First of Two Part Series: Signature Trading Opportunities

Thursday, December 18, 2014 | 12:00 – 1:00 pm ET

Join Jim Dalton as he evaluates current markets using his ‘top down’ trading process. By employing market-generated information and the Market Profile, Jim will illustrate how he formulates his perspective for the longer term, short-term, and day timeframe and how he uses these observations for his trade decision-making.

Please download the following reports to supplement Jim’s presentation:

S&P Morning Report for December 18, 2014
Download it here

S&P Recap and Preparation Report for December 18, 2014
Download it here

How to Use the Market Profile to Size Up Our Competition

Thursday, December 11, 2014 | 12:00 – 1:00 pm ET

How can we use the Market Profile to read the market’s two-way auction process with all its attendant emotional herd behavior? Jim Dalton will show how to use several Market Profile observations to compete and capitalize in the highly competitive game of trading.

Please download the following reports to supplement Jim’s presentation:

S&P Morning Report for December 11, 2014
Download it here

S&P Recap and Preparation Report for December 11, 2014
Download it here

Presentation Slides
Download them here

Thursday, December 11, 2014 | 12:00 – 1:15 pm ET

Please download the following reports to supplement Jim’s presentation:

S&P Morning Report for December 11, 2014
Download it here

S&P Recap and Preparation Report for December 11, 2014
Download it here

Presentation Slides
Download them here

Starting Immediately After European Close: How to Combat Overtrading

Monday, December 1, 2014 | 11:30 am – 1:00 pm ET

For European and overseas traders we have slotted this session at a more convenient time. The Market Profile is a powerful tool to guide your trading decisions. Jim Dalton will discuss various Market Profile observations that he uses that can have a profound impact in your trade decision-making.

Jim will also discuss the preservation of mental capital and although subtle, how significant this consideration is in your daily trading.

Please download the following reports to supplement Jim’s presentation:

S&P Recap and Preparation Report for December 1, 2014
Download it here

S&P Morning Report for December 1, 2014
Download it here

Presentation Slides
Download it here

19 A Week of Trading with Jim Part 3

Over the last two weeks we have delved into some of the less obvious elements of trading and execution. As I mentioned previously, Jim says when it comes to trading the difference between success and failure is very small. I have seen this through my own trading as I suspect you have as well. This week we’ll discuss some observations as well as nuances that are “around the edges” yet have a potentially big impact on our bottom line and ultimately, career longevity. In fact, Jim says the real advantages are all around the edges, beyond the numbers, and accumulated over time.

Evolution of a Trader

Preparation—Moving Beyond the Numbers

Jim reflected that over the years he has observed a similar tendency of traders in the beginning of their learning process. What normally occurs, and was my own personal experience, is that we write down all the references and do the more linear analysis as far as prior pit session close, range, POC, value relative to prior day, longer timeframe references, noting poor lows/highs, structure, and so on. We feel like we are diligent and doing the necessary work to be prepared to trade. This is a normal progression in the learning process; however how we ideally want to prepare is markedly different.

Jim’s preparation goes “beyond the numbers”. It is in the preparation, out of the heat of battle, where he opens his mind to consider all of the resonant information that is affecting the auction. This is challenging—abstract—and much different than how I learned as a trader over the years to view markets. This process, this analysis, is ambiguous and requires prioritization of data that requires depth in our market understanding. We seek and record various data that often provide conflicting information which can be unsettling. Yet it is in this mode of preparation we form a contextual understanding—a broad perspective that engages our minds more fully. From here we begin to internalize information and employ more abstract reasoning. We form a holographic view where multiple observations are interconnected. The following Crude Oil example illustrates the interplay between observing market-generated information and big picture perspective and the contextual understanding that results.

Crude Oil—This example is taken from Jim’s comments to our paid subscribers which was written after Wednesday, January 26, 2011 close for the pre-market update for the pit session on January 27th:

19 Chart

The above chart was captured after Thursday, January 27, 2011 to show the outcome, however as mentioned, these comments were sent after Wednesday, January 26, 2011:

“WHAT DOESN’T HAPPEN—Following an outside day most traders and technicians expect meaningful follow-through. If there is that follow-through on Thursday everything is normal and the $88 level will grab the trader’s immediate attention. Overnight activity is generally higher following an outside day.” The first clue was that the overnight activity did not follow through. To continue what I wrote, “What doesn’t happen is very often more important than what actually occurs. Professional traders intuitively sense that something is wrong and are likely to fade the market. On Thursday pay attention to the expected reaction following an outside day.”After the fact the market confirmed what I wrote before the market opened; what didn’t occur was the most important market-generated information.  In human communications we talk above “inference logic”; what the person didn’t say may infer the most important information. This way of looking at the markets illustrates a similar dynamic.

