Gremlin Development During Chop

In the What Books Should I Read post I list the book The Chimp Paradox by Steve Peters which isn’t about trading specifically but can certainly be utilized by traders.

In chapter 4 of this book Peters introduces the concept of “The Computer” in the human brain which has two functions:

  1. It can think and act automatically for you using programmed thoughts and behaviors.
  2. It is a reference source for information, beliefs, and values.

He also outlines what is in the computer as follows:

  1. The Autopilot:  a helpful or constructive belief or behavior
  2. The Gremlin:  an unhelpful or destructive belief or behavior that is removable.
  3. The Goblin:  an unhelpful or destructive belief of behavior that is firmly fixed and extremely difficult to remove.
  4. The Stone of Life:  contains the values and beliefs by which you live your life.

The action in the grain markets last week (wheat and corn in particular) had me thinking about this book and some of my past struggles as a trader with regard to gremlins that I would develop under certain regimes that come back to bite me when the markets change.  Here’s a little more detail on gremlins from the book:

Gremlins usually occur after the age of eight…they are soft wired so when you find them you can remove them… example of two very common Gremlins that most people have in their Computers and experience from time to time:  the twins of unrealistic expectation and unhelpful expectation….other examples include things like overreacting to situations, beating yourself up, worrying about decisions and not making them, getting angry when you don’t want to

Corn and Wheat have been trading in a very small daily ranges within the context of a larger trading range since early mid March.  When I say “large”….for those of you that don’t follow a market like corn it’s generally been bouncing back and forth in a 10-12 cent range for a few months moving 4-6 cents up or down over each 24 hour period.  Dull, quiet, uneventful, and so on.  While we’ve had a rew realatively violent swings within this range (in particular after the great not so great Spring Blizzard of late April) for the most part the days have been small range and slow and over several sessions we drift slowly from the top of the larger trading range to the bottom and then back again.  Here’s a visual:

gremlin timeThis is the perfect environment for a Gremlin to develop for the non-automated trader.  While any number of Gremlins can get placed into the Computer during periods like this I know one I have struggled with in the past under similar circumstances is the development of the expectation that “price will come back to me”.  This gets cemented as a habit or autopilot when these sort of tight range mean-reversion regimes persist because you can, for example, short the bottom of the range and then add to the position as it goes against you for several sessions not following any plan other than “I’m going to win on this trade” only to eventually see price drift back down again and reward you with a chance to scratch or in this environment you are probably able to get out with some sort of profit.  You also start getting confident you can do “a ton of size” because “look how tight the ranges are” both of which reinforce the original belief that “price always comes back to me”.  Maybe you do this once early on during the range which is already a problem and then it gets reinforced several times again during the period the tight range trade lasts.   This is an absolute disaster in the making for a trader because eventually a week like last week comes along where price gets directional and starts gapping one way in consecutive sessions and you are still running on the autopilot that was developed under a different regime and you are executing with the gremlin that says “price will come back to me”.  By the end of a week like last week not only are you probably in a world of hurt in terms of capital and mindset, you might even be out of business.

If you are struggling with this like I have in the past your job now is to work on replacing the Gremlin with an Autopilot/new habit loop.  How is this done?  Here are some ideas on how to start addressing this issue.

First, you want to identify and label the Gremlin.  So for this example that might look like this:

In range bound markets I hold on to and add to losing trades. 

This is broad, so the book suggests asking some questions.  In this example questions could be:

  • What do you believe holding on to losing trades and adding to your position will imply about you?
  • What are the consequences of you holding on to losing trades and adding to losers?

Answers to these sort of questions are going to be different from person to person and from trading gremlin to trading gremlin but it could be things such as:

  • I want to be right about every trade
  • I’m constantly focused on outcomes instead of following a process

The book then suggests replacing these Gremlins with some truths so that might look like this:

  • Traders that are successful accept that they will not be right on every trade
  • Successful traders keep a laser focus on the execution of their specific process rather than the outcome of the very next trade

From the book

Gremlins can take several efforts, and some time to remove them, but with persistence they will go.  The number of “truths” or Autopilots, to help with this problem is significant.  In order for it to work you have to find these truths and then continually reinforce them until they are firmly fixed in the Computer and become second nature.

Breaking the cycle early is also important.  A way to do this as a trader in this situation is to give yourself an automatic process to go through when you are in a range trade environment and find a trade moving against by asking questions

  1. I need to review whether or not I’m following my trade plan and obeying my risk parameters for this trade.
  2. I need to think if it is appropriate for me to add to a position that is against me within the trading range.  Was this part of my trading plan?

