Turning the Corner and Getting Paid

So Patrick and I have promised you some positive, encouraging updates and stories…..so here is a story of a client that boldly sticks out to us and we are very proud of this client (and his wife) for their perseverance, patience, discipline and overall view/scope of the futures markets.

This account, prior to what you are about to see, had many downs at first, some ups but more downs. They have been through different educators, followed a number of systems and even fell into the “I win 90%+ of my trades but still lose money” category for awhile. However, through it all they have gained education but just as important – experience. It’s from their experience and many hours of “screen time” that has allowed them to view the markets in a different way than before and too help develop a method and plan to their trading.

See….becoming successful at trading doesn’t happen overnight, and if you are one of the few that do see immediate success, be smart about it as it doesn’t always work in your favor. Trading is about being able to adapt and trade (or don’t trade) in many environments.

As you continue to read this blog, you will see and read how our client is in now - “Turning the Corner and Getting Paid”.

Below you will see a clip from my client’s February 2011 monthly statement. Notice the line in the middle of the month; I drew this line as it was right around this point where my client and I had another long discussion about what he was doing wrong and why he could not find any consistency. Looking back on this monthly statement, you can clearly see his losing days were much higher than his winning days.



It was around the middle of the month, when I received another call from him stating that he was taking a new approach, an even more conservative approach to his trading. An approach that he himself knew would be tough accomplish, as he had always fallen back into bad trading habits and his discipline had been thrown out of the window time after time. This time though, he seemed a bit more confident about this “new style”. It sounded promising and I wished him the best of luck and told him to be patient and stay disciplined.

Below, in successive order, will see a clip from my client’s March, April and May monthly statements. Notice the growing balance each month but more importantly, notice his % gains. They aren’t 50%, they aren’t 30% - they are low….but steady.

March 2011 – Net Profit was 6.99% (Even he said this was a bit higher than expected)



April 2011 – Net Profit was 4.69% (It was during this month, he called and told me that his goal is to be above $100,000 in the account by Winter, maybe even sooner if he was lucky.)



May 2011 – Net Profit was 6.67%



June 2011 – Net Profit was 6.15% (I really wanted too call him and tell him how Patrick and I both were watching and rooting for him to reach his goal but we held back – we didn’t want to be a jinx!)



July 2011 – Net Profit was 2.96% (Another good month and of course, the goal of $100,000 had been met! He had given me a call once he reached his goal, which was actually more around the middle of the month but it wasn’t too gloat or too celebrate – ok, maybe a little – it was too start a new phase in his trading method/plan. Phase two of his method actually came from an idea we had on a blog about paying yourself for the hard work and hours you spend trading. Positive reinforcement for hard work goes a long way. He requested that I send him a check out of the account on the 1st day of each month but only if the balance was above $100,000. The check was to be for the exact amount in excess of $100,000 at the end of each month. I liked this idea, I liked it a lot.)



August 2011 – Net Profit was 8.15% (Please note the date of 8/1/2011, where we sent him his first withdrawal, as his balance at the end of July was $1,600.58 over the $100k mark)



September 2011 – Net Profit was 7.94% (Please note the date of 9/1/2011, where we sent him his second withdrawal from the account, per his prior request.)



October 2011 – Net Profit .84% (Please note, another withdrawal for the profits made in September).



November 2011 – Net Profit was 3.17% (Again, another withdrawal for profits made in October)



December 1st Daily Statement – This is to show the most recent withdrawal from the account.



Obviously these results are not indicative of any futures results and there are no guarantees when you trade futures. With that said though, I do look at this account and because I personally know the ups and downs that they have endured, I am proud of them. I am also confident that this account holder is looking at the longer term and at the bigger picture; which is hard for many day traders.

As you will hear me say again and again…..trading is a marathon, not a sprint. So pace yourself and be prepared, patient and disciplined. The markets will be here tomorrow, the day after, and the day after that….so, keep that in mind when you are learning and developing your trading plan.

Talk soon,

Josh

Negative Stuff. Positive Stuff.

I was perusing the existing posts recently and I just wanted to throw it out there, that our intention to create outlet is not to just talk about negative stuff and losing all the time. Our primary purpose as brokers is really to help people avoid costly mistakes so that they are around for a long, long time. That’s why a lot of the posts on this blog seem like lectures. This really is not by design. We have had some intense, heartfelt discussions with many clients over the years about their strengths and weaknesses and there just seems to be some common threads that tie those together who are even moderately consistent. These commons threads often involved things that people don’t do. Hence often find ourselves (over the phone, over email, and on this blog) saying “Stop that!”

In general, we find that the people are who do things described on this blog the least (over leveraging, not understanding the market they are trading, setting unrealistic goals, and so forth) are with us longer. And this is good for us as well.

