Time Compression Trading (10-31-2010)

As Jankovsky would himself say - Time Compression Trading: Exploiting Multiple Time Frames in Zero Sum Markets (Wiley Trading)  contains nothing new with respect to to trading - everything that can be said has been said; and has been said over and over again.

I think he tries a little too hard at times, but Jankovsky's method of delivery struck a chord with me.

'Time compression' is Jankovsky's term for what takes place before markets move. I would describe it as the convergence of personal opinion across multiple time frames (I don't recall a systematic definition of the term). The more opinions involved, the greater the compression and the greater the resulting spike/drop in price will be.  And that is the gist of his message: the market is not prices, the market is the process by which people come together in price. People, people, people. For the 'market' to exist, there has to be at least two people on each side of the trade. People will only enter or exit the market because they believe that it is in their best interest to do so, and to do so right now.This means that every trade, EVERY trade, is two opposing perspectives of what is happening or predictions on what will happen, coming together and acting on that perspective. We are all looking at the same information.

And 80% to 90% of us are losing.

Jankovsky suggests that:

'In all these cases, it is not the market that is preventing the traders from prospering but how they choose to participate. ... Until traders choose to look at things in a different manner and choose to participate better, they have only a small chance of ever gaining wealth.'

That is the emphasis throughout the book: winning traders are willing participants in the market - they choose how they will participate, and they choose to participate based on their observation of the market. By watching how the market behaves and understanding and realizing that it is the decisions people are making that is driving price behavior, they choose to participate with what is happening. They choose to participate in  high probability scenarios (there are enough of us losers to make the probabilities rather high). Winning traders maintain a sense of probabilities rather than certainties.

On the other hand, losing traders approach the market looking for certainty. They look at prices and try to evaluate what is happening and how they can profit. Their evaluation is based on price and is concerned with price (rather than understanding the underlying people dynamic). They wait for confirmation of a move. 'They lose perspective because they trust something other than themselves to find the trades for them.' After they are in the trade they constantly review every price change attempting to predict how far the price will go. They are focused on results rather than the choices they make to participate.

Jankosky continually stresses the fact that wins and losses come from a personal perspective - 'the way you choose to see things is how your urge to action is stimulated.' Understanding the true nature of the market frees me to participate - it enables me to observe the choices people are making and act accordingly. It is a shift away from price prediction to predicting the likelihood of people doing things. It is a focus away from 'What does this mean?' to 'What is happening?'

As I mentioned earlier, I don't agree with everything in the book (perhaps why Jankovsky is a successful trader and why I am still on the negative side), but Jankovsky managed to sever my personal stubborn insistence on somehow using price to predict price. He helped me to understand that nothing can predict price and that successful traders don't try to predict price, every moment in the market is unique, every trade in the market is a battle in two equally strong perspectives; he helped me to understand order flow: 'Understanding how the order flow develops and when it is ready to change is a different process from predicting prices. It involves an understanding of what motivates people to do certain things, how they behave when under perceived threat, what they value when placing themselves at risk, and what will change their minds and force them to liquidate.'

Scott shows me it can be done. Douglas lays out the game plan. Jankovsky pushes me over the edge.

Foolish optimism or a rock solid paradigm shift? Time will tell.

Trade well.

End of Day Journal (10-28-2010)

Summary:

Paper traded 200 share lots today:

I think I needed a day like today as a reality check. I made two mistakes today. The first was paying a modicum of attention to the EMA's on my POT trade. They were showing red and I bailed on the long position after some decent profit. I didn't 'feel' the exit and there was a $1.25 left on the run. I turned the EMA's off for the afternoon session, and am going to leave them off from now on - I didn't even notice they were gone. The second mistake was a silly mis-key and a POT long at about 12:30 that I didn't get out of right away; again the 'let's see what happens' syndrome.

I was early on the MCP, CMG, and SOHU and got stopped on all of them. Ironically, it was the MCP trade that had one of the largest stops of the day. The majority of my entries are simply spot on - these three would of been the biggest winners of the day - but it becomes a game of trying to keep stops small yet affording enough room for the stock to do what it needs to do. The biggest stops were on the NFLX trades and both of them didn't work out. Most of my exits are pretty good as well, though I should of kept watching V.

