Tuesday, October 25, 2011


I may be  misquoting this, but I think Steve Jobs was the one who said " we are born alone, we live alone, and we die alone." If he was not the person who coined that phrase my apologies, but someone prominent recently was quoted as saying that. When I first heard it my initial reaction was that it was a terribly negative view of life. However, after I thought about it for awhile, there is actually quite a bit of truth to it. One of the negatives to being a trader is the isolated life you wind up living at times. Most of your friends if not all of them, have no idea what you do, and really don't understand it even when you explain it to them. Further, you need to isolate yourself to some degree to not get caught up in all the noise that is out there that can distract you from making good decisions. For those old enough to know the song by the B52's, I am living in my own private Idaho.

I have a little private Idaho I constructed just off my front porch for little Vinny, so he can go outside but not get loose. We have coyotes all over the place where I live and although he has the worlds best bodyguards with my crew, I can't be sure they will always accompany him any time he has to go take a pee. He will be big enough pretty quickly where the coyotes won't pick on him, but he is not at the moment, so I guard him with my life. One day he will guard mine with his.

I don't know if it is instinct or environment, or both, but my Saint Bernards have always lived to chase those pesky little coyotes. God help the Coyotes if they ever catch them, they will tear them into 1000 pieces. The coyotes know this innately, so they really motor when my dogs catch scent of them. They like to set traps, but there can't be enough of them to trap the big guys I have when they are traveling as a pack. It is interesting how nature seems to have it's balance. Animals prey on what they know is easy pickins, and flee from what is not. Since I live in the hills, I can observe this every day. My horses run from Coyotes, who would think that, they could kill them with one flick of the wrist. However, they don't know that and horses are prey animals not preying animals. They know what is good for them and their instinct is to flee. I have seen many times my horses charging up toward my barn, while my dogs run at full speed in the direction the horses are running from. When I see this I quickly grab my 12 gauge and go after them just in case it is a mountain lion. Nature in balance, although I guess I am tipping the balance with my shotgun, but as I always write, I like the odds in my favor. We need to do the same thing as traders. We need to flee from trouble ASAP like my horses do. We also need to accept that there are cycles of life and that applies to our results.

Forget about the challenge of trying to figure out the markets complex puzzles, even the easy ones are difficult. If you are looking for a challenge, there is plenty here to challenge you just trying to ferret out good trades. Do not get carried away trying to grind over one you are not sure about. Whatever  the setups you use are, be they moving average cross overs or complex quantitative analysis, stick with the high probability setups. If I find myself hesitating over something like I am with the stock indexes right here, I just move on to something else. When I force trades I get bad results. When I said the stock indexes could be traded either way the other day using a stop and reverse type of strategy, those are situations I usually stay clear of. I miss some that I would have been right on by doing that, but I also dodge a lot of dumb trades that might effect my psyche.

As Clint Eastwood said, "a man has to know his limitations." I do know mine or at least some of them. I think the best way that you gain confidence is through success. There is no better feeling than a perfectly executed trade, literally. You feel like you have mastered the world. At the same time there is nothing worse than a bad trade, it has the opposite feeling. What we have to do is eliminate those highs and lows to the best degree we can. One of the reasons I don't watch overnight trades that I hold for days to a couple of weeks, is that it takes out a lot of the highs and lows. I don't like that "wow I am up 23k awesome, oops hang on, no now I am down 5k" etc.. It does not make me more money babysitting trades that I know I am trying to hold for longer periods than a few hours. I know I will make a bad decision to exit if I do this, so I don't. There of course is the moment of truth when I pull the charts up after the close to see what happened. However, interestingly enough, even when they turn out poorly, the reaction I have ends quickly. The opposite of just living watching something just go against you all day long until you get stopped out, it just too painful for my taste. Ignorance is bliss. When I looked today and saw I got stopped out of Coffee it had almost no emotional impact at all. This is ideally the way it needs to be.

Cattle at this point is an example of a market I was not sure enough about to make a trade Tuesday. I know I want to be looking for sells there, no doubt about that. However, some of my short term indicators were not quite giving me the correct "look" coming into Tuesday, so I found myself trying to justify selling a break if one occurred. I then realized I was forcing that trade, so I bailed on that market for Tuesday. I did appear at the time of analysis that something could be set up for Wednesday if the market does not break Tuesday, so that is what I put in my notes and I moved on. Ironically, Cattle dealt us a tricky outside bar that then went back down and closed low, what is called a Search and Destroy day by the market profile people. Had I traded that market today I would have been stopped out most certainly for a loss.