Ruling Reason

Jim has often used the term “ruling reason”; for example, you may have ten pieces of information that are suggesting shorting is in order; however, you have recorded one contrary piece of information that, although is only one observation, overrules all the others. I (and I would guess other traders who receive Jim’s updates) see Jim pick up on something that I had not considered because I wasn’t looking at the market with enough contextual consideration. I believe this reveals where I have not fully internalized Jim’s approach— how a professional trader sees the markets. It is not natural for us to think about data this way yet I’ve come to more fully appreciate “ruling reason” because I see how it can help gain an edge.

To acquire this logic and reasoning, Jim starts with a top down approach beginning with the monthly bar, proceeding to the weekly, the daily, and finally the Profiles. Most traders, particularly short-term traders bypass these important preparation steps. A continuation of the earlier Crude Oil example illustrates Jim’s ruling reason logic for his pre-market update for Friday, January 28, 2011.

Crude Oil

 19 Chart 2

“Friday’s very visual, important reference is last month’s low at 85.29.  Trading below last month’s low signals an even more dramatic shift in sentiment. For daily preparation, treat 85.29 as you would the bottom of any balanced range; the three following scenarios are the most likely.

1. Fail to take out last month’s low and begin to auction higher.

2. Look below the low, fail to find price acceptance, and reenter the two-month range; these are, very often, big opportunities or what we refer to as asymmetric opportunities—risk is limited and return is proportionally much greater.

3. Trade below the two-month range and discover new sellers. These are also potentially large opportunities.”

This was the ruling reason; remember Crude Oil was sharply falling; there were multiple reasons to short. You will read many reasons in the press after the session ended as to why the rebound on Friday; however, the monthly December low provided the contextual condition that enabled you to come into the pit session with an actionable plan and execute a solid trade. Only a top down approach would have enabled you to identify this reference and imagine the potential move that could result; the failure to take out the December low was the observation to keep in your sights. It was the ‘ruling reason’.

Confidence

While watching Jim trade I noticed how he is constantly gauging confidence, or lack thereof, throughout the day. This process starts as he views the overnight (is inventory short or long) and will we likely open in or out of balance. He then continues this consideration as he takes in the market-generated information during the pit session. This helps him adjust his perspective and fine tune the trading plan he has prepared pre-open. It is a wonderful observational filter to keep our analysis up to date with current market conditions while also helping us to remain objective.

As an example, say we come into the pit session with a gap open but there is little continuation. Jim is considering confidence as one measure to gauge the odds of acceptance and what timeframe is likely dominating. In our article last week, Part 2, our first example illustrated how Jim used market conditions and the Profile to determine who our competitors were, along with inventory conditions.

19 Chart 3

Here we contemplate the confidence the market was exhibiting. Jim was watching tempo and volume along with the Profile; he has internalized these observations over time to give him a feel for the market’s confidence. This perspective does not involve technical observations yet it has tangible benefit in helping us understand the odds of acceptance or failure outside of containment.

Total Absorption

People ask Jim, “How do you measure tempo? What do you mean by confidence? How can I gauge these?” I also add, how does Jim discern between a liquidation break and a possible trend day starting? How can he discern the difference so effectively with such confidence? How can Jim understand so clearly anomalies and other nuances that affect the odds in his trading decisions? How does he identify so consistently excellent trade location that presents asymmetric opportunities? The answer is quality time in front of his screens; observing, trading, and reviewing his thought process and the trade decisions he made.

Jim has written, “You really learn about markets by being there and learning to observe everything that goes on; what has happened before has a lot to say about the outcome going forward; getting an edge and picking up a nuance here and a nuance there requires total absorption.”  I can often identify excellent trade location and an asymmetric opportunity. However to execute this opportunity is an area for improvement. Jim says this disconnect reveals that I have not internalized this concept fully. I would add that it also reveals when I am not totally absorbed—in my prior preparation as well as how I am watching the market as this opportunity presents itself.

