Trader Interview: Sunrise Trader @SunriseTrader

Sunrise Trader

The next interview in the series is with Sunrise Trader. He’s one of the best traders to follow on Twitter and I highly recommend you check him out. He summed up his Twitter purpose quite nicely just the other day:

Scroll through his feed and you’ll find a lot about his trading plan along with nicely marked up charts but also daily inspiration and quotes that make him a joy to follow. I’m really pleased that he agreed to do an interview because I knew he’d give some excellent answers. I love his detailed and concise explanation about money management, an absolutely critical skill for any trader.

What is the most overrated trading advice?

“Complexity/logic and the belief a trader needs to know it all.”

The market is not based on logic and complexity. It is based on human emotion and the current market participants’ thoughts and actions.  A trader must keep in mind that it is not the news or earnings release that is important.  It is the reaction to the news or earnings release.  Reactions are often different than what logic might think. 

Many want to know all things trading.  It is next to impossible.  What a trader should do is hone their skills to one or two types of setups and have the patience to wait for those setups to materialize.

Traders need to keep things simple.  Keep their trading plan, charts and methods simple.  Don’t overthink. Traders need to trust in their process. Once a trader finds a system that works for them, they need to wash, rinse, repeat over and over again.

I often say: Plan it, set an alert, see it, trade it.  See it first.  Use your eyes. 

What is the most underrated trading advice?

“Risk management”

Many come to the trading business thinking about all the money they want to make, when what they should learn right out of the gate is how much money can be lost and a formula for how many shares can be purchased. 

As traders our #1 job is risk management/money management. If you take the time to learn money management, you will be ahead of 90+% of new traders in my opinion.

You need to ask yourself and plan with these primary questions in your mind each time you place a trade:

  • How many continuous losing trades can my account handle?
  • How much am I willing to risk?
  • What is my risk vs my potential reward?

Now for some math, you start with an account of $10,000 and you want to buy a stock that is trading at $50 per share. How many shares can you buy? Hint: it is not 200 shares. First, you need to decide how much per share you are willing to risk. Let’s say you settle on $10, really? $10 x 200 shares = a loss of $2k or 20% of your account. Do this just a few times and you will see an account balance of ZERO.

To find out how many shares you can buy, you must calculate using a % of your total account. Traders who are successful will often risk up to 2% of their total account on each trade. 2% of 10K = $200 dollars. You now decide, based on your stop, what the risk per share will be. For this example, your stop is $2 below the purchase price. You are willing to risk a total of $200 (2% of your total capital)/a stop of $2 means you can buy 100 shares. If your stop was $5 you could buy 40 shares. You may find that your risk tolerance is greater than 2%, maybe for you it is 5%. I implore you to do the math based on your personal risk tolerance.

I can tell you that trading takes time to learn, there is no holy grail and no perfect system. If you can spend time on learning a system, gaining an edge and perfecting money management/risk management you will be miles ahead in your trading career.

What’s a non-trading related book that’s influenced you recently?

10% Happier by Dan Harris.  He makes a case for mindfulness and meditation.  It is a mix of true-life stories with research and wisdom.   You learn through practice to quiet the voices in your head and appreciate living in the moment. 

Questions for Sunrise?

Ask him in the comments below or ask him on Twitter. Thanks Sunrise!

Do you know someone who you think would make a good interviewee? Contact me!

Sever Your Market Tether on Vacation

When I first started trading it was very hard to go on vacation and spend time away while the markets were open. I would reflexively check what stocks were gapping and try to imagine how my trading day would be going if I were trading. Honestly I just couldn’t enjoy vacation – I constantly felt like I was missing out on profitable market action but more importantly I worried I was losing time to improve as a trader. What most traders don’t realize is that purposeful time away from the markets is one of the most valuable long term investments you can make for your trading. This post explains how to use vacation to improve your trading.

Realization that Vacation is Long Term Profitable

As a new trader years ago I would dread time off. Sometime over the course of the last 15 years of trading, though, I’ve become way more comfortable spending time away from the market. Rather than being something to dread, I came to relish days off. I can’t pinpoint a particular moment in time when my thought process changed – it was a gradual change that occurred over time although I do remember a specific incident that accelerated it…

My Worst Day was a Day I Shouldn’t Have Even Been Trading

Many years ago my wife and I had planned to travel across the country to spend time with friends for the weekend. We had purchased plane tickets, hotel, and the rental car. We had been travelling a good amount prior to this trip so as the travel day approached we were not exactly looking forward to getting on another plane.

