BIG MIKE’S TRADING FORUM

Big Mike’s Trading Forum is a great place to hang out and discuss trading. I have been following Big Mike since he was on the Ninja forum as ctrlbrk. He has always been a very helpful guy. He was nice enough to answer a few of my questions as his forum is coming up on his second anniversary even with a broken hand.

This is a great interview and well worth a read. Interview posts are not very popular on my blog, but they are much more informative and useful if you want to make a living from trading , it would be good to listen to those who have been around for a while like Big Mike.

So after reading this post, head on over to Big Mike Trading, a great forum for traders and some of the things he has planned for the second anniversary.

• Memorial Day charity drive: All Elite subscriptions get donated to charity
• Battle of the Bots: June Winner gets Algo Trading book from Amazon
• Teaching contest: Win an iPad 2 for the best thread teaching a methodology (follow-up to our iPad 2 journal contest)
• Velocity Futures Webinar: Giving away two cent commissions for an entire month to two people
• Suri Duddella Webinar: Chart pattern expert, giving away 10 autographed copies of his book
• MultiCharts Webinar: Platform overview, new features, giving away two lifetime licenses and two sets of two hours each programming time for custom indicators or strategies
• NinjaTrader Webinar: Platform overview, new features, giving away two round trip tickets from anywhere in the world to Las Vegas for November 2011 Trade Expo, plus one two year subscription to NT
• Al Brooks Webinar: New price action books, price action trading: giving away 10 autographed copies of his book

AND NOW THE INTERVIEW

[1] One of my big things is journaling. I even print out my journals at the end of the month. When I go back over them months later I learn so much about my trading. I know you are a big fan of journals also. My question is, why do you think it is so hard from some people to do journals?

“Journals are probably the single best tool a trader can have.  Yet most traders throw it out the window and think they don’t need a journal.  Well, most traders fail.  So do the math…  I think people come up with a list of excuses that they don’t need to journal, but the single biggest one can probably be simplified into lack of determination to see it through.  Another common one is simply the “lack of time” excuse.  To me this says the trader is overtrading and it would take them hours to journal about all the trades.

Individual traders are not computers.  Let the computers do high frequency trading.  You should focus on just a small number of setups each day, maybe 3-5 trades at most.  Anyone should be able to write down why they entered and exited a trade three times a day, no excuses.”

[2] Somewhat related to the previous question, in that you have to be honest with yourself to improve. Why do you think people are not honest with them selves in their trading. Almost as if they see what they want to see.

“It’s not that people intentionally deceive themselves.  I don’t believe that.  What I’ve found through my own experiences and through the forum is that traders get caught up in something and can’t see the forest for the trees.  I refer to it as the black hole phenomenon, where the trader gets sucked into this vicious cycle of repeating the same mistakes over and over.  But the trader can’t escape.  In order to deal with this, the mind plays tricks and invents all sorts of reasons that a trade failed or that the trader lost money.

I’ve got news for you, if you don’t accept full and complete responsibility for every action, beginning to end, having to do with your trading – you will never succeed.  Don’t blame your computer if it is slow.  Don’t blame your internet connection for dropping out.  Don’t blame your platform for crashing.  Don’t blame Goldman Sachs for running your stop.  And worst of all, don’t play the “if only” game with your indicators.  If only you had… <insert 42 excuses here>.  It’s all you.  Own it.  Take responsibility.  If your computer sucks, your internet connection is flaky, and  your platform crashes routinely, then you shouldn’t be trading until you resolve all of those issues.

Once a trader finally comes to terms with the fact they are solely responsible for their own trading success or failure, it can be an eye-opening experience.  On the one hand, you can finally move past all the junk that gets in the way psychologically holding you back, and face it head on and deal with it.  But on the other hand, you finally realize you have only yourself to blame.  It’s crunch time.”

[3] We all start out somewhere trying to be full time traders. Do you have any advice for someone who is marginally profitable part time to make the jump to full time ?

“If you are marginally profitable, my first question is over what time period and how many trades?  I would be cautious if the term is less than 1 year and the frequency of trades is less than say 500.  Don’t get cocky and think because you had two good trades in a row that you’ve got this trading thing licked.  Trading success is incremental.  There are many things you must master, all individually, in order to finally put all the pieces together.  You can’t skip over the hard parts, there are no short cuts.  There is no indicator or trading system to download that will make you money.

My advice begins with “congratulations!”.  Even marginally profitable is considered a success in terms of the larger group of traders.  Build on it, slowly.  One of the most common mistakes traders make is allowing their ego of always wanting to be right to get in the way of a trade decision.  That often leads to giving back days, weeks, months or even years worth of profit in just a handful of terribly executed trades.  So go slow, don’t get cocky, and make sure you have some meaningful analytics in place to measure your success.”