Overall I am flat out impressed with how my trading has changed over the last couple of weeks. I think several things came together - I have been consistently practicing visualization, I worked out the 'Sell when a stock runs out of buyers, buy when a stock runs out of sellers' question on a personal level, I was introduced to range bars, and I spent most of last week tweaking a new setup and realized that I was falling into old habits again (i.e. being stupid). All of these set the stage for Time Compression Trading: Exploiting Multiple Time Frames in Zero Sum Markets (Wiley Trading) and the author's ideas were driven home and permanently set. Not that author's ideas are new - Scott has said the same over and over again on his blog. I was able to see myself. The time was just right.

The emotional aspects of my trading have abated tremendously. I am guessing this is because I understand that every moment in the market is completely and utterly unique. Even at today's low point on the profit curve, I did not doubt that as long as I kept doing what I do everything would work out fine; it didn't cross my mind to second guess. Why? Because I know what is going on. I just have to get better at interpreting; I feel like a sponge just soaking it in - and acting on it.

Is this cool or what?

As it turns out, I was still negative at EOD, but no worries; it will come.

Tomorrow is dissertation day. I won't be trading on Friday's until I finish this up.

I am seriously considering going live next week, but after being negative today, I will talk it over some more with my wife before making the plunge. No hurry.

Whoot!!

Trade well.

Details:

AMZN

 BG

CMG (15 and 45)

LVS

MCP (15 and 45; the 15 doesn't include the first trade)

MMM

NFLX

POT (15's morning and afternoon sessions)

RVBD

SOHU

V 

End of Day Journal (10-27-2010)

Summary:

Paper trading 200 share lots:

Well - net negative for the afternoon. I am the culprit, FFIV was the stock. I take a closer look at what I did in the review.

This morning and this afternoon I jumped around between a 30 and 45 range for the 'bigger picture', there were some very big movers today. Check out MCP's 45 range - something like 15% of today's volume right at the HOD; something had to happen.

Trade well.

Details:

FFIV (15 and 45 range)

There isn't much to say really, my timing was off. I recognized that the stock was at the top and we were running short on buyers. A little bit on the early side, and when I got stopped I reversed, then reversed again. The initial read was good, but my stop was out in 'space'. The action was slow and it felt like buyers rather than early shorts getting stopped - but who knows? The mistake was made when I started reversing - I think it was more out of habit than really focusing on what was going on. I need to stop and ask if a reverse is justified before pulling the trigger (e.g., like I did on TEO today) 

LXK

 MCP (15 and 45 range)

 
 NFLX

 NOV

TEO

I am proud of this move - the first long was stopped. I let it go a little bit before making a decision and decided that another long was justified. This is how I should of played FFIV.

Mid-morning thoughts (10-27-2010)

I am starting to feel a little giddy... which might be a bad thing.

Not sure if I will trade this afternoon, but I think I should to try and get some more time under my belt. Going for a run right now.

Trade well.

The Awakening (edited on 10-28-2010)

(Note: I keep editing this because I keep reading it. I didn't do such a great job the first time. Still not sure that I am able to express how my thinking has changed. Work in progress...)

Say you were given the choice between trading systems. One system has a success rate of 55%. The other has a success rate of 35%. Which would you choose?

Did you make a decision? Easy right?

Did you choose the 55% system? Why not choose the 35% rate system and do the exact opposite?

This is the deal: somewhere between 80% to 90% of traders are failing or on the way to failing at this game. If you want to win you need to do something different.

And this is the difference: nothing matters.

That is to say, nothing I used to think mattered, ever really mattered. Not TA, not moving averages, not patterns, not charts, not colors - not price. The only thing that matters is what everyone else thinks matters. That is it.

And - I have no idea what that collective 'it' is, no one can know what everyone else is thinking.

But - I can guarantee that some things matter to 80% to 90% of traders, e.g., the ones that are failing. That is a lot of people - and they are all doing the exact opposite of what they should be doing. Enough of them do whatever they do for the same reasons and at the same time. I still don't know what the reason is, but as long as they have their reasons and act on them, I don't have to know.

