This is an awesome talk which touches upon the ideas of Risk Management, Probability and to some extent the "Mindset" needed to manage risk. Watch it and let me know what you think.
The map is not the territory - Part 2 of 2
Last week in part 1 of this post, I linked a video by Julia Galef, where she use the metaphor of a Soldier and Scout to refer to two different mindsets.
In the trading/scalping world. These two metaphors could be used to highlight two key skills needed to scalp. Let's see what they are.
Scalper as a Scout - If you remember in the video, Ms. Galef says, "The scout's jobs is not to attack or defend, his/her job is to identify the terrain, look for any obstacles, and above all understand whats out there as accurately as possible"
In the scalping world it means, knowing the "Range" probabilities of the instrument that you are trading. You need to know how far can it go in either direction. The following are some of the questions that you would need answers for.
- What is the median/mean range of the instrument that you are trading?
- What is the standard deviation? or IQR interquartile range?
- What is the probability of a mean reversion of the instrument on an intraday basis?
- Are there any time based probabilities? For example is there a a time slot where the probability of a mean reversion is higher?
- If range expansion happens, at what time slots is there a higher probability of an expansion? or does it expand in a linear way?
- Are there any day based probabilities? For example are Mondays on an average low range day or expiry days are high range?
As as scalper you need to know all these and more, that's the terrain on which you would be fighting the battle. How can you even afford not to know it? Remember how the Allies (with all their artillery and trained soldiers) lost the Battle of Gallipoli against the Ottaman empire. One of the main reasons for that was inaccurate maps and lack of understanding of the terrain.
Back to markets, so without understanding the range probabilities of the instrument, your trading tools (read charts, indicators etc.) are all of no use. You cannot be shooting bullets if you are down in the ditch.
Scalper as a Soldier - While you definitely need to know the terrain well, you also need to know how to fight the battle. Which in the language of trading would mean, entries, exits, scaling-in and scaling-out, understanding indicators and other tools for precise entries and exits.
You also need, psychological traits of courage, patience, and most importantly resilience.
Lastly, it's important to recognize that as Soldiers sometimes we loose sense of the territory, after all maps are not territories. They are abstraction of the territory. Maps are in our minds.
In the words of the Polish American philosopher Alfred Korzybski these are metaphors of belief and reality - "Reality exists outside our mind but we can construct models of this 'territory' based on what we glimpse through our senses." - Perhaps that's the reason we use the term "Mental Maps" and not "Mental Territories".
The only way out of this Map vs. Territory paradox, is to reconcile both, as often as possible.
The map is not the territory - Part 1 of 2
A few days back, I was having a coaching conversation with developing trader and as usual I started with the concepts related to Range (High-Low Range of NIFTY). Being a young, eager student, he said - "No No, I know what a range is, and all that, all that I need to know is when to Enter and when to Exit, that's more important for me"
And, unfortunately he is not the only one I came across who was more interested in Entries and Exits than in understanding the boundaries of the playground i.e before playing the game.
I follow Julia Galef through her Rationally Speaking podcast, and she has done a very relevant Ted Talk about decision making. She uses the metaphor of the Soldier vs. Scout to illustrate two different ways of Information gathering and there by using that information for decision making.
While I do recommend that you watch the video for yourself, here is a summary of what she is saying.
There are two ways of looking at the world around us and gathering information. In our context let's say you are looking at the index/markets.
Soldier Mindset - This is a metaphor for people who engage in what is called Motivated Reasoning, meaning - Unconscious emotional drives impacting our decisions instead of reason and facts. People who use this approach consider some ideas as allies and want to hold on to those ideas and other ideas as enemies,and would we want to shoot them down.
Let's say, you follow someone on Twitter and that person says, I think this is the bottom for the day, now you really admire this person (for several reasons), now there are two things possible - He/she is right or He/she is wrong. No issues at all if he/she is right as you know and believe that they are pretty good at predicting the markets. However the problem is, when they are wrong - you would find it very difficult to convince yourself that they may not be that great at predicting. Instead, you may want to give them some benefit, and continue to hold them in high esteem, because that belief in this person is of greater value to you than being curious to check or re-examine your beliefs.
