Posts in Category: Trading

Seven hundred dollars later: anatomy of a trade

After Danny Riley’s recommendation Thursday morning to “buy weakness” and use caution, I thought it would help to show you one example of how to do that. This isn’t the only way. It’s not even my preferred way. But $700 later with no drawdowns, it’s a good way. Here’s a chart with notes throughout the day. If you just want to see the buy and sell, it’s on there. But if you really want to know what happened and didn’t happen in my mind, then the long version of the story, I hope, may be useful to you.


The Opening Range is a Magnet

I fired up my NinjaTrader sim account and watched the opening range. I didn’t use any of my favorite indicators, like moving averages, a MACD with my own settings, stochastics (though I sometimes wonder why), and the ADX. These just happen to be the ones I like, but as I said, I didn’t use them.

I learned about the ADX from my friend the late Candy Schaap, one of the best teachers of trading. She would often repeat, “Price, price, price!” to remind us not to worry about the news or try to predict tops and bottoms. She would also sometimes say, “If you ask me stupid questions, I can’t help you.” The price here and now was the only true thing for her and therefore, the only thing to focus on. I try to remember that when I think too much.

For writers and traders, thinking is often not helpful. Fortunately, I didn’t have much time to think on Thursday. I had my simulated account up on the right screen, email and social media on the left, and the video I was editing in the center. The video, by the way, is a rare speech by one of the original market wizards, which he has given us permission to make public as long as we don’t charge for it. It’s extraordinary, wise, and personal. You’re going to love it.

Remember, this was a simulated account using real-time data. So it was real in one sense, but I didn’t feel the same emotion I would feel if it were real money. You’ve heard many times that you should only trade with risk capital. But there’s also emotional risk capital, which I did feel. I mean, what if I failed, lost a bunch of money, and then had to write to you about that?

8:47 As the opening range (I use the first 20 minutes) ended, I saw two bounces off the lower level and went long. I was prepared to risk down to 1695, the next lower support. Since the market had been doing a sideways dance for a couple days, the odds were good that it would test the upper end of the opening range and I could at least take a couple ticks.

8:56 It gophered, sticking its head out of the range. If it does something once, the market is more likely to try it again. Those who couldn’t buy and sell at that price the first time will want to have a shot. And trading programs will mimic that tendency. Sure enough, the market rallied up. With such a decisive move, now that I was already profiting, I decided to take on a second contract’s worth of risk.

The First Profit

9:18 When prices leave the opening range, it often acts like a magnet, pulling them back. That’s why it helps to look for momentum with volume. When the upward surge slowed down just after breaking that psychologically important 1700 mark, it was clear there would be profit-taking.

Jesse Livermore was a legendary trader of the 1920s. He is said to be the subject of a purported work of fiction, Reminiscences of a Stock Operator, an early trading classic and must-read. He traded solely by the price ticker, no charts. If a price stayed in one spot for too long and didn’t continue along the trend, he simply got out and got back in when things got moving again. That was a second reason why I got out, with a profit of over $200.

The First Mistake, an Unforced Error

9:40 I jumped the gun a bit. I bought after seeing a few upticks. But those upticks were not at an established support level. There was no good reason to think that was anything but a little profit-taking or setting off buy stops. There was no good reason to buy there. But I did and I was drawn down for a few minutes. I still had my profits from before, so I was okay, but I was needlessly paying good money to pretend that I could tell the market where to turn.

10:00 As it dropped, I saw that I had the dotted trendline, drawn from a few days back, which I could use as a support level. If prices obeyed that trendline and bounced off of it, more likely than not it meant the end of the correction and a return to the uptrend. Now, if I was really being a disciplined trend-follower–which is the only way to trade successfully–I would have shorted that whole downward correction. But I had phone calls and emails and other work going on. So I just waited to see if the market would respect that trendline and bounce. It did, and I bought again. But I forgot that the first bounce is usually followed by a couple more. So now I was dollar cost averaging, which is risky, and I was waiting. By waiting, I mean wishing and hoping, which is a foolish way to trade.