I have been following some successful traders for awhile, and we’ll have some good highlights to show soon. =)

Realistic Goals

One conversation I frequently have with live clients is about setting realistic goals in terms of positive account growth. What is appropriate? What is necessary to make it worth the risk for the trader? Of course the answers to these questions are not all black and white. Hopefully this article helps you reflect a little bit on your daily goals.

We find that how one decides what their daily goals should look like is often driven by the following:

1) What their goals are for the account (Curing boredom? Making a living? Supplementing another income stream? The thrill?)

AND/OR

2) What have they been taught by the educating group that they have learned from?

Who wants to sit in front of a desk for eight hours per day for $50 in average PNL? Rarely do I speak with someone who is excited by that idea. However, I find often that the displeasure associated with the above (as well as other factors I have noticed) play into determining what PNL goal someone has on an average day, rather than what is reasonably possible. For example – if you have $10,000 to risk for a futures account, and you are looking to average even a $50 PNL per day – what does that mean in terms of annual returns?

Let’s assume 20 trading days in the month, and no compounding. If you average $50 in net profit each day, this works out to 10% per month or 120% a year***. Have you watched the financial news networks lately? How is the hedge fund industry doing these days? Stock index products – how are they doing? You get the idea. Generating 120% per year net of costs is not a cakewalk. If it were, I would not be writing this right now – I’d be executing that strategy from my yacht in the Mediterranean.

One main idea here is – if you are planning to truly make a living on a $10,000 futures account, unless your standards of living are below what mine were my sophomore year at the University of Iowa (they probably aren’t – trust me), then perhaps you need to re-think things. It’s not us trying to burst your bubble, but there is a lot of chatter out there pitching a pipe dream. And we find often that people believe they are going to make $200 a day on a $5,000 account. This might happen over the short run, but it’s difficult to sustain over the long run because of the risks needed to generate such a return and the fact that you are human and eventually you’ll slip up and make a mistake, and it may be costly.

I’m not saying that you should not open an account at all with a small amount of money. We have seen success stories with accounts that began modestly. But if you do go this route (remember – only deposit risk capital into a futures account – money you can afford to lose), have a clear, well-defined purpose for that account so that you can best position yourself to avoid mistakes that are associated with trying to squeeze too much out of it.

***If you know of a reliable investment where you can net 120% per year…please let me know =)

Stock Traders, Take Note

I had a very interesting conversation with a prospective customer recently about his efforts to convert from equity trading into futures trading. This person had a great deal of experience actively trading individual stocks, as well as indexes and even highly leveraged ETFs. The conversation was an eye opener for me in terms of how I need to speak with equity traders about perhaps one of the most important concepts of futures trading – leverage.

We were discussing his foray into a demo of our InfinityAT trading platform, and actually send me a copy of a trade log to review; asking what I thought. The 1st thing I noticed were the 20 lot trades. “20 lots per trade?” I said to him. His response: “I’m just trying to replicate what I am used to doing in my stock account”.

This got my brain turning. Let’s assume he trades SPY (the cash version of the S&P 500 Index) in his equity account. How much SPY would he have to be trading to get the equivalent of 20 E-mini S&P futures contracts? Let’s do the math.
Right now the price of the ES is 1237.00. Each point is worth $50. This means that the “full contract value” of one contract is $50 x 1237, or $61,850. Multiply that by 20 contracts, and you get $1,237,000. This is the full contract value of his 20 lot ES trade.

It’s pre-market as I write this, but it looks like the SPY is going to open around $125. This means that if he is trading with zero leverage at his stock broker, he would need to trade about 9900 shares of SPY with an account size over $1.2 million in order to take a position size worth the same as 20 ES futures contracts. Even if his broker gave him the most aggressive available leverage of 4:1, he would need over $300,000 with his stock broker to take the same position.

At this point, one can see the attraction of the futures markets over the equity markets – the amount of capital we require to trade 20 ES contracts is a tiny fraction of what is required by the stock broker, even at the most aggressive 4:1 leverage they offer. (Note – the higher the leverage, or lower margin, the higher the risk of the trade. Leverage can magnify gains but it also can magnify losses). If you control your risk judiciously and have an effective system, you can generate higher returns on your capital with futures trading than with stock trading, simply because the leverage is higher. However, no matter what, you should only deposit risk capital into a futures account. You may lose all or more of your initial investment. You should never deposit money into a futures account that if lost, would hamper your lifestyle or lengthen your retirement horizon.

Throwing numbers around like $1,237,000 really put things in perspective for this prospective client. He was planning to trade a futures account worth about $25,000. What an eye opener. Trading 20 ES contracts with $25,000 equates to almost 50:1 leverage. While Infinity offers low margin in an effort to remain competitive, we do not encourage people to begin trading this way, for obvious reasons. I asked the customer where he got the idea to trade 20 ES contracts. He told me it just sounded strange to go from trading thousands of shares of stock to just a few futures contracts. He thought that unless he traded 20+ ES contracts that he was not getting more “bang for his buck”.