You can also be applying the "Soldier Mindset" to your own self. Let's say you believe in some "Gann numbers" thing. If it works even a little bit, your belief in that system only grows stronger. Now lets say it doesn't work. What you would do is, instead of questioning the rationale behind the system, you may just brush that instance aside or even put your own reading in question - Telling yourself - "Oh may be I don't know Gann system so well. I need to work more on it."
I am sure you get the drift now. It's essentially about holding (unconscious) biases while gathering information and making decisions.
The other side is what she calls the
Scout Mindset - Here the person in question is driven not to make one idea win or other loose, but to see what is there. This person is looking for facts and evidence. He/she is curious and takes pleasure in learning new information, even if it contradicts his/her own belief. In fact, some people with the "Scout Mindset" may seek others who are willing to contradict their ideas. They constantly keep testing their own beliefs. More importantly they are grounded in the sense, their self worth is not tied to them being right or wrong, but instead to finding what is right or wrong.
She also points to the fact that people with "Scout Mindset" make better quality decisions and this mindset does not correlate with IQ. So you could be very intelligent but bad at decision making.
So whats in it for us Scalpers and Traders?
As traders we make multiple decisions and use varied frameworks to understand market structure. Obviously our success depends on making more of right decisions and less of wrong decisions. And if you are developing trader its important that you start with creating and following frameworks which are more evidence based rather than "belief" based. In other words you need to be more of a "Scout" rather than a "Soldier".
So what is it that you could do to develop a "Scout Mindset" as a trader?
- Ask for evidence - Whenever you come across a system or an indicator, always seek evidence in terms of back tests, better still learn to do these yourself. Perhaps learn to code in Python or R.
- Develop co-relational curiosity - Looks for co-relations between different signals/events. If X happens does Y also happen.
- Calculate Probabilities - i.e - Yes if X happens Y also happens, but how often does Y happen? - This would tell you if there is an edge in the co-relational relationship that you found.
- Question Ideas, People and Systems - That's the only way to progress. If you find someone becoming uncomfortable with your questions and becoming defensive, that's a sure sign of a scam.
Unfortunately this is an industry full of snake oil sellers who feed on thousands if not millions of bright eyed suckers who come in everyday, only to loose their hard earned money and more importantly their self-worth. Being a "Scout" is one good way to avoid this eventuality.
I am sure by now you may thinking - All this is fine, but what was that Range, Map and Territory thing? - Well that's for Part 2 of 2
Getting Started - Scalping Basics - 03
So here is the review of Part 3 of the Six part series. This one is titled "Trade Execution"
Part 3 of 6 - Trade Execution
Previous parts here - Part 1 of 6 - "Define, Expect & Explain"; Part 2 of 6 - "Searching for Opportunities"
Though execution is an important topic, a lot of what is shared in the video is not relevant from from an Indian perspective. I would still urge you to watch the video. Below are the key ideas shared in the video from an Indian perspective.
Scalping Efficiency - Here Tom talks about understand the products that you would like to scalp and then goes on to explain which are the better suited products in the US market. Let's look at products in India , given the way taxes are structured, Options are any day more cost efficient products in India.
Let's compare the costs - 1 lot of NIFTY Futures vs. 1 lot of slightly ITM Call Premium (Delta 0.7 approx)
Compare the STT which is almost 12 times more for Futures. The net loss of trading for a 1 lot is 6 times higher in Futures. Also note the break even points. almost 2 times more. I would suggest you do the math yourself using the Zerodha Brokerage Calculator.
Orders - Though Tom talks about "Marketable Limit Orders" more about it here, we in India don't have that choice. Its either a Market Order or a Limit Order. Yes, there are other orders like Cover Order and Bracket order that is available, but they don't work for my trading style. Since every penny matters in Scalping, it only makes sense to do limit orders and if required manage the position by scaling-in. But both entries and exits have to be on Limit orders unless in an exceptional situation you just want to square off and scoot.
Default Size - Tom says 1 lot has been a default size for him, but then he is talking about futures in the US. I would answer this in a more nuanced way. (Disclaimer - This is the method that I use, there is no best way to do it, there are several ways, just that the below described method works better for me, happy to hear your comments)
I trade in a way, where I identify a trade location. Once price gets to my trade location, I define boundaries of that location, and scale-in to my position in tranches of increasing sizes, for example if 10 is the total number of lots allocated for the trade in a specific price zone of 10 points, I would scale in with a the fall of every 3 or 4 points with 2,3, and 5 lots. This approach works (only) if used in a context of a larger probabilistic framework. Similarly, I also scale out of the trade and trail around 30% of the position to catch larger moves.