The Long and Winding Road

1:00 PM One p.m.? Three long hours? Yes. I was more curious than stubborn and since it was simulated money, I wanted to see what would happen and where I might suffer. You can do that with fake money. The moral hazard comes when people, like certain large banks we know, start doing the same thing with Other People’s Money. I sometimes joke that the rogue trader’s favorite drug is no longer cocaine, as I hear it was in the 80s. Now it’s opium. Or rather, O.P.M. Other people’s pensions, other people’s mortgaged homes. Ya down with OPM? Yeah, you know them! Actually, we do know them. We bailed them out.

But I digress. And I digressed from trading for those few hours. I did a lot of other work while keeping an eye on my chart. Once the top of the opening range started acting as support, I felt comfortable holding on for a couple of hours. The old saying, “what was resistance becomes support” applied here. I knew that with that support, the market would likely try to top 1700 again and probably attack that earlier high.

Sure enough, it did take a second try. Then it came down again and meandered in a sideways channel, drawn by the magnetic force of the opening range even as traders were drawn by the magnetic force of hunger. I could see them out of our office window heading to lunch in their colorful jackets.

The Part Where I Do Silly Things

Please keep the obvious in mind. Any time during those three hours would have been a good time to get out with a nice little profit. As the old saw goes, “You can’t lose money taking profits.” A friend of mine calls it the Steve Miller exit: “Go on, take the money and run.” Please remember that I waited needlessly and any time would have been a good one to take profits.

Why? Because I can always get back in. The only time I can’t get back in is when I’ve let my account get wiped out paying for me to indulge my ego. Egos are ridiculously expensive. In a real trade, I’d have taken the profits and then taken a front-row seat on the sidelines.

1:10 PM By now I had my eyes on a place to take profits and I was looking at the trendline, also drawn from several days back, around 1703. 1703 sounded like a good number for another reason: as I mentioned in my article on Fibonacci on Wednesday, markets like to stop at threes and sevens. The market had spent some time at 1697, the middle of the opening range, before rallying up and out of the range. 1703 seemed a good target. That’s not to say it would get there anytime soon. I had bought myself another wait.

2:00 PM The market lingered sideways again around 1702. We had turned on the MIM, but I didn’t check it. Instead, I looked and after a while noticed that price had made a series of progressively higher lows, which all fit along a single line. There was a new trend for the day. It extended to about 1699.25.

I knew that I could and probably should take profits at that 1702 level. And surely so did a lot of others who were long like I was. I knew it was reasonable to assume that any such profit-taking would trigger a series of stops going down, and the falloff would be sharp. But would it be the end of that day’s story?

Enter the MIM

That’s when I checked the MIM: after having identified support and resistance levels, trendlines, and Fibonacci levels (not shown). These are all part of my method, which I call by the acronym S.T.I.F.F. to help me remember. S is for Support & Resistance, T is for Trendlines, I is for Indicators, including volume and moving averages, the first F is for Fibonacci, and the last F is for fundamentals. I only use fundamentals to anticipate the movement of the herd, not to predict price reactions. That’s because I don’t believe the market reacts to news. I believe the consensus is already priced in, both in the prices shown on the chart and the buy and sell orders that have been decided but not yet placed. News is just an excuse for the market to finally do what it was planning to do all along.

Anyway, in that context and only in the context of a solid trading method–one that worked without the MIM–should anyone start using the MIM. As much as we have lowered the price to make it widely available to individuals on their laptops at home as well as major hedge funds and banks, we have also undercut short-term sales by repeatedly telling people the MIM is not a red-light-green-light “system” or an indicator. It is something more. The only requests we’ve had for refunds–which we gladly give–is from people who wanted a simply buy-here-sell-here way of making easy money.

But enough about that. The MIM was showing an imbalance slightly to the buy side of 59%, meaning six buy orders to ever four sell orders in our “secret” basket of stocks. As the market raced downwards, the MIM just kept climbing until it reached 94% to the buy side. I drew the new trendline a little off at first, and bought a third contract when the market reached that line and headed upward. Then I redrew the line more carefully, saw that the bounce should really have happened at 1699 and change.

Just as I finished drawing the line, the price dropped and bounced at 1699 and change. Though I was still profitable this whole time, I don’t like that “trading with the market’s money” attitude towards trading with earlier profits. Even if I just pulled it from the market five minutes ago, it’s now my money. It would have been cautious but perfectly honorable to take profits and do the Steve Miller move.