Stopping any more Gremlins from going into the Computer

The book also contains a section about how to avoid this issue.  Consider from a trading perspective:

Putting Autopilots or Gremlins into the computer is done by experience, including discussions and education.  So when you experience anything in life you will interpret this.  If you interpret it in a negative and unhelpful way, then Gremlins will appear in the Computer for future reference.  If you interpret the event or experience in a positive or constructive way, then Autopilots get put into the Computer.  Therefore, it is important when inputting into the Computer that you think carefully through the experience that you have had an interpret it correctly.

I’m going to end here.  My hope is if anyone reading is struggling with the recent action in grains over the last week or any market going through similar moves currently or in the past they have found some value in the basic ideas presented here on how to remove some of the autopilots that are resulting in problems with your trading.

  • FF
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Beware The Confirmation Bias

Usually within the first month or two of our attempts to tackle trading or investing we are introduced to the concept of confirmation bias and the dangers it presents for anyone taking on such endeavors.  This weekend has provided me an opportunity to illustrate how this might happen to us while using social media.

Over the weekend I got a little “love” in a Zero Hedge article for some common memes I use for AgTwit.  The context of my tweets being used was basically something along the lines of “grains are down a lot, they might be cheap, some smart people think they might be bottoming, and look how bearish everyone is”.  Here’s an image of how it was presented:

fat finger love

I want to make clear before I get into this post that I’m in no way mad about this article.  I thought it was all in good fun, enjoyed reading it, and naturally I welcome the attention to my premium quality Ag memes. That being said, I want to draw readers attention to the fact that the writer of this article framed the presentation of these images as an example of the sentiment in the ag trader community and I think there is a warning for all of us with regard to how and why it was done this way.

Time for a little background on the anchor pics in particular.

About three years ago I began to have long conversations off-line with trader @statFutures and during those conversations we would discuss the broad global landscape for the grain markets to help form and talk through overall narratives and what it likely meant for Chicago board prices.  The reason we go through this exercise and continue to do so is to give ourselves an idea not of what is possible in markets, but what is probable and then from there both Q and I, while trading very differently, lean on various data for execution in our respective time frames and then monitor the broad narrative over time.  I take away much more from these conversations and offer far less than what Q does so I am extremely grateful for them.  If you’d like to hear a basic idea of what some of these talks have sounded like, listen to this.   This experience has been extremely valuable for me because while I’ve been around markets for quite a while I haven’t been trading grains that entire time and Q’s experience dwarfs my own in the space.  The broad global landscape that was introduced to me during these calls is what prompted something of an inside joke between the two of us and that’s how the anchor pictures were born.  Though Q and I focus on wheat primarily, the anchor meme originally started with Corn:

blog 1

I’ve highlighted the date on this which can be seen above, 11/13/15.  I’ve been posting it ever since.  Take note.

Then later, I made one for our dear friend Sybil (that’s wheat for the uninitiated, see Terms Used).  I’ve highlighted the date again on this, 3/15/16:

blog 2

So, that’s the story of the anchor pics and my warning here is simple.  We have all this great access to information via social media and the web now as traders but it’s of critical importance for us to understand the people that are saying XYZ, why they are saying it for how long they have been saying it, and how they utilize market data.  Basically if you are going to lean on this type of information to form your own trade plans you should have some idea of how the person you are making an example of trades for themselves.  Probably most important is to better understand the time frames they trade on.  I’d guess that about 70% of the arguments I’ve seen on twitter stem from the fact that people are operating under completely different time frames and they end up talking past each other as a result.

On the topic of sentiment I’ve been described several times lately on Twitter as being “bearish wheat forever” because those that have followed me for a while now have seen these anchor pics, especially for wheat, over and over and over and over and over and over…….and over again.  I ‘d make Marshawn Lynch proud.  This is what trading is all about, taking high probability positions repeatedly until the odds of success change or end entirely.  At that point we adapt.  Since I’ve been posting these anchor pictures the higher probability has been on the short side broadly speaking and also….I think they are funny.  What trading isn’t about is what you often see done on twitter which starts with something like “everyone is” and then someone goes on to pump whatever their position is by describing “everyone” as being on the other side of their brilliant insight.

Now, that being said, and this is why it’s so important not to read articles without further study of your own, especially when a single individual is used as an example of something, I’m also very aware we have started to push extremes in the sentiment department, and I’m looking at specific data and what it means in relation to this broad narrative I spoke about earlier. For example:


a few more anchor pictures got posted, and then…….


So, wrapping up here…..this happens all the time when you read articles about markets and you want to be alert for it as a trader.  Writers have an idea about market direction they want to present and they go out and find screen caps on social media or other analysis that helps support the set-up they are about to present for the other side of the trade (their side).  If you read this Zero Hedge article you will see several other examples of this within that article. Fact is, these anchor pictures have been used for nearly two years and the author chose not to mention that or present the tweets I’m showing you here some of which were just put on the stream this week where actual data is presented in relation to sentiment and a time frame is discussed.  Keep this in mind as you look around on the web at these sort of presentations, do your own homework, and continue to test your ideas and challenge your own biases.   I will continue to do my best to follow my own advice here.

