Context Anyone?


Am I being aggressive….feeling chippy?  Not really, so why did say this?  Let me do some explaining.

Readers know I am a short-term trader as are most of the people I follow on the Twitter.  What I am about to write about is context for a day trader.  Today is one of those days where it looks like every 4 ticks lower since the open there are the “is this the low” kind of tweets coming through the stream and lots of bottom pickers.  This is very common when gaps are this large down on the open.   I don’t recall seeing this many people trying to find the bottom on 1/20.  I don’t make anything out of that statement in terms of market direction I simply find it interesting to watch the behavior.

Let’s review some background information we had coming into today

  • On Tuesday, Wednesday, and Thursday of last week during RTH (Regular Trading Hours or the “pit session) we saw the ES POC (point of control) stacked on top of itself between  roughly 1903 and 1906.  The market was experiencing relatively large ranges in those sessions, as has become the norm this year, but from a volume perspective we were trading in balance those days.  Prior to those sessions we had built a strong volume point of control at 1931 so my thinking as I’m watching that volume get stacked between 1903-1906 is that we are building energy to go re-auction 1931 again.  Many buyers AND sellers considered that zone (1903-1906) as a fair place to transact…eventually one side is wrong and they give up their positions.  I think at Thursday’s close it’s going to be higher and recent sellers will likely be the ones to give up first.
  • That idea was clearly wrong for Friday.  Was Friday hard to read given my first idea?  Not really.  Did I get killed Friday?  Nope.  Lets take a look at what the market did instead:

blog 1

So what are we looking at here?  I’ve got last Thursday’s profile to the left.  On Friday we put in the high print of RTH right on the open at 1905.25 and the rest, as they say, is history.  The high print shows rejection and a lack of interest from buyers in transacting above the previous days point of control (the POC or point of control is the pink line in the charts for non IRT users).  Back home we call this context in some circles its apparently referred to as voodoo.  Anyway….  Most of you that have been following me know that I sit out the first hour of trade most days in all the markets I trade so that I can wait for the IB (Initial Balance) to be established.  The reason I do this is because I have more context to trade with once the tone for the day has been established in that first hour.  I have a plan for up, down, sideways but I never know “for sure” which one is going to be the right approach on any given day. The first hour is used to observe which side is dominating and then I try to lean with them regardless of whether or not it was my top idea for the day.  Some days that goes well, some days it goes extremely well, and other days I lose.  Don Miller is fond of saying that trading is basically:  “make a little, lose a little, make a little, make a lot”….I can’t think of a better description.

The IB markers are the yellow lines in the chart you are looking at above.  As you can see on Friday the IB lows broke shortly after being established at 10:30 and served as resistance the rest of the day.   Here is a series of tweets made Friday as I’m observing this happen:

blog 2

So to review what these tweets mean from the top

  1. Last Wed. profile was a double distribution structure which simply means it has two distinct high volume areas in the days range.  The lower distribution was reached very early on in the driving action down early on Friday.  If buyers fail to balance at that lower distribution my first hypo has to then be for recent lows toward 1865 to be tested.  The market is telling me that I have to stick a fork in my top hypo looking for that push to 1931.  For Friday, that’s over.  Done.  Time to move on.  That’s the context the market has given me to work with.  As for those of you that ask questions about every word I tweet…Ratt is a band…they sang a song called Round and Round which was released in 1984.  I might have listened to it on Friday.  Maybe twice.  Its on YouTube if you are that interested.  Ratt has nothing to do with the market context for Friday.
  2. I also know from previous sessions that 1865 has been tested multiple times (1/27, 1/28, 2/3) so I am not viewing that as stronger support each time its being tested I’m viewing it as weaker.  The market has advertised lower to buyers several times and found them there…while I don’t ever know for sure where buyers that haven’t acted yet will step in, I am more confident after this many tests that the market is likely going to have to advertise even lower still to find more or new buyers.
  3. With the o/n (overnight) lows being taken out early on Friday and the IB lows breaking and then serving as resistance this is an example of me stating what is obvious to anyone following the auction as it plays out.  I’ve had people get annoyed with me on Twitter for stating the obvious but….if you’ve been on there for even a week you know just how hard it is for many people on the platform to even acknowledge the obvious….so you’ll have to deal with me doing this once in a while…I find it a good habit to vocalize what is going on for my own trading.  In the end, Friday’s session was bearish.  I don’t need to hear about 10 thousand macro inputs as a day trader to understand this.  I don’t need to go searching for headlines after the close.  I don’t have to double-check the correlation to crude.  I don’t have to pretend it wasn’t because this week is Chinese New Year and maybe since they are off we’ll be ok Monday….the price and volume action on Friday was enough information.

Then a lot of us watched the Super Bowl…..and fast forward to this morning.

  • We had a significant gap down this morning.  Friday’s close was 1875 so that means we are gapping down through this 1865 area.  I had already built into my assumptions Friday (see tweet above) that this was not likely to be strong support again.  Today’s open confirmed that but even before then the market was serving up more context to work with.   As I mentioned on the stream this morning given the size of the gap when we measure gaps this large over the last 3 years there was a very strong indication early that the gap was not going to get closed today.  I did the stat disclaimer in the last post but I’d like to repeat again since I’m going to introduce more stats below:  low probability isn’t ZERO, it means low probability.  Here are my first tweets about ES this morning before the open:

today ES

The reason I’m looking for the 1835 is because there is a naked point of control there.  It’s a previous level where both buyers and sellers were willing to transact in size.  For those of you reading unfamiliar with this kind of term the “point of control” is the most commonly traded price each day in terms of total volume traded.  When the POC is referred to as naked it means that it hasn’t been touched/auctioned again since the session it was formed.

Permit me go on a minor rant here for a moment.  I have often seen fundamental types or people that have no understanding of the day-to-day auction say things like “The markets have no memory”This is simply not true.  People…..buyers and sellers (or those programming computers to do this work) make up the market.  Of course people have memories about where they transacted.  A volume point of control is often where bigger players are transacting because they are the ones that create the most volume thus creating the point of control.  So tell me, reader, do you think if XYZ hedge fund is long from 1835 from 1/20/16 and price is now nearing that again that they have no memory of doing that?  What if 5 hedge funds are long from that level?  Personally I hold the belief that all 5 funds remember that they transacted there…especially so if they continue to hold that position.