A TOTAL ABSORPTION EXAMPLE—I trade mostly Treasury bonds and S&Ps; on Friday morning Jim called and said that following the fourth quarter GDP report the bond market dropped rapidly and was now contained within a very tight range. He said the traders were waiting for some directional indication and that once they got that there was a chance that they would jump on it and begin to push prices directionally for the remainder of the day. He was feeling the pent-up need the traders had to simply trade. I am laughing as I write this because anytime someone uses the word simply you immediately know that what follows is anything but. He knew how volatile the market had been over the past few days as trader’s violently pushed prices up then down; for 35 trading days that is all there has been. The graphic shows the time of the call and what occurred—beyond any numbers—it was seen only as a result of total absorption over the week as well as Friday morning.

19 Chart 4

I watch Jim trade with focus. I don’t want to suggest that he trades like this all day; I don’t know any human mind that could be that intent for 8 hours straight. He knows himself and has an awareness of his limits. But when he is trading he is not on the phone, on Yahoo IM, emailing people, looking at pages on the web. He is watching how highs and lows are being made, watching the tempo, gauging the level of confidence in the market, and adjusting his perspective as the Profile and longer term charts print.

With total focus we can see prices slowing, we recognize where we are in the balance or trend, or if prices are up against a long term or intermediate reference. We observe over time how tempo, volume, and confidence factor into our market perspective and contextual understanding. We get a feel for the auction. It is subjective and may seem elusive, particularly when this approach is compared to the more technical methods we have learned about trading.

I find oftentimes it is freeing to look at the market more abstractly though it sometimes reveals gaps and a lack of depth in my experience. Weaving together linear and abstract information to gain a contextual understanding is a process that takes time to become Proficient, let alone Advanced or Expert. Yet being Proficient is a worthwhile goal. Once we are Proficient we have the foundation to build more depth inside. Our understanding does not result from an indicator or system results, it is born from our thought process, our ‘connecting the dots’ in our analysis, and the market perspective we develop as a result.

Summary

I talked with a trader in Dallas who, after watching the video, commented that the material was so novel and unique. The comment made was “Jim’s approach provides the missing link”. For so many years, this trader had tried mechanical systems that had little depth in their methodology. “When they break down and don’t work out, I have nothing to fall back on. I have little way of making sense of what I am observing. Jim’s approach, although involved, makes so much sense to me. It is what my approach has been missing.”

There are many facets to trading that transcend linear thinking and conventional wisdom. Effective trading is often counter-intuitive to many of the tenets we live by and the principles we have learned over our lifetime. Make no mistake about it, trading is tremendously competitive. Like an Olympic race that is won or lost by thousandths of a second, so it often is with trading profitably. The difference between winning and losing is miniscule; nuances and a recognition of the importance of a depth of understanding warrant attention.

I talk with many traders and hear successes and excitement, as well as traders sharing their doubt as to whether “it’s me and I’m just not getting it”. Sometimes I think we trade under the assumption that others are doing well and we are behind the curve. Statistics show that nothing could be further from the truth. Jim’s approach requires thought, effort, and hours of observation. But the rewards, if we truly want to trade for a living or trade with profitability, are well worth the journey. As the saying goes, “If it was easy, everyone would do it.”

18 A Week of Trading with Jim Part 2

A Week of Trading with Jim Part 2

Our Competitors

Last week we talked about Jim’s landscape approach and the broad perspective this affords him. Here I want to share how I watched Jim employ the human element in his analysis, part of how he develops a ‘feel’ for the market. This perspective is fascinating to me. Not only does it reveal much different information than a strictly technical approach but equally important, it allows us to engage our minds more fully. It enables us to internalize the auction process and gain a more intuitive understanding. There are a lot of moving parts in formulating our analysis and market perspective; incorporating this viewpoint helps us bring them all together.

Jim says trading is a game. There are little games that are played throughout the session and it is advantageous to figure out what the current game is. For example, sometimes the game is to run the stops at the prior pit session high or low or the overnight high or low; the stops are run and the market rotates back down (or up). “Game over, side out,” Jim says. Then we look to see what the next game is. We were ready to publish this article when Jim called to say, “Game playing is more prevalent when the day and short-term traders are dominating the market; the intermediate and longer-term timeframes may even see these games as noise.”

This is more reinforcement of the need to understand timeframes—our competitors in the game. Jim explained that each timeframe plays differently; the short timeframe is more openly competing with us; their play is more direct and intense, somewhat like a tennis volley. The longer timeframe competes much differently but their effect is real; when they are in the market the whole game changes.