Best of luck in your trading.

  • FF
Posted in Broad Market Observations, Corn, Wheat | 2 Comments

Some Thoughts on COT

Given the carnage in the grains yesterday I’m guessing we are set to hear a great deal of buzz about the COT when it’s released later today.  I’ve been observing a common trend on Twitter for at least 20 months now where there is continuous chatter about “record fund shorts” after these sort of moves and I thought it might be a good idea to put some thoughts in writing on the topic.  The constant assumption seems to be that “record shorts” indicate a massive rally is about to happen and that is all the analysis that is needed but you can all observe the overall price trend in grains for yourselves.  What I’m going to present here is the idea that looking at the overall absolute contract level and thinking specs of today are the same as specs yesterday is ignoring larger industry trends and that’s why, at least in part, this commentary and its ability to forecast future price reversals has been so bad.


Some of you that follow the twits stream may be familiar with this table above as I’ve discussed it there before.  I pull this each quarter from Barclay Hedge which is a large database tracker for hedge fund and managed futures programs.  If you’d like to monitor this moving forward then click here and use the Agricultural Traders link.  This particular table is Barclay Hedge’s listing of CTA programs specific to Ag meaning within their disclosure doc they have identified the trading program as agricultural focused only.  It is important for me to make that distinction because when considering the COT and the table above we have to keep in mind that many other trend following programs operating in the CTA/CPO space are also going to trade the ags but they won’t be listed under this particular Barclay Hedge index.  Many trend following programs will trade 100 markets or more so they’ll fall under other categories in Barclay’s database but they likely trade ags as well especially when we have such persistent directional action like this.  Consider this table for overall managed futures industry AUM:


The trend in overall managed futures assets is obvious.  Over the last decade the amount of capital in this space has grown considerably.  A secondary factor you can consider through this link is that margins do not remain constant.  When you consider the assets in the tables above and the margin changes you will probably start to wonder what the absolute level of net longs and shorts in the spec space telling you on its own?  I think the answer is not a whole lot.

Personally I find much more value in constant review of the commercial positions in the COT.  In particular their rate of change in establishing positions and the price levels they’ve done this at as well as their position size relative to open interest.  I was heavily influenced by Larry Williams book on this topic so if you are interested in digging deeper on the subject I’d start there and also check out his various presentations.

Best of luck in your trading.



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Costs Matter

I made the following tweet on my stream today:


It’s often easy to misunderstand what is being said on Twitter so let me unpack these two tweets.  First, I tried to make a point to direct this toward active traders and people who are new.  What is active?  If you are day trading this post is directed at you rather than the trader that may hold positions for weeks or months at a time. I realize that there are plenty of medium/long-term trend followers (or whatever countless other strategies that are “low-frequency” in nature)  out there that might do something like 400 round turns per million per year in which case commissions/trading costs, while still important, are probably not nearly as critical as they might be for an active trader that is operating intraday constantly working in and out of positions each day with considerable volume.       I had also assumed when putting out my tweet that anyone that is actively engaging in short-term trading that has been around for a while has already discovered how important costs are to their trading hence the reason for me tweeting “If you’re new”.

Why do I say anything on Twitter about this?  I did this because I keep listening to futures traders that are active intraday being interviewed on various programs and the topic of costs virtually never comes up.  They are asked about their background, trading methods/style, exits, psychology, and so on.  Discussion about costs with these types of traders is almost never mentioned though.  For whatever reason those other things are considered standard questions for an interview with active traders but costs are not.  For the people who are trying to make a career out of this that are active in this manner but haven’t really considered costs you are going to need to do so sooner rather than later.

I’m going to use Don Miller, a veteran trader many of you may be familiar with, to make my point.  Years ago Mr. Miller did a series of YouTube videos called Trading After Dark which I think are great.  If you haven’t ever seen them I would encourage you to check them out.   For this post I’m going to focus on episode 6.  Here is a visual he used during this episode:



Definitions for this visual are as follows:

Revenue:  Gross amount of gain from a trade sequence (going from flat to flat)

Expenses:  Trade sequences that result in a draw or a loss.  These do not include commissions/his trading costs.

Early in the video Mr. Miller makes a point to discuss CME membership and costs of execution.  Why would he make a point of saying something about that?  Well, lets say that in some unicorn existing fantasy world you are Johnny New Trader and you watched these Trading After Dark videos and you decide you wanna be you wanna be like Don and you will replicate him right from the jump.  You like this idea because look at that visual….after his losses he was +$65,070 for the week!  Not too shabby right?  You probably haven’t done what he told you to do in the video (calculate your own costs see if this works for you) because you are too excited to get started.

