Overcoming bad habits acquired from day trading

Discussions about personal psychology for the individual trader.
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JimR
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Overcoming bad habits acquired from day trading

Post by JimR » Fri Mar 11, 2005 2:03 pm

I worked at a day trading firm on Wall Street for about the last 2.5 years with very little success. Including commissions, I was down about $40k in that period, most of which is commission charges.

Anyway, the more I watched trades take off after I'd taken my token half a buck, I began to realize the futility of day trading, at least for me. I've had more than several great calls over the past 2-3 years which would've have netted 20+ points, but made very little on them due to us not being allowed to hold positions overnight. We were taught to "take your profits", "take what the market gives you", "watch the tape", "step in front of big bids & big offers", etc. The more I read the tape the more I began to realize how ridiculous this method of trading actually is. Sure there are some guys who make a good living at it, but the vast majority lose or breakeven after paying most of their profits in commissions due to the high volume of intraday trades. It seemed to me that the firm was really the winner in this tape reading game.

Anyway, not blaming anyone for my lack of success, moreso blaming myself for taking 2+ years to realize that this model is very inefficient. However, I have developed some bad habits from day trading which I'm finding harder to break than I expected. As, I transition from scalping to a longer term trend following approach, I often find myself peeking at the 5-minute charts & the tape to see what's going on. This only gives me anxiety when I see a position moving against me intraday, even though I still may be in the money and in no danger of losing money.

If anyone has transitioned from day trading to a longer term approach, I'd like to hear how you may have handled some of the bad habits acquired from day trading. Or if anyone has any advice on this subject, Im ALL EARS.

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Post by AFJ Garner » Sat Mar 12, 2005 4:25 am

And as I have often pointed out before, for the first few years of trend following, you may well NEED a day job. Unless you are well heeled enough or have other sources of income, it is likely to take a few years to build your account to the size where you can make regular withdrawals to live off. But that is just my own experience. There may well be others out there who trend follow shorter term or trade a bigger and better mix of systems, or who have had a luckier break on timing, who have managed to live off trend following from the start?

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Post by verec » Sat Mar 12, 2005 8:31 am

Unless you have other strong interests in life (reading, having fun with friends, playing some instrument, painting, writing, acting ...) I would suggest that you need a day job to escape the boredom of watching prices that don't go anywhere 90% of the time, even if you can afford not to get a regular income for a while.

The way I see trading now, is made of patience, discipline and process. Nothing to get excited about, nor leading you to get a full time, satisfying life.

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Post by Old European » Sat Mar 12, 2005 4:22 pm

Once you have chosen to go the long-term trend following route, being obsessed by the tape does not add any value to your trading. It only may give you completely unnecessary adrenaline shots, generate strong emotions and lead to bad quality of life.

As others already said, what is really important is discipline and patience. Try to be as detached as possible from the markets. If you have the right attitude, following the markets is extremely boring and a complete waste of time and energy.

You better spend your time doing research (if you are afraid of losing your edge), maybe think of also managing other people's money (once you have a decent track record) or force yourself to develop other interests (like art or fishing). Of course you can decide to have a normal day job (preferably not in the financial industry). And a job that you really enjoy. Combined with your long-term trading this should generate enough income to lead a comfortable and balanced life.

Cheers,

Old European

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Post by Ghostrider » Thu Mar 24, 2005 4:52 pm

Nice post Jim.
This was a tough change for me, too.
For me, it was all about the system. My trading system resembles me, in a way it's who I am, the risks associated with it, the frequency of trades, the time in a drawdown, the compounded growth rates, the number of rules (someone could wake me up from a dead sleep - ask me my rules - and I could recite them clearly). I love my system. Because of this relationship I have with it (she's like a buddy, she helps me stay on track when the going gets tough --- read: drawdown), it's very easy for me to follow the system - even in drawdowns.
I think you just need to find your system, once you do, it becomes easy.
I see people (some on this website) that claim to have or had great systems, but they no longer trade or trade those systems. I believe that the systems they were trading were never really theirs to begin with. Finding your own system will empower you and help you become the trader you were meant to be, and it won't be easy, but if this occupation is really the right livelihood for you, you'll find it.
I wish you all the best.
GR :P

PS. I almost never look at the markets when their open - I have no urge. I spend more time tying pale morning duns - I can't seem to get the wings to stand up right....