This prospective client has since thanked me for the wakeup call and told me that he has gone back to trading 1-3 contracts on the simulator for practice. This makes his time on the simulator more productive and allows him to set realistic goals which can and will be the subject of an entirely different post.

When you trade a particular market, make sure you understand the full value of the asset you are trading. Not just what the broker offers for day margins, and not just what the exchange asks for to hold an overnight position. Understand total value of the asset you are risking your capital with so you can truly get an understanding of the amount of leverage you are using when you trade. It really puts things in perspective.

A Question of Capacity

Patrick and I had the pleasure of enjoying time with our long-time clients, a couple from Central Illinois, last week; as they ventured up to Chicago for a couple of night stay. In talking with them, we discussed a number of items that included: our day to day workload, strategies they have followed and used (the good and bad), the importance of one's self-control and discipline while trading and the markets, in general. One statement really stood out during our conversation - it was a statement neither Patrick or I had heard of before, let alone put a lot of thought into in the past. However, this statement and self proclamation by our client rang a very true tone and as I let it sink in more and more, I realized that this statement is something that needs to be heard by more than just the table of 4 we had at dinner. This was much more important - a true stepping stone for all traders.

Duane, our client, said the following statement...."It wasn't until I got over the idea that I did not need to capture an entire move, that I started to see success. In other words - the market has a certain "capacity"; what it is willing to "give" to a trader who buys the very bottom and sells the very top. Once I accepted that I only need to capture a small portion of that "capacity", everything changed.

He followed up his comment with an analogical reference....He said, "I'm in a room with 2 men. Every minute, they toss an open bag filled with $100 in quarters back and forth. All I need to do is get 25 cents from that big bag each time they toss it back and forth. Sometimes, they throw it too high - I reach too far, I get squashed. So many times, as I have learned, there is no opportunity for me to get my 25 cents - the best plan is to not try at get any at all. But each day there are many opportunities to get that 25 cents, and I only need to get that quarter a few times a day to be successful."

Bottom line is that trading the futures markets inherently presents many opportunities and when you add in leverage, many look at reward before they look at the risks involved. So it is very important to understand and respect the risk before the reward. In my opinion, for a futures trader to be successful over a long period of time, it takes a lot more than having great set of indicators or a certain back tested method. It takes patience, discipline and realizing that hitting constant singles is better than always swinging for the fences.

We're back!

For the 1^st time ever (sort of), we’re back!

Patrick Zielbauer here. After a 10 month hiatus Josh and I have decided to start things up again. Life, among other things has kept us both busy as usual. Between my wedding, Josh’s toddlers, and the markets, let’s just say that more than a few times exhaustion trumped our drive to share our futures related thoughts with the world via our blog. However, as of late we’ve had an “uptick” in the requests from our clientele to share our thoughts about the markets and how our customers are trading them.

As expected, the marketplace has changed dramatically since our last post in December of 2010 (what I mean is, we expect things to change – we don’t know how – but our time on this side of the business has shown us that volatility tends to be cyclical – periods of volatility followed by periods of lack of volatility). The last 3 months, particularly the month of August and the first few weeks of September, gave us glimpses back into October of 2008 and galvanized the uncertainty that permeates the all aspects of the markets today.

Who is navigating the markets consistently, and how? Who has adapted to this new paradigm and what are they doing now that they were not doing in April and May? These are questions we are being asked more often now. The amount of one on one conversation we’ve had with our clients about these topics has generated a lot of discussion between Josh and me, and once again, we have a lot on our mind – hence you will be seeing more updates from us in the near future.

One thing that comes shooting to the forefront in terms of the type of questions we have been fielding is the topic of averaging into positions. As you know, many people attempt to apply the concepts of “dollar cost averaging” into day trading futures – mostly unsuccessfully. With the combination of extreme volatility, high leverage, and a platform that allows you to so easily enter and exit the market…well, you can see where this leads, especially when combined with trader whose personality leaves them predisposed to instant gratification.

I believe the reason this strategy is becoming more popular is because as volatility increased and traditional lagging indicators “fail” the traders using them, traders are now willing to accept the idea that they might not be able to call the exact top or bottom – instead, they are willing to buy or sell a “range”. In a choppy market, the tendency for the market to “revert to the mean” means that someone scaling in and out of positions might see a great deal of success (while trend-traders complain about “this chop”). However, when the market does not come back soon enough, on one of those days, a trader who scales into position might soon see themselves giving back everything they’ve made and then some. How do we attempt to prevent this?