So you, Johnny New Trader that hasn’t considered your costs, goes to TradeStation and sets up an account and you trade 7,394 contracts (what he’s referring to as cards in the visual above) of ES your first week and lets just assume by some miracle that first week of trading you match the performance that he’s got here.  You just made $65k right?  Wrong…..  because costs.

Currently at TradeStation your basic retail fee for an ES contract is $4.38 per turn.  This includes exchange and clearing fees plus the NFA fees so I’m quoting an all-in cost here and of course this will vary from broker to broker but most retail traders will likely be in the ballpark of this price point.  So…total costs to do what Mr. Miller did here as a regular retail trader:  ~$34,000.   Subtract that from your gross gain and now consider you are going to pay taxes too before you get to hang on to what is left assuming you make any money.  Are you doing trading for an income/as a job?  What happens when you go into a drawdown with such a cost structure?  How fast will you deplete your account during a drawdown if you are taking capital out for income while eating these sort of costs?  Can you even survive a drawdown?

This was the point of my tweets.  New traders must think about these costs and what it means to their bottom line and how it will impact whatever strategy they’ve decided to implement.  If you are a short-term focused trader and are very active on a day-to-day basis it is critical you to begin to think about this now even if you are still simply focused on trying become profitable/achieve positive expectancy as a trader.


DM Blog Link

CME Fee Schedule


EDIT:  I made an error in this post that was pointed to me thanks to Matt Herzog @mattth.  I doubled the number of contracts traded in this example so the costs I’m showing here for the comparable retail trader are wrong.  The actual number of round turns is 3,697 for the week shown in the image above.  As such, in the example I’m giving the retail trader at TS would have paid $16,192.86 that week for trading costs.

Does this change the point I’m making here?  No.  The typical retail trader out there is not likely to overcome those sort of costs without exploring lower fees, a lease, or purchasing a seat.  Consider that a trader doing this just 40 weeks a year has nearly $650,000 in overhead trading expenses when Jan 1 rolls around.  Even for an experienced trader that’s certainly a challenge but here I’m primarily suggesting in this post that the new trader not considering this while only trading in tight price ranges moving in and out of positions all day has almost no chance of survival as a result of these costs.

Thanks for correcting me on this one, Matt!


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Idea Generation and Implementation

Apologies to readers that are interested in the blog that it has been so long since I took any time to write about anything.  I don’t have any good excuses for the break I simply haven’t felt like doing a post for a while.  In the new year I plan on blogging more and tweeting less which will hopefully bring followers/readers a bit more value in the fullness of time.

Today I wanted to knock out a quick blog post on a simple trading strategy in Corn that I began to implement a while ago.  As this is the internet I’m going to say up front that this trading strategy:

  • Isn’t meant to be advertised as the greatest thing ever
  • Isn’t complex
  • Could probably be improved any number of ways and approached differently than the simplified version I will present here
  • Only trades 1 time per week
  • And last but probably most important:  Past performance is not indicative of future results

Twitter followers know that I’m an IRT user.  One thing I like about IRT that I haven’t seen much of on other platforms is that they have a lot of pre-built charts that can help traders come up with ideas on trading strategies and getting to know the movement of the markets they trade rather than a focus of the ease of which you can draw lines on a chart, etc.  You’ve probably heard veteran traders talk about “getting to know the personality” of the markets you focus on and I think IRT does a great job in helping traders do that.

Those of you that follow my grain commentary on Twitter have probably seen me talk about one of these pre-built charts that can give us an idea of the “best day of the week” in each market we want to study.  Basically what this chart produces for us is the net cumulative ticks gained or lost for each market over whatever period of time we want to perform a look-back.  In the case of Corn for example I can look back to see which day was the best for performance the last month, quarter, year, two years, and so on.   In case you’ve never seen me post one of these on Twitter here is what the output looks like:


For this particular output I’m showing you each days cumulative performance during RTH for Corn over the past 2 years.  Hopefully the chart is visible enough for you to see that Friday is the best day of the week and on this particular look-back period it is by a substantial amount.  On the other hand, Wednesday has been the worst day of the week over this period of time.

So, having gone through this exercise with each market I trade using various look-back periods Corn stood out to me as having consistent positive Friday performance.  After reviewing this I came up with a strategy that a trader with literally no experience could implement:

  • Buy the close in Corn on Thursday in the front-month contract and sell the close on Friday.