So….this morning I’m looking at the range of the o/n action, the size of the gap down, and this naked 1835 poc and it jumps out to me as a highly probable downside continuation objective to work around as a hypo 1 today.  That’s where these tweets come from and this is the same day-to-day approach for all the markets I tweet about each morning.

  • Lets look at some other common things the ES does
    • The o/n (overnight) lows were taken out early (the o/n highs were 1884.5).  The o/n high OR the low is either touched OR exceeded in about 95-97% of all sessions in the ES.  When one side breaks, the odds that the other side will break as well are reduced considerably.  Today for example the o/n lows were taken out early and so I have context that there are very low odds (NOT ZERO) I’ll see the o/n highs reached today.  This is not true simply because the o/n range was large either.
    • When is the most common time for the high OR the low of the session to be put in for the ES?  Well…the answer is the first hour.  Chart here and in the interest of time I’m not doing a detailed overview of the percentages or instances.  This is a 2 year trailing study for ES.  Does this mean every day?  Absolutely not….we’ve seen several days this year with huge reversals into the close that set a new high or low and the chart below plainly shows they occur at all hours increments of the trade day….but seeing the final High OR the final LOW established in the first hour of trade is what is most common.  This may be of interest to the people on Twitter still claiming the only price that ever matters is the close!

hi low

  • The high print so far came on the opening bar of the RTH which of course is within the first hour.  Stats suggestive to me that it is a low probability we are going to see 1852.50 print again today before the close.
  • The IB high today was 1852.5 and the low was 1833.25.  The IB low was broken after it was established.  I know from data that it is now uncommon (read:  lower probability, NOT ZERO) for the IB high to break in the same session.
  • What about the range of the ES?  So we know that the High OR the Low is most often established in the first hour…but what about the range the rest of the day.  When do we usually see the range expand to its limits in the ES?  The answer illustrated in the chart below (also a 2 year trailing study) is in the last hour:

range set

So I’ve watched at this point in the day the following take place: we gapped down significantly through previous support, the high of the RTH (so far) was put in during the first hour, the o/n lows break, the IB lows break….now we are headed into the close which is the most common time for the days range to expand and in this case of course if all the stats held through we’d see expansion on the downside.  Now you have some color as to why I found it odd to watch intraday players since the open actively searching for a bottom to fish.  What data were they using and what context?  Perhaps some will share in the comments.

Now, as I wrote this post out guess what happened….yes indeed the first hour highs were exceeded and so was the IB high.  That’s markets!  We’ve seen several neutral days like this so far this year but so far none have had any upside staying power….perhaps this will be the one.  Not common for this type of action to happen but there it went anyway.  All I can do as a trader is play the odds though and that requires discipline each day.

Lets also take time to face some reality about this however since I’ve already been trolled once about how I now feel about my “surprised at all the bottom picking attempts” tweet.

First of all, being that I live in the real world, I’m of the mind that for anyone that spent the morning and into the afternoon picking a bottom this rally is nice but probably didn’t get them back in the black for the day.  Even worse for the person that says they day-trade that is now grinding it out into the o/n.  Yeah….I’ve been there.  Even more real world is that its far more likely many lost money today fighting the downside early and often.  Second, please don’t tweet me by measuring from the intraday low and then comparing the time stamp on my tweet.  We traded 14 contracts at the low tick….and it wasn’t you so the insinuation is sort of ridiculous.  Third, I made very clear in my post and constantly on my feed that I’m a day trader and today the primary hypo played out in full and extended before the reversal.  Did I get long late today?  Nope.  What’s going to happen tomorrow?  I have no idea.  What I will do when writing plans tonight is note all the auction levels from today and previous sessions where I can gain context and I’ll develop a plan for up, down, and sideways.  Tomorrow morning I’ll review the overnight session and key levels in the context of those plans and from there I will execute.  Same process every single day.

Good Luck In Your Trading

  • FF




Posted in @ES, Process, Trading and Forecasting, Uncategorized | Tagged , , | 11 Comments

Intraday Trading Example

Big snowstorm and I’m stuck inside….haven’t done a blog post in a while so this is as good a time as any.

This post is designed to show an example from recent session on how I’m using real-time context from the market to execute trades each day.  In this example I’m going to focus on the action that took place during the RTH (Regular Trading Hours) in Wheat on 1/15/16.  The grains RTH session lasts from 9:30 am eastern until 2:20 pm. Before we get to that day’s action lets review a few terms that will be used in the review as well as some stats that are available to us headed into each session.  For some/many of you this is probably review so you can skip ahead to the day session chart at the bottom if you’d like to read further.


VPOC:  This stands for Volume Point of Control and represents the exact price at which the most volume is traded during the session.

IB High/Low:  This stands for the Initial Balance High and Low and marks the high and low prints within the first hour of trade.

VWAP:  This stands for Volume Weighted Average Price.  VWAP is calculated by adding up the dollars traded for every transaction (price multiplied by the number of contracts traded) and then dividing by the total contracts traded for the day.


Here are some basic statistics I enter each session with knowledge of in every market I trade.  These are only some of the stats that I use.

I feel like its important to say something about using stats in markets before this is looked at based on what I see out in Twitter land on a fairly regular basis.  Stats tell us something about markets but they never tell us everything.  In particular they can’t tell us anything about all the people that haven’t acted yet in the market that day, week, or month.  We’ve got all kinds of great tools to measure the buyers and sellers that have acted but there is no magic formula to figure out exactly what the people that haven’t acted are going to do.  Since that is the case, I always have to be mindful that risk management is the first priority.  Even when I have a stat that takes place 90% of the time, as a trader, I am constantly reminding myself that the very next trade sequence I get involved in may be the 10% of the time it doesn’t work out.  The stats simply help me understand what is most likely going to take place not what will happen.  The most drastic example of that kind of thinking I’ve seen recently on Twitter surrounded the rally that was supposed to take place in stocks in December as so much data suggested it was a “done deal”.  That being said lets take a look at a few basic stats for Wheat.