Here is the other deal: how many people want to buy/sell a stock? This doesn't matter either. Only one person will always buy at the very highest price, and one person will always sell at the very lowest price. The 'a lot of people' eventually becomes one person. It has to. There is not an endless supply of people on either side of the trade. Pick your time frame (or in my case, range) and wait till the tide is ready to turn. It doesn't matter how long it takes, it doesn't matter what the TA says, it doesn't even matter what the price is. To 80% to 90% of the crowd something matters a lot, and it matters enough for them to act on it. Use that and capitalize.

Jankovsky (btw - the question at the top of this entry comes from his book) sets it up like this: every trade is a conflict in perspectives. In order for any trade to take place, there has to be two people with opposing view points - someone looking at the same information that you are and thinking the exact opposite. Who is right?

Who knows? No one knows.

The conflict will eventually be resolved, it has to be, and it will only be resolved when one of the parties capitulates.

What does capitulation look like? Why does one side give in to the other side? I have no idea. But one side will always give in - at some point they have to. The side with the most opinions always wins, and the losers will have to give in When does this happen? I don't know. I would be willing to bet that the vast majority of traders don't expect to change their minds, they entered the trade thinking they were right. They themselves probably don't really know when they will change their minds. But they will; each side of the trade will run out of opinions and people willing to act. They will come into the market and they will go out of the market. They have to.

All I have to do is wait.

There is the very real chance that I will completely fail at my trading tomorrow. I still have some skills to develop, and it might take awhile. But I see what is happening now. I may have some emotions crop up and make some mistakes, but I can't ever stop knowing the true nature of the market. I am a believer.

Here is how it works out on the charts I am using: I am using the fancy MA's as a general indicator of what is happening. If the MA's agree then the probability is high that the price will continue in that direction. (Personally I think that having the range/price based MA is more reflective of the trend - the price is moving, it doesn't matter how long it takes to get to where it is going.) Both of the MA's are color coded for a fast simple read. It doesn't matter where they are in relation to price, or if one is over the other, or anything. They are relatively long periods and are meant to show what the price is doing, especially as the range bars don't always allow a lot of information on screen (dependent on how much the stock has moved during the day). I have the charts set up for 24/7 time frames to keep the MA's smooth. The straight lines are all price based S/R; the shaded band is the fastest, the teal line is next fastest, and the red and green are longer term. This saves me the trouble of drawing lines on the chart - again because there is not a lot of info on the screen and these are fairly reliable. I primarily use these for stops. I also have the volume bars and an MA based on the volume:

So what I am looking for is volume changes, this tells me buyers/sellers are coming in and one side is running out of an opinion. The great thing about range bars is that the volume bars are also based on the range bars, so I can see at exactly what price volume is coming in. Volume is neutral. But if volume is coming in and the price isn't moving, then tides are turning.

Check out yesterday's CRM trade:

Notice the exceptionally high volume on the exit candle. The bar is only $0.15 long and look how much volume came into that price level without it budging. Probability says we have to run out of buyers. And it looks like we did.

On a time based chart this is harder to see - at least for me. That high volume bar lasted 8 minutes, covering 2 5 minute bars. Here is what it looked like:

  I can't see this as well; even though it is prettier.

The charts are no good if you don't know what is happening underneath it all.

Trade well.

End of Day Journal (10-26-2010)

Summary:

Paper traded 200 share lots today:

$2.42/share and $2.53/share on CMG and NFLX respectively. I also had a $0.92/share on NFLX right before the long run. Biggest losses on SOHU for 2 @ $0.88/share and 2 @ $0.60/share.

Done early. I have to get ready to teach a class at ASU this afternoon, and I am still behind on my sleep.

I did one incredibly stupid entry today (SOHU). I regretted it as soon as I was in. But - and this was another mistake - I decided to wait to see what would happen: 'After all, no one knows what will happen next'. A definite no-no - the likelihood of the trade moving in direction was not high and I should of exited as soon as I realized that. Instead I waited, and then added to a loser. I thought the add was a good entry, it was not emotionally wracked and oblivious to what was happening. Still a mistake.

Other than that, I had problems getting a grip on LXK. I moved my stop down as it looked like indecision was setting in and volume was increasing on the top side of the channel.