The day came and on our way to the airport very early that Friday morning, we both looked at each other and realized we really didn’t want to go on the trip. We just couldn’t get back on a plane and fly all the way across the country. We decided to turn the car around and go home – one of those crazy decisions that we never make. “Ah!”, I thought as we drove home, “I’ll be able to trade today.” Was having to skip a trading day one of the reasons we turned around that morning? Not consciously but looking back subconsciously it had to have been.

I traded that day as I normally would having skipped a vacation that we’d already paid for. You can guess what happened – that ended up being my worst trading day up until that point. I didn’t make any big mistakes – it was just dumb luck that this happened to be the day that my strategies performed REALLY, REALLY BADLY. I’ve never forgotten that day – a very costly one at least partly due to the fact that I was uncomfortable being away from the market.

I’ve recently thought a lot about my increasing comfort with time away from the trading desk and after seeing the results of this poll from Brian Shannon from Alphatrends where most traders said they wanted the markets opened more I realized that most traders aren’t getting the most out of their time way from the market.

Eliminate the Distracting “Market Tether”

As traders we feel the need to be “in tune” with the market. When we go on vacation there’s an underlying fear that we’ll lose that synchronicity – we’ll become out of touch with the market and when we return to trading it will take time to burrow back into the market’s current flow.

What I’ve come to realize is that this market tether is exactly what you need to cut on vacation to become a better trader over time. Doing this right will allow you to truly enjoy your time away from the markets AND improve your trading each time. Here’s how.

The Market Tether: Short Term Satisfaction but Long Term Closed Mindedness

The vacation “market tether” is bad for traders for a couple of obvious reasons and a very important one that’s not apparent:

  • You aren’t immersed fully in enjoying vacation
  • You aren’t really getting recharged from your time away from trading
  • Most importantly: fully severing the market tether gives you a better long term trading perspective

The first two are obvious – if you’re distracted for any reason you’re not able to fully enjoy your current vacation activity. You’re simply not getting the most out of vacation. Not only does this make the vacation less enjoyable than it should be, but you’ll ultimately be missing out on one of the most important long term benefits of time away.

This “market tether” can be conscious or subconscious. Either way it’s satisfying a short term need at the expense of long term trading improvement. The short term need is the desire to stay in tune with the market. Less experienced traders might even be missing the thrill of market action like the feeling of a gambler who steps away from the slot machines.

When you’re trading each day you should be following your trading systems closely. By definition you are burrowed down into your trading zone – ignoring all other distractions. This includes even other clues for other ideas that could turn into profitable trading strategies. Regularly letting yourself to come completely out of your “trading zone” – that is, severing your market tether however psychologically difficult – will ultimately allow you have a fresh perspective on the market itself and your own trading. What I’ve found over the years is that this fresh perspective isn’t possible if you’re continuously burrowed into the trading zone you’ve created for yourself day in and day out. You need to get completely out of your trading zone to be able to expand it and improve it.

Without occasionally severing your market tether you’ll always be the trader that trades the myopic zone that you’ve created for yourself. Many of my best trading ideas have come right after time away from the markets.

Take Vacation with Intention

When you have this perspective it’s much, much easier to spend time away from your trading desk. In fact, you should look forward to it and plan ahead to ensure that you’re getting ENOUGH time away from the markets to get better.

When planning vacation I always check my earnings season tool to choose times that are likely not to see significant market action. I know how my strategies are affected by earnings so I can plan to spend time away when my strategies are likely to not trade frequently anyway. Because I day trade exclusively, I also have the flexibility to take an unplanned vacation day on a whim since I have no overnight positions that I’m obligated to manage – one of the most underrated reasons to day trade.

When you’re on vacation, it’s much easier to enjoy when you realize that you’re literally becoming a better trader by not trading. Ignore the markets while you’re away and you’ll be refreshed and in a position to see the markets in a different light when you come back.

Do you have strategies for taking market vacations? I’d like to hear about them in the comments.

Earnings Season: How to use it in your Trading

Most traders and investors are familiar with the concept of earnings season: the period of time where most public companies release their earnings and various other fundamental financial metrics (price/earnings, cash flow, debt, etc) as required by the SEC. These company announcements very often trigger large moves in the stock price as the market responds and processes the the information about the company and establishes a new equilibrium. The volatility around this response is often quite strong and is the focus for many trading strategies. As I often say, I don’t attempt to trade the news but I trade the market’s reaction to the news.

Most traders think about earnings season in an inaccurate way. This post explains why that is and suggests a much better way to think about earnings seasons.

Why “season” makes no sense

The word season implies that there’s a definite start and end date. Consider deer hunting season. You have a definite start date where it is legal to shoot deer up until the end date of the season at which point it is illegal again. Everyone knows the well defined dates of the season and almost everyone adheres to these rules. This is not at all the case with earnings releases. You can literally find companies reporting earnings on every trading day of the year.