So the bottom line in terms of size is, define the size that you would like to trade, and don't change it arbitrarily, also define a stop loss level based on the average cost of the position. More on this when we talk about Risk Reward ratios.
Market Depth - Most of us i.e retail traders have access to Level 1 Market Depth, which shows us 5 best ask and bid prices, I personally do not see an edge in that, however, glancing at it would give us a sense of the bid-ask spread, volatility/rate of change, and the volumes being traded.
Order flow - To view this, you would need a tick data feed, preferably e-signal and some charting tool like Market Delta for foot print charts. This data again has limited predictive capabilities, but definitely better than the minimalist market depth. Here we can, to some extent, identify large lot buyers, spot cumulative volume delta divergences etc. I subscribe to these through Vtrender.
All these tools help us make a probabilistic guess about the very near term market direction (30 minutes to 2 hours), and add to that a cost efficient product helps us make the best of the market moves.
Hope you found this useful.
Feel free to post your questions or write to me on srao@niftyscalper.com
Trading as a way of life : Jihan Bowes
This guy is awesome. Sums up trading pretty well. Do give it a dekko and don't miss the hip hop part at the end.
How to analyze markets on an Intraday basis? - Damon Pavlatos
I have been following Damon for quite some time now, he is a market veteran and has been in the broking business for decades now, he also happens to be married to another favorite trader of mine Linda Bradford Rashke.
In this short video he gives us a glimpse of how he looks at the market on an intraday level and that should tell us, the novices, what to do.
Quora Question - What is the best technical course in trading for developing myself as a professional trader?
What is the best technical course in trading for developing myself as a professional trader?
I wish there was a simple answer to this question like - These are the top 5 trading universities in the world, write the TMAT exam and apply for each of them.
Ok. Let’s get real.
The fact is there is no such university. You would need to design your career/education and life.
The following are some recommendation that I would have if you are looking at becoming a professional trader
- Your best bet in this case would be to pursue - Chartered Market Technician Program this program. Its a self study program and you would need to clear a qualifying exam to be certified. Pretty well recognized in the industry. - Please note this is not at all a necessity. Nor is it sufficient by itself. Its a nice to have certification.
- There are no other professionally run courses that I would recommend. Always go with a “Caveat emptor” mindset when looking for a commercially run program.
- Zerodha has done an awesome job of creating content for an Indian context - Zerodha Varsity - This could be a good starting point.
- Look for mentors on Twitter, Trading forums, Seminars, Conferences - identify who are the people who contribute better, connect and seek inputs. Again, not easy, but this is what works in the longer run. And yes please beware of snake oil sellers, there are thousands of them. And the best actually never sell, because they don’t have to, they trade for a living.
- Create a learning plan and ecosystem for yourself - Listen to videos, podcasts - make notes, structure your learning, that would help you connect the dots.
- In this whole process you will learn a lot about trading and also about your own personality and what kind of trading works for you. From this phase onward you would become more nuanced in what you want to learn. That would be the starting point on your way to become a professional.
Finally want to leave this post with a task for you - Listen to a dozen interviews of traders on - Chat With Traders Podcast | Hosted by Aaron Fifield - Usually Aaron starts with the question - How did you get into Trading?
Standing on the shoulder of giants
Long weekend and I was reflecting on all the people who have helped me on my journey to become a better trader, these are the people who've in many ways influenced my thoughts, some of them have taken time out to help me understand certain nuances. You know who you are. My heartfelt gratitude to all.
Listing in no particular order, but categorized based on medium
Youtube Channels
1. Chat with traders - Aaron does a fantastic job of interviewing people. There are some podcasts that I have gone back to several time. I will create a separate list of must listens later.
2. SBM Capital - Mike Bellafiore and his team at SBM do an awesome job of sharing knowledge again a someone I look up to and a channel that I follow. Really no nonsense stuff.