[4] I have been trading the same basic system for the  last few years. It has evolved over time, but it is basically the same. I run into others who constantly want to radically change their system even when they have a perfectly workably system, one bad day of trading and they throw the system  out and start their search again? What are your thoughts?

“Congrats!  That’s awesome that you’ve been trading the same basic system for this length of time.  I constantly tell people to stop changing everything.  People rush to change indicators, tweak settings, or download the newest craze system in order to solve an underlying problem with their own trading psychology.  They want more filters, they want to stay out of chop.  Basically, they want the holy grail.

If you have been trading for 3 years but you’ve changed your method every few weeks, then you don’t have three years of experience but rather only a few weeks experience.  I strongly believe that success is determined by your ability to read the market, and not by your ability to follow a blue-to-red trading system or indicator.  You don’t stand a chance of properly reading the market if you are constantly changing your charts and indicators.”

[5] In trading, I have found that best advice I have ever received has been free or inexpensive. I usually steer people who ask me questions to Reminiscences of a Stock Operator ( can be found free ) , the CME website, and Al Brooks book ( Soon to be in English ). Besides Big Mike Trading, of course , where else would you direct others ?

“I prefer reading Trading Psychology books.  Brett Steenbarger has several absolutely excellent books, and a blog online that is filled to the brim of real-world advice.  I don’t read books that describe methodologies very often.  If the book has lots of pictures of charts, then it is really of no interest to me.  Sure, I’m always eager to learn new things, but I want to incorporate it into my existing trading system and am not eager to make any kind of departure from what is working for me.

As for online resources, of course I think BMT is the place to be.  I don’t frequent any other trading related websites anymore since BMT has taken off.”

[6] How do you deal with the boredom of trading? That is sitting on your hands and waiting for a great trade. Is it something that came with experience for you?

“If trading is exciting, your probably losing money.  I don’t treat trading like gambling.  I go to Vegas to gamble, which means to have fun.  I trade in order to make a living.  I usually trade for about 2-3 hours per day.  During this time, I turn off my phone, TV, and I don’t browse the web.  I am looking solely at charts on all of my monitors and I work to get in rhythm with the market.

With my particular methodology, I know where I want to enter and exit a trade ahead of time.  So I place limit orders and don’t have to watch the market tick by tick in order to press the button to get into a trade.  I would suggest a similar approach to others, as watching every tick will just lead to over trading and second guessing of your original analysis.

That said, a huge number of traders have a problem over trading.  My suggestion to them is to make a promise to yourself that you will take only 3 trades a day, period.  So help me, if you take 4 trades….  I find that knowing this number ahead of time really helps to focus traders.  Of course if you make this promise with yourself, your best bet is to post about it in your journal on BMT so you get the extra accountability you need.  The mind is a powerful tool, be sure you are using it to your advantage ”

[7] Finishing up, if you could give one and only one piece of advice to a trader, what would it be ?

“Be realistic with your expectations.  Too often, traders come into this business and think they can turn their $500 forex account into $5,000, or they can turn their $20,000 futures account into a steady $75,000/yr income.  You cannot.  Those kinds of returns are outlandish.  Just because some guy on a website selling you his secret method says you can do it doesn’t mean you actually can.  Be realistic.  Realistically speaking, you will probably spend $20,000 to $50,000 the first two years you trade.  I say “spend”, not “lose”, because I look at this period as your tuition and its an educational expense.  Hopefully your third year you can earn a 10-20% return or so.  By your fifth year, maybe you can get to your $75,000/yr income figure with a modestly sized account.  A common number thrown around is 10,000 hours – you need 10,000 hours before you start to “get it”.

Expanding on the above – make sure you treat trading as a business.  If you are serious about being a full-time trader, then act like it.  This means no interruptions while you are working.  No wife and kids coming into your office every hour.  No surfing the web, watching TV, sleeping in, staying up late, etc.  If you don’t respect yourself enough to treat your trading business seriously, then you won’t succeed.  After you “make it” in trading, you’ll find your life will open up and you can do the things you’ve dreamed about without them interfering with your work, because you’ll likely only be working 2-3 hours a day.  But during your tuition period, you can expect to work 12 hour days routinely.

TW, it’s been a pleasure answering your questions today.  I look forward to seeing you, and your readers, on BMT!

Big Mike”

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DO NOT HOLD OVERNIGHT

I just wanted to get that out there in the beginning. Do not hold overnight positions using Ninja, period. Your PnL and positions will get totally out of whack when doing overnights and it is not as all fun as a lot of not nice things can happen in your account. I will describe it as “Evil” as a blanket term for bad things that can happen to your account.