This first chart is a 2 year trailing study that looks at the most common time of day Wheat will set the High price OR the Low price for the session.  I conducted this within the InvestorRT platform.

time high or low set for blog

So what this chart shows us is that the most common time for the High OR the Low to be established in Wheat over the last two years is within the first hour of trade.

This second study looks at the most common time of the trading session for the Total Range to be established.  This is a 1 year trailing study.  As a quick aside I run these studies over the last quarter, 1 year, 2 year, 5 year, and 10 year trailing periods….there is very little change to the data on any of them in case readers were curious.  This study was also completed with InvestorRT.

time range set for blogSo what this study shows us is that the Total Range for the session is most often established into the close.

For review, what these two data points tell us is that most sessions in Wheat see the High OR the Low established within the first hour of trade and then the rest of the session the range tends to expand away from that High OR Low print in the other direction with the total range for the session most often established into the close.  Please focus again on the fact that this happens most of the time, not every day.

Here is the RTH chart from 1/15/16 and I’ve marked 7 points here that I’ll review below.  You can see the edge of the 1/14/16 session on the left and the early trade for the 1/19/16 session on the right. 1/18/16 was of course a holiday so there is no profile for that session.

wheat 1 for blog

  1. We can see on the very left of this chart the profile from Thursday 1/14 and you’ll notice that on the 1/15/16 session we are focused on that Wheat opened with an OAOR or Open Auction Out of Range with a gap down at open outside of the previous days range.   When we have OAOR open type there is a higher probability that OTF or Other Time Frame players are going to be active on the open and in this particular case I’m going to be alert for responsive buying on the open as buyers may see value in transacting at these lower prices.  I also know from gap size studies that I keep that gaps down of this size since 2012 have only remained open all session about 30% of the time.  Said another way, there is roughly a 70% chance this down gap open will be closed before the end of the session.  This suggests to me I don’t want to be anxious to sell into this gap down open.  If the gap was much larger (8 points or more) these stats would tell me to be less alert for responsive buying on open and instead I’d look for more open drive directional action down.  So there isn’t a gap of that size on open and as a result I’m looking for that responsive buying right away.  What will I do in terms of execution on days like this on the open?  Nothing.  My job here is to hurry up and wait….I am not a huge market player that moves the Wheat market and I am not OTF.  I want to observe more context before I will try to lean with the side of the market that appears to be in control, either the buyers or the sellers.  On open types like this I simply don’t have enough information to execute yet.  As we can observe on the chart responsive buyers did show up and promptly close the down gap open before the first 15 minutes of trade take place. In doing so they go back and test the previous days POC (see the pink horizontal line on the left of the previous days profile).  This is important context for me early.
  2. By point 2 on the chart (10:30 am) the IB or Initial Balance has been established.  The IB range is marked in the chart with the yellow horizontal lines.  The IB high for this session is 470.5 and the low is 465.  We know from the stats we reviewed above that one of these (the High OR the Low) is unlikely to be exceeded the rest of the session.  What I’m still doing at this point is waiting and now I’m watching which side of the IB is broken by market participants.  As we can clearly see in the chart the IB High at 470.5 is broken first.  At this point in time my bias for the day is to look for long trades and so I begin to look for entries with the idea that the low print is likely in for the day and occurred on open AND that the range will expand on the upside into the final hour of trade this session.
  3. Point 3 is the first opportunity for me to take action on a trade.  Now that I have observed which side of the market (buyers or sellers) appear to be in control I’m looking for lower risk entries on any pullback and at point 3 we have a pullback below the IB high and toward the VWAP (this is the light blue line you see on the chart).  I’m not going to get into whether or not trades are scaled into or entered all-in as that should be a function of your own expectancy, holding period, etc.  What I will say here is that thinking critically about stop placement on initial entry I know if I place a stop just below the IB low on my first trade entry near VWAP there are fairly low odds that I’ll be stopped out on this trade.  Entering here near point #3 the way I like to trade I’d be looking at scaling off at least 1/3 of my long position on any rotation back above the IB highs and 2 points above my average entry.  By doing this I fully realize I will not achieve “max profit” on my trade position if it continues to run in my favor but my goal after entry as an intraday trader is to get my risk to zero as soon as I can for each trade sequence as I usually take 1-4 set ups like this each day in the markets I trade.  As we can see about 15 minutes after entry near point #3 a scale opportunity arises as price pushes to and through the IB high and all the way to a new session high of 474.5 where I have placed the #4 marker.  This move also breaks the previous sessions high.
  4. At marker #4 we’ve been given a lot of context yet again by observing that we have put in a double top two ticks above the previous days range high.  Anyone that has followed me on Twitter for a while knows that I’m a big fan of looking for a breakthrough of double tops and bottoms when they are visited a third time.  I sometimes like to rap on the stream “trip tops aint a thang”.  After this double top is put in we observe further context from the market as price rotates back down again.  Where does price rotate to?  Back to the IB high.  What happens next?  It puts in a tail 1 tick above the rising VWAP for the session at point #5.
  5. If for whatever reason a trader like myself had missed entry at point #3 OR if I had taken a second scale into the previous days high and raised stops on the remainder of the position from entry point #3, then this is likely the second set-up of the day for a long sequence and I’m looking to get in again at or near the IB high or the VWAP on the long side.  Now what I’m generally thinking at this point in time is that I still know that its most likely for Wheat to expand its total range for the day into the close and I’ve now seen the double top put in at 474.5.  Other than this there isn’t any context the market has given me that would suggest that buyers have lost control of the market yet.  If I’m in a new long from around point #5 my thinking is that I’ll be looking to scale 1/3 of my position right in front of that double top at 474.5 and IF the double top breaks (I know its likely to break but I’m not certain of this) I’ll be raising my stops to my breakeven level and looking to scale again above there at 478 which is  previous close (pCL) we haven’t tested since it was put in (you can’t see this marker on the chart so you’ll have to trust me that it was up there).  Where would my stop be for a trade at entry #5? I would look to place a stop just below the VAL or Value Area Low which is the dark blue horizontal line you see on the chart at 469.5.  My thinking here is that if sellers are pushing back below that level I’m losing context to remain long and losing context that suggests buyers are still in control and so I’d need to step aside and wait for the market to give me more information or simply stop for the day and start my homework for the next session after the close. For the next hour and half the market chops sideways establishing POC for the day at 471.5 (pink horizontal line).  This means any entry at point 5 is still hasn’t been stopped out yet nor has any partial scale of this position been achieved on the upside.  Now we are entering into the close at point #6 and we are still looking for that range expansion to the upside.
  6. At point #6 just ahead of the close we get another test of VWAP and the IB High and there is a push higher that fails one tick below the double top and then prices close on the upper edge of the profile for the day.  This move likely allowed for a 1/3 scale of the long position from #5.  Twitter followers will often see me mention things like weak or poor highs and that’s how I would read this close.  Buyers were balancing trade on the upper portion of the profile all session and they had shown up on all the tests of the IB High and the VWAP.  With this being the case my read here is that buyers are still in control of the market at this juncture but they have run out of time in today’s session and so the most likely move from here is for that double top at 474.5 to break in the overnight session and for prices to move toward the previously untested close above at 478 as a next upside objective.  Traders like me have a few choices into a close like this as we are still likely long from point #5 with a partial position.  First we could simply maintain the position we have and tighten up stops into the o/n session OR we could exit the rest of the position into the close to end the session flat and then prepare homework for the following session.
  7. Point #7 shows the open the next session which is a gap up open that ultimately reaches the next objective.  We couldn’t know this was going to play out but there was a great deal of context from the prior session that this was the most likely outcome.