3. Futures.io - This is another channel with very relevant webinars.
4. Wikimaniacs - Fairly good assortment of content, they have all the popular and big names covered.
Forums
1. Trader Laboratory - This one is absolute gold. Esp. follow content by jperl and soultrader. I owe these guys a lot.
2. Forex Factory - Follow posts by dee50
3. Capital Mind - This is a paid one, but have learnt a lot from various people and the discussions, esp. vyr
4. Twitter - I will put this in the category of forums - the below list of people are worth following
- @Thakker_Inv
Network Engineer by profession. Market Profile learner and trader.
- @niftywizard
Entrepreneur & Independent Nifty Future trader. Market profile,Volume,ADX. Tweets are commentary only, you must analyze & trade at your own risk!
- @LanceBeggs
Futures Trader & Trading Educator
- @sweetspottrader
l Am The Smart Money U Guys Talk About . Travel ,Food ,Fitness ,Yoga,Stock markets and Harvey Specter
- @VerdiTrader
Tweets are only for learning purposes, I don't recommend anyone to follow me or my tweets and act based on them since I make mistakes all the time.
- @IMRiskManager
Avid Reader, Keen Observer, Curious Learner, Skeptically Optimistic. On Twitter for learning and sharing knowledge.
- @assortZ
Life revolves around Nifty,BNF,Basket of 15 stocks,Market Profile and Ilaiyaraja
- @StoicTrader
"Pure mathematics is, in its way, the poetry of logical ideas." - Albert Einstein
- @Am_Shai
Index Trader on NSE trading with MarketProfile + OrderFlow. Reach me - vtrender@gmail.com
- @ap_pune
Chem engineer in international oil & gas industry; Technical analysis of stock mkts / Sports; Tweets on mkt purely meant for educational purpose
- @ProAMTraider
#AMT #MP #VSA #OFA Hybrid Trader = Discretionary system - Systematic discretion. Founder @justfintech & Gaffer in Film Industry.
- @Sunchartist
Macro / Technical analysis a labour of love , travel, foodie, current affairs
- @steenbab
Trading coach, psychologist, author, blogger, and stock index trader
- @RaghunathHyd
Markets, NSE, Futures and Options. Ideas & Strategies in FnO. Anything posted on the timeline should not be taken as an advice but for only…
- @Prashanth_Krish
Chartered Market Technician, Stock Market Trader, Systematic Trend Following, History & Movie Buff.
Websites & Blogs
1. TastyTrade - I think I have spoken enough about this in the past.
2. Trading Naked - Nice site for basics of Market Profile
3. http://www.smbtraining.com/ - Again search within the blog and the site, this is another treasure trove.
4. http://traderfeed.blogspot.in/ - How can we not include Brett's blog. This is my go to place for anything to do with trading psychology, also sometimes find interesting information about market probabilities and statistics.
That's pretty much for now, I will keep updating this list as I go along. Hope this helps you get started.
Mastery Series - Neurobiology of Practice & More
This is first one in the series on Mastery
Pick up any text about Mastery and you are sure to stumble on ideas of Deliberate Practice, Reflective Practice and the famous 10000 hour rule by Anders Ericsson.
This short Ted-Ed video is a good watch as a segue in to the topic.
Here is what it talks about
- What does practice do to our brains - The neurobiology of Practice
- How many hours of practice do we need for Mastery?
- What kind of practice matters?
- What constitutes quality practice?
- Beyond practicing is there anything else that one can do?
Watch this video to get the answers to these questions. At the end, Trading or Scalping after all is a skill and like any other skill needs sustained efforts and intense practice over long periods of time.
So off I go. Time for some reflective practice.
Getting Started - Scalping Basics - 02
So here is the review of Part 2 of the Six part series. This one is titled "Searching for Opportunities" - It's a rather short one.
Part 2 of 6 - Searching for Opportunities
"Liquidity is the most important prerequisite" - This is something that we discussed in the previous post as well, and to tell you something interesting, NIFTY Options is the most liquid product in the world. Take a look at this NSE press release. Yes there are some nuances to it. Like, when it comes to scalping NIFTY, you would find that ATM and slightly OTM strikes have better volumes compared to ITM strikes. Also strikes ending in 100's have higher liquidity than those in 50's. But at the end, when it comes to liquidity nothing comes close to NIFTY options.
