/JY.png
Steve: The commercials are long yen. The specs are short yen, long $/Y. We fade the specs, therefore, we're looking to sell $/Y
Steve: The C-wave up was an execution scenario.
Steve: A way to time the entry
Bob: Ok, I understand
Bob: I think we're in a 3 wave down
Steve: me too.
Bob: so get in on a retrace?
Steve: do you see the tail on the 30 min about 7 bars ago?
Bob: Yea, the real long one
Steve: yea. I sold on a stop below the low of that tail.
Steve: I wanted it to clear that before getting in.
Steve: it bothers me that it didn't tank more on the IP number though
Steve: but it looks like a relatively low risk abc on the 5 min
Bob: You mean the TIC data?
Steve: well IP came out at 9:15
Steve: just sold more
Bob: Oh import, got ya
Steve: industrial production
Bob: wrong day, ok
Bob: I was thinking about selling if it broke 117.10
Bob: question is the stop, do I just go with a 1/4 ATR or move it up some?
Steve: ok so if you have an idea that Bernanke is being talked up too much. You need a scenario for all types of market action. What if it rallies into his speech, what if it pukes before, etc..
Steve: No, you need a technical point. In general you want the tech point to be somewhere around 1/4 atr. That's why sometimes you just can't get into a trade because you don't have a reasonable risk point.
Bob: The only decent point would be the last pivot at 76...too much for a 1/4
Steve: not if you go down in time frame
Steve: you can sell any little abc and risk the high of that
Steve: I'm not telling you to do that in this instance, but in general
Steve: I will be selling more on any abc up. Sometimes just risking the high of that abc for that portion of the position.
Bob: 31?
Bob: on the 5 min?
Steve: yea
Steve: oh wait
Steve: yea about 32
Steve: that could have been an a wave and we'll have a c up but there's always risk
Bob: so, let this up move go a bit and see if it exceeds a C specs. Then if and when it moves down, enter
Steve: or on the 1 min, look to see if it stalls here, short and risk 33
Steve: if it parabolas here
Bob: Bernanke is going to have to get up on the desk and scream "We're going all the way to 8%!" to exceed expectations today
Steve: right
Steve: on the other hand, a lot of people seem to know that.
Bob: True, I saw one forecaster mention that
Steve: While you'll want to get the largest portion of your position in on an abc, you'll also want to add as your proven right, ie, as it goes through some lows, eg, 117.12, 116, 85, etc..
Bob: Yea, I've got them marked up
Steve: You can't put on big positions on stop entries because you don't get good risk points. At that point you try and get large positions on at ABCs
Bob: What do you mean by large?
Steve: So an execution game-plan has to entail multiple scenarios. I had one if it made a text book abc and another if it just went straight down
Bob: I'm thinking of hitting the first with 1%, then .5% on an ABC
Steve: well you could sell a little here and risk the high of this latest abc
Steve: but it's getting a way a bit
Bob: Yea, maybe a half %
Steve: ok so by large I mean an entry on an abc would be typical 3 times larger than one on a stop
Steve: What %vol are you trading for a whole position?
Steve: 3?
Bob: no, 1.5
Steve: at this point you would want to sell a small enough position that you wouldn't be bothered by a c wave up (on 1 min) from here
Bob: bothered by being stopped out you mean?
Bob: I just sold .5%
Steve: what's your risk?
Bob: 20 pips
Steve: ok. are you looking at the 1 min chart?
Bob: yes
Steve: you don't want to be in a position of selling here and risking and getting stopped out at the recent high, because that is right about where a c-wave would end right?
Steve: so its good you didn't just risk the high, or did you?
Bob: yep, but I could widen it up
Bob: put my risk up to 1%
Bob: my stop is currently at 35
Steve: Better is to stop yourself at the high and then sell again if it looks like the C-wave has finished. Otherwise you start to hang on for 1 more tic for 20 tics.
Steve: that's good
Bob: that's the 20 pips, at 35
Steve: always better to get out and back in than hope it tops out
Bob: yea, less stressful, I'm sure
Steve: you reset your hand, mind that way.
Steve: the one caveat I have it that if you sold at 15, you could have waited 3 more tics for it to take out that low, understand?
Steve: it's not a lot to give up for a good confirmation
Bob: I see it
Steve: if it were 10-15 tics that's one thing
Steve: make sense?
Bob: sure does
Steve: put up an hourly and draw a trend line sloping up from those two recent lows
Bob: ok
Steve: so you have to think, ok Bernanke is about to speak...
Steve: there is a decent possibility of hawkish comments making for a little 5 min C wave up from here.
Steve: maybe up to that trend line. You have to be prepared for that, lest you think your entire idea is wrong.
Steve: the other possibility is he disappoints and it drops like a stone.
Bob: The TL being at about 42?
Steve: Just at note: When I sell an abc, I expect it to go almost instantly. maybe not a lot, but I expect 5 tics out of it within a minute or two
Bob: and if it doesn’t?
Steve: good question. It depends but it bothers me
Steve: because when I'm right, it usually goes instantly and never looks back
Bob: makes sense
Steve: so where would you sell if it goes up from here?
Bob: If the TL held
Bob: about 40