That’s it.  For what I’m presenting here today there are no other rules or conditions for this trade strategy.  This strategy doesn’t care about the weather, or corn yields, the Farmers Almanac, or whether or not the year ends in a 6!  So, with a second reminder that past performance is not indicative of future results…here’s how this process has done (no slippage presented here and this is before commissions) for 2016 with two more trades to execute before the year is over:

  • TRADES:  48
  • Wins:  33  (69%)
  • Losses:  14 (29%)
  • Scratch:  1
  • Total Gain Ticks:  339
  • Average Winner:  16 ticks
  • Average Loser:  -15 ticks
  • Total MAE:  629 ticks  / Average MAE:  13 ticks
  • Total MFE:  830 ticks / Average MFE:  17 ticks
  • Best Consecutive Wins:  6
  • Worst Consecutive Losses:  3



For those not familiar MAE = Max Adverse Excursion or the max number of ticks the trade moved against the position while it was active.  MFE = Max Favorable Excursion or the max number of ticks the trade moved in favor of the position while it was active.

Closing Remarks

The purpose of this posts is to show readers a way you might come up with a trading strategy to test and implement.  As I stated above I’m not presenting this as the best strategy in the world or even the most superior way to implement the tendency for corn to perform well on Friday’s (for example readers might look to see if exits T+1 – T+5 produce superior results, if its better to take the set-up only when Corn is above X moving average, etc.) but this is a simple strategy that has done fairly well in a year where Corn is down ~8% for the year.  While it is true the strategy is very simple, people who won’t automate it may find that it isn’t easy.  One example of what can happen when you give yourself control over the entry and the exit is that you may find yourself looking at the MFE table above and thinking that you can outsmart the system by selling closer to the max MFE each week instead of at the close and therefore lock in a larger gain over time.  This is the kind of stuff that kills most traders, its not the strategy they are using, or “they” being out to get your trade, the USDA publishing fake data or anything else…its the inability to follow a plan every time even when we know it has an edge.

Finally, if there are any terms in this post you are not familiar with please check the terms used page.  If its not there simply ask me here or on Twitter and I will answer you asap.

*I’ve recently talked about various trading strats on Twitter and some people have come back to me talking to me about absurd slippage assumptions for XYZ market and then after some back and forth have revealed to me that “they don’t trade XYZ market anyway”…..if there are comments in this thread along these lines I will not be responding to them.  If you can’t use basic orders in Corn, which is the deepest of the grains, without getting large slippage you are trading far more size than I do and probably already have far superior strategies for trading than this one.

Best of luck in your trading in the New Year.

  • FF


Posted in Corn, Homework, Process, Trading | 4 Comments

Applying Lessons From a Navy Seal To Trading

I recently listened to a Tim Ferriss podcast where he interviews Navy Seal Jocko Willink.  I’ve listened to this interview in its entirety five times and I plan to listen to it several more times.  To say that it has impacted and inspired me on so many levels would be an understatement.   There are a few parts of the podcast in particular that I wanted to write about here on the blog because I think they apply directly to things that traders will confront and I think they might be beneficial for some readers.   I would highly suggest the entire video but let me start by focusing on this point in the video where Willink discusses what he calls “detachment” from about the 58 minute mark through about the 1 hour and 4 minute mark.  Please stop and listen to this now:

What is jumping out at me during this portion of the interview?  First, Willink talks about a moment early in his career as a Seal where he’s training and for the first time he detached himself, identified the problem, called out the solution to his team, and “clicked” in terms of becoming a leader.  As a follow-up to this he tells another story about a soldier that was injured who came to watch training with him one day from a point of view where they could easily see the action unfold as they were removed from being directly in the trenches.  What does the other soldier say as they are watching the training?  Despite the explosions and the smoke and the bad guys in the hills and the chaos that was surely being felt down where the training was taking place, the solider says to Willink

“It’s so easy when you’re not in it.”

Willink goes on to share with this soldier that this, his ability to detach and execute, was how it was for him live as a Seal.  He says a light went off for that soldier at that very moment….he understood very clearly then why Willink was elite and why he was a leader of men in arguably the most stressful and intense situation a person can be in.

There is a saying that I think is true in trading which is that “trading is simple but it is not easy”.  I think this is very similar to what Willink is discussing here with regard to the story he shared and the concept of detachment.  Let me try to make some comparisons to trading.

On the blog here and literally hundreds of times on my stream I’ve talked about the importance of the IB breaks in various markets and how I use them for trading execution and/or context.  If you are not familiar with that terminology or others I will reference in this post, refer to this page.  This morning on Twitter I shared some statistics from a basic strategy in Crude Oil where a trader takes a position in the direction of the IB breakout and holds it until the close.  Could we make the strategy more nuanced/complex….of course.  I’m trying to show a very simple approach and the data attached to it.  Last week here were the stats on this strategy:

  • Max Adverse Excursion:  132 ticks
  • Max Favorable Excursion:  435 ticks
  • Profit/Loss Monday – Friday:  +$2.34 per contract
  • Days profitable:  5 of 5