I have NEVER once held futures position on purpose overnight. Note that I have said on purpose. I have woken up to start trading and noticed I had a position on in the per-market, that should not have been. I no longer had a profit or stop loss orders in the market so I was trading with out any protection. If a black swan had happened overnight, I would have been … messed up. That is a feeling I never want to have again which is why I check my positions everyday I trade.

WHAT BROKERS USE TRADING TECHNOLOGIES

This is overlooked a lot because most people associate NinjaTrader with Zen-Fire. In the beginning that was the big marketing push. NinjaTrader can connect to several different broker technologies, like IB ( Interactive Brokers ) and others.

Some brokers like Deep Discount Trading, Velocity, Advantage offer NinjaTrader but with Trading Technologies instead of Zenfire. By using Trading Technologies FIX connection, they can lower their commissions and a lot of traders won’t notice the difference anyway.

If you do hold positions overnight and have a problem You won’t get much sympathy from Ninjatrader support. Every broker will handle this differently and I have even heard that Ninja/TT will ‘act’ differently depending on the TT infrastructure that the broker has in his / her office.

We advise you NOT to carry positions overnight (between sessions) since NinjaTrader cannot accurately report your position which can adversely affect your account. – Ninjatrader.com

That is from NinjaTrader’s connection guide. It does not say what will happen, we just have to assume it is something evil.

WHAT HAPPENS AT THE END OF THE DAY?

There are more problems than mark to market trading with TT, but here is a small explanation from one of the Ninjatrader support staff on PnL calculation that I waned to include here.

When a product closes for the day and goes to a pre-open state, the broker will carry the position forward at the settlement price (*). When the futures contact closes and moves from a ‘closed’ to ‘pre-open’ a few minutes later, the open PnL is booked and set to ’0′. The new average price is then set to the price the market is trading at the open. This is technically correct and expected for all futures contracts. This is referred to as ‘Marked-to-Market’ and is how all futures contracts are handled.

*: In electronic futures, the broker will use the last traded price since the settlement is actually done in the pit and the broker will have no access to that data until the end of the day.

Also, if you have any GTC orders that are still open at the end of the day, they will also be re-opened.

CHECK YOUR ACCOUNT AT THE END OF THE DAY

At the end of the trading day, you should check that you do not have any un expected orders or positions in the market if you are a day trader. Most of the time it will be empty as it should be, but the one time you catch a mistake or a problem , it will be worth it. The thing you want to watch for is GTC orders that stay on your book. usually these are entry orders that may have been laying around like little landmines.

Most clearing firms have a web portal that lets you check your positions and orders. This is a great complement to Ninja trader because even if it does not show up in you account size or position, it will show up on your clearing firms system.

Remember, GTC orders are evil for Day Traders.

PIMPING MY NEWSLETTER

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Photo Courtesy x-ra delta one

So I opened an account with DeepDiscountTrading.com. I am in no way unhappy with my current broker and I will continue to trade with them. One of the reasons ( among other reasons ) why I opened my account with Howard, was because he is crazy helpful.

Since he has been such a nice guy, he was nice enough to answer some questions for my blog.

This is a Q&A about trading from someone who has been around the biz for a while.

If you want to learn more, you can visit his website at : DeepDiscountTrading.com

The text in blue italics  is from Howard, everything else is from me.

MARGINS

Q[1] Day trade margins seem to be on the retreat with $500 intraday for the eminis. Is this because risk management systems have gotten better, or the volume in electronic trading has allowed FCMs to offer lower margins, or is it due to competition, or something else ?

A : Very low day trade margins are more due to one Brokerage trying to out-compete another Brokerage. Risk Management is still a day to day battle for all of the Clearing Firms and there is no simple short-cut around it. The Exchanges have recently been putting pressure onto the Clearing Firms to raise any low day trading margin policies because the Risk ultimately falls on them.

Q[2] I personally do not use the low intraday margins that much. But I like the fact that they are there because once in a blue moon, I will use them. So what margin level do you normally see from traders ? ($4,000 per contract ? $2,000 ? $1,000 or something else)

A : On average, it is the Day Traders who maintain small account balances that like to squeeze the Brokerage for aggressive intraday margins of approximately 10% of the Initial margin set by the Exchange which creates a lot of Stress for the Industry. But Day Traders who maintain large account balances feel more comfortable applying 50% of the Initial margin allowing them xtra cushion if the market should move against them which creates a lot less Stress for the Industry.

