I'm going to post a trading session I had with my mentor in Feb, 2006. It's very interesting to me as I haven't read it in about 2 years. Part of the reason for posting it is to show how a professional trader thinks and approaches trading. After 3.5 years I now have a much deeper understanding and appreciation for what he was doing that day than I had when it was happening. Professional traders aren't supermen, they just have a plan and they usually stick with it. This a chat transcript that's fairly long, so I'll put it up in two or three posts. I would appreciate some feedback on its usefulness. If people think it's worthwhile I'll post some more chats I had with him.
Feb, 2006 Trading session
Steve: just sent you an email asking where you plan was
Bob: Hi ya
Bob: didn't do one
Steve: why not
Bob: I looked at everything, but I didn't write it up
Steve: why not
Bob: I don't know
Bob: It's not that I didn't have the time or anything
Steve: explain
Bob: Well, I mean I had the time, I came home and did everything I normally do, I just didn’t write anything because nothing changed from yesterday
Bob: Just more verbiage about what everyone expects from Bernanke today
Steve: well do you have any trade ideas for today?
Bob: No, and this is the problem, I can't come up with them
Steve: alright hold on
Bob: I’m watching the Yen and I doubt it's going to go up and hit the trend line
Bob: I’m looking at alternate counts for it
Bob: Have you looked at the Cot for the Yen? The comms are long, but it's futures so it means they think it will get stronger, right?
Steve: well that was only an ideal scenario. You have to make scenarios for it going straight up, straight down, etc..
Steve: The comms are short $/Y
Steve: Ok I see the problem
Bob: look at this then, please
Bob: http://www.softwarenorth.net/cot/current/charts/JY.png
Steve: The commercials are long yen. The specs are short yen, long $/Y. We fade the specs, therefore, we're looking to sell $/Y
Steve: The C-wave up was an execution scenario.
Steve: A way to time the entry
Bob: Ok, I understand
Bob: I think we're in a 3 wave down
Steve: me too.
Bob: so get in on a retrace?
Steve: do you see the tail on the 30 min about 7 bars ago?
Bob: Yea, the real long one
Steve: yea. I sold on a stop below the low of that tail.
Steve: I wanted it to clear that before getting in.
Steve: it bothers me that it didn't tank more on the IP number though
Steve: but it looks like a relatively low risk abc on the 5 min
Bob: You mean the TIC data?
Steve: well IP came out at 9:15
Steve: just sold more
Bob: Oh import, got ya
Steve: industrial production
Bob: wrong day, ok
Bob: I was thinking about selling if it broke 117.10
Bob: question is the stop, do I just go with a 1/4 ATR or move it up some?
Steve: ok so if you have an idea that Bernanke is being talked up too much. You need a scenario for all types of market action. What if it rallies into his speech, what if it pukes before, etc..
Steve: No, you need a technical point. In general you want the tech point to be somewhere around 1/4 atr. That's why sometimes you just can't get into a trade because you don't have a reasonable risk point.
Bob: The only decent point would be the last pivot at 76...too much for a 1/4
Steve: not if you go down in time frame
Steve: you can sell any little abc and risk the high of that
Steve: I'm not telling you to do that in this instance, but in general
Steve: I will be selling more on any abc up. Sometimes just risking the high of that abc for that portion of the position.
Bob: 31?
Bob: on the 5 min?
Steve: yea
Steve: oh wait
Steve: yea about 32
Steve: that could have been an a wave and we'll have a c up but there's always risk
Bob: so, let this up move go a bit and see if it exceeds a C specs. Then if and when it moves down, enter
Steve: or on the 1 min, look to see if it stalls here, short and risk 33
Steve: if it parabolas here
Bob: Bernanke is going to have to get up on the desk and scream "We're going all the way to 8%!" to exceed expectations today
Steve: right
Steve: on the other hand, a lot of people seem to know that.
Bob: True, I saw one forecaster mention that
Steve: While you'll want to get the largest portion of your position in on an abc, you'll also want to add as your proven right, ie, as it goes through some lows, eg, 117.12, 116, 85, etc..
Bob: Yea, I've got them marked up
Steve: You can't put on big positions on stop entries because you don't get good risk points. At that point you try and get large positions on at ABCs
Bob: What do you mean by large?