A bit of housekeeping here, Coffee and Bonds/Notes. First the Coffee trade that wound up crappy after a dynamite start.

I had the general area of the target I was going for, and I did have orders in that neighborhood today as well as a stop below yesterday's low. Unfortunately, this market got crushed today, so the stop was executed, taking me out with less than half of the max closing equity that the trade had at it's peak.

Get over it! When trying to catch larger moves, this happens, it is the nature of the beast. I had an inkling and put it in my notes that I thought the stock market was going to decline Tuesday and it would likely drag some of the commodities with it. However, that was just a gut feeling, and I don't trade off those types of feelings. Even though you may guess correctly at times, over time that type of trading will get you wiped out. It is still better than a kick in the ass since it made some money, so time to move on.

I mentioned that I thought the Bond market was setting up a buy, and I got into that trade today. I tried to get some of the contracts on via pullback and we never pulled back, so I don't have the full size on. Time will tell if I will be grateful or pissed about that one.

You can see where I went long here. I felt Notes were a bit stronger than Bonds, but it is basically the same trade. You just wind up with more contracts here than in Bonds since the stops are always smaller. This trade clearly rests on the stock market. If we just quickly reverse back up in stocks, this trade will likely fail, just as stocks drive virtually every other market as well. I mentioned recently I felt this market was ready for a rally, now we will see. I also mentioned Gold was setup for a rally, and that has moved up nicely.

I think the Naz of all things is actually setting up a sell signal depending on how tomorrow closes. I also think Cattle is setup now for Wednesday as a sell if it breaks down some. Today was the wildest intraday swings in crude I have ever seen. I still think the energies are sells here, but today was radical. At one point Crude Oil was up over $3 and Unleaded Gas was down 300 points. There obviously was some intraday big time spread trading in the energies today. By the close when Crude sold off Unleaded rallied. The whole day made no sense at all. Nat Gas and the Grains are also tempting on the long side.

Good Trading


Anonymous said...

When you enter orders as you did in coffee - some at the target and some below the prior day's low-are you using GTC oreders or just Day orders. Also how do you handle the unfilled open orders when one side is stopped out when you are not watching the market all day long whihc you seemed to indicate in Tuesday's Blog.
Don in Virginia

Chris Johnston said...

The orders are contingent orders, in Coffee, OCO straddling the market, and in the case of add ons on retracements, they are order triggers orders types of situations.

Genesis platform allows for both when it interfaces with PFG. I also set alarms so I know when they are triggerred on the add ons, I don't do that on the OCO stuff like with Coffee.

Yves said...

Congrats on your interesting blog, I like the way you put things into perspective, always very helpful in the trading field..

I would like to emphasize the importance of being consistent with the time frame applicable when entering the trade. When I followed up swing trades intraday, more often than not, found myself cutting a losing trade or taking a profit, just to notice afterwards the market reversed or continued its way. So now I try to only review those trades only at the end of the day (but it's difficult, I'm curious about it :)


Chris Johnston said...

Steve I completely agree with you. My logic is that if I make the decision to do the trade based on daily bars at night, why would I then watch intraday swings of that same market.

I have found over time that I need to get out of my own way some times. I tend to get in my own way when I babysit something too closely.

Anonymous said...

Hi Chris:

Back on Sunday you said:

>>One of the reasons I am a short term trader is being exhibited by the stock market right here. It is so difficult to pick the exact low, and if your success requires you to do that, your results are going to be mixed. When you miss a major low like the one we have just seen, you find yourself in a very tough spot as to where to "get in." As a long term investor you cannot afford not to be in, so you have to chase it. As a short term trader, it is just another trade and there are plenty of other markets to play in if you miss one somewhere. I miss trades all the time, and I have missed this one, or have I?<<

I am wondering that any long term investor chasing the risk market now is in danger of chasing over the cliff:


The article on this blog about negative 10 year Treasury bond yields and the fact that recessions have followed negative 10 year yields in every instance since the 1950s is a caution in forming the definition of “long term investor.”


Chris Johnston said...

I think we are already in one or the last one never ended. Only government number doctoring makes the numbers look like a recovery

Alain said...


think you wrote this article for me:) thank you. Sometimes, it is important to sit back and analyze the situation. The only one to blame is myself.

We had a PXY IDX short sign on N'Gas suggesting little lower prices. Target shooter suggests prices around 3.45.

Same short signs in coffee & copper but obviously no entry (yet).

Just amazed where indices and energy are going. POIV problem remains. Sentiment sales on ES, NQ, Russell. Dow seem strongest. Taking out this week's low on closing basis may be meaningful.