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Post by JimR » Fri Mar 25, 2005 7:38 pm

garryboor wrote:Lots of mech systems traders say "Thank God I have a day job which prevents me from looking at the tape during market hours". I'm one of em.

My situation forces me to use EOD data and to enter my orders at night before the next session's Open. Since I can't watch the day's action, it doesn't stress me out. Many people feel similarly.

All posts were very helpful & informative. I look forward to more experiences from others who have successfully made the transition from day trader to trend follower.

I understand the EOD methodolgy however, I don't like to enter my stops with the broker. I prefer to keep them in my system, or written down on my blotter and execute them manually when the stop price is hit. How does one do this if you are not at least gazing at the intraday prices? Let's say I enter a position in the morning at $50 with a stop of $48.50. If the price closes at $47, I've violated my risk management rule. If I put the stop with the broker, well, you guys know there's not many specialists or locals who ever met a stop they didn't like.

What is an effective method of placing stops in a system where you don't look at the prices until the EOD? I guess you'd almost have to put the stop on the "book" to protect yourself? No?

Thanks again to all who have offered advice in this area.

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Post by verec » Fri Mar 25, 2005 8:16 pm

jimr wrote:What is an effective method of placing stops in a system where you don't look at the prices until the EOD?
A very simple answer is to estimate the amount of slippage you'd get on your stops, and factor that in your position sizing. In your $50 example with a stop at $48.50 and a close at $47 your slippage was twice as much as you expected. This means that you should have risked half of your initial position.

So, the question now is how to get a realistical measure of slippage? That's for you to answer :)

Not to mention the fact that, by watching and reacting to intraday movements you might end-up closing a position only because of a small temporary spike against you ...

I guess that the main reason behind the question is because of the "day-trading tint" that still colors your thinking. If you go for LTTF, you won't have stops as tight as you used to have in day-trading. Most probably defined in some amount of volatility (X ATR), which, in turn dictates your position size on that trade.

If you put your stops outside of "the noise" (what the volatility measure such as the ATR gives you), then you definitely don't need to worry about intraday.

I recall having read, probably in the Market Wizards?, that some Turtles got caught on the wrong side of the 1987 crash and lost as much as 30% on that single day, even though they were glued to their terminal all day long. To me, this means that if you come up with an EOD strategy that returns 30%+ year after year, you definitely can afford a "once every ten years" big catastophe, and still come out well ahead, without having to become nervous at the screen ...
--
The 2p of a burnt ex day-trader

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Post by JimR » Sat Mar 26, 2005 7:26 pm

Verec, thanks for the informative response.

Just to clarify: You are suggesting that stops be placed "on the book" with the broker, correct?

If I don't monitor prices intraday and without a stop on the book, a position would be exposed to a voilent adverse move, slippage or not. As opposed to having an alert inform me when a stop level is hit and then executing the liquidation myself. Your suggestion of limiting position size solves one problem but what about in an instance of a 4 or 5 ATR adverse move?

If I use a 2N stop on a stock with an ATR of $.75 and the position goes(& closes) against me $3.00(or 4 ATR), I would obviously violate my stop loss rule and be subject to a big loss, regardless of slippage. My point (& question) being, wouldn't the stop loss order have to be "on the book" if prices are not being monitored during the day?


Your insightful thoughts are much appreciated.

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Post by verec » Sun Mar 27, 2005 4:09 pm

jimr wrote:[...]My point (& question) being, wouldn't the stop loss order have to be "on the book" if prices are not being monitored during the day?

The distance of your stop, and whether to have them "in the market" or "in your head" are two orthogonal issues.

Many here can report about their stops being run through in a fast enough market, whether in the market or in their head. Stops in the markets are no guarantee, Neither are stops in the head.