Even though I’ve seen Jim’s  writings and heard him talk about this many times, I was still caught off guard when he’d say, “Look at this, they’re going for the gap”, or “they’re trying to take out the high” or “Look, it went to exactly halfback” or  “the momentum traders are in here”. He found it almost entertaining, as if he was watching some sporting event. It was somewhat transparent to me. I only saw it once he pointed it out. Jim has internalized the game perspective so deeply that as he is viewing price it almost jumps out at him. It takes years to incorporate all the facets of trading and it is not my wish to discourage anyone (including myself).  Yet I can’t help but share it because I see how helpful it is to view the auction as a game—not the numbers, the technical data, the Profile necessarily. Just figuring out the game that is being played and cranking it in to add depth to our understanding.

An interesting insight I had after watching Jim trade over the week: I realize that oftentimes we are so busy focusing on ourselves—how we are feeling, if we should put the trade on, or perhaps if we should exit if we are in a trade. Obviously these are necessary considerations but I see how Jim is equally cognizant of his competitors, constantly aware of who—what timeframe—is in the pit session, what their inventory position is likely to be, and how are they feeling as a result. This concept is discussed in Mind over Markets and Markets in Profile; we’re not breaking any new ground here. But I hope to bring it to life so we can more deeply understand how to employ it in our own trading. The following example is from the first trading day of the year, Monday, January 3, 2011:

January 3, 2011: Composite Profiles as several 30 minute periods print

The pit session gapped five plus handles higher to take out the 2010 high. Exuberance started the session and continued. But we did not see elongation; there were no additional longer timeframes in this market taking it higher. There was considerable news coming out throughout the week with the biggest employment number of the month being released on Friday. The longer timeframes were not in this market with size.

The predominant players were the shorter timeframe. If you understood this you could envision what may be happening; the day timeframe inventory was getting excessively long as more traders bought; but the market wasn’t going higher. They could not take out the E period high. It was interesting to me that Jim commented when F period started to print and didn’t take out the E high, he simply said, “They didn’t take the high.” It was as if he could see there, from thousands of hours of observation, that this was significant. Jim doesn’t talk too much as he trades but the comment at the time struck me funny. It’s hard to explain it. As I mentioned last week, Jim often points out that what didn’t happen is often more important than what did occur.

As the day wore on Jim was considering his competitors; they are short-term and likely need to go home flat (remember to think time of day to supplement your analysis). Their inventory is long as evidenced by the Profile shape. Many have bought and they are not getting much for it. Every tick down and every tick that does not go up makes them question their position. The closing bell is imminent and they are hoping against hope for the move up. Jim said to me, “Can you feel them hanging on by their fingernails? Picture someone on the edge of a cliff. What is it going to take to knock them off?”

Each tick down brings in a new sell order, which brings the market lower and brings in more sell orders. The long liquidation break follows. It stutter-stepped an hour or so—remember the diffusion model and the laggards—there was still time before the bell, they hadn’t thrown in the towel just yet. I was hesitant to short this market because it was a considerable gap and everyone seemed to be buying. We have been taught to be very careful of fading a gap, correct? We’ve learned that the market gapped up—it is out of balance to the upside, higher value is clearly evident. Yet as day traders or short-term traders the contextual conditions in the day timeframe presented us with a solid trade.

This example highlights how important it is to keep our analysis in the present tense; I saw Jim do this repeatedly over the days. Did we open out of a balance? Yes. Did Jim have his trading plan prepared for a breakout and a large opportunity day? Yes. But he was fine tuning his pre-market analysis with the most current information and the most up to date information was telling him we are not seeing elongation. Jim had also recorded the anomaly circled. Recognizing your competitor, what their inventory position likely is, how they are feeling as price drips lower, along with the time of day, will give you an edge that, in my opinion, surpasses an indicator or mechanical trading method.

One observation before we move on: Jim was visualizing this scenario a couple of hours before the break—he was not predicting it but it was a possibility that he was aware of in his developing market outlook. Using his imagination he was keyed in to market-generated information that might give him further clues, what he might do, and where he may put a trade on if he felt his analysis and the odds warranted it. We will talk about visualizing—being forward looking—a little later in the article but it is worth noting here. I saw how helpful this was to Jim putting on a solid trade. Visualization and imagination is not a widely discussed topic but I don’t think its value to a trader can be overstated.