"The very act of scalping is initiated by the market itself" - "Price extremes are a good place for market forces to push price in the opposite direction." This is what Tom Sosnoff says. In other words I guess he is trying to say that markets are mean reverting, and that is where the opportunity lies. It's very true for NIFTY as well. At NIftyScalper we use probabilities of mean reversion to trade, and you would be surprised to know that there are specific time slots with certain mean reversion probabilities. I practically make a living of it.
"Ranges are the key to scalping" - You need some range, some movement to scalp. If you look at NIFTY Index data you would get a sense of the average range of NIFTY. It comes to around 80 points i.e the High-Low range, which is what we are interested in, not the Open-Close range.
If you are scalping options, the delta of the strikes would play a role here. I usually scalp ATM strikes, so you would have a a delta of (0.5) which means a range that is half that of the Index. There are a few days in a year where the index itself is in a narrow range of sub 50 at times, that is when it becomes difficult to scalp, but then ranges are also mean reverting, there are periods of expansions and contractions.
Role of VIX or the Volatility Index - This is something they allude to indirectly by referring to expected move in the index. More on what it is here.
It's important to understand the implications of VIX and its correlation with NIFTY. It helps us build on our market awareness and also aids in having a directional bias while scalping.
That's pretty much for this episode. The next one is about "Trade Execution", I would say its a key building block of scalping. Eager to write about it as there are a lot of contextual differences which need explaining.
Learning to see data - NYT Article Summary & More
Article Link - https://www.nytimes.com/2015/03/29/sunday-review/learning-to-see-data.html?_r=1
I came across this article sometime back when I was researching on "Perceptual Learning". Perceptual learning basically is about how we learn and create patterns in our brain using all of our senses.
Here's an excerpt from the article which explains it further
In the context of markets, it is closely linked to the idea of "Fractals" and concept of "Thin Slicing" from psychology.
When we are looking at charts and trading, esp. seasoned traders get an intuitive feeling of what may happen next. I have seen this with several traders. They see a pattern emerging and they know how its going to develop further. Obviously its not fool proof, but even if it's better than a coin toss probability, its good enough, in reality I have seen people who have a probability of getting it right more often. But then, it may not just be their refined visual perceptual abilities, there could be other variables that they may be tacitly processing, perhaps some moving averages or some other data. Its only when their brains kind of processes all these elements together that they get their predictions right.
Also, since price movements are fractal in nature, traders are further able to apply the same sense to different time frames, and perhaps benefit from larger swings as well.
But then how do we develop this intuition, unfortunately there are no shortcuts. Sufficient "Screen Time", "Focus" and "Reflection" seem to be the only ways get there.
BTW, if you are more interested in the subject of forecasting there is this awesome book by Philip E. Tetlock and Dan Gardner called "Superforecasting: The Art and Science of Prediction", here is a nice summary.
Getting Started - Scalping Basics - 01
This is the first in the "Getting Started" series which I would be doing on the blog. The purpose of this series is to curate learning resources which give a general sense of what "Scalping" is, and it also helps in creating a mental framework based on which one can further pursue specific sub-areas of interest.
Since most of the content which would be introduced in this post is more US focused, I would attempt to contextualize it based on its applicability and relevance to Indian markets, while adding my prespective as well.
Sometime in 2015, TastyTrade did an awesome six part series on Scalping. I would say it was a first of its kind. Though I would recommend that you watch each of the episodes in series, however due to paucity of time if you would not want to do that here is a re-contextualized summary of it.
Part 1 of 6 - Define, Expect & Explain
"This is the story of Tom and Tony's life, 35 years of scalping for Tom..., we think there is a skill set to it.." - TS (Tom Sosnoff)
Tom and Tony were Market Makers at CBOE, and as market makers all that they did was Buy at Bid and Sell at Ask. Though today they are more like any other retail traders, they still scalp futures and they think there is a skill to it.
"Direction is luck, however there is a method .." "80 % of the time Tom is right.. how can it be pure luck" - TS and TB (Tony Battista)
This is very important to understand. Direction is luck, but there is a method. Which means we at any given point of time, cannot predict the direction, however the skill lies in managing the trade.
"Mechanics.. understanding the probabilities - understanding what is supposed to happen";
"Intraday Range...Opportunity can be found by examining the intraday range and the risk could also be assessed using the same" - TS
Here Tom is trying to say that once you know the probable range in which a specific market operates, you would know the boundaries withing which the price would move, for instance if you are at the mean at a given point of time, you know the probable move in either side that can happen. Which also means you know when the move exceeds the norm.