There are a few things I have suggested to my customers who gravitate towards such a strategy:

1) Have an “uncle” point. Do NOT, ever, trade without some sort of catastrophic stop. How do you calculate this? It’s a question with more than 1 answer, definitely. One thing I have seen people do is use a multiple of what their average winning day’s profit is. For example, if your average winning day is $250 with a scaling in strategy, you are only willing to accept risk equal to 10 x this amount ($2500, or two weeks of average profit) on a given day. The theory being, the likelihood of you being in the market during a move that could be considered “catastrophic” more than once in 10 trading days is relatively low. The idea being to give the trade room to work out without putting your account in a position where you will incur an “irrecoverable loss”. I know – it’s easy to say with the benefit of both hindsight and “in theory”…and hard to put into practice in real life. Still, you need to plan for this one way or another.

2) Be overcapitalized. Easy, right? After all the people who trade this way, the ones who tend to be most consistent are trading with large amounts of risk capital relative to their contract size. For example – trading 1-5 contracts (starting with one, five maximum) with a $100,000 balance. It is going to take a lot for someone trading in this fashion to be “forced out” of a position – meaning he can hang on – while many other people are getting “blown out”.

3) Go in light. Annoyingly light. Trading with $100,000 in the account? Start with 1 contract. If you’re right on, right off the bat, and end up $100 on the day – accept it and be happy. Being “OK” with days like this is important to succeeding with this strategy. Because the second you get impatient and starting going in heavier as a result, you’ll get a harsh dose of the market reminding you who is boss.

In summary…if I were to leave Infinity tomorrow to trade futures on my own, based on my experience, I too would probably trade a strategy like this. After all my time here, I still don’t think a strategy with a 2 point stop on the ES or a 10 tick stop on the YM could work for me. I am just not that smart or precise, simple as that.

A few updates:

1) Josh did a webinar on Saturday, 10/15 with Greg W. from The Trading Zone that spanned over 4 hours, covering a variety of topics. There will be a recording available shortly.

2) If you are trading live with us now, make sure you are on version 5.2.4 of the platform. Update/Download page: http://www.infinityfutures.com/updatedownload.aspx?ref=pzec

3) If you are taking a break or trading elsewhere, or looking to get involved, please register for the simulator (this has real time data, order execution, and charting) here: http://www.infinityfutures.com/practiceaccount.aspx?ref=pzec

4) We plan to cover a variety of topics in the coming weeks. If there is something specific you’d like to discuss, please email us: eminichronicles@infinityfutures.com.

We look forward to hearing from you and good luck out there!

Win/Loss Percentage vs Trading Odds

OMG - I am blogging again....it's been some time since I jumped on this bad boy blog
and shared my thoughts with you, so here it goes....

A lot of traders ask, "What should my win/loss percentage be to be successful? Should I be winning at 60%, 70%, 80%?"

In my opinion, there is real answer to that question. I think you have to flip the question around a bit and ask yourself, "When you incur a loss or a losses, how big are they? Are your losses larger than your total wins combined?" If so, you are not making money and win/loss percentage means nothing.

I have seen (first hand unfortunately) too many traders that will call and trade the market with a 75-80% success rate, sometimes even 90%, however, because they don't use correct trade and money management, the 10-25% trades they take losses on will well exceed their gains.

Which brings us back to square one....what is the correct win/loss percentage needed to be successful? Simple, there isn't one.

I recently had the privilege to sit down with one of my partners, Anthony Giacomin and Jim Dalton. For those who don't know Jim Dalton, he has been a trader/educator for well over 30 years and has authored a some very influential trading books - "Mind over Markets" and "Markets in Profile". He is an active trader that has been using Market Profile as his basis for making trading decisions pretty much since Market Profile was invented and he believes more in trading odds vs. win/loss percentages.

In our discussions, you could tell his passion about market profile and how important it is to the overall market's structure and makeup. He explained to me that if certain areas in any market develop true support and resistance, the odds are now in his favor and as long as he trades these specific areas with very strict money management - which means using stops and getting stopped out - all it takes is for one of the trades to work to be profitable.

He shared that some of his biggest winners have come after 2 or 3 consecutive stop outs, and then the next trade would work and as long as he was actively moving his stops with the market going in his direction, the profits taken on that trade will wipe out the previous stop out losses and leave him in the green.

Wait, let me sum that up in one sentence.....You can be successful trading if you make 1 winning trade out of 4? The answer can be yes.

Now, I am in no way saying this is the right way to trade for everyone but it was
definitely an eye opener to me. It also confirmed a few of the other educator's theories that I work with such as, Greg W from TheTradingZone.com and Rob from Discovery Trading Group. Both of them have been Market Profile traders for years.

Obviously there is no Holy Grail to trading, but I feel it is important to point out that you should always be open to different ideas and strategies that may not make sense mathematically, but in the end become something that may help you turn the corner with your trading and investing.