Odds-based trading

When I first started learning this concept in May 2009 Jim may as well have been speaking Chinese. Even if I could grasp its ambiguous nature I had not the slightest idea how I would implement it in my trading. Over time however I see how actionable and important this consideration is in trade decision-making. Jim says that considering the odds is a necessary component to career longevity. In Linda Raschke’s webinar on January 12, 2011, Jim talked about the liquidating break from long overnight inventory that took place in the E-mini S&P while we were trading together during the first week of the year on January 6, 2011:

Jim’s preparation and thought process:

1. Prior pit session high

2. Overnight inventory is long

3. Jim shorts the failure to find acceptance above the prior pit session high. Prices cannot even come close to the overnight high; the tempo slowed and there was low conviction going up.

This is an asymmetric opportunity; trade location is excellent—we will know we are wrong very quickly to exit with minimal risk—if it moves out of balance against us we exit with a small loss. Yet the potential profit is much greater. As day traders, Jim says this is a trade we almost have to do, namely because of the asymmetric opportunity.

4. The liquidation break

5. As Jim is in his short he notes the anomaly. Jim explained that this anomaly suggests hesitation—that the decline lacks conviction and the odds for continuation are decreased. The hesitation is picked up in the structure—we had a four wide anomaly with the long single prints down. I realize this explanation may be obscure to some but the more you recognize anomalies and think of how they affect the odds in context with your observations of the auction, the more you will internalize your recognition of them and understand how to use them in your trade decision making.

6. Jim exits as he recognizes the “take your breath away” push down for what it is—a liquidation break of overnight inventory that reflects panic selling. In previous discussions Jim has stated that this is the trade that misleads the most number of traders. Jim says the question for us to address is: is there simply liquidation or a combination of liquidation and new money selling? The answer is contextual; if you have previously predetermined that inventory is long you are already aware of the possibility of it simply being a liquidation break. Another analogy I’ve heard Jim use is, “trading is a lot like playing blackjack with a single deck; what has been played before has a lot to say about the odds of winning the current hand that has been dealt to you.”

7. We see that prices traded inside the established range the remainder of the session.

At the time Jim covered his short he said to me, “The market may go lower; sometimes it happens and you leave something on the table. But the odds are that this move will not see follow through” (given the contextual conditions of this particular market scenario). “Over a sample size of 100…500 trades, executing this type of trade consistently should increase your bottom line.”

I wanted to stay in the trade but I was watching price; I was not thinking about odds or much else. Big price moves do that to traders. It is tempting to want to go for the home run, and it can be easy to justify in our minds when we see prices break so hard. I have often watched Jim exit while I stay in a similar trade only to give up points and profits; the market often moves very quickly off these lows (or highs) and profit is greatly reduced as you try to exit at a much poorer price. It is worth noting that this style of trading drains emotional capital as well. We only have so much emotional capital in a trading day; this style of execution is a waste of energy. I have grown in my understanding of odds based trading but it is still not fully internalized in me. If it were, it would not be pushed aside so readily as I decide to follow price.

Jim had visualized the potential of the liquidation break as he was developing his perspective. Jim says that as we gain accumulated experience we begin to expand our ability to visualize. This is an edge that doesn’t come from a technical approach nonetheless it is tangible. The research of behavioral finance has found that most traders form their view of what they believe will happen going forward based on what they have seen happen in the most recent past. To separate ourselves from our competition and be one of the estimated 5-10% who have successful long term trading careers we would do well to diverge from the crowd in this area. I see how Jim is continually imagining what may happen and what the Profile may look like when the next auction starts to print. In doing so, when something unexpected happens, he is not caught flat footed, scrambling. He has already envisioned—imagined—the possibility and formulated an idea of what he may decide to do. I see how looking out at the horizon also helps keep him calm and contain his emotions.

Anomalies

Anomalies are market-generated information that help us determine the odds. The chart showing the January 6th liquidation break earlier illustrates how Jim sometimes uses anomalies to determine his willingness to stay in a trade, take a trade, or remain flat. Notice the anomaly of four wide circled in green. As the price was breaking, Jim was cranking this anomaly into his analysis, the odds of continuation, and his subsequent decision to exit. This four wide anomaly with the single prints break increased the odds of prices finding their way back up to this level and the body of the Profile. As we often hear Jim say, “Nuances are important.” The anomaly, in this case, is an alert that the market is struggling to go lower. If there was a good combination of new money shorts being placed along with liquidation the odds are that the decline would have been smoother.