There is also general disagreement about when earnings season starts and ends. Traditionally it was thought that earnings season officially kicks off with the earnings release from one company: Alcoa (AA). Over the years as technology companies have become increasingly important this tradition seems to be fading somewhat.

I’ve noticed that traders often speak as if they are intimately familiar with earnings season but if you ask them to put the earnings season start and end dates on their calendar and you’ll end up with a variety of different dates chosen.

Does this make the entire concept of earnings season invalid? Of course not, but there is a much more useful way to think about the concept. Different trading strategies perform differently depending on how many companies are reporting. Some strategies depend entirely on earnings announcements and others AVOID earnings announcements specifically. It’s important to think about how your trading strategy is affected by earnings announcements and earnings season – for example, when you’re planning time away from the market you probably want to schedule the time outside of earnings season.

A better way to think about earnings

Here’s how I’ve come to think about earnings season over the course of over a decade of trading.

First, when you look at the distribution of when companies report earnings, you definitely see a clustering around certain times of the year. However you’ll also notice a lot of companies reporting outside those clusters. See the chart below.

Earnings season chart

The second thing that stands out from the chart: there are four earnings seasons throughout the year but the length of each of them varies widely. The first earnings season of the year is much more spread out than the rest of the earnings seasons. Why? Most companies’ fiscal years align with the calendar year so these companies are reporting earnings for an entire year starting in mid January. It takes longer to report annual earnings than quarterly earnings since you’re producing fancy, glossy reports and fulfilling additional requirements.

So what date makes sense to use as the start of a particular earnings season given the fact that companies report every trading day? Enough traders still respect the Alcoa earnings report as the start of the season to follow along. When you plot those dates on the chart it does seem to mostly align pretty well with what most would consider the start of the earnings seasons. Until some other method comes into vogue this seems logical.

What about the end date for each season? You can’t simply add a certain amount of days to each start date since the season length varies so much. A better way to think about it is for a given day calculate a percent of the way through that particular earnings season. In other words, of the total number of companies reporting that season, what percent have reported as of a particular date?

Dynamically Updating Chart Showing Earnings Big Picture

The above chart is dynamically generated and shows the current day (or next trading day) and what percent through the current earnings season we are. As of this writing it shows February 11th and that we’re 33.1% through the current earnings season. Use this chart to determine when it’s best to take time away from the market. Because the earnings seasons have different lengths, this visualization is a much better way to think about earnings.

Earnings Season is the Forest, now let’s look at the Trees

Now that we’ve used an intelligent way to determine where we are within earnings season, let’s look at the best way to scan for individual companies that have reported recently or in the near future. There are a few different tools you can use for this purpose but we’ll look at two: Yahoo! Finance Earnings Calendar and the Trade-Ideas Top List.

Yahoo! Finance Earnings Calendar

The Yahoo! Earnings Calendar is very popular and does a decent job of allowing you to see which companies are reporting on a given day. By default it shows all companies that are reporting today and you can click on adjacent dates in the header and see earnings announcements for these different days.

Yahoo Finance earnings calendar
Yahoo! Finance Earnings Calendar

Because it shows all companies reporting earnings, the first thing you’re going to want to do is filter this list down. On the date I’ve chosen here you can see there are 122 companies displayed. That is going to be far too many to be able to process in a reasonable amount of time. Most of these companies don’t have enough volume to trade anyway. There are some filters you can apply to the list by clicking on the Event Filters link and at first glance the list seems substantial. However when you look closer and try to apply a simple filter for Average Volume you quickly realize that it doesn’t contain this very elementary filter.

Yahoo Finance earnings filter
No average volume filter available

This alone makes the list unusable but on top of that there are only a couple fields available to display for each stock. As a trader you need to be able to view the appropriate fields right alongside the symbol in the list. Looking them up for each symbol is time consuming and requires a ton of mouse clicks. This could be the difference between catching the trade and being simply too late to catch the move.

The other major drawback of this calendar is the fact that all companies that are scheduled to report earnings today are in the list. This includes companies that are reporting before the close as well as companies reporting after the market close. Why is important to make this distinction? Imagine you’re looking at the list in the middle of the trading day. A sizable number of companies in the list will have already reported prior to the market open but most of the rest will be reporting after the close.

These two categories of companies are dramatically different! Companies reporting prior to the open will likely be quite volatile while the ones reporting after the close will still have relatively calm price action prior to their earnings release. Similarly when you look at yesterday’s earnings reports the one that reported before the close have already had a full day of trading to process the report while the ones that reported after hours have not.