By then the MIM was racing past 70, 80, and then 90. I had seen it work often enough to know that it was working. The key to the MIM is to have enough volume, as Danny emphasized in yesterday’s Special Report. I held on to the three contracts I had bought, with my eye on 1703 as a target. The market moved too fast for me to trail my stops well, but I had a good one halfway up.

A Quick Profit, Followed By Lunch

2;37 PM The market began slowing down. I had set a limit order to sell everything just under 1703. Why not at 1703? First, it’s a round number and odd numbers tend to get filled more easily unless you’re a big institution trading tens of thousands of contracts. Second, my only reason for holding out until exactly 1703 would have been ego. Losing money because you’re greedy for money is stupid. I left the limit order in place, took profits, and went to get a sandwich. The other reason for not holding out until 1703? I was hungry.

End result? a little over $700 in profits. Other than a brief $50 drawdown on my first trade, I was never in negative territory. Other than the rally at the end, I only traded one or two contracts. Though I do like scalping sometimes and, in fact, my scalping method is taught at, I didn’t have to get in and out many times or play the buy sell buttons like it was a video game. It was calm, straightforward, and based on price. The MIM did what I think it should do: it confirmed something I already saw on the chart, namely, the bounce off 1699 leading into the close.

Let me end where I began. I’m not saying this is a great way or one of the best ways you could have traded Thursday’s price action. It is just one way, which I chose so I could talk to you about the central truth, price, and not about indicators or FOMC announcements or jobless claims. In other words, nothing Candy Schaap might have called “stupid.” I shared this just to show you that it is possible. I’m not saying it’s so easy anyone can do it and I’m not saying it’s so hard you can only do it if you buy my $5000 DVD home study course, including a one-on-one phone consultation with me, who will totally not be sitting on a cot in my parents’ basement in my pajamas when you call.

In the markets, the only truth is price. Let experience hammer away at you until you accept this and make it the basis of your method. Just don’t make it have to hammer away too long; be malleable. The reason I call my method STIFF is because it allows me to be flexible. It’s my little joke to myself to remind me that if you focus clearly on what’s true, a powerful tool like the MIM can help you to a great finish of your trading day. But if you focus on the noise, the MIM just becomes another part of the noise.

If you found this helpful (or didn’t) could you leave a comment below about how you traded or might have traded Thursday’s action? One of our core beliefs at MrTopStep is that WE >me, always. So let’s learn together. I look forward to your comments.

Fibonacci and S&P 1700: a tale of memory and risk

Over the years, people have asked me a range of questions about Fibonacci levels, such as:

  1. Aren’t they just support and resistance levels that people like, making 61.8% and 38.2% self-fulfilling yet arbitrary numbers?
  2. Isn’t the golden ratio of 61.8 found everywhere in nature and perhaps is a mystical key to unlocking the secrets of the universe?
  3. Isn’t Fibonacci a large bow-tie pasta that is delicious served with sun-dried tomatoes and a light pesto sauce?

The answers are

  1. Sort of, but not arbitrary
  2. Whoa, hippie! All around in nature yes, but let’s not get carried away
  3. No, you’re thinking of Farfalloni.

Though most trading software lets you draw Fibonacci retracements, the key to using them is to understand the psychology behind them, specifically: memory and the need to take just enough but not too much risk.


Since Fib levels often lie very close to major lines of support and resistance, let’s look at those. Resistance is a price above which the market has trouble going. It might poke its head up there, but it ducks quickly back down. It means that the herd (and I mean that in the nicest way possible) is reaching for a higher price, but is so far not ready to be there.

Every time it gets close, it gives in to the need for security and sells, locking in profit. The herd’s need for security in a risky situation is greater than its need to venture to new levels of profit.

ES-09-13-60-Min-7_30_2013-fibonacci1.jpgWhat do you do when you find yourself in a risky situation? Try to get home as quickly as possible. And if you can’t get all the way home, at least to get back to the last safe spot you remember.

A lot of other people were there. You’d been there before so even if it was still a dangerous place to rest, at least you knew what the danger was.

Support and resistance lines are nothing more than levels where the herd remembers having spent some time. “Hey, I remember 1675 in the E-mini! I spent a lot of time there, sometimes several bars in a row, before moving back up or further down. A lot of others were there, too. Good times.”