Part 2

Steve: sounds good.
Bob: watch the 1 min for momentum change
Steve: yup
Bob: My understanding is the Bernanke thing is going to go on for a couple of hours, so price could go up and down as pieces come out and are interpreted
Steve: yea, but if the ball starts rolling early to the downside it may not matter what he says because others will see the market doesn't care and bail.
Steve: setting up to be an ugly day
Bob: Dear Members of the Congress, we are fucked!
Bob: rofl
Bob: did hear it?
Bob: did you hear it?
Steve: what did he say
Bob: sustained expansion on track, need to possibly raise rates
Steve: ok good
Steve: tone sucks
Steve: he didn't start speaking yet
Bob: no, text released
Steve: oh he pre-released
Bob: inflation contained
Bob: stocks going down
Bob: brb
Steve: k
Bob: back
Bob: you watching any news site?
Steve: watching cnbc
Bob: I'm listening to Bloomberg
Steve: I sold more $/;Y on that rally
Steve: while it looked impulsive, it was driven by knee-jerk reaction rather than any real buying. It was more a function of low liquidity that any substantial idea
Bob: I see
Bob: so, you think what's come out so far is good for shorting?
Steve: I don't know that he's really said anything
Steve: I think that no matter what he says, the upside will eventually fade
Bob: Ok
Steve: I added only about 7% of my total position
Bob: so, if it breaks the low at 04, it's worth waiting to see if it goes below 117?
Bob: then sell any pullback?
Steve: well, depending on how much of my full position I had on I would rather sell an abc. either up from here, or below a break of the low at 116. 89
Steve: The low of the day isn't much of a confirmation in the day's
Bob: ok
Steve: so regardless of whether today's trade works out, do you see the power of fading the predominant theme?
Bob: I guess. You must realize it's a hard sell.
Steve: why?
Bob: Because it's counter-intuitive in a way
Bob: these guys are giving me a headache
Steve: reread those write-ups I sent you
Bob: ok
Steve: all the politicos want face time
Bob: what write-ups? Email?
Steve: personally I think we'll see 116
Steve: today
Steve: the ones about Why contrarian trading works, and Trading Philosophy
Bob: Well, that's the target I see on the Daily
Bob: Oh, those. I’ve read them numerous times
Bob: They make sense to me, very logical
Bob: I guess it's an emotional hesitation
Bob: I don't have any doubt in your ability to trade this way
Steve: I didn't think you did
Bob: you know what I doubt
Steve: what?
Bob: my ability to trade this way
Bob: natural, of course
Steve: lol, I figured you’d say that
Steve: I would doubt many people's ability, but not yours.
Steve: seriously
Bob: your faith in me is inspiring...and necessary
Bob: ok, just checked my math and I'm only in at .39% risk
Bob: I'm going to enter on an ABC and get it up to 1%
Steve: sounds good
Steve: btw, you've got enough in this trade that you wouldn't take a loss. You'd want to move stop to BE (or take a tic like I do).
Steve: You always want to get enough off the initial execution that you can move your stop to BE relatively fast and get a free trade.
Bob: that is immensely calming
Bob: ok, I like that idea
Bob: not that I was nervous, but it does ease the mind
Steve: yea it really makes a difference.
Steve: I look at my P&L like trench warfare. Move ahead, consolidate gains and dig in. repeat
Bob: Nice way to look at it
Bob: are you looking at the 1 min?
Steve: you might be getting a tiny abc here
Bob: that's what I’m thinking
Bob: would you say it's in the C on the 1 min right now?
Steve: yea
Steve: but you could get 10 pip shots either way
Steve: probably a good sell of a small portion here
Steve: maybe .3
Bob: just hit 1.618 extension
Steve: I'd wait one more bar to see
Steve: wait for momentum roll over
Bob: stopped out
Steve: that’s ok, keep your head in ready to pounce again.
Bob: yep
Steve: this is a difficult day to trade, no doubt
Steve: you can't expect normal abc type stuff
Bob: it's stalling at the last support
Bob: now?
Steve: maybe .25%
Steve: might be getting a 5th wave up
Steve: looks pretty impulsive
Bob: yep
Steve: you can draw the trend line off the two most recent highs, but it could probably won't respect trendlines given the furor
Steve: I’m out
Bob: yep, me too
Bob: you think these congressmen understand half of what he's saying?
Steve: absolutely not
Steve: at this point, if he says anything remotely dovish this will get smacked.
Steve: I sold about 1/5 of a position here
Steve: if we get a new impulse down I
Steve: I'll sell any abc
Bob: ok
Steve: I'd like to see a fat bar down, not just a slow move lower
Steve: he is talking really hawkish
Steve: taking another tiny stab here
Bob: I'm in at 47
Bob: stop right above the high
Bob: is that too close?
Steve: I got in at 53
Steve: tough call
Steve: id really like to see an impulse down before getting in large
Bob: I agree
Steve: this could be an A wave down and the things goes higher all day. but that's not the way I'm gonna bet
Steve: to answer your question, no it isn't too close
Steve: that's my stop too
Bob: ok
Steve: take a look at the hourly. In a normal situation I'd never fade this upmove. This difference here is that volatility has picked up so that these are average moves at a new level of volatility
Steve: question about the current account deficit, this will be interesting
Bob: ok
Steve: do you understand the volatility concept?
Bob: the up bar matches the down bar so we've established new volatility levels