AUTOMATED TRADING

Q[3] It seems that automated trading has become very popular. I know you do not offer auto trading, but I want to ask for your advice for those trying to auto trade. Any pitfalls you have seen ? (By pitfalls, I mean something that happens rarely but can be very damaging to an account)

A : Automated Trading has become very popular recently for 2 basic reasons. Firstly for the Inexperienced Trader, it allows them to participate in the Futures market because the System performs all of the entries & exits automatically for them. Secondly for the Experienced Trader, it allows them to code their strategy into the System to help enforce their rules of discipline. Actually, we do offer Automated Trading. We offer a huge selection of trading platforms that allow for Automated Trading. When you visit the corporate website of all these trading platform vendors, then you will see a list of Automated Systems or Strategies that are compatible with their trading platforms available for lease or sale. As for the pitfalls, there are 2 aspects to consider : “Functionality & Performance”. For Functionality, technology has progressed tremendously over the years allowing the Systems to become more dependable & reliable thru the course of real time trading. But it is always advised to never turn your back on an Automated System with total trust. The Automated System should always be monitored at all times whenever it is activated. For Performance, the Automated System is only as good as the “parameters” that are coded into the System. Finding an Automated System that performs with an excellent annual rate of return consistently is the biggest challenge. As for my personal feelings; “If the System was truly a consistent winner, then it would be worth Millions or Billions of Dollars, so why would they need to lease or sell it to you” ?? (But hopefully there are some Automated System vendors out there with Honest intentions)

BACK OFFICE

Q[4] Most brokers do not market the trading platform fee separately. I don’t think a lot of traders understand that the trading platform fee is additional and usually rolled into their commission rate. I guess that can cause confusion since brokers need to pass the trading platform fees along. Could you explain the trading platform fee and why it is usually bundled into the commission rate ?

A : When trading online, all orders need to be placed thru a trading platform. There are many trading platforms available and these trading platform vendors need to charge you a fee to use their trading platform in order to stay in business. Most brokerages offer just a few trading platforms. So to keep everything nice & simple, most brokerages usually build the trading platform fee into their commission rate and they will tell you that their trading platform will be included for Free. But I made a business decision to offer Traders a wide variety of trading platforms depending on their personal needs. Depending on the features & capabilities of the trading platforms, the fee will vary from low to high. So I personally market the trading platform fee separately from the commission rate so Traders know exactly where each penny is going to for full Transparency. A lot of Traders appreciate this approach. Because on the flip-side when a brokerage bundles the trading platform fee & commission rates all together, it can raise the question mark in which direction are all the fees truly flowing ?

Q[5] I know you probably get this question a lot because many traders still seem confused about this issue. What is the difference between and IB and a FCM ?

A : IB stands for Introducing Broker. The title says it all. The IB introduces Traders to the FCM (Futures Commission Merchant) otherwise known as the Clearing Firm. The main function of the FCM or Clearing Firm is to accept funds & orders from Traders according to the rules of the Exchange & Regulations.

TRADERS

Q[6] What do you see as a weak point for most traders ? (For example, I still see traders that are confused over order types such as “Stop Limit” or “Limit if Touched”)

A : There are many different order types available depending on your approach or strategy. If you Google “Order Types”, then you will find their full definitions & rules to avoid making a mistake when placing an order. But the biggest mistake that I see Traders do mostly, is they don’t formulate a trading strategy from beginning to end. They get a signal from their technical indicators, and then they jump into the market, but in the meantime they didn’t take the time prior to the trade to figure out where they should place their Stop Loss order & what Profit-Taking technique should they implement ?

Q[7] Finishing up, if you could give one and only one piece of advice to a trader, what would it be ?

A : Risk Management should be Rule # 1 . If you don’t manage your losses then you won’t have any money leftover to trade. I see it over & over again. A Trader (small or large) will jump into the market without a Stop Loss order. Then the market will move against them by a few hundred or a few thousand dollars. Then they spend the rest of the day with both fingers crossed hoping for the market to bounce back. Sometimes it does – Sometimes it doesn’t. But if they had a reasonable Stop Loss order in place, then they could of been stopped out with a reasonable loss allowing them to change directions or to sit on the side-line for the next signal. But some Traders will tell me; “If I place a Stop Loss order then the market will definitely chase it”. Not True !! I have placed many Stop Loss orders in my personal trading account, and sometimes the market will chase down my Stop Loss order, and sometimes the market will hit the brakes 1 tick away from my Stop Loss order, and then reverse direction to become a winning trade. But some Traders will tell me; “I prefer to use a mental Stop Loss order versus an actual Stop Loss order”. So when the market races to their mental Stop Loss order price, instead of jumping out immediately with a Market order, they start telling themselves; “I will jump out after tick or two – I will jump out after another tick or two”. Then before you know it, they are negative a few hundred or a few thousand dollars again. “Either use Risk Management properly or learn the hard way”.

(Since I’m Licensed within the Industry, I have to wrap-up by Law by saying; The Risk Of Loss In Trading Futures & Options On Futures Can Be Substantial & Past Performance Is Not Indicative Of Future Results)

I don’t post often, but I do have a mailing list you can subscribe to in the meantime. I usually write about Ninjatrader programming, but other trading topics as well. Subscribe to TraderWerks Blog by Email