So I think it is obvious that watching the high and the low of the first hour of RTH and then taking a position in the direction of whatever side breaks first and simply holding it to the close is a very, very simple strategy.  Is it easy to execute?  No, it isn’t.  That’s true despite the fact that there is nothing at all to think about the way I’ve presented the execution here.  In reality though as a trader you have lots of time over the course of a trading day where you can allow things to throw you off your game and to wreak havoc on your execution.  In Willink’s story he’s talking about bad guys on the hills, smoke, explosions, etc that might throw soldiers off of their plan.  The penalties of doing this in warfare are severe to say the least.  In trading you could have people on Twitter going on about whatever and you allow this to distract you, Canadian wildfire stories that are making you second guess your statistical work and edge, perhaps you didn’t sleep well the night before and have low energy on the desk…..  I could offer countless examples and I’m certain if you’ve traded for any length of time you know exactly what I’m talking about.  Ultimately I’m saying that it is often not easy to detach yourself from the noise and execute properly and this leads to errors for the trader:  not taking a planned trade, interfering with trade management, chasing, and outside influence dictating actions.  The consequences are losses, mental debits, maybe blowing up an account, perhaps completely failing if you do this enough times.  So this is an example, in my opinion, of trading being simple but not necessarily easy.

Let me offer another example with Soybeans which was something I tweeted about last week.  Here is a picture of the RTH session in Soybeans from last Friday 5/6 and a basic stat sheet I use for uncovering common market behavior to aid my execution:

da beans

stat sheet

Let’s walk through the stats and compare to the RTH session on Friday:

  • First stat shows that the most common time for the High OR the Low of the day in Soybeans to be set is in the first hour of trade.  Did that happen Friday?  Yes.  The lows were established on the opening bar (these bars are 15 minutes each).
  • Second stat shows that the most common time of day for the total range of the session to be set is in the last hour of trade.  Did that happen Friday?  Yes.  The last bar is also where the high of the day occurs and thus where the total range for the session has been put in.
  • Third stat shows that on a 60 day trailing basis 71.8% of the time we open inside the previous days range we test the previous days poc in the same session.  Did that happen Friday?  Yes.  That happened right off the open.
  • Fourth stat shows that most of the time only 1 side of the IB, either the IB high or the Low is broken.  On a 60 day trailing basis only one side or the other has broken 72.88% of the time.  Did that happen Friday?  Yes.  Only the IB high was broken.

This is why I tweeted out on Friday that “it doesn’t get much cleaner on the stat front than Friday”.  Basically all the “normal” things that happen in Soybeans happened.  While that is all well and good I will tell you as a trader I know this kind of data and much more for ALL of the markets I trade.  I know this stuff cold and I’ve sat through thousands of trade sequences leaning on it.  I can also tell you that there have been so many times where, by the time that bell has rung and the session is over, I haven’t captured any of it.  In fact far worse than simply not taking the trades there have been many times where I found myself taking trades that were a direct contradiction to the data I have.  The session is over and I look back on the day and these stats and I think… did I screw this up.  How is it even possible when I know all this data?  It is all so clear what I should have been doing!!!  I’d be willing to bet that most traders reading this have had this experience or are going through it currently.  We simply could not detach ourselves from whatever else was going on and execute properly and according to plan.  We know what to do…that part is simple….its the doing it that isn’t often easy.

Willink also talks in this interview about one of his guiding principles in life which I find very powerful.  It is the idea that:

“Discipline Equals Freedom”

I thought for a long time after hearing him discuss this and about how this applies to a trader…because I think it is absolutely true that as traders when we are disciplined with our execution and our process that is when we enjoy the most freedom.  When I say “enjoy that freedom” I mean both inside and outside of trading.  I know personally when I was constantly committing the errors I described above, not taking planned trades/micromanaging trades or if I half-assed my preparation, etc. that I was never less free as a trader,  that I was a slave to my own mistakes.  I didn’t feel free at all.  It is brutal to go through that as a trader. Worse still is that when we are stuck in that sort of routine it often leaks over into our personal lives as well after we get off the desk.  Even though it might seem on the surface that we are enjoying the freedom to do whatever we want at any given moment instead of following a trade plan, the fact is that leads to little or no freedom at all.  We develop bad habits and often become a slave to them despite probably telling ourselves “I won’t do that again”.  Simply saying it, we find, isn’t enough.

So the question becomes….how do we stay disciplined?  How can we detach?  I think one way, and I’d love to hear other ideas in the comments section from readers, is to create good habit loops.  Readers will recall from this post that one of my favorite books that had a positive impact on my trading is The Power of Habit by Charles Duhigg.  I think we can apply many of the lessons in this book to help us get to this point of detachment, discipline in our execution as traders, and ultimately more freedom.  How?