Part 3

Steve: as long as you suspect some reason that the market should be more volatile, in this case, bernanke
Steve: on another note, I'd like to see an impulse down the size of that largest bar up to make me confident
Steve: on the 1 min, that is,
Bob: ok
Steve: In trading, your constantly taking tiny losses, but then you make 15 times your avg loss in a stroke.
Steve: Don't expect to have anything close to a 50/50 win rate.
Bob: that's something I have to learn to do
Steve: I lose so much its incredible
Steve: Paul’s win loss was about 34%
Steve: mine is about the same
Steve: of course when we're right we have 6x the position.
Bob: interesting conversation right now
Steve: what are they saying
Bob: talking about the future of social services
Bob: 3 programs will account for 16% of GDP in 25 or so years
Steve: sounds like a welfare state
Bob: they could cut them off, or cut them down
Steve: looks like $/Y is about to rollover
Bob: do you say that because of the way the 1min is developing?
Steve: yea, the abc that it looks like it could be is taking too long to develop, that's usually not a good sign for a renewed impulsive
Steve: brb
Bob: ok
Steve: this guy is an fucking asshole
Bob: rofl
Steve: did you hear him?
Bob: yea
Steve: he spent more time telling him that he was sorry for being abrupt because he had limited time than using his limited time to ask questions
Bob: maybe he gets paid by the word
Steve: I'm wondering if the theme that the market priced in this speech a theme in itself
Steve: I’m out
Bob: me too
Bob: well, the initial idea of an ABC on the 4 hour is now heading up for the C
Steve: yep, good catch
Steve: though the day is early
Steve: I’m watching the chat on fxstreet and everyone was long euro.
Bob: oops
Steve: you know, the fact that it was falling going into the speech was significant. Not that I would have traded it any different.
Bob: why was it significant?
Steve: Well it could be interpreted as weak tone OR it could be interpreted as people selling anticipating it was priced in.
Bob: I don't understand this " it could be interpreted as people selling anticipating it was priced in."
Steve: well, the market is expecting bullish comments from bernanke. Why is it going down then? The first is that it's priced in. That's what we were betting. The other is that everyone else thought it was priced in too and therefore sold it down.
Bob: so why are they buying?
Steve: this was before he spoke
Steve: because if the comments are bullish, and in fact they weren't priced in, it’s not surprising it went up
Bob: has he said anything very hawkish?
Steve: I would say he has
Steve: go to fxstreet and watch the chat
Bob: ok
Steve: given the chat and the move I'm tossing this idea for now.
Bob: ok
Bob: I think the C wave idea is valid though, maybe tomorrow it'll complete
Steve: agreed
Steve: I got some stuff I gotta do
Bob: Ok, that was really interesting, I enjoyed it
Steve: good. hope you learned something.
Bob: I really liked taking small shots at it. It didn't bother me getting stopped out
Steve: You can be dead wrong on your analysis and still lose little to none with good execution
Bob: yea, that's the most important thing I learned today
Bob: I lost .65% today but I was taking a shot at a much larger reward. I see how it works, and I also have a good idea now on how to execute that approach
Bob: I certainly see the value of doing it that way
Steve: yup, a much larger reward. You made good trades. They just happened to lose this time.
Bob: Just like poker. I think all would be traders should learn how to play Hold Em
Steve: exactly
Bob: Ok, take care, have a good day in the snow
Steve: ok later.