Most companies report their earnings after the close but a significant number report before the open. Here’s the breakdown:

Why is this important? It’s good to understand what the majority of companies do, but there’s another important difference. When companies report after the close there’s the post market trading session, the overnight, plus the pre market session before the next normal trading session occurs. There’s significantly more trading time plus clock time before the next trading day as compared to companies that report before the market open. I definitely have strategies where this dynamic has a strong effect. By the time the regular session rolls around, companies that reported yesterday after the close can be somewhat superseded by the companies that reported in the pre market.

Nasdaq has a similar earnings page but it suffers from the same limitations as the Yahoo! earnings page. These earnings views could be fine for a lot of investors but if you’re trading the markets you are definitely going to need more flexibility in your scan which ultimately saves time and effort and will allow you to take more profitable trades.

A Much Better Earnings Scanner: Trade-Ideas

Trade-Ideas is a scanner and artificial intelligence product that is the best way I know of to display recent and upcoming earnings announcements. It doesn’t have the filtering limitations that the Yahoo calendar has and you can display whatever fields you want for each symbol. You can also quickly sort the list by any field and even paper trade any symbol using the Trade-Ideas simulated trading account that comes with every subscription.

Here’s a view of my Recent Earnings Announcements top list window in Trade-Ideas. This list allows me to view only companies that have reported earnings this morning before the open OR yesterday after the close. That is, only companies where the current trading day is the first trading session after the company’s earnings announcement. I also have applied some basic filters to reduce the list of companies reporting earnings to just the ones that I’m likely to trade. For example, I have a minimum value for daily average volume and a minimum price of $1 and a maximum price of $500. I know that I won’t trade symbols outside of those thresholds so my list excludes them from the beginning.

This view is just not possible in other platforms. Here’s the cloud link for this window so you can bring up this exact top list in your Trade-Ideas.

Recent earnings announcements scan
Recent earnings announcements in a Trade-Ideas Top List

The second top list I frequently use in Trade-Ideas for earnings is my Upcoming Earnings Announcements window. I have it configured to show me all companies that are reporting earnings after the close today or at anytime over the following week. This view has all my favorite columns to sort by including the Earnings Date field. That allows me to quickly sort the list by when the company is releasing earnings relative to the current point in time.

So symbols will appear first on my Upcoming Earnings Announcements window and when the first trading session after their announcement comes around they’ll fall off that top list and appear on the Recent Earnings Announcements list that I use during the trading day. Here is the cloud link for my Upcoming Earnings Announcements window so you can bring up this exact top list in your Trade-Ideas .

Upcoming earnings announcements scan

You can easily modify the Earnings Date filter for your own use and, for example, only show companies reporting earnings before the next session or fewer days. To view only the companies reporting earnings in the next two days, change the value of 5.5 to 2.5:

Changing earnings date min and max
The filter that controls how many days to display

These earnings scans are just one of many features that Trade-Ideas offers. Click on the link below to learn more about Trade-Ideas. Sign up and you can immediately start using the two windows I use to view Earnings Announcements that I mentioned above.

Click Here to learn more about Trade-Ideas and use code DMABE15 to get a 15% discount

Can Traders Learn *Anything* from Poker?

Several years ago I started playing poker as an intellectual pursuit with the intent of learning some lessons from the poker world that I could apply to my trading. I thought as a trader that I had a healthy view of money that would give me an initial boost in poker. Bankroll management? That’s the basic skill of a trader and applying that to poker was second nature. There are a lot of parallels with poker and trading and I thought that my trading experience would ultimately translate well into poker.

I have mostly abandoned “serious” poker at this point for a variety of reasons and this post will explain why. I feel like I’ve gotten all I can get out of poker and while I’m mostly disappointed that I wasn’t able to apply more to my trading I did learn one very valuable lesson.

My Initial Goals for Poker

I set out with a handful of goals for my poker endeavor:

  • Have fun (not hard to do at a poker table!)
  • Learn some skills that I could apply to my trading to take it to the next level
  • Relish being a beginner at something and enjoy the process of improvement
  • Making money playing poker was, of course, a goal but definitely secondary

My Poker Process

Live Poker in a Casino

The nearest casino to where I live when I started playing was Harrah’s in Cherokee, NC which is about a four hour drive. A good friend of mine has played poker somewhat seriously since college so we have organized a couple trips a year to either Cherokee, Las Vegas, the Hard Rock Casino in Tampa, and more recently the MGM at National Harbor after it opened a few years ago.

Live poker in a casino is a blast – if you haven’t played in a casino I’d highly encourage you to do so. I thought it was going to be a seedy place with a bunch of low lifes but nothing could be further from the truth. Although of course there are the occasional jerks, I have been consistently amazed at the friendliness and camaraderie at a poker table at a casino. You see all sorts of people from all walks of life coming together to play an awesome game with a perfect blend of skill and luck. I’ve played a lot of hours in casinos and I’d say that the average poker player is far more fun and friendly than the average person.