And that is pretty much it.  This probably seems like an awful lot of information for those not familiar with this kind of trade approach but in reality with enough screen time and trade sequences under your belt everything I’m showing you here becomes completely automatic each and every trading day.  Some days it simply doesn’t work and despite our best efforts of reading context and leaning on our stats and set-ups our stops are hit and we lose or end up scratching trades all session and spinning our wheels.  That’s part of the deal for a trader.  The key is coming back in the next session and having the discipline to follow the process again.

I hope you find some value in this post.  As always constructive feedback is welcome here or via Twitter.

Good luck in your trading.

  • FF
Posted in Process, Trading and Forecasting, Wheat | Tagged , , | 17 Comments

Grains RTH

I’ve gotten an awful lot of questions in the last two weeks about commentary made specifically about “RTH” in the grains space.  RTH = Regular Trading Hours or what used to be, and still is in some circles, referred to as the “pit session”.   The RTH in grains currently takes place from 9:30 am eastern until 2:20 pm eastern.  The former official closing time was 2:15 until recently but any observer of this market has likely noticed that for the most part the action between 2:15 and 2:20 is more like the globex trade.

As all of us that trade in this space know the vast majority of the trading volume happens during the RTH so I think it is important for complete homework/prep to view in isolation what is taking place at this time rather than only using globex/24 hour charts.

Since it appears that quite a few people on the stream are not viewing the charts in this manner I’m going to throw up a 60 minute chart for each market with the RTH only given that we have a report coming up Friday.  Perhaps these can be of use to someone.  Note that the last bar in each “day” is not a full 60 minute bar given the 2:20 close time. There are only two annotations you’ll see on the charts.  First you will see 3 moving averages 50 (blue) 100 (purple) 200 period (yellow).  Second, all gaps that have not been closed (and are in view of the chart snap taken) are marked with horizontal lines and the price level of those gaps should be visible on the right.

Good luck on Friday


bean rth Corn rth wheat rth

Posted in Uncategorized | Leave a comment

Random Thoughts 8/23/2015

Very exciting action last week in markets and much to look forward to in the week ahead has motivated me to make a blog entry.  Here is a collection of random thoughts based on things going on and some of the conversations I’ve had in the last week.  As I have warned readers in the past my comments are likely not to be of much value for the fully automated trader.  If you are like most traders and are not fully automated (at least at this point) perhaps you will find some of the comments below beneficial.

“How do you manage your equity curve?”

I received this question last week from a follower on the Twits and I think it’s an interesting question worth discussing.  My response to this question was very simple:  I don’t, I focus on management of the process.  Let me try to explain why I think focusing primarily or entirely on daily P&L is a poor choice as opposed to focusing each day on best execution of our process.

What I think goes on with most traders that still haven’t “made the turn” to consistency is that, assuming they even have a system with trade rules they don’t follow them or in many cases, the process is entirely random and constantly changing which is to say there is no process.  The latter is easy to understand and the former comes with a bit more nuance so lets review some of the issues that come from the former first.  These are issues that I believe will be amplified during periods like we are experiencing currently.

Lets assume for this example that the former trader has some sort of moving average crossover rules (or whatever) that they have decided to approach markets with that is not entirely automated.  They receive a trade signal to buy but markets are deep in the red on the session and as a result the trader:

  1. Passes on the signal
  2. Waits for “confirmation” despite already receiving signal, then ends up chasing a trade late
  3. Takes the trade and takes profits very quickly in an attempt to avoid a loss
  4. Takes a trade, a stop is hit, and now trader is too afraid to take the next signal.  They are now waiting for “double confirmation”
  5. Takes a loss on system and then becomes risk seeking in order to “make the market pay”

Again, these are only a few examples of what can happen when you are not focused on process but instead are thinking almost entirely about P&L and that equity curve.

What happens next?  In my personal experience dealing with this typically what comes next is the abandonment of whatever system was being used (I’m using the term “being used” loosely here) and the search is on for a new system that “works”.  This process is often repeated several times and unfortunately for many eventually results in the trader leaving trading for good and telling everyone they come in contact with that the markets are rigged.

The latter trader, the one doing things on an entirely random basis, has a slightly different problem.  When this type of trader experiences a drawdown, and they will, they have nothing to review within their process to figure out what is going wrong, if adjustments should be made, and/or which part(s) of their approach is not in sync with current market action.  This approach, or perhaps I should say lack of approach, helps enable the trader to focus entirely on P&L.