One of the things Duhigg discusses in this book is how habits get formed in the first place.  Basically when we first try to perform a new task our brains are exerting a great deal of effort to process new information.  Once we understand a certain task our behavior becomes automatic.  I touched on this when writing my process post where I talked about playing chords on a guitar.  At first it is hard to play basic chords for most of us, we have to think about where to put our hands to form each chord and physically it hurts your fingers.  Over time performing that same action becomes automatic and something I tried to describe as “unthought thought” and the pain goes away because the movement and finger placement has become common…a habit.  Duhigg says in the book “This process in which the brain converts a sequence of actions into an automatic routine is known as “chunking,” and it’s at the root of how habits form”.

Enter the Habit Loop.  The book describes exactly what a habit loop consists of.  There are essentially three elements that Duhigg describes:

  1. A Cue that tells your brain to go into automatic mode and which habit to use is the first step.
  2. Then you go through a Routine which Duhigg says can be physical, mental, or emotional.
  3. Last, there is a Reward, which helps your brain figure out of this particular loop is worth remembering in the future.

Over time the loop will become more and more automatic.  Duhigg says “the cue and the reward become intertwined until a powerful sense of anticipation and craving emerges.”

Part of the reason I think that this concept of the Habit Loop and implementing it as traders is so critical is because it helps enable that detachment that Willink is talking about.  It helps create that vantage point that he and the other soldier had when observing training where suddenly everything looked so easy.  So how do we break bad habits and create good new habits in our trading and elsewhere? Duhigg gives us several suggestions on how to go about doing this using running as an example:

If you want to start running each morning, it’s essential that you choose a simple cue (like always lacing up your sneakers before breakfast or leaving your running clothes next to your bed) and a clear reward (such as a midday treat, a sense of accomplishment from recording your miles, or the endorphin rush you get from a jog).

Then Duhigg warns us that a cue and a reward alone have been shown in many studies not to be enough to make a new habit last.  This is critical for traders because most of us have gone through the experience where we build up all of this mental capital (and monetary capital) following our process for weeks or months only to then deviate from the process on one big trade and give all of those profits back or worse.  He continues:

Only when your brain starts expecting the reward – craving the endorphins or sense of accomplishment – will it become automatic to lace up your jogging shoes each morning.  The cue, in addition to triggering a routine, must also trigger a craving for the reward to come.

In trading for example using the Crude Oil trade set-up above the cue is simple….you take a trade in the direction of the IB breakout when it happens.  That is our cue to act.  The reward identification is also simple….if you’ve studied market behavior you know if you take enough of these trades you are going to make some money on balance.  This means there is also an expectation embedded into this process.  There are other rewards as traders but let’s be real….that’s the main reason we are all doing this, to make money (most of us, anyway).  This craving to become consistent and make money is going to be present during such a habit loop for traders so that when the cue happens every fiber in your being is screaming at you that you must take the trade and follow your plan.  Then there is one final thing Duhigg suggests to make the new habit last:

For a habit to stay changed, people must believe that change is possible.  And most often, that belief only emerges with the help of a group.

I’m sure most people have heard of the saying “no man is an island”….it applies here in my opinion.  There are very few traders who go this path completely alone.  If you are struggling with the things I’m talking about in this post, with detaching yourself and having discipline to do what you need to do, consider being part of a group to solidify the new habits you want to form.  The group could simply be one or two other like-minded traders using similar routines and habit loops but the point is you want to be around people that help enable you to believe that you can change as this will create a situation where the habit loops you are trying to implement become permanent.  Good trading groups should help demand accountability for all involved.  The type of accountability that we might find easy to brush aside if we are going things alone.

Let’s bring this full circle back to Willink.  Earlier in this post I did a quick summary of him describing training on the oil rig:

First, Willink talks about a moment early in his career as a Seal where he’s training and for the first time he detached himself, identified the problem, called out the solution to his team, and “clicked” in terms of becoming a leader.

Does it seem clearer now that this was the early formation of a Habit Loop that he would carry with him forever?  There is a cue, there was a routine, and there is a reward.  There is also a deep craving attached to the process.  For Willink he always wanted to be a warrior and a leader and once he found himself in that role it was his desire to be elite and to protect his men and accomplish the mission.  Further, he is part of a group that encourages him to follow this loop and they are going to hold him accountable.  In this case, being accountable and following the process it is literally a matter of life and death.

Can we challenge ourselves to act the same way as traders?  Will we do what it takes?

I hope that you have found this post helpful in some way.  Good luck in your trading.

  • FF
Posted in Homework, Process | Tagged , | 11 Comments

What Books Should I Read?

This post’s title is probably the most common question I’ve gotten on Twitter.  Let me start by reminding readers about something that I believe and have talked about here and here and here and here and dozens of other places:

Trading is not an intellectual pursuit it is a performance endeavor.

Now I know some of you are reading this and thinking “uh….ok there ‘FatF1nger’, whatever you say”… I’ll lean on Mr. Buffett in an attempt to have the point I’m making hold more weight than it does when I say it:

You don’t need to be a rocket scientist.  Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.