Home Games

My friend also hosts a home game 5-6 times a year so I got his advice for hosting my own game. His game is always a tournament and I knew I wanted to play cash games, so I started hosting my own monthly home game. These are extremely low stakes games that are mostly just fun. Even the good players aren’t taking the game that seriously and the “cheap thrill” of poker at these stakes ends up being a very inexpensive form of entertainment.

Playing Online

I also played a bit online although it’s quite difficult to play now in the US and the competition even at the lowest stakes is very strong these days. I like being able to use a tool like Poker Tracker to track performance over time. I don’t play online anymore just because playing live is so much more fun. Playing online does allow you to play a LOT of hands pretty quickly so in that regard it’s good to play online to advance past the basics. After that I found it too tedious and just craved playing live.

How are Poker and Trading Similar?

  1. They both require a basic level of risk management
    Money management (usually called “Bankroll management” in poker) are requirements in both disciplines. How much can you afford to risk with each trade/session?
  2. You will have to be able to endure drawdowns
    And I mean large, soul crushing drawdowns that can last a long time. Some very good poker players can have drawdowns that last 100,000 hands. In poker this is called variance. Sometimes you trade exactly right and follow your system to a T and lose money. Same with poker. I had multiple sessions/trips where I ended up down multiple buy-ins despite having played quite well. This is very similar to trading where you can trade well and still end up losing money over weeks or months or even years.
  3. The amount of work required away from the table/market is large
    Trader success as well as poker success is highly correlated with the ratio of time spent studying over the time spent playing/trading. Both disciplines reward the participants who put in study time.
  4. There are different styles/strategies that can work
    Loose aggressive, tight passive, tight aggressive, etc. – these are all styles of poker play that can be successful depending on your personality. These are roughly analogous to trading strategies (kind of).

How are Poker and Trading Different?

In trading I have a few pre-defined trading strategies that I use. I’ve researched them deeply and there’s no question how I should approach things during the trading day. I know the odds that trades from different strategies will be profitable so during the day there’s really not a whole lot of discretion for me.

This was ultimately a very difficult thing for me to transfer to the poker table. You can’t have planned for every situation at a poker table – there’s just too many factors to consider at any moment. There’s a LOT of discretion and judgement calls to make that you just can’t plan for ahead of time. You have to be able to study some general situations and then be able to apply a lot of different concepts in real time at a poker table when everyone at the table is anxious for you to play to keep the game going. This takes a tremendous amount of experience and study away from the table to get good at. It’s also one of the things that makes poker so great – talking about hands after the fact with other players. In some situations you’ll might talk to 5 different players and get 5 completely different opinions about the best action to take in a certain spot. This is one of the best things about poker that there’s not really an exact equivalent to in trading. Sure you can talk about trades after you make them but there’s nowhere near the same level of analysis that you can do after a poker hand.

I realized pretty early on that it was not going to be possible for me to be able to play enough poker to get enough consistent and intentional practice to get very good. You can spend a lot of time studying away from the table but you have to also play a lot of live hands to implement what you’ve studied.

So What Did I Learn about Trading from Poker?

Beyond the basics of risk management and putting in time away from the table/markets is there ANYTHING that traders can learn from playing poker? To be honest it was a good bit less than I was originally hoping for. My main takeaway from poker, though, is I think a very important one.

The best poker players can intuitively know when a situation arises where they have a strong edge and are able to exploit it as frequently and efficiently as possible. For example, recognizing when you’re very likely to have the best hand or when your opponent is likely to fold to a raise. The ability to know when these situations arise is vitally important in poker and the actual cards in your hand become less important – it’s more about determining what your opponent has.

In this case there is a definite parallel to trading: when you have a trading edge you should be able to recognize it and put on larger size. I’ve spent the better part of a decade thinking about this and I think I’ve made some headway. That’s my main goal for 2020 – trading with bigger size when I have an edge. More about this in another post.

My Poker Future

So am I abandoning poker? Not at all. It’s such an awesome and underrated game. I’ll continue my friendly home game and will continue making the occasional trip to a casino to play live when it’s convenient. Hopefully more casinos get built within driving distance one day and I can play more frequently live in the future. If you have never played poker I highly recommend you give it a shot!

Trader Interview: Brian Shannon @alphatrends

The next interview in the series is with Brian Shannon. Brian has been trading for a LONG time and has developed the reputation as one of the best guys in the business. His market commentary videos are well known for having a concise, no-nonsense approach. His book Technical Analysis Using Multiple Timeframes is excellent and widely reviewed and recommended. Find out more about Brian at his Alphatrends website and be sure and follow him on Twitter @alphatrends.