"Bet the same side.. Short side" - TS
Though Tom says he always has a short bias, personally I have benefited by being direction agnostic, I personally do not see an edge in trading only one side, the reason he may be suggesting that is, because he trades futures and mentally its easy to stay on one side, however when it comes to options all that you have to do is to look at which side is going up (It has to be either the CE or PE), so mentally you are always chasing the price/premium moving upwards, and hence being direction agnostic works well in Options.
"Its not about where it ends up.. its about what it does in between." - TS
Full time traders look at what happens between the open and close of the markets, and that is where opportunities lie. At NiftyScalper we have analyzed data to understand the probable opportunities a market like NIFTY can offer, and there are several such sweet spots that are there for the taking.
"Directional call is not what makes money for most people" - TS
Read this sentence again! There is nothing more that I would like to add here.
"More than an engagement tool" - TS
Meaning, they used this approach for more than just being busy with markets, they make money through this. And yes anyone can, so long as they develop the skills.
"Scalping Products - Tiers, Liquidity separates the tiers". -TS
In India, if we go by liquidity the only products which stand out are NIFTY Options and Futures. Stocks options just don't fit the bill. Especially if you are looking at scalability.
"Some point where you have a very high statistical chance to take your 4 or 5 point profit" - "That's all scalping is - recognizing those odds" - TS
All that you need to do is to analyze NIFTY intraday data on a shorter time frame and see where such statistically high probability trade locations exist. And they do!
Finally rounding it off Tom and Tony share the key aspects to successful scalping
1. Markets are cyclical
Meaning markets are mean reverting most of the days. More on this later, this deserves a blog post of it own.
2. Probabilistic outcomes... if you wait long enough
You need to play the game long enough for the probabilities to come true, meaning if the probabilities are based on a years' data, then you would need at least a year long participation to gain by those probabilities.
3. Managing winners vs. Managing price - you cannot expect the market to go the level that you think its gonna go to... you can expect though the levels its supposed to be, based on where its currently trading
Trade management is what they are alluding to over here. You cannot predict where the price will go in the next few minutes or hours, but you can have a plan in place as to what you would do if the price moves in either direction.
4. Multitasking
Yes, you may have to work with multiple systems, charting tools and order execution tools. But there is a catch here, multitasking does not mean trading multiple instruments. I have seldom seen a successful scalper who focuses on more than 2 products. I personally cannot do even 2, I trade only 1 instrument i.e NIFTY
5. You have to stay small
Yes at least till the time you master the game, you need to stay small. And to make money scalping while staying small is possible but you need the right brokerage plan for that. Something like a fixed brokerage plan is ideal.
6. You have to recognize when the move has exceeded your expectation
This is something which I highlighted previously, once you know the probable ranges you know what to expect.
7. You have to have the capital
Yes you need to have sufficient capital to start with, what constitutes sufficient capital needs a post of it own.
8. You have to recognize when you are in the wrong product...
Here again, its more to do with liquidity, especially with Options, some ITM and OTM strikes may have insufficient liquidity, from a scalping standpoint. Also knowledge of Option greeks is desirable to understand how those variables can affect us.
9. Usually a Intraday play - why "usually"
Tom says sometimes they tend to hold positions for longer duration. I want to clarify a few things in the context of scalping. One, the risks associated with scalping are very different from the risks associated with Positional trades. Hence if you plan to hold positions overnight you need to manage your size accordingly, else you could be risking all the advantages of scalping intraday and perhaps risking your capital much more than what you would want to.
10. Before entering the trade we need to have an exit strategy - Profit target.
Yes, essentially you need to have both a SL and a Target in mind. Yes I said it right "in mind". The reason I am underlining that aspect is, scalping is more like surfing, you need to go with the flow, which can mean both "Scaling-in" and "Scaling-out" of trades. But this scaling in and out needs to be done in the context of the probabilities. Which is where understanding probabilities becomes so important.
11. Scalping is luck.. but success is understanding the simple math...
Lastly, we need to appreciate that "Picking the direction" or "Directional movement" is luck. But what we do with that movement and how we manage that is math.