So why bring this up in the context of question in the title of the post?  Whenever I get this question I never want to rattle off a list of books because all the books in the world aren’t going to make anyone a good or even average trader.  I don’t think I’m doing anything of real value for someone asking this question by giving them a list of things to read and acting as if that will make them a trader.

Since I view trading as a performance endeavor similar to something an athlete or musician is doing I often think of the question in that context which is why I don’t think providing a list of books is very helpful.  Think about it this way, would you walk up to a professional football player and ask him what book you can read to become a good football player?  Do you honestly believe if you read a book about football that you’d be good at playing it?  Do you think if you read a step by step manual from Tom Brady on how to throw a football that you could study it for a few weeks, memorize the manual, and then walk outside and throw like him?  Would you walk up to a professional concert pianist and ask them what book they can suggest for you so that you can learn to play like they do?  Do you think that after a detailed reading of theory or piano scales that you could hop on the piano and pound out a little Rachmaninoff for fun?   When you think about trading in this context, as a performance endeavor, you realize immediately that the question of which book to read will not ultimately provide the answer of how to become a good trader.

Here is what I suggest to anyone new(er) to the business of trading asking me what they should read.

  1. Read everything you can get your hands on.  Seriously.  Don’t limit your reading only to books specifically about markets or trading.  Embrace writings about any performance endeavor and human psychology.  Soak up as much material as you can.  If someone tells you a book is no good, so what….read it anyway.  You’ll find that some of what you read is going to be worthless, some of it will be great, and the vast majority of it is going to be somewhere in between.  Early on it is going to feel like you’ve placed your mouth on a fire hose and that’s ok.  In the fullness of time you’ll benefit from having done this in my opinion.  So that brings me the next point.
  2. Don’t get bogged down on every little thing in every book you are reading and then start thinking that in the real world markets are going to “work” just like what you read about in a book.  Not gonna happen.  Instead, try to take 1-2 things (or more if you find them) from the material that you can use to help forge your own path in trading and to help drive the process to developing your own approach and edges in the markets.  Don’t be afraid to find your own way by putting together pieces from various things you read.  You are going to find that a lot of things you read about in books are ultimately only rules of thumb and as a result you’ll need to take the next step in defining them so that they can be used for specific execution.  Trials and tribulation await you and ultimately you have to make the process your own.  Trying to copy what someone else is doing is not a great path forward, in my opinion.
  3. Find someone with experience that will answer questions for you.  Speak with them as often as you can. Be more interested in listening to them than you are in speaking.
  4. Don’t ever stop being a student of the business.  Or, stated another way, don’t ever stop working on your craft and looking for ways to improve it.  Markets are always changing in one way or another.  That is one thing I’m fairly confident describing as a constant in trading.  Strategies will need to be adapted and so will your attitude and daily routine over time.  We all have to constantly be working to maintain our edge and to get better.
  5. Be honest with yourself.  Take regular objective assessments of what you are doing that go beyond basic P&L tracking. Take inventory of your emotions on a regular basis.  If you don’t feel like you can do this on your own find someone who will help you do it.

Now I’m sure some of you have read this and you are still thinking “great, but what books should I read”?

Ok……I’m sure I’m leaving some out and that I’ll add to this list over time but for now here is a list of books that I can think of off the top of my head which I’ve enjoyed and benefitted from in one way or another over the years.

In no particular order

  • New Trading Systems and Methods, Perry Kaufman
  • Options as a Strategic Investment, Lawrence McMillan
  • Evidence-Based Technical Analysis, David Aronson
  • Thinking Fast and Slow, Daniel Kahneman
  • The Emperor’s Handbook, Marcus Aurelius
  • Anatomy of $SPY on First Trading Day of the Month, Kora Reddy
  • The Education of a Speculator and Practical Speculation, Vic Niederhoffer
  • Playing For Keeps, David Halberstam
  • Intermarket Analysis, John Murphy
  • The Signal and The Noise, Nate Silver
  • The Power of Habit, Charles Duhigg
  • How We Know What Isn’t So, Thomas Gilovich
  • Trading In The Zone, Mark Douglas
  • Trade Like a Stock Market Wizard, Mark Minervini
  • Inside the Mind of the Turtles and Way of the Turtle, Curtis Faith
  • All of Market Wizards books, Jack Schwager
  • Trade Stocks and Commodities with the Insiders, Larry Williams
  • Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay
  • Trade Your Way to Financial Freedom, Van Tharp
  • How To Calculate Quickly, Henry Sticker
  • How To Lie With Statistics, Darrell Huff
  • The Chimp Paradox, Steve Peters
  • A Sense of Where You Are, John McPhee

Websites/Other Resources

Good luck in your trading.


Posted in Homework, Process, Random Thoughts | 6 Comments