My thought under times of stress like we are seeing now in many markets is that to be consistent as a trader you need to focus the vast majority of your energy on your process.  If you are not already consistent as a trader doing this will put you on a better path to getting there than a daily focus on P&L will.  Focusing on your process is where you will develop your true edge.

One could speak for hours on this topic but I’ll end here and move on to the next one.  In closing on this I have attached this chart of DUNN Composite Performance below.  For those of you that are not familiar Dunn is a long running commodity trading program that has enjoyed a great deal of success.  That success has also come with a lot of deep and sometimes long duration drawdowns.  Do you think this chart offers any clues about whether or not Dunn managed their process or their P&L?  I do….


“Don’t be emotional”

So if you have followed me on Twits for any length of time you’ve probably seen me get rather chapped when a lot of people start tossing out market maxims like the one above as if they offer some sort of edge or serve as some profound insight about how to operate.  These usually come hot and heavy during times of stress and I’ve certainly started to see them again this weekend.

The idea that you should not be emotional while trading is extremely popular.  Allow me to be blunt:  if you are human, non-automated, and you trade…this is a bullshit nonsense goal to have.  I’d like to offer some alternative views on how to deal with emotions since we will experience them as a trader whether we like it or not.  My opinion is that self-knowledge of our own emotional cycles can help us separate impulsive feelings from intuitive pattern recognition.   Instead of focusing energy on trying not to have any emotions we should instead focus on controlling our response to the emotions we do have.

There are some recent studies on neuroscience (google: Brosch 2012-2015) which suggest emotions not only should not be avoided by the trader but that they organize memory and determine our perception.  Thus, emotions can become a data point that traders learn to track to improve their edge.  A quant might take issue with this and tell me that all that is relevant is the data.  Data is certainly valuable but it doesn’t ever hold all the answers to an uncertain future that we face in markets.  Probabilities are one clue and we should recognize that even looking at a distribution of possible outcomes produces a qualitative response in the human brain.  A normal bell curve will induce a feeling of confidence whereas a skewed curve produces greater anxiety.  This is referred to as anticipated affect.

So if we accept that paying attention to emotions is worthwhile the next step is taking inventory of the emotions we experience from day-to-day and learning how to create habit loops in response to them.  That means writing/recording senses and sensory feelings.  Some can be emotional, like fear of losing or missing out and some can be physical, such as misperception of risk because we didn’t get enough sleep.

Lets assume you spend several weeks or months taking inventory and several patterns start to emerge.  For example, you begin to notice that on days after you have not slept well your anxiety is high while on the desk and you see from your inventory of these feelings that you are taking a bunch of FOMO (Fear Of Missing Out) trades under such circumstances.  What might that look like?  Perhaps you are taking what you perceive as breakout trades in the ES intraday when you are in this particular emotional state.  It’s not that you never take breakout trades but you normally have more specific conditions under which you take them.  You normally look at various higher time frame charts (like a daily chart) to identify resistance areas where if we see bids above you want to be long.  On days you are tired you notice a habit that you are watching the DOM and time and sales and you see ES going bid through the sessions highs with some decent sized orders hitting the offer and you jump on (it’s going up, we aren’t yet to my area where I’d normally do business but I have to get on board before it goes too far!!!)  only to then see when you do this you are consistently taking 15 ticks of heat and are getting trapped near the top tick just in time to see prices reverse against your trade which further increases your anxiety and propensity to compound these errors.

Now that we have identified a problematic emotional state and the habit of acting on it the goal is to create a routine to avoid it.  In this case our goal is to prevent ourselves from acting on breakout trades in this emotional state.  Again, we aren’t trying to be void of emotions we are focused on how we react to those emotions.

In The Power of Habit we can learn about how to develop a habit loop.  It basically requires three things:  a cue, a routine, and a reward.   What is our cue?  If you are taking inventory of your emotions the first cue is the situation where once again you are watching the ES on a day you are feeling tired and its breaking those session highs and there it is, the urge to buy but not at your predefined area.  The next step is to have a routine for when this cue triggers.  So maybe the planned response is that as soon as this cue is active you will shut your order entry mechanism OFF until which time you have an actual signal as opposed to taking an impulsive trade like this.  If you are really struggling with something like this figure out a way to set up sound alerts on your system.  Turn your monitors dark so you can’t see anything and ONLY act when you hear a sound alert which would be programmed to tell you when your system has given a signal.  There are several routines you could put in place in order to develop your habit.  The routine itself needs to get you to a point where you will not take a trade until a system signal is present.  What is the reward? The reward is that you are following your process and avoiding these impulsive emotion driven trades because that is the outcome we are looking for.  Don’t make the reward about money.

Once this process is established it then requires repetition for a period of time before it becomes a habit.  Eventually you get to the point where this will be automatic and it won’t feel like you have to put any effort into it.  Now, think about the fact that some emotions and this process of self-knowledge may actually uncover something positive as well.  Do you really want to try to be unemotional if that is the case?

Ever watch that Paul Tudor Jones trading documentary?  I’ve probably watched that video 200 times.  Does anyone think that he has no emotions during many of those scenes? At one point he’s putting on Bruce Willis’ shoes for good luck.  No emotion?  That’s funny…  Great traders develop habits that allow them to distinguish between acting on impulse and acting on intuition and in my opinion I believe you get a taste of this throughout that documentary.

Avoid Negative People During Drawdowns

My final note here is something I’ve been thinking of writing about for a few months now.  I hope I can get the point across properly.  My trigger for this came from a guy at my gym who I’ll refer to as Johnny Negative.  I don’t even know John’s real name but he’s one of those guys that makes a point to talk to everyone in the gym often about personal things (at a very high volume) that you never inquired about.  This is an example of a conversation I had with him recently:


Him:  Doing legs today huh?

Me:  Yeah, leg day is always a burner.

Him:  Everything sucks.  There is no work.  I haven’t had a steady project for three weeks.  It’s way too hot outside too so I can’t even enjoy the summer while I’m off and did you see what Obama did yesterday?   These socialists…….

FRIDAY (same week)

Him:  What are you doing….back?  You ever do pull-ups?  I hate pull-ups.

Me:  Yeah, back day today.