Jim mentioned other anomalies that provide input into the handicapping:  for example, declining volume as an auction continues, not enough elongation—the ‘b’ and ‘p’ formation, and too much elongation—everything happened too fast and the market is too stretched out.

Please go back and look at the first chart from January 3, 2011 of the E-mini S&P. Do you see the anomaly and how this affected the odds of upside continuation? It doesn’t always work out so neatly but they are worth recording as you watch the auction.

Being Flexible

When we are present to what is, we are right up front with the expansion of time, but when we make a mistake and get frozen in what was, a layer of detachment builds. Time goes on and we stop.

                                                            The Art of Learning, Josh Waitzkin

Traders who have worked with Jim have heard him say, “There is what we want to happen, what we need to happen, and what the market is telling us.” As the Profile develops and the session unfolds we need to constantly readjust our analysis—our perspective. This can be particularly difficult when we are in a trade; we get stubborn or choose to focus on evidence that supports our trade position or market outlook while we may subconsciously disregard information that may be telling us something different. One thing that struck me as I watched Jim trade was how fluid and adaptive he was. See the E-mini S&P chart below from January 5, 2011:

1. Price is trading up with little conviction.

2. Anomaly below is noted as we watch. We are thinking prices may rotate lower. I want to short the high—I don’t want to miss the party. Jim is patient like a predator waiting for the right moment to pounce. He is focused like one too.

3. Next auction prints—a new anomaly develops higher; Jim’s perspective changes. My mind has become fixated on what was. I want the market to go down and think it will—based on my earlier observations. My mental flexibility is compromised. I have now (subconsciously) shifted to gut feel, intuition; I have ceased taking in the market-generated information objectively.

As you can see the market closed near the highs. Our initial sentiment that the market may rotate down needed to be adjusted as the day went on. I watched Jim go with the flow and change his perspective. In hindsight it doesn’t sound so difficult; in the moment I was unable to do this. I am not proud to say that I could not shake my short bias for most of the session. “Me, stubborn?  I have an open mind.”…Yeh right. The consequences of this day were marginal but I think we can all agree that on a different type of day this mental lapse could cause some serious pain.

This may sound minor but think about your trades—trades you took, trades you passed on, or when your positions did not work out as planned. You may find that sometimes your flexibility was pushed aside and “gut feel” took precedence. Jim says that sometimes gut feel works but more often it tends to mislead us. There are times when our gut is right; however it can cause us to get overanxious and take the trade early rather than exercise patience and await the auction’s completion.

As Jim was reviewing my article he called to tell me how well he felt I expressed the idea of “want to” or “need to” happen. Jim said that the “need to happen” mental error captures an extremely high percentage of his trading losses. He has a loss—whether a prior loss or in a current position—and he needs the market to bail him out; Jim said that objectivity is gone once this thought goes through his mind.

Summary

The first and third examples illustrate the thoughts I wanted to share but it is fitting that they are also two similar Profiles with two different outcomes. Our first example from January 3, 2011 broke lower after no elongation while the last chart example with a similar market situation from January 5, 2011 did not break lower. There were differences we explained, namely the anomaly, but still, they were subtle. Welcome to the reality of trading. We realize it would be comforting to provide neat and tidy examples that made each scenario seem straightforward and easy to understand. But in some way this would be a disservice and only serve to discourage as you found yourself in yet another unique market situation wondering if it is you and you ‘just can’t get it’. Nothing could be further from the truth.

Like so many others, as a retail trader I have read and researched much over the years looking for a system, method or approach that I could execute consistently to a profitable end. But I, like so many other fellow traders, realize that this is a ruse. The observations and insights I have shared I believe refute the whole idea. The good news is that if we can grasp the true nature of trading and do the work we have the potential to separate ourselves and have a shot at a profitable trading career.

How many of us have tried to use systems, indicators and even Jim’s concepts for that matter without bringing in all the factors, and were cast into poor, or less than ideal trading decisions. It can be frustrating to be faced with constantly different market scenarios but the reality is no two situations are alike. The value of Jim’s approach is that it enables us to understand our market observations with a contextual backdrop; this gives us the potential to develop a depth that builds on itself over time. Even using Jim’s approach we get caught focusing on one data point or one concept that we find after the fact we weighted too heavily. There is no silver bullet, no holy grail on which to build a trading career. It is our hope that we can convey the real path to trading success and provide the support that enables traders to excel in the intensely competitive world of trading.