What is the most overrated trading advice?

“Winners take care of themselves.”  
Once you have your money in the market, you can never let your guard down, complacency is the silent equity thief.  Winners are clearly less stress, but accumulated profits are your money.  Profits are not “house money” that you can be careless with.  Things can change quickly in the markets, without a plan to protect profits and manage your winners you will give back large gains and worse, allow them to turn into losers!

What is the most underrated trading advice?

People will mention they are “bullish or bearish” on a stock or the market, without any reference to a timeframe.   In order to add value, there needs to be some point of reference from a time perspective.  I might be bullish on a long term uptrend in the market when I look back a year or two, but there will be periods during that bullish trend where the best trades are on the short side.  Also,  being “bullish” might be from the reference of a purchase made two years ago, that doesn’t make it a good buy today.  

What’s a non-trading related book that’s influenced you recently?

The Impossible Climb – The story of Alex Honnold and his accomplishment of being the first person to free solo the 3,000 foot El Capitan, the largest cliff in Yosemite National Park.  The book chronicles the laser focus it takes to tackle a goal that was widely considered impossible, if not a suicide mission.

Questions for Brian?

Ask him in the comments below or ask him on Twitter. Thanks Brian!

Do you know someone who you think would make a good interviewee? Contact me!

Trader Interview: Fred, Lone Stock Trader @lonestocktrader

The next interview in the series is with Fred, the Lone Stock Trader. Fred trades for a living and posts about it on his web site. He’s written several excellent articles on his system and trading in general that are worth reading. His 2019 review is particularly good as well as his post about how he transitioned from failed business to profitable trader. I love the no-nonsense style of his writing and his openness about his trading. I’m really happy to post his responses here.

What is the most overrated trading advice?

The most overrated trading advice is “get out when you’re wrong”. But don’t get me wrong (pun intended). The advice is sound.

I consider it overrated, because it reinforces the perspective that losing money on a trade means you were wrong, which is a wrong association in my opinion. If you’re following a trading strategy, losses are just part of the normal distribution of the strategy. The result of one trade is random. The result of one hundred trades is less random. Thinking that a loss (or ending the day/week/month in the red) automatically means you’ve done something wrong shows that you haven’t accepted the probabilistic nature of trading, and that you’re on the dead-end path of trying to win (“be right”) all the time, which often is at the root cause of why so many traders end up blowing their account.

What is the most underrated trading advice?

“Review your past trades”.
It’s something most traders know they should be doing. Yet I’m pretty sure very few actually do it. That’s the single exercise that turned my trading around years ago. I discovered my strengths, my weaknesses, and that if I had followed my strategy perfectly, I would have made money instead of losing consistently. The whole game then shifted from me trying to make money on every trade, to me focusing on following/executing my strategy perfectly. That’s when I started making money. That’s when I genuinely accepted that trading was probability game.

What’s a non-trading related book that’s influenced you recently?

It might sound cliche, but “Atomic Habits” by James Clear had a huge impact on my life. Motivation and discipline only lasts so long. Be it saving money, losing weight, being a successful trader, running a marathon or nurturing a healthy relationship, it’s not your discipline/motivation that will allow you to reach these goals. It’s your habits. This book explains and gives examples of how to form good habits and get rid of the bad ones.

Questions for Fred?

Ask him in the comments below or ask him on Twitter. Thanks Fred!

Do you know someone who you think would make a good interviewee? Contact me!

Amazon Delivery Truck as Car Trip Reducer?

You’ve probably seen a graphic similar to this one that shows the road capacity and throughput given different modes of transport.  This is often used to show support for public transit subsidies which perhaps some places should do more of. 

Note that these type of images always the theoretical capacity if the bus was always full compared to the actual average number of passengers in cars (1.5 it seems). The visualizations would be much less impressive if it showed actually existing ridership levels for the alternate transit modes. 

Another way to view this issue, though, is how many actual car trips are avoided by the existence of various modes and services?  When viewed this way, of course, the bus is not that efficient at all especially when you realize that bus ridership cannibalizes bike and pedestrian usage at a significant rate. Anecdotally this happened almost overnight here in Chapel Hill/Carrboro when the buses went fare free several years ago. See this article about Finland resisting the urge to make public transit free for precisely this reason.

Which Produces Most Car Trip Replacement?