Him:  I’m so pissed.  They have me working overtime on this huge project now.  These guys were supposed to get me prints but they are late so now I’m late and they keep changing the deadline for the job.  Now I have to work on Saturday and probably Sunday too.  I was supposed to go to “local pub name” with my wife this weekend.  I hate work……and did you see what Obama did?  These socialists…..

I have a fantastic story about his brother-in-law and headphones but in the interest of time…

You’ve probably got people you know both inside and outside of trading that are like this.  So why am I bringing this up?  The fact is trading is tough and ultra competitive and it can be extremely frustrating at times and beat you down some, or a lot, if you let it.  Trading has also been relatively challenging recently in my opinion and  I’m sure a lot of traders out there are experiencing some of these feelings the last few weeks given the action we’ve seen.  You make some progress for the year, you feel like trading is going well and your process is in sync with markets and then….. SLAM you find yourself giving a bunch back over a few sessions or in a drawdown and so on.

The only thing I can share here is that personally when I go through periods like this I make sure to avoid the Johnny Negatives both inside and outside of trading in order to eliminate their influence on the way I feel.  It’s not that someone like Johnny Negative at the gym is forcing me to feel a certain way or is even a bad guy but being around people like that when experiencing your own frustrations in trading is not conducive to putting you in a frame of mind for best execution.  When things are going well these types of people are usually fairly easy to look past but during more challenging times they can help to keep you in the cycle instead of looking forward and keeping your eye on the prize. Johnny is especially important to ignore right before you are going to execute…perhaps you can tolerate him a little better even when you are dealing with your own frustrations when you aren’t about to get on the desk.

Finally, always keep in mind that if your strategy still produces an edge and you are going through a tough time that the other side coming is probably a much more favorable period for your strat.  When that time comes you want to be at your best mentally in order to execute like a champion.

I hope this post was helpful.  Best of luck in your trading this week.





Posted in Random Thoughts | Tagged | 1 Comment

Morning Grain Observations 8/17/15

Good morning.  Its been quite a while since I have put anything out on the blog so I thought today would be a good day to write out the morning hypos for the grains.  Before I do that a couple of opinions/comments on last weeks action.

As everyone that trades grains knows we got a big report last week and USDA dropped something of a bomb on the market with generally higher than expected yield estimates. The market’s response was what you might expect and we sold off fairly aggressively on Wednesday post report and then chopped around into the end of the week.  On Wed. evening and into Thursday the theme on the Twit stream had become fairly obvious and I can easily summarize it as follows:  The USDA is out of their minds!  

Well….maybe the USDA is out of their minds (and keep your own time frame and role in the market in mind with what you are about to read) but as a shorter term trader my job is to align myself with the action of the market.  The action leading up to the report and after the report would suggest that the market didn’t think the USDA has completely lost it.

I proposed a question after the report on my stream which was to ask if the USDA is absolutely wrong then what data is right?  The responses that came back ranged anywhere from “it’s just common sense that they are way off” to “I have a few satellite image studies that show they are wrong”.  Jeffrey Carter probably provided the most interesting response (@pointsnfigures) with regard to a better way USDA could go about collecting data but that discussion is best saved for another time.

Here’s my basic thinking on this trying to stay objective and use information I have to draw conclusions about the net perception in the market:

  1.  The USDA surveys something like 25,000 producers for this data set along with other studies.  Even if the USDA numbers are high, I’m hard pressed to believe that any single individual producer or analyst has more robust data from which to draw better conclusions.
  2. Can COT offer any clues as to whether or not the USDA has lost it?  I think that it can be somewhat instructive here.  Below are the net commercial positions on a 3 year basis for Corn and Soybeans.  These charts are from

beams for blog Corn for blog

So we can see rather clearly that commercials established considerable net short positions over the last few months in each market and what’s more they did not look to substantially cover these shorts into the report.  While the net shorts are not at the most extreme absolute levels we’ve seen over this period of time we can see that they were rather aggressively established the last few months.  In fact, in beans with the COT data we have into last Tuesday we can see they increased the net short position headed into the report.

I ask myself a simple question:  Who knows the market better than the commercials?  Generally my response is that collectively, nobody does.  We see here that even if USDA is off the commercials are more aligned with what they gave us than not.  Now, someone might point out that the data we have for COT only goes through Tuesday, the report was Wednesday, surely they covered some more.  My assumption is that they probably did but who knows how much…. what we do know is that while it seemed many market participants were looking for this report to give an upside boost to futures prices arguably the most informed players in the marketplace were not looking for that in the net.  No producer wants to hear this, but one might also conclude given this information that even if the USDA is off in their estimates the price of grains might not be.

Big picture weekly overview:

  • Corn Sentiment:  46% bulls.  Neutral
  • Wheat Sentiment:  35% bulls down from 61% bulls the weekly of July 13.  I consider this neutral and not yet at extremes.
  • Soybean Sentiment:  42% bulls.  Neutral

Morning Price Snapshot along with Average True Range and Volume Data.  Note the ATR and Volume are listed for 20, 60, and 120 day periods respectively:

range vol



Wheat (U) is trading up 1 6/8 at time of writing on below avg. o/n volume in a 7 4/8 handle range.  Note that Z is starting to have higher o/n volume than U at this time so in the interest of time I’ll stick with U hypos today but will be trading both U and Z this week.  The o/n high is 509 and the low is 501 4/8.  Most traded price so far on the session is 505 6/8.  Friday’s poc was 507 4/8, (514 in Z).

Hypo 1:  In hypo 1 I note all of the o/n action is within Friday’s range.  I’m going to look for chop on the open with first idea that buyers defend any rotation back toward 507-504 and then push bids through the o/n highs.  Under this scenario the next upside objective looks for a test of Friday’s highs at 512 2/8 with a secondary immediately above at the 8/12 aggregate poc of 513.  If buyers remain aggressive at those levels I will look for continuation higher in 1.5 handle increments with a trailer on any remaining position.