My point was that by using EOD only and whatching prices at home in the evening, if you were to use far enough stops then the probability of an extreme move against you can become as small as you want by adjusting the distance.

Of course, this will affect other parameters and the total profitability of the system, but that's why I mentionned this story about a Turtle losing 30% of his capital in a single day, despite sound and proven money management techniques. Whether his stops where in the market or in his head is irrelevant: they wouldn't have been executed at the target price anyway.

But his entire system allowed him to recover from that single day 30% drawdown. If anyone has more details about this story, I'd love to hear them.
jimr wrote:Your insightful thoughts are much appreciated.
Another sentence like that, and I run for president in 2008 8)

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Post by TC » Mon Mar 28, 2005 5:09 pm

verec wrote:..... Stops in the markets are no guarantee.........
A stop in the market does not guarantee your price but it does in virtually all cases guarantee you a fill. An exception might be if you had a stop very close to the daily limit, in that circumstance you might find a fast market moving beyond your stop to lock limit up/down before your broker had a chance to execute. If the market then opens at the limit the next day you could experience very substantial slippage before your "in the market" stop was filled.

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Post by BARLI » Sat May 14, 2005 3:33 pm

jimr wrote: worked at a day trading firm on Wall Street for about the last 2.5 years with very little success. Including commissions, I was down about $40k in that period, most of which is commission charges...
If anyone has transitioned from day trading to a longer term approach, I'd like to hear how you may have handled some of the bad habits acquired from day trading. Or if anyone has any advice on this subject, Im ALL EARS.
Hello Jim, thanks for a terrific post!

from my own experience i can say that first i needed someone who really is making money Day Trading to know how to do it. and i FOUND the guy! this is Mark Fisher, veteran trader who has his own methodology in Day Trading and been in Crude Oil Pit in Nymex for 20 years. i found hsi stuff works, and i started implementing it in my own trading. the thing is that those guys(locals,brokers, anyone whos coming with pit trading experience understand better how markets really work during a single day). so i wanted to learn from a local. Paul Jones also started as a floor broker. look what Paul says about Mark and his stuff:
http://mbfcc.com/book/paul_tudor_jones.shtml

Mark even taught Paul's traders in Tudor Company. i still use his approach in my own trading to help me understand what really is happening in the market. Mark's method called ACD, its all explained in his book Logical Trader, look at www.mbfcc.com or on Amazon for this book.

jimr wrote:If I put the stop with the broker, well, you guys know there's not many specialists or locals who ever met a stop they didn't like...

concerning to this one, you were obviously placing your stops on a very obvious levels. as Victor Sperandeo says in his book Wall Street Pro 1 you need to place stops or to far to reach them or to close, cos anyways they'll be hit. Mark explains where to place stops in his book. i also had an experience with that in a Wheat market, fortunately for me i understood my mistakes. there are levels (when you day trade) than once broken should have a very good follow through to let you capitalize on, if it does not happen you get out on a TIME stop. Paul Jones in Market Wizards sadi that Eli taught him that time stops are even more important than price stops. there are not a lot of traders who get out of a trade just because markets dont move, they wait for the pain to take, they say "no pain , no gain". i also used to think that way, then i understood "if theres pain theres no gain". Day trading was ok for me, but it took a lot of my time, and i didnt like being glued to the screen for the day session, so i became a short term trader(3-5 days). and really , my day trading habbits were telling me to get out of a profitable trade earlier than i really should, or from a trade that has a little loss in open trade equity balance to get out earlier, and watching after how it develops into profitable trade. there is only one enemy for me - my emotions... but my stop always rests on a platform, it simply prevents from once in a time "market surprises".

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Post by CRM114 » Sun May 15, 2005 6:05 pm

BARLI wrote:Mark's method called ACD, its all explained in his book Logical Trader...
From what I can remember from looking at this book, Fisher spends lots of time talking about his method but he never explains how to calculate his "magic number." I think he said it had something to do with volatility, and, at the time, I thought that it might be fun to look at his examples and reverse-engineer his number by going back and finding the volatility or ATR. I suppose he wants people to subscribe to his service. What do you do, BARLI?