So why do we remember those levels and not others?

Whether you believe that something in us seeks the golden ratio and that we are programmed for it, just as the Fibonacci sequence guides the number of flowers on a petal, the shape of a nautilus shell, and many other aspects of nature; or you believe it’s just group-think, you can’t deny that the numbers are real. Markets do stop there more often than they stop at other random numbers.

The most common price levels typically end in 3 and 7. Day traders often buy a price ending in 7, hold it through the higher round number (ending in 0) and place a limit order to take profits at the next 3. 7 and 3 add to 10, giving us the well-known 10-Handle Rule.

There’s more such math, which mystical types enjoy playing with, but let’s leave at this: Magicians know that when asked to pick a number between 1 and 10, most people will choose seven, especially if they’ve been giving some simple subconscious suggestion. Of those who don’t pick 7, the majority of them will pick 3.

The difference between 3 and 7 is 4; the difference between 7 and the next 3 above it is 6. Multiply by 10 and you get 40 and 60. Or roughly 38.2 and 61.8. The market moves in Fibonacci steps.

Risk and safety

Popular psychology coach (he doesn’t like “motivational speaker”) Anthony Robbins identifies six human needs that govern our behavior. Two of these are our competing needs for certainty and uncertainty. He talked about them in his brilliant TED talk a few years ago. (While you’re at the site, if you’re having trouble sleeping, you can check out my TEDx talk on “A New Capitalism” on It’ll work better than Ambien.)

As I’ve said before, the thing that gets bought and sold in any market is really risk. We buy when we want to take on more of it and sell when we want to protect our profits or remaining account balance by getting out. We buy risk when we want more uncertainty and sell risk when we want more certainty.

On your next trade, instead of asking yourself whether you’re long or short the underlying commodity, ask yourself whether you’re long or short risk.

We see this struggle for a risk-certainty balance in the common phenomenon of resistance becoming support. What was a line enforced by people saying, “Don’t go any higher! It’s too dangerous,” becomes a line that says, “Use this as your launching pad and keep going up. If it gets too scary, you can always come back down here. Or you might try that nice rest stop about 61.8% of the way back here. Lots of people rest there.”

The opening range is a magnet

You may notice that after the market has reached well outside the opening range, it starts to lose momentum. People aren’t so eager for more risk and want to get out with a profit. At some point after each successive rally or selloff, the market tries to return to the opening range. Sometimes it goes back so fast and furious it even overshoots and heads in the other direction.

Other times, it starts to head back, but doesn’t make it all the way back to the opening range. When it starts to do that, draw a Fibonacci retracement on the initial move. More likely than not, the market will pause at 61.8% and maybe also 38, 50, and 76.4%. That’s not to say it will stay there. But rarely does a market simply race past 61.8% without pausing to pay its respects.

Why? Let’s put it all together. It pauses at 61.8 before deciding to reverse course again or continue back to 100% because the herd remembers 61.8% as a place where lots of traders gathered, offering lots of opportunity to sell and buy.

Whether it’s because we are drawn by some force the way bees are drawn to the particular honeycomb that they call home, or simply because everyone else remembers it as a good place to pause, it is real.

And in a place as risky as the market, any place you can find some temporary shelter is a place you remember and are tempted to return to.

ES-09-13-60-Min-7_30_2013-fibonacci2.pngNow look at this chart and think about the psychology it reveals. 1700 is a big milestone. The market needed a place to pause and catch its breath before attacking the summit. And what levels did it choose to pause at? And what level is a 61.8% level both in a one-week range and in a one-day range? Seems like as good a place as any to launch a rally from.

Before you go long just remember one more thing about Fibonacci levels: they also make good spots at which to place your stops. You have planned your stops, right?

Memorial Day thoughts on trading and happiness


tomb_sentinels_brave_hurricane_sandy_image_1_of_3.jpgA big reason trading is hard is it calls us to face some of our worst fears: fears of not just losing but being “a loser,” fears of letting others down, of not being good enough in general. Add to these the practical fear that comes when you’re trading with money you can’t afford to lose. Oh, the spreadsheet may say you can, but if your identity is partly tied up in your account balance, you really can’t afford it. We all make this mistake sometimes. We confuse our net worth and our self worth.