Hypo 2:  In hypo 2 I note that the o/n lows coincide with Friday’s aggregate poc and we see good excess at those lows so far for the o/n session.  See this image to view this context:

da poc

So, in hypo 2 I’m going to look for failure of buyers to defend any early rotation as low as 504 with sellers pushing back to and through the o/n lows and through Friday’s aggregate poc in the process.  The next immediate downside objective through those lows would be for a push to the round (5) with a secondary objective at 496 2/8 (naked aggregate poc from 8/13, see above) and then 494 2/8.  Extension objective under this hypo is 487 6/8.

Hypo 3:  Normal chop hypo included in all morning prep where I favor outside/in trade approach.


corns fro blog

Corn (U) is trading up 3 at time of writing on below avg o/n volume in a 5 4/8 range.  Note the volume in Z Corn is better just like Wheat but in the interest of time since U is technically still front month I’m going to stick with this contract for the hypos here. The o/n high is 369 and the low is 362 4/8.  Most traded price on the session so far is 367.  Friday’s poc was 364 (376 in Z).

Hypo 1:  Hypo 1 here looks for buyers to break the o/n highs fairly early in the session as Corn has done a better job than Beans in terms of repairing all the singles from the Wednesday report sell-off.  Those singles extend up to ~373 so with bids north of the o/n high that is the next key swing objective above with a 377 2/8 extension target.

Hypo 2:  In this hypo I’m going to look for sellers to push offers back through 364 2/8 and then targeting a test of the o/n lows at 362 4/8.  If sellers remain aggressive at that level I’ll look for further selling toward the 360 level with a 357 6/8 extension objective which is Thursday’s naked poc.

Hypo 3:  Chop

My apologies but I have run out of time this morning so I won’t include any Soybean hypos in this post as I need to wrap a few things up before the bell.

Good luck today traders.




Posted in Corn, Homework, Morning Observations, Process, Soybeans, Wheat | Tagged , , , , | 1 Comment

Trading Is Not Forecasting

I stated the following on Twitter today:

“a lot of people still don’t/won’t ever get it…trading is not about predicting”

I’ve made this comment several times in the past on Twits and it always generates responses that range from agreement to someone calling me an idiot.  That’s fair I suppose, maybe I am an idiot.  In any event, this post is an attempt to articulate in more than 140 characters what this statement means to me and why I think that it is true.   I’ll attempt to keep the post as brief/direct as possible.

If you are fully automated then this post is probably worthless for you.  If you are strictly a fundamental trader/investor then this post is also likely going to be of little value to you because you are very likely to be using at least some predictions from information that is not generated by the market itself to enter your trades on a regular basis.

With that being said let me start with some basic premises and if you can’t agree to these you should also probably stop reading once finished because the rest of this post will likely only result in upsetting you.

Here are 4 premises:

1.  A person can make a bad forecast/prediction and still make money on a trade.

2.  A person can make a good forecast/prediction and still lose money on a trade.  Need an example?

3.  A person’s ability to forecast a particular market may improve over time but their trading results may not reflect this improvement.

4.  Nobody needs to predict anything in order to make money in trading.

Like most people when I first started to trade in the markets I was under the impression that to make money from trading I had to know what the market was going to do.  I watched a lot of financial television where the vast majority of the time what you see is a guest/regular making predictions about what was going to happen next for a stock.  I figured this must be the way the pros do it.  As a result of this most traders, myself included, focused a great deal early in their career on getting better at making these predictions and this is true for both the fundamental and the technical trader.  It is fairly uncommon to do very well early on in trading so usually what happens is that instead of focusing more on your execution: exit strategy, position sizing, risk management, etc. you focus more on getting better at predicting the markets.    I will also say that in most cases, the trader will probably notice through consistent journaling that even if they were getting better at forecasting over time it wouldn’t always correlate to better trading or making more money.  There is a reason, for example, that there are documented talented forecasters all over the industry that don’t even trade.  I would also claim there were an awful lot of people in the pits for a long period of time that never predicted anything and they made a fortune as traders because they developed an edge in reacting to the environment around them rather than predicting what that environment was going to be like. Many traders today have developed a different set of skills so that they can do this on the screens instead of in the pits.  Basically what I’m getting at is that making grand predictions about the future isn’t the foundation for good trading or making money in this business.  It is process driven repeatable execution and disciplined risk management that is.  As I’ve stated on my Twit feed many times and in the title of this post:  Trading is not Forecasting.

So What Is Trading?

Every single time we put a trade on the outcome of that particular trade is random.  As a result of this we know that trading is risky because all outcomes are probable rather than guaranteed.  If you haven’t yet embraced this fact then it is likely you are having regular struggles as a trader

In Trading In The Zone by Mark Douglass he suggests:

Trading presents us with a fundamental paradox:  How do we remain disciplined, focused, and confident in the face of constant uncertainty?  ….When you learn the trading skill of risk acceptance, the market will not be able to generate information that you define or interpret as painful……this is called an objective perspective – one that is not skewed or distorted by what you are afraid is going to happen or not happen.

The practical response to this, which suggests to the trader that they need to base the foundation of their execution on a repeatable and defined process that specifically focuses on risk management and probabilistic thinking, is precisely why I think basing trades solely off of forecasts makes the business of trading so unbelievably difficult and often impossible for most people.  It is also why I think that trading and forecasting are two completely different activities.

Let’s consider a scenario under the first premise I made above.  Pretend for a moment that Joe Trader has predicted that the Nikkei is going to rally to 20,000 and so he enters long in the futures at 19,000 which is below his forecasted price so he deems it a good place to transact.  The next day the Nikkei gaps down on the open and proceeds to lose 1,000 points over the next 12 sessions.  At this point Joe is “feeling pain”.  He might even be doing one of those “God, its me, Joe, I swear if you let me out of this trade I’ll never (insert whatever here)” type talks on the desk.  His account has now sustained a sizeable real-time loss but he is still very much psychologically invested in his position on two fronts.  First, he has risked capital and second, he put his ego on the line when he entered this trade based on the forecast/assumption that the Nikkei was going to 20,000.   He might have even mentioned this forecast to others in any number of ways which is worse still.

During the next trading session there is an announcement of a grand new stimulus plan for the Japanese markets that is surely going to get them back on the reflation track.  Futures start to move up again and two weeks later the Nikkei is trading at 19200 and Joe decides to take his profits on the trade.  He sits down at the desk after he exits and says to himself “damn, that was a close one”.