Next week—I will continue with Jim’s ideas and share what I learned about stops, nuances, and other observations that I hope will benefit you in your evolution as a trader.

I will continue to share what I learned about stops, nuances, and some other observations that I hope will add value to your trading education.

Next week—I will continue to share Jim’s thoughts about stops, nuances, and other observations that can benefit you in your evolution as a “Field of Vision” trader.

17 – A Week of Trading with Jim Part 1

If you could ask for one thing to help you in your trading what would it be? So many traders respond mentoring; to have the support and insights that come from working with someone, one-on-one, or perhaps in a small group.

Last week my partner Julia Stuart came out to Arizona and traded with me for the week. It is amazing how many insights and nuances she observed; many of these I was not even aware of as they had become internalized years back. Julia commented that the nuances she observed that made such a difference between being successful versus being unsuccessful are hardly acknowledged in most trading information she has read. I asked Julia to share what she learned, the a-ha moments, the insights we had. I believe this perspective will help fellow traders pick up some personal insights to how I trade and what it takes to master the complexities required of a professional trader.

Emotion

We need emotion to make decisions, to execute trades. However Jim says there is a fine line between emotional and rational decision-making. I see how calm Jim is as he trades. A few times I would say something like “The market is really trying to push lower and it’s moving.” Jim would look at me and say, “You’re too emotional. I can hear it in the sound of your voice.” Sometimes I would use words that were emotional in themselves, like “it’s breaking out” or “it’s cratering” and Jim would say, “Be careful of the words you use. They tend to fuel the emotional side.” At the time I got defensive. I didn’t think I was being emotional; I was simply sharing what I was seeing. But I realized after the week was over and I compared Jim’s language and his emotion to my own that I still have too much emotion as I trade. I thought I had come a long way with controlling my emotions and that I was focusing much more on market-generated information. Sometimes we get a reality check and we are humbled. I would not have been aware of this if Jim did not point it out. Self awareness is tricky at times.

Once we get emotional it’s difficult to see the big picture; our focus narrows as emotion takes a bigger space in our thoughts. And it’s difficult to go back. We hear Jim say that some of the best advice he ever got is to “take a walk”. If you feel you’re losing perspective or wanting to take a trade you know you should not, take a deep breath, get up and take a walk. Jim laughed when he relayed conversations he’s had with trader friends. “I’m not taking this trade, I know I should not short here, I’m not trading it….” Click. You’re in the trade! Can anyone else relate to this mental phenomenon?

We all know it takes mental discipline to control our emotions but let’s face it—regaining objectivity through mental discipline alone sometimes doesn’t cut it. Use tools to combat emotion—breathe deep, push back from your desk, take a walk, drink water, make a cup of tea. I watched Jim play a hand of solitaire on his machine on occasion. We each have different ways that personally work for us.

Uncertainty and Ambiguity

“Creativity requires the courage to let go of certainties.”

Erich Seligmann Fromm

When I first started taking Jim’s course these topics were front and center. I had never really thought much about these concepts and how they relate to trading. Jim suggests several books that are not about trading, one being The Black Swan, by Nassim Nicholas Taleb. This book opened my mind up considerably and helped me understand how as humans we don’t like ambiguity or uncertainty.

Taleb writes that, “We loathe ambiguity, loathe it with a passion.” It is difficult to accept; many times as traders we want hard and fast rules—buy here and sell there. I have had the realization over time that this is not what career longevity and successful trading is about. I talk with many traders and, being a retail trader myself, see that this concept is not very popular in the trading world; nonetheless this fact does not change trading reality.

Taleb also writes, “We tend to learn the precise, not the general.” Jim has shown me that it is a trap to try to circumvent ambiguity and the uncertainty we face day in and day out. Accepting uncertainty and the reality that the markets are unpredictable will enable us to deepen our market understanding. Ambiguities, gray areas and unknowns are an integral part of trading; understanding this will enhance our perspective and our ability to execute. I see how it is difficult to convey this through the written word. I always hear Jim express this in seminars and when talking with traders; for those who attended Linda Raschke’s hosting of Jim’s webinar on overnight inventory, I hope you could feel this through the examples he went through.