These fears sometimes cause stress reactions as strong as facing a divorce or a serious illness. Your stress hormones, your blood pressure, they don’t care that you’re watching blips on a price chart. To them, you might as well be facing a wild tiger. This happens even to multi-millionaires. Few things are sadder to see than an unhappy rich person.
If anything, it gets worse as your number goes up. If a trading loss means you’re temporarily no longer a “millionaire,” whatever that means to you, that can feel devastating. Same with billionaire–maybe worse since Forbes will make it public. And mature and sophisticated as you are, there’s a part of you that feels exactly like a little kid who just lost his favorite toy or got bullied in school.
The best traders often learn their emotional equilibrium from role models outside the world of finance. Athletes, artists. scientists, leaders of various kinds who have faced great fear and used it creatively to shape their character can be found everywhere if you look. And you must look. The true masters of money show mastery in life as well. They have unshakeable confidence and optimism. They follow what Rudyard Kipling wrote in his famous poem, “If you can meet with Triumph and Disaster/ And treat those two impostors just the same…”
My best training came when I spent three years after college in Kimitsu, Japan, studying aikido. At first, I struggled and felt weak and incompetent. I already had a black belt from my American school, but in Kimitsu I began to lose hope as week after week I couldn’t do even the basic techniques. When Watanabe, my usual partner, grabbed my wrist it was like being held by a stone statue. As I strained to move him even a couple of inches, I got angrier and angrier. Not at Watanabe, who was patient and encouraging, not at Sensei, even though he watched me with a wry little smile and offered hardly any advice. I was angry at myself and the world.
One evening, Sensei pointed to my head and said in his limited English, “You make enemy, here.” On “here,” he tapped my forehead.
Then he said, “No enemy!” pointing at Watanabe. “Just Watanabe. No enemy. No angry.” Then he added in Japanese, your spirit and his spirit are one spirit. So just blend with him.
I was so tired I nodded and, without any hesitation or plan, tipped Watanabe over and flipped him with one hand onto the mat. “Outstanding!” shouted Sensei.
When I was angry and determined to win, I was weak and powerless. When I let go of my anger and just blended with the situation as it was, I could throw much stronger men halfway across the dojo. And I could do it with ease and grace.
My power came from just blending with the larger forces at work.
Same with the markets. We get angry at them for not doing what they should do, for taking our money, for having some kind of vendetta against us. But the truth is, the market doesn’t care about me, it doesn’t know me, it neither loves nor hates me. It just is. My only enemy is my own attitude. Fortunately, my attitude, unlike the market, is completely under my control.
Try this: look for people outside the world of trading who face adversity with hope instead of anger. Who are relentless and brave in their optimism, even the when the whole world seems to want to break their spirit. My role model for this evening is Anne Frank, who wrote:

It’s difficult in times like these: ideals, dreams and cherished hopes rise within us, only to be crushed by grim reality. It’s a wonder I haven’t abandoned all my ideals, they seem so absurd and impossible to carry out.

I simply can’t build up my hopes on a foundation consisting of confusion, misery, and death. I see the world gradually being turned into a wilderness, I hear the ever-approaching thunder, which will destroy us too, I can feel the sufferings of millions.

I still express my ideals because I still believe, in spite of everything, that people are truly good at heart. When I look up into the heavens, I think that it will all come out right, that this cruelty too will end, and that peace and tranquility will return again.

Everyone has inside of him a piece of good news. The good news is that you don’t know how much you can love. What you can accomplish. And what your potential is.

How wonderful it is that nobody need wait a single moment before starting to improve the world.

I must uphold my ideals, for perhaps the time will come when I shall be able to carry them out.

This Memorial Day, we remember the fallen brave who found ideals to live and die for that were greater than their own safety and comfort. Greater by far than mere money. If we can hold to hope even when everything seems to be telling us to despair, then we master one of the great secrets of life. And suddenly, the blips on a stock or futures chart or ticker no longer seem worthy of our fear.

The markets are not an enemy. We just make the markets our enemy in our minds. We don’t have to “beat the market.” If we can give up that desire and just blend with them, we can master them with ease and grace.