I wonder if this sounds familiar for some readers?  Is that a sustainable way to stay in this business long term?

Broad Conclusion

What matters most for the trader’s long term success and staying power in markets is not their ability to predict the future but in their ability to manage their trading through a specific process that accepts and accounts for the risks that are being taken.  Focusing on execution derived from a forecast rather than an objective process results in added psychological risks that can only be detrimental to long term results. Doing so encourages the trader to think about markets in terms of being right or wrong rather than thinking about them in terms of probabilities.  Trading is not forecasting.

As always feedback is welcome and good luck with your trading.

– FF




Posted in Random Thoughts, Trading and Forecasting | Tagged , | 14 Comments

Morning Observations 3/27/15

notes for blog

Ahead of GDP this morning current highs for notes at 28’16 and lows at 28’08.  Most traded price so far is 28’13.5 with VWAP at 28’12 as I’m writing this.  Four time frame look above at notes with all time frames in a uptrend but the 55m (bottom right).  Key idea continues to be same as have mentioned on Twits this week which is to look for a rotation back toward the FOMC breakout in the 27’22 – 27’16 range (focus on 276m lower left and daily upper right charts for these references).  In the event GDP triggers upside catalyst this morning looking for push above the current highs with next objective at 28’18, 28’23 and 28’26.5.  Any aggressive bids above the 28’26.5 I’ll look for a retest of yesterday’s highs at 29’02 with an extension target of 29’05 which is the naked aggregate poc from 3/25.

gold for blog

Four time frame look at Gold above.  As mentioned on stream yesterday current idea was to be alert for retracement back to the scene of the o/n breakout toward 1199-1197 which was viewed as a high probability as the breakout came on news and the war drum beat.  All time frames are currently shown in a uptrend but the weekly which remains in a downtrend at this time.  Current o/n high is 1205.6 and the low is 1195.  The o/n highs match yesterday’s aggregate poc so we’ve seen initial rejection there at first attempt to go bid above again.  With bids above the o/n high I’ll look for continuation toward the 1216.50 level and a retest of yesterday’s highs with an extended target toward 1230.  Offers below the o/n lows I’ll look for continuation toward 1193.70 and if sellers remain aggressive there next targets are 1189.50 and 1185.40 on the downside with an 1177.7 extension target.  I still expect gold to rally further to the upside within the context of the daily chart (upper right above) but make note that the breakout on that time frame references back toward 1165.7 for rotation potential on the downside.

natgas for blog

Four time frame look at Nat Gas above with all time frames in a down trend currently.  O/n high is 2.697 and current low as I’m writing is 2.651.  O/n profile is extremely thin up top with the o/n high roughly coinciding with yesterday’s aggregate poc showing early rejection at attempts to bid above that area.  Main idea is to look to operate with sellers in this market but there are several upside rotation references in the charts:  58m: 2.725, 288m:  2.717, and daily 2.755.  With aggressive offers below the current lows the next downside objective is 2.601 followed by 2.553 and 2.543.  Current extension target used is the 288m channel objective at 2.519.  Bids above 2.776 will turn the 58m chart to a uptrend where the first upside objective comes in at the 2.850 level.

crude for blog 1

crude for blog 2

Current highs for crude are 51.38 and current lows are 50.05.  Note in second chart that current o/n highs coincide with yesterday’s aggregate poc.  As mentioned yesterday I viewed the rotation down during RTH as a textbook return to the scene of the news breakout and buyers successfully defended that area.  They did so again last night creating something of a double bottom near the round.  My first expectation for today is to look for chop in this market headed into the weekend favoring scalps and two-sided trade. Second idea is to look for bids above the o/n highs and through yesterday’s aggregate poc in which case I’ll look for a retest of the 52.48 highs as the next major swing objective.  Though I’m not expecting it today if we see bids above yest. highs I’m looking for next major swings at 53.25 and 54.05.  Third option is to look for sellers below 50.40 and continued push to the o/n lows.  If the o/n lows are broken to the downside I’ll look for a continued downside rotation back toward the 49.31 level.

sushi for blog

Nikkei 58m chart above.  While weekly and daily charts remain in a uptrend in this market my 288m time frame is in a downtrend and I’m illustration first expectation for today’s trade which is to look for offers below 19265.  The next downside objective under this scenario is 19150 followed by 19090 and the downside extension objectives are currently between 18965 and 18945.   I do not have a very strong short-term plan to execute on the long side today so if there is no confirmation of above scenarios from the market there will be nothing for me to do.

beans for blogFour time frame look at Soybeans above.  All time frames currently in a downtrend.  The o/n high is 976 2/8 and the low is 970 4/8.  Another muted o/n session with below avg. volume and only 5 6/8 handles of range.  I’m looking for an attempt at upside rotation early by buyers back toward the 975-976 level as a first idea where I’m expecting sellers to defend early and push back toward the o/n lows and through them.  If the o/n lows are broken the next downside targets come in at 969 2/8, 967 and 964 2/8 and under this scenario I’d expect the gap to fill from Sunday night back toward the 963 level.  I’m not looking for any major range expansion out of the grains today and think instead the trade remains largely balanced until next week’s report.  In scenario two I’m going to look for same upside attempt by buyers and no sellers defense.  If buyers can remain aggressive above the o/n highs then I’ll look for a next upside objective at 979 2/8 followed by 982 and an extension target of 984 2/8.  Note that under this scenario it will flip the 42m time frame bullish but the 210 and daily will remain bearish.  The weekly has a ton of work to do before it flips to bullish so I’m not taking any time to review that.  Third option is opening drive HTF (Higher Time Frame) type action on the open where scenario 1 downside objectives apply but range expansion becomes a great probability.  Low expectation for this kind of action today.

Have some thoughts for ES, TF, C, and W as well but I’m running out of time and need to end here.  Good luck today traders.

– FF

Posted in Crude Oil, Gold, Homework, Morning Observations, Natural Gas, Nikkei, Soybeans, Ten Year Notes | Tagged , , , , , , | 1 Comment