The service that I imagine is by far the most efficient in terms of reducing car trips is one that a lot of people typically complain about – the Amazon delivery truck.  Of course they seem like they’re everywhere but you can fit a lot of packages in each one and I imagine Amazon is ruthlessly efficient at using the full capacity. You can fit far more packages in a truck than people in a bus and although not every package represents a car trip replacement I suspect that the ratio is quite strong. You’d also have to account for the fact that without Amazon we wouldn’t acquire quite as much stuff. Reviewing our own purchase history makes it clear to me that Amazon is reducing our family’s car trips.

If Amazon went away tomorrow, how many new car trips would emerge? A lot I bet. Has anyone seen any studies on this phenomenon?

My 2019 Trading Annual Review

Last year I made some big changes in how I trade my main 3 strategies. Each year I go back and review all the trades I took and see where I could improve. Are there any adjustments I can make to get better? Did any strategy perform poorly relative to what I expected? This is a good time to reflect on the changes I made and see how they played out.

First of all, here’s an equity curve (in R multiples) for the entire decade. The total R for the decade was 2011.9. This includes probably 10 strategies or so I’ve traded during that period. Pretty good. When you look at an equity curve zoomed out like this it looks smooth but when you zoom in you notice some drawdowns. One of the great benefits of using R multiples to measure performance is that it normalizes performance no matter the risk amount you’re using for a particular strategy. At any given point in time I may be at full risk in one strategy but a small fraction of that in another. Here’s a post where I go into detail about my process for sizing up.

My Gappers Strategy for 2019

Although this curve looks ok by the end of the year, in March it looked terrible! That is the time where I took a step back and reevaluated what I was doing with this strategy. Keep in mind that the basic strategy is one that I’ve traded for over a decade now. I’ve made some pretty drastic changes to the strategy over the years but the fundamental strategy is exactly the same. So what did I do in March?

I started looking at my backtest in a completely different way. I removed the stops! (I know, I know – bear with me.) My workflow from the backtest went as follows:

  • Create a backtest with very little filtering of trades – includes stops and targets.
  • The Filter Phase: Apply filters to determine which trades from the backtest I’ll actually end up trading going forward.

The Filter Phase is the hardest part and the one that takes the most energy and experience to do well. The set of trades that I end up actually trading turns out to be a pretty small percentage of the total backtest. I realized that I was doing my filtering after the stop had been applied to the trade. This has the affect of ignoring some valuable information for each trade. Here’s my new workflow that I’m using now:

  • Create a backtest with very little filtering of trades – NO STOPS OR TARGETS.
  • The Filter Phase: Apply filters to determine which trades from the backtest I’ll actually end up trading going forward.
  • Determine stops and targets to use.

Notice that the stops and targets are applied at the end instead of the very beginning. Why does this matter? The difference is subtle but turns out to be very important.

Let’s take two types of trades from the backtest. They both end up stopping out but the first type stops out but just barely and then continues in the desired direction. Here’s a theoretical example of the first type: LVGO from 1/14. It barely hit the stop price of 28.99 only to continue on.

The second type stops out and then continues its plunge finishing the day well below (assuming a long trade) the stop. A good example of this is STT from 1/17. It hit the stop of 83.32 and continued south for the remainder of the day.

In my original workflow, these two types of trades were considered equivalent and my filter phase would not notice any difference among them. In fact they are very, very different! My updated workflow accounts for this difference – I consider it like adding another full dimension to my backtesting routine.

I’m hoping to continue sizing up this strategy in 2020.

Strategy B

My other main strategy I’ve been trading largely unchanged since 2015 or so. Here’s the equity curve for 2019 for strategy B.

This doesn’t look great but when I zoom out and look at the chart from 2015 to present it looks fine having gained 400 R. This strategy is actually quite flexible. It’s designed to use variable position sizing based on the quality of the setup. I haven’t implemented that yet (I use same size for each trade in the strategy) but I hope to do this in 2020 which I’ll write about in a future post.

I hope you traded well in 2019 and you trade even better in 2020! If you have any questions feel free to contact me.

Trader Interview: Anne-Marie Baiynd @AnneMarieTrades

The next interview in the series is with Anne-Marie Baiynd, a long time trader, coach, and author of The Trading Book (Amazon link). I haven’t yet met Anne-Marie in person but we’ve interacted on social media quite a bit and I think her Twitter presence is great. I know several folks in the trading industry that have met her in person and have nothing but good things to say about her.

Her bio tells me she’s had a wide range of experiences before planting her trading roots: neuroscience, mathematics, econometrics, and recruiting – plus she’s started several companies along the way.

Here are her responses:

What is the most overrated trading advice?

“You’ve got to take the emotion out of trading”

Though people are becoming more sensible about this, I remember when I started almost two decades ago, this was all the rage. The fact is that trading should be disciplined but humans cannot operate without emotion, so people end up trying to stifle their emotions only to see them explode in other aspects of their lives or their trading accounts. Emotion has to be managed – but it cannot be squelched in the trading environment.