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Post by sluggo » Sun May 15, 2005 6:13 pm


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Post by BARLI » Mon May 16, 2005 7:04 am

CRM114 wrote:From what I can remember from looking at this book, Fisher spends lots of time talking about his method but he never explains how to calculate his "magic number." I think he said it had something to do with volatility, and, at the time, I thought that it might be fun to look at his examples and reverse-engineer his number by going back and finding the volatility or ATR. I suppose he wants people to subscribe to his service. What do you do, BARLI?
You're right about Mark not explaining the method which they use to calculate points A' and C' for the markets, and its really true that it depends on volatility at a time. if you'll do your own research you will see that markets change their volatility over some periods of time, so for day traders its crucial to seize the change. so if today Crude Oil or Euro is volatile and in a year it will be less volatile, i couldnt trade it with old ACD points, i'd lose! but i can say that before i got this book, i really didnt understand what was going on in the markets, no matter how many boks i read previously. after reading this one i was up 80% first month i was applying this. but as Mark stresses it and the traders that wrok for him its 70% of discipline that makes you successful. so when i saw a system generating a signal in Live Cattle intraday, and i didnt take it, it was a good but painful experience to see how the market was trading lower the entire day and i was on the sidelines.

concerning people subscribing to his services...well of course Mark wouldnt mind it , and i've taken a trial period only.i think its only for those who do not want to calculate daily pivots for themselves, hehe. but there's some more info on his web site than olny daily pivots, like Reversal days that they believe will happen according to their research and so on. their services are too pricy, so i dont subscribe.

sluggo , thanks a lot for the link! there's trading symposium link on there too, so i can go and watch it now :P

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Post by JimR » Mon May 16, 2005 4:12 pm

Thanks Barli for your insights...

I don't really dont "want" to learn how to day trade, but thanks for the book references anyway :lol: .

I, like you, do not want to be glued to the screen watching every print. I no longer day trade, for that very reason. I think it's an inefficient use of a trader's time, at best.

My biggest emotional hurdle is watching profits evaporate while waiting for the trend to further develop in my favor. That is when the day trading habits are hardest to break.

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Post by dctag » Tue May 17, 2005 9:50 am

I feel your pain. I come from a daytrading shop and it was hard getting away from being glued to the screen. I found it just took time to change my mentality. When a stock gets to my entry and exit points I am still a 5-min chart person but until it gets to those areas I don't worry about it anymore. It took about a year before I stopped getting out way too early due to a stupid minor fluctuation. Granted I still gt out too early or too late but at least now it is because of my methodology and not my mentality.

-David

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Post by BARLI » Tue May 17, 2005 10:53 am

thats why Kiwi says that he doesnt watch the screen when he position trades or long term trades. emotions and news are our greatest enemies... i've noticed that even Mark Fisher while day trading walks out of the pit after he put his stop and limit orders with his clerk, he also hates being glued to the quotes the entire trading session. i guess its all about finding one's trading style.

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Post by JimR » Tue May 17, 2005 11:53 am

dctag wrote:I feel your pain. I come from a daytrading shop and it was hard getting away from being glued to the screen. I found it just took time to change my mentality. When a stock gets to my entry and exit points I am still a 5-min chart person but until it gets to those areas I don't worry about it anymore. It took about a year before I stopped getting out way too early due to a stupid minor fluctuation. Granted I still gt out too early or too late but at least now it is because of my methodology and not my mentality.

-David
Thank you DCtag for your input. WHen you say you're still a 5-min chart person once your targets are hit, do you mean that once you're in a position that you then monitor the 5-min chart throughout the day? Or will you just set your stop, then let it develop where it may.

Switching to a trend following approach from a day trading environment is probably like going from sleigh riding to extreme skiing at Alta(well maybe not that drastic), so I didn't expect the bad habits to be easily broken. I am making progress though. Being a few points in the money then watching 1/2 of that evaporate is still quite an emotional ride for me though. :shock:

Thanks again & to you Barli also ,

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