Steve: So an execution game-plan has to entail multiple scenarios. I had one if it made a text book abc and another if it just went straight down
Bob: I'm thinking of hitting the first with 1%, then .5% on an ABC
Steve: well you could sell a little here and risk the high of this latest abc
Steve: but it's getting a way a bit
Bob: Yea, maybe a half %
Steve: ok so by large I mean an entry on an abc would be typical 3 times larger than one on a stop
Steve: What %vol are you trading for a whole position?
Steve: 3?
Bob: no, 1.5
Steve: at this point you would want to sell a small enough position that you wouldn't be bothered by a c wave up (on 1 min) from here
Bob: bothered by being stopped out you mean?
Bob: I just sold .5%
Steve: what's your risk?
Bob: 20 pips
Steve: ok. are you looking at the 1 min chart?
Bob: yes
Steve: you don't want to be in a position of selling here and risking and getting stopped out at the recent high, because that is right about where a c-wave would end right?
Steve: so its good you didn't just risk the high, or did you?
Bob: yep, but I could widen it up
Bob: put my risk up to 1%
Bob: my stop is currently at 35
Steve: Better is to stop yourself at the high and then sell again if it looks like the C-wave has finished. Otherwise you start to hang on for 1 more tic for 20 tics.
Steve: that's good
Bob: that's the 20 pips, at 35
Steve: always better to get out and back in than hope it tops out
Bob: yea, less stressful, I'm sure
Steve: you reset your hand, mind that way.
Steve: the one caveat I have it that if you sold at 15, you could have waited 3 more tics for it to take out that low, understand?
Steve: it's not a lot to give up for a good confirmation
Bob: I see it
Steve: if it were 10-15 tics that's one thing
Steve: make sense?
Bob: sure does
Steve: put up an hourly and draw a trend line sloping up from those two recent lows
Bob: ok
Steve: so you have to think, ok Bernanke is about to speak...
Steve: there is a decent possibility of hawkish comments making for a little 5 min C wave up from here.
Steve: maybe up to that trend line. You have to be prepared for that, lest you think your entire idea is wrong.
Steve: the other possibility is he disappoints and it drops like a stone.
Bob: The TL being at about 42?
Steve: Just at note: When I sell an abc, I expect it to go almost instantly. maybe not a lot, but I expect 5 tics out of it within a minute or two
Bob: and if it doesn’t?
Steve: good question. It depends but it bothers me
Steve: because when I'm right, it usually goes instantly and never looks back
Bob: makes sense
Steve: so where would you sell if it goes up from here?
Bob: If the TL held
Bob: about 40
Feb, 2006 Trading session
Steve: just sent you an email asking where you plan was
Bob: Hi ya
Bob: didn't do one
Steve: why not
Bob: I looked at everything, but I didn't write it up
Steve: why not
Bob: I don't know
Bob: It's not that I didn't have the time or anything
Steve: explain
Bob: Well, I mean I had the time, I came home and did everything I normally do, I just didn’t write anything because nothing changed from yesterday
Bob: Just more verbiage about what everyone expects from Bernanke today
Steve: well do you have any trade ideas for today?
Bob: No, and this is the problem, I can't come up with them
Steve: alright hold on
Bob: I’m watching the Yen and I doubt it's going to go up and hit the trend line
Bob: I’m looking at alternate counts for it
Bob: Have you looked at the Cot for the Yen? The comms are long, but it's futures so it means they think it will get stronger, right?
Steve: well that was only an ideal scenario. You have to make scenarios for it going straight up, straight down, etc..
Steve: The comms are short $/Y
Steve: Ok I see the problem
Bob: look at this then, please
Bob: http://www.softwarenorth.net/cot/current/charts/JY.png
Steve: The commercials are long yen. The specs are short yen, long $/Y. We fade the specs, therefore, we're looking to sell $/Y
Steve: The C-wave up was an execution scenario.
Steve: A way to time the entry
Bob: Ok, I understand
Bob: I think we're in a 3 wave down
Steve: me too.
Bob: so get in on a retrace?
Steve: do you see the tail on the 30 min about 7 bars ago?
Bob: Yea, the real long one
Steve: yea. I sold on a stop below the low of that tail.
Steve: I wanted it to clear that before getting in.
Steve: it bothers me that it didn't tank more on the IP number though
Steve: but it looks like a relatively low risk abc on the 5 min
Bob: You mean the TIC data?
