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tanstaafl

Observations of a Newbie Trader

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Hi all, I just wanted to introduce myself and maybe sort out a few things in my own mind by writing them out.

 

I'm new to trading so you could call me a newbie but I've been dabbling with investments for a while. I'm mid-30's, single (maybe not for long), no kids (prob not anytime soon but who knows...), secure salary at about 150K per year, and about 150K in a discretionary taxable account at IB, which I had opened primarily as a long-term investment account (buy and hold dividend stocks/index etfs, sell covered calls). Most of my IB account is actually in index ETFs, but I usually have about 20% in cash. I'd like to make some return on that cash, even if very meager, plus I've always wanted to learn how to trade, so I figured, what the hay, I have an IB account anyway so let me just try trading futures and see how it goes. If I can make consistent small returns (in the range of a few % points per year) I will be very pleased; if not, I will move on to the next thing.

 

Somehow, I believe that learning how to trade will make me a better long-term investor, if for no other reason than I will find better entry points for my long-term investments. But in the end, it's just about getting a decent return on my money whether you want to call it investing or trading.

 

Until recently, I'd always thought of futures as "exotic derivative instruments" that only professionals should attempt to trade. But as I learn more about them, they don't seem all that exotic anymore. In fact, since most of my investment portfolio is in index ETFs, it seems that learning about futures would be a natural progression. On rare occasion I will buy a put option on my ETFs if I expect some sort of market correction due to some predefined event at a specific time (ie, Greek default on March 20, US debt ceiling debacle last summer, etc.), but I just hate buying things that are guaranteed to be worth nothing over time (I'm happy to sell them though). Selling the ES seems like an effective way of hedging my net long-portfolio; basically buying short term insurance - though I'm not too familiar with the process of rolling-over contracts so I probably wouldn't do it during those times of the year - at least not until I learn about the costs of rolling-over.

 

But more importantly, sometimes I think the market is going to move in a certain direction in the short term (minutes to hours to seconds to a few months), and I want to have an instrument that I can use to act on that belief. I don't want to be limited to either being net long or neutral. Furthermore, I don't want to have to sell my holdings in anticipation of a small correction, and then end up paying short term capital gains. I would rather hedge my net long position, or even go temporarily net short, without having to sell my underlying. So futures make a lot of sense to me. Plus, the 60%/40% rule is amazing. I can't believe it exists, though I understand it may not be around for much longer. And finally, I hate hate hate recording every single stock trade, cost basis, long-term, short-term, blah blah blah on my tax return. A one-line gain/loss sounds wonderful.

 

But like I said, it's all about improving the returns of my overall portfolio. And day trading futures seems like a potential way to boost the returns on my cash position, which is earning 0.

 

So anyway, that's the story of how I went from investing to dabbling in trading futures. Long story short, haha.

 

I've been intra-day trading 1-3 contracts of ES for about 2 weeks, about 10-20 round trips per day, and I'm happy to report that I have not lost money. I'm up about $200 net of commissions. I've made $400 in commissions for IB. My goal for the next 2 weeks is to make more for myself than IB, haha.

 

Much more valuable than the $200 are the few lessons I've learned. For example:

 

-My biggest mistake is taking on too much risk and then panicking when the market moves against me before moving in the expected direction. I often end up closing the trade at a loss and then seeing the expected move happen after I have closed out. Whereas, this rarely happens when I have a smaller position because I am comfortable with the amount of loss before the expected move occurs. The end result is that my higher contract trades (2-3) usually end up being small losers and my lower contract trades (1) are usually my big winners because I let them run. So for now, smaller is better, or less is more.

 

-I should be comfortable walking away from the computer to take a pee without a stop loss in place; if not, I have too much at risk.

 

- Max loss per day for me is $400, trading 1-3 contracts at a time.

 

- Don't trade for the sake of trading. Wait for the fat pitch.

 

- Set TIME LIMITS, as well as profit targets and stop losses. ie, I will get out of this trade, come hell or high water by 3PM.

 

- Scalping the ES does not work; limit orders do not fill until the price passes through. Will try the YM next week.

 

- Backup plans: 1) iphone with 3G and TWS app, 2) telephone

 

- Cycles tend to occur in threes with decreasing amplitude and frequency (due to traders trying to get out sooner and with less profit than the next guy). After the third cycle, look for a break. If it breaks, trade the break. Why threes? I have no idea. Something to do with Fibonacci ratios I suppose... Or maybe flying space monkeys.

 

- Volume, volume, volume. Engulfing signal where the engulfing signal volume is greater than the engulfed signal is more predictive. Also the ratio of engulfing to engulfed is predictive.

 

I'd like to calculate some statistics but have no idea how. Anyone care to explain to me how to do this?

- What percentage of days does ES trade up 1%, 1.5%, 2% from last day close?

- When ES reaches +1.5%, what are the chances it reaches +2%?

- when a new daily high is created, and that high is then not broken for 30 minutes,

what are the chances that the high will be broken within the next 30 minutes?

(pretty low i would guess)

- if a nice round number (eg 1310) is crossed 3 times within 10 minutes, how many

times will it cross again in the next 5 minutes?

 

 

Anyway, that's it for tonight. I just wanted to share my trading experiences so far. Would love to hear from other newbies or more experienced traders and how they got started.

 

Did you just start trading or did you do read a lot of books first? One rule I set for myself, perhaps wise, perhaps foolish, is that I will not pay for any books, websites, mentors, etc. that purport to teach me how to trade. I figure that I need to actually get my feet wet trading before I can get anything out of reading books. And I don't want to start out in the hole before I have even started trading. I consider buying books the same as paying commissions. And anyway much of what is out there seems to be more psychology-related, which to be honest, does not seem to be the kind of thing that I could learn from reading a book. Maybe after amassing some trading experience, it would be helpful to read some of those psychological books to understand and control the normal emotions felt during trading, but I don't think I am going to learn much from those books without experience. Even then, I don't know if I would pay for them since much of it seems to be common sense. Maybe if I were younger, I would benefit more from controlling my emotions, but as I am, I feel I am pretty even-keeled, so long as I have not taken on too much risk. So when I feel emotional, I reduce my risk. Pretty simple. Sometimes that means I take a loss.

 

And anyway, there are so many free resources out there (like this website) that I feel are as useful as most trading books out there. The one exception is that I would be willing to purchase a book about programming, maybe c# or easy language, because I see myself moving in that direction though I will always be a discretionary trader because I see the markets more as a poker game than a chess game. There is much more psychology in poker than in chess, but both are data driven games.

 

Ninja trader. Nice program. But I am not going to pay $50 per month, until I know that I can consistently make at least twice that much per month, and at this point, that is not yet known. Also the real-time volume bars do not show up in Ninja trader, as they do when I use the IB charting program. Does anyone have a solution to that? All data is provided by IB.

 

Ok that's it for now.

 

Tanstaafl

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Did you just start trading or did you do read a lot of books first? One rule I set for myself, perhaps wise, perhaps foolish, is that I will not pay for any books, websites, mentors, etc. that purport to teach me how to trade. I figure that I need to actually get my feet wet trading before I can get anything out of reading books....

 

You can practice on a demo account to get your feet wet. Get familiar with the markets first before you start reading. I think learning process goes faster if you know how things work. There are lots of free educational sources, e-books on the internet, those sources can be very useful too.

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