I dont know why your doing all this, but I am enjoying the reading immensely. If Im understanding correctly then Steve is talking about shorting upward breakouts that retreat quickly when your analysis says short is the way to go. Regardless, I doubt that this is the most important aspect of the convo.

The difficulty in trading is creating a rating system/outlook for analysis concerning the importance of different information, and then playing a worldwide game of rock paper scissors with the market participents.

What I like about this chat is that It gives a look in to how Tech's and news, and therefore sentiment could be used together.

All my own opinion,
Great stuff.

Dopey , Great stuff to be shared for free
I bet most traders will not find anything of value in it as they want you to tell them where the eur is heading or enter here and exit there!

Absolutely. At the time, all the factors he considers, which are 6 things, were pointing south. The way he trades once he has a plan is to take small shots at it based on the technical, which in this case was small ABCs upmoves. If it starts moving, then he keeps adding on small upmoves until he has his full position on.

On this particular day, it didn't break south, but not much was lost in the process. At the time this was all new for me, and it was an eye-opener. One doesn't have to commit a full position until the market reveals its direction.

For me, the most important lesson was the need for a plan, a method of executing it, and sticking to the plan. I remember when the session ended that I was a bit frustrated that we had spent all that time and effort that day without even seeing the market move one way or another. For him, it was just another trading day. Now I truly appreciate it for I now go days looking at the charts and doing nothing.

We see on these boards that people like to define themselves and others with simplistic labels...you're either a fundamental trader or a tech trader. You're a scalper or a trend follower, etc. A guy like him does everything. He considers the news (only as to how the other traders consider it), sentiment, tone, position, time, and technical. I watched him hold a Cad trade for 4 months and make a fortune on it and I've watched him many times get in and out within minutes. His take on it all was why limit yourself.

And he saw the whole thing as one huge rock paper scissors game. He even had me play the game when I first started working with him.

I agree. I must admit when I started working with him I kind of was waiting for the "secret" to be revealed. It was frustrating at times. Yet he had said up front that he was only going to show me how to become a trader, he wasn't going to make me into one.

There are a lot of gems in his stuff. However, you need to have the schema to learn it. For newbies, this stuff will go over their heads. For others if they're far enough along the learning curve, there are some very important lessons. I'm not revealing any great secrets. Rather I'm showing a process that is made of multiple components in which the sum is greater than the parts.

Great stuff Dopey, thanks for sharing.

I think what is necessary for most serious developing traders is that they require a mentor or a small mentoring group with feedback given to their trades and thought process.