Steve: well IP came out at 9:15
Steve: just sold more
Bob: Oh import, got ya
Steve: industrial production
Bob: wrong day, ok
Bob: I was thinking about selling if it broke 117.10
Bob: question is the stop, do I just go with a 1/4 ATR or move it up some?
Steve: ok so if you have an idea that Bernanke is being talked up too much. You need a scenario for all types of market action. What if it rallies into his speech, what if it pukes before, etc..
Steve: No, you need a technical point. In general you want the tech point to be somewhere around 1/4 atr. That's why sometimes you just can't get into a trade because you don't have a reasonable risk point.
Bob: The only decent point would be the last pivot at 76...too much for a 1/4
Steve: not if you go down in time frame
Steve: you can sell any little abc and risk the high of that
Steve: I'm not telling you to do that in this instance, but in general
Steve: I will be selling more on any abc up. Sometimes just risking the high of that abc for that portion of the position.
Bob: 31?
Bob: on the 5 min?
Steve: yea
Steve: oh wait
Steve: yea about 32
Steve: that could have been an a wave and we'll have a c up but there's always risk
Bob: so, let this up move go a bit and see if it exceeds a C specs. Then if and when it moves down, enter
Steve: or on the 1 min, look to see if it stalls here, short and risk 33
Steve: if it parabolas here
Bob: Bernanke is going to have to get up on the desk and scream "We're going all the way to 8%!" to exceed expectations today
Steve: right
Steve: on the other hand, a lot of people seem to know that.
Bob: True, I saw one forecaster mention that
Steve: While you'll want to get the largest portion of your position in on an abc, you'll also want to add as your proven right, ie, as it goes through some lows, eg, 117.12, 116, 85, etc..
Bob: Yea, I've got them marked up
Steve: You can't put on big positions on stop entries because you don't get good risk points. At that point you try and get large positions on at ABCs
Bob: What do you mean by large?
Steve: So an execution game-plan has to entail multiple scenarios. I had one if it made a text book abc and another if it just went straight down
Bob: I'm thinking of hitting the first with 1%, then .5% on an ABC
Steve: well you could sell a little here and risk the high of this latest abc
Steve: but it's getting a way a bit
Bob: Yea, maybe a half %
Steve: ok so by large I mean an entry on an abc would be typical 3 times larger than one on a stop
Steve: What %vol are you trading for a whole position?
Steve: 3?
Bob: no, 1.5
Steve: at this point you would want to sell a small enough position that you wouldn't be bothered by a c wave up (on 1 min) from here
Bob: bothered by being stopped out you mean?
Bob: I just sold .5%
Steve: what's your risk?
Bob: 20 pips
Steve: ok. are you looking at the 1 min chart?
Bob: yes
Steve: you don't want to be in a position of selling here and risking and getting stopped out at the recent high, because that is right about where a c-wave would end right?
Steve: so its good you didn't just risk the high, or did you?
Bob: yep, but I could widen it up
Bob: put my risk up to 1%
Bob: my stop is currently at 35
Steve: Better is to stop yourself at the high and then sell again if it looks like the C-wave has finished. Otherwise you start to hang on for 1 more tic for 20 tics.
Steve: that's good
Bob: that's the 20 pips, at 35
Steve: always better to get out and back in than hope it tops out
Bob: yea, less stressful, I'm sure
Steve: you reset your hand, mind that way.
Steve: the one caveat I have it that if you sold at 15, you could have waited 3 more tics for it to take out that low, understand?
Steve: it's not a lot to give up for a good confirmation
Bob: I see it
Steve: if it were 10-15 tics that's one thing
Steve: make sense?
Bob: sure does
Steve: put up an hourly and draw a trend line sloping up from those two recent lows
Bob: ok
Steve: so you have to think, ok Bernanke is about to speak...
Steve: there is a decent possibility of hawkish comments making for a little 5 min C wave up from here.
Steve: maybe up to that trend line. You have to be prepared for that, lest you think your entire idea is wrong.
Steve: the other possibility is he disappoints and it drops like a stone.
Bob: The TL being at about 42?
Steve: Just at note: When I sell an abc, I expect it to go almost instantly. maybe not a lot, but I expect 5 tics out of it within a minute or two
Bob: and if it doesn’t?
Steve: good question. It depends but it bothers me
Steve: because when I'm right, it usually goes instantly and never looks back
Bob: makes sense
Steve: so where would you sell if it goes up from here?
Bob: If the TL held
Bob: about 40