What is the most underrated trading advice?

“Learn to paper trade strategies properly before you trade in the live environment”

Everyone wants to be in on the action before they actually know what to do. Myself included. Granted there are things you learn in the live trading space that can only be assessed there, but jumping in with real money before you establish proper risk protocol and strategy execution is like putting on slalom skis for the first time and getting dropped off atop an Olympic ski jump….with almost as disastrous results. Learn to trade before you actually trade.

What’s a non-trading related book that’s influenced you recently?

“Thinking Fast and Slow” by Daniel Kahneman

An excellent study of the decision systems we have and how we war with them in the realms of our personal biases. It helped so much in the understanding of the thought process that goes into the decision-making business of trading.

Questions for Anne-Marie?

Ask her in the comments below or ask her on Twitter. Thanks Anne-Marie!

Do you know someone who you think would make a good interviewee? Contact me!

Trader Interview: Sean McLaughlin @chicagosean

I’m starting a trader interview series. The series will not be a long form, exhaustive list of questions about how and why the interviewee got into trading or how their upbringing did or did not contribute to their success. There will be just three simple questions designed to reveal how the trader separates themselves from the trading herd.

There’s a lot of trading advice floating around out there. Some of it’s great, some of it’s terrible, and a lot of it is so ingrained in the collective trader psyche that it becomes meaningless or cliche. Some of it applies only to a certain type of trader (“sell in May and go away”) and some of it is so common that no one would dare question it (“add to your winners, cut your losers short”).

The first two questions apply to the collective trading advice that is present all around us. What is the most overrated trading advice? What is the most underrated trading advice? I expect I’ll get some pretty contrarian takes on these questions even for the already contrarian bunch that traders are.

The last question is designed to bring out a learning suggestion – a book recommendation. Not the same tired question (“what’s the best trading book to buy?” – it’s One Good Trade by the way) but a different and much more interesting question. What’s a non trading book you’ve read recently that INDIRECTLY helped your trading? In other words, a non trading book that you were surprised to find lessons that you could apply to your trading or just improved your life or understanding of the world in some way.

Who is Sean McLaughlin?

I appreciate my friend Sean McLaughlin (@chicagosean) for agreeing to participate and being the inaugural interviewee. I don’t remember the first time I actually met Sean but it feels like I’ve known him a long time. He’s brutally honest about his trading and that comes out in his blog and his tweets. Sean has a great voice and hosts at least two podcasts that are worth checking out. He hosts a Denver traders’ meet up which I understand is awesome – I wish there was something like that in my area. Sean came to Trade-Ideas via StockTwits and he’s been an awesome addition. Here are Sean’s answers to the questions…

What is the most overrated trading advice?

Journaling. Yeah. I said it. 

Look, I journal. But I don’t do it every day. And I certainly don’t do it for every trade. I do it when I’m called to do it. I don’t set a timer, and I don’t force myself to eat spinach whenever I don’t journal. Deep introspection is important for traders. But the means in which we all get there varies widely. For some, its meditation. For others its exercise. I might like to hike. Or maybe inspiration hits you best when you’re in the shower or on long drives? Whatever works for you, do more of it. At the end of the day, we all need time to think and strategize and re-energize away from the screens. Whatever that means to you and however that works for you — rock on with your Spirit Animal self.

What is the most underrated trading advice?

The X’s and O’s of trading are important, no question. But no matter how efficient you are at learning how to be a better trader, and no matter how quickly your assent to trading mastery, none of it will matter — NONE OF IT — if you don’t get your personal financial house in order and establish systems and best practices to systematically save money, minimize tax impacts, aggressively pay down and ultimately avoid debt, and live within your means with a sensible budget. No amount of income you might derive from the markets will matter if you don’t take care of this stuff first and make it a priority throughout your journey. Take it from me. I’ve lived the nightmare.

What’s a non-trading related book that’s influenced you recently?

I TEACH YOU TO BE RICH, Ramit Sethi. Terrible title, but life-changing approach to personal finances for me. The introduction to YNAB within this book alone was worth the $10 cost. This one book has opened my mind to so many new things to be aware of and be systematic about and can be directly linked to an ever-increasing positive slope to my personal net worth, self-esteem, productivity, health, family relationships around money, and ultimately my success as a trader. All these things are linked. The sooner we accept this, the sooner we thrive in all facets of our careers and life.

Questions for Sean?

Ask them in the comments or hit him up on Twitter. Thanks Sean!

Do you know someone who you think would make a good interviewee? Contact me!