Ed Seykota's trading tribe is a specific example.

This leads to the next question: Some say mentors are good only if you trade the same method as them. What are your views?

Thanks for this Dopey. I don't post much, but really enjoying your threads, priceless stuff.

interesting stuff, thanks for sharing!

Awesome 'exchange' Sir, thanks!
More... more..

i was digging around your threads dopey, due to a trader wanting to know where to find this little gem so i am bumping this. hope you don't mind.

I'd never seen these posts before, thanks for bumping them! I especially liked part 3 just from a technical standpoint....the idea of taking multiple shots at a trade, and that actual win rate means very little. Sometimes the hardest part of trading is actually establishing a position in a potentially high reward trade

No problem. Due to my recent postings on these threads, I spent about 3 hours last night going through my work with him. It's always helpful to me.

Thanks for the posts Dopey. Read the Trading Session. Confirmed some things; some things were new for sure. Good stuff! One thing comes through about this guy who mentored you: he is a VERY CLEAR THINKER. He is able to process quickly and "knows" what is and what isn't of critical relevance to what he knows he needs to know. A Blink thinker? Hmm...He is also very decisive. I think you were very fortunate to have gone that way. He is also good at "tapping the market" for information when he trades. He definitely knows what he is looking for, no question there. Just means that he "understands some things" well .

Anyway, he made mention in the chat of an article he sent you called Trading Philosophy. Any idea where it might be located? How can I locate any others that were posted (did some digging, no luck yet). I saw the ones RedLion found.

Thanks again,


FX4...

I agree. It's actually much harder to trade this way than what most people want to do. It does take a huge commitment to do so, though. Bear in mind that he was a professional trader, his job was to spend 10 hours a day doing nothing but trading so it makes sense to trade this way. For most retail traders, it's very hard to find that time, and to make the commitment.

That being said, one can still trade this way using price alerts and having a plan on how enter trades as they develop. Most of us know how much it truly sucks to put on a full position to watch it get stopped out and then shortly thereafter price goes where you thought it was going to go. I know for myself it's very demoralizing when it happens.

But if you only put on a part of a position and get stopped, you avoid the full loss, which might be the daily loss limit for those who have them, but even more importantly, you maintain a strong hand by not being demoralized by the loss. You could lose, say, 1/4 of your position, then watch price move your way and it'll be so much easier to then reenter with the remainder.

It's true that doing it this way you may hit your desired entry with a smaller position, but there's always opportunities to add-on. I think this is a huge mistake most retail traders make...they don't add-on when their analysis starts playing out for them. Call it fear, or just lack of understanding of what they’re doing, but they miss the opportunity to capitalize on moves.

One of the things he taught me is that when your analysis proves right, especially when you’re expecting a good move based on the fundamentals kicking in, then hit the trade hard. He told me of hitting positions with as much as 10%, all added on in pieces. Also, keep in mind that as he added on, each piece was watched carefully and he gave it a very short time to prove itself. If he missed the entry he wanted, he'd just wait and try again with the ad- on. It’s all part of trading. Just simply putting on 1.5% trade after trade is making it hard to make up ground. But hit a move with 3-5% and watch it turn into a 5:1 winner and you’ve made your month. That is how professionals trade.

It’s hard, but that’s good. As he always said, we need someone to take money from.

I think this is a huge mistake most retail traders make...they don't add-on when they’re analysis starts playing out for them. Call it fear, or just lack of understanding what they’re doing, but they miss the opportunity to capitalize on moves. One of the things he taught me is that when your analysis proves right, especially when you’re expecting a good move based on the fundamentals kicking in, then hit the trade hard.

Agreed!!! Been working on that lately myself . Very, very crucial. When everything seems to gel like that, it's the move a trader doesn't want to miss.

Good advice for retail traders for sure. Fear could be in the way, but, just jump over and do it anyway.

FX4

I'm pretty sure I never posted that. Call it an inclination not to share too much with the world. That being said, you can send me a pm with an email addy and I'll send it to you simply because you're the only person who ever asked about it, afaik.

Thanks much. Will do.

FX4

Let's see if this is interesting