I also realize how important trade location factors in here. Jim has said to me, “Why didn’t you take the short?” I have responded with, “I thought it might take the overnight high first. I was waiting to see if it would test higher first.” Jim says, “Put the trade on and monitor for continuation. If you are at the top of a range, tempo has slowed and the scenario is one that you had planned, put the trade on. Your risk is small, you will know you are wrong very quickly and yet your potential gain is much larger. If you want to be a day trader you have to be able to execute these types of trades.”

Although I understand these two concepts much better today and how they tie in to trading, I realized after trading with Jim that they are still not internalized in me. I see (with some pain) that I often hesitate on trades where I see Jim be very decisive. Jim has internalized uncertainty and ambiguity to the point that he does not even think about them as he makes a trade.

I was lamenting to Jim as we were trading that too many times I do my homework, write out my scenarios, and I am prepared. As the session unfolds one of my scenarios is playing out and I hesitate…as the market moves away from the excellent trade location I prepared myself for I find myself unable to chase it. Jim says, “If you take the trade two points from where you were supposed to get in, now you won’t know if you are wrong without considerably more risk. Why do all the preparation and homework only to go into the market and not follow through? Why bother doing the work?” Jim says that understanding and accepting uncertainty and ambiguity is central to profitable trading. I know this is an area I need to continue to work on to grow as a trader and the solution is quite simple, “Do the trade and monitor for continuation.” It is amazing to me how many times I can over complicate things.

I remember Linda Raschke saying that if you don’t take every trade that is part of a sound trading plan you have prepared, you obliterate your edge. Inevitably you end up taking the losing trades and passing on the winning ones—Murphy’s Law I guess you could say. We have to take each trade consistently. I watch Jim consistently execute trades with little emotion because a) he accepts the uncertainty that comes with the trade, b) he plays the odds, and c) he has trade location that offers excellent risk/reward. We’ve all heard Jim say that trade location is one of the best risk tools available. But just as Jim wrote in Mind over Markets, “The best trades often fly in the face of the most recent price activity,” these can be difficult trades to put on. I see through my own experience that internalizing these concepts—not just understanding them—is imperative to consistent, profitable trading.

Landscape

One of Jim’s students, a tennis pro from Phoenix, after trading with Jim for a day, used the word landscape to describe Jim’s ability to maintain a broader perspective. What a wonderful way to put it. Jim’s market perspective is sweeping. He prepares his scenarios, is aware of the balance areas, gaps, price levels that might attract multiple timeframes, and the news coming out; all the information we hear Jim share in the video, his writings, and his webinars. When the market opens Jim is considering this information and is prepared to act but his view encompasses such a broader perspective. It was interesting to me how Jim toggles between the general—landscape view—and the precise—his trading plan. When the landscape mode is on, it is a deemphasizing of the precise, not an elimination of it, and a recognition of the general.

To give an example, Jim often trades the S&Ps so he is watching the dollar and observing how these markets are trading with each other, if at all, and he is doing the same with the bonds, crude oil, and to a slightly lesser extent the commodities. When crude oil was down over two dollars on January 4, 2011, one would expect the S&Ps to be feeling the pinch since the index is weighted heavily with energy related stocks; these stocks would logically be sold and one would expect the index in the day timeframe to go down as a result. But the S&Ps were holding their own; Jim commented, “We still have no sellers in here.” Jim still had a specific trading plan for this day and put on trades, but he was cognizant of the broader market conditions. Students of Jim have heard him say, “Most anyone can tell you what happened in a trading day. Professional traders can tell you what didn’t happen. Sometimes what doesn’t happen is more important than what does.”

Students of Jim have also heard him say, “We know we know we are in trouble when we are leaning over our desks with our face two feet from our screens.” I noticed how Jim sits at his computer—pushed back rather far, comfortably in his chair as his eyes scan over several markets, never getting too involved in one market, one observation, or one data point. Maintaining the landscape view can protect us from getting to narrow in our perspective and getting caught up in price action.

Summary

As a side note, Jim confessed after reviewing this article that he actually executed better when I was present and had to execute as he teaches rather than when he is not under scrutiny.  He said he was more odds based, taming down the gambling instinct. We are all human; every trader runs into obstacles, makes mental mistakes, emotional trades, and the like. No one is immune to the human frailties that trading seems to have such potential to bring out.

Next Week—I will pick it up and talk about other interesting things I learned, namely understanding our competitors—how they are feeling and who is in the market, and some other less obvious trading observations.

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