Charts won't reflect the full day's action. The greatest thing about the range charts is that it is very easy to see at which price level volume is coming in at. This means it is time to get out. I don't want to set myself up here, but my trading is changing.

I threw the NFLX and CMG trades on a 5 minute - all said and done, they are much prettier to look at:

CMG

Details:

CMG

LXK

NFLX

SOHU

This chart is on the 15.

End of Day Journal (10-26-2010)

Summary:

Paper traded 200 share lots today:

Been an extremely long day and very tired at the end of it.

I was up all night reading a new book: Time Compression Trading: Exploiting Multiple Time Frames in Zero Sum Markets (Wiley Trading) (recommended by Tarigal). Get it. Read it. Now. Hands down the best book I have read with respect to trading. I could not put it down. I would almost go so far as to say that it is better than Douglas. I don't agree with everything he writes (as if what I agree with matters at all to someone interested in learning how to trade), but he is able to express and bring home some incredible ideas.

In a nutshell:

1. Every single trade that takes place is because a minimum of two people feel like it is the right time to do something. One person is thinking short or time to exit a long, another person is thinking long or time to exit a short. Often times the people involved feel as if they have no choice but to act. And they are looking at the exact same information.
2. There are only two possibilities after the trade happens: one person will be a winner the other a loser. Figure out which is which.
3. A market can only be in one of two states: balanced or unbalanced. The market is in a constant cycle of states.
4. TA is a complete myth. It is the most popular form of 'trying to reduce risk by figuring out what is going to happen' in today's market. Everyone is looking at the exact same TA and coming to exact opposite  conclusions. They have to in order for a trade to take place. TA can only be right ~50% of the time; no matter how hard you try. TA is using price to predict price. Hogwash.
5. There are only two variables that matter: Time: given enough time someone will change their mind about what is happening in the market and shift the market's current state. Price: everyone has a price that they 'have to' exit or enter on. (I think Jankovsky makes it a little more complicated than this, but this is what I got out his book.)
6. The end result of these two variables is more trading activity (e.g.,  more volume). When enough time has passed or a price reaches a certain level more people jump in/out. Always. 

I could go on and on. I may do a review after I read it again.

I caught myself this weekend 'tweaking' my charts - trying to find just the right setup. How many times have I done this? But this time I was able to recognize it very early in the process. The book brought me completely out of my stupor. I ended up using the principals cited to trade today - still not 100% sure how to implement them all, but I started noticing things right away. Kankovsky did such a great job expressing his ideas and I don't believe there is any way that I could ever make the TA mistake again. I know what to look for now.

I wrote in my blog last week about 'believing'  - about believing in the trend, believing in the momo. I thought that was the right thing to do. But it is utter nonsense. If I am focused on 'believing' I am focused on confirmation and persuading myself; and more importantly, I am NOT focused on what is happening in the market. There is no reason to try and convince myself of anything. Why should I ever try that again? That whole escapade is about 'trying to reduce risk', 'trying to bring more certainty' to the trade, 'confirming the direction' before entering. Somewhere between 80% and 90% of traders lose; somewhere between 80% and 90% of traders try to reduce risk and convince themselves that they are doing the right thing by using TA. Time and price are all that matter; and time is in the equation only in terms of how it relates to price. Personally - I believe a guy can simplify by eliminating time from consideration: why should it matter to me (a winning trader) how long it takes a price to rise or fall?

Heh. How is that for a little tirade? Seriously - using this approach leaves absolutely no room for fear, hope, and/or greed.  They had no factor in my trading today. The only factor that decided my trading was my ability to read and interpret what other people were thinking. - or as it were, my inability; the signs were there I just didn't read them correctly, and I missed exits. 

Maybe this book was the little boost I needed to get me over the edge? Time will tell.

I traded on the 15 and 30 range charts today.

 Trade well.

Details:

You will notice some changes on the charts. I removed the faster period MA's and the Donchian channel, and added volume.  I am only trading in trend - though I almost reversed on SOHU. I did not read the exits on NFLX and CGM correctly - but I will eventually.

CGM

CRM

NFLX

PEGA

SOHU (30 range)

SOHU (15 range)