Sunday, May 25, 2008

Lost and Found, or Does Common Sense Work in Trading?

There are things in trading that run contrary to common sense as we know it. Recent conversation with a trader who asked for advice is a good example of such occurence and illustrates often-made mistake.

First, a joke showing what common sense leads us to do. Fair warning: joke is silly and decisively not funny. A drunk crawls under the street light looking for something on the ground. Asked what he is looking for he says "Lost my watch on that corner". Asked why he is looking here when a watch is dropped 15 yards from the spot, he explains "It's dark over there, little chance to find anything, so I am looking here where there is a street light".

... OK, I warned it was lacking in laughter department. Nonetheless, it indicates that looking for a lost thing in a well-lit spot instead of where the loss has occured is silly. Now, let's get back to our trader and his question.

- I have this pattern of suffering a string losses... it starts usually when I get onto some very volatile stock or a stock making unusually big movement, looking so lucrative because of a great potential. So I jump in, it moves against me, I take quite a loss. Next thing I know, I make trade after trade on this same stock. It's like I got addicted to it and just can't move onto something else. Loss after loss, the day turns into total disaster. Got something to hit me with to cure this disease?

- Got a question for you. Why continue trading that same stock after couple tries proved unsuccessful? Why not leave it be and move to something ou have firmer grip on?

- Well... it makes big movements, I have better chance to get back all those unusually big losses...

- But you don't have reliable read on this particular one. Isn't it more likely that you will suffer more "unusually big losses"?

- Ummmm. I don't know. I just feel it's natural to stay with it until I get my money back. Hasn't happened yet, even once.

That's when I remembered that joke. It's a common sense and natural thing to do in every day's life to look for a lost something at the spot where you lost it. In trading, not so much. Go to well-lit spot and look to get your money back there. Lost money is not tied to a particular spot (stock), it's lost in the market. The market is a big space; go where there is a streetlight that helps you read things well. A stock that you have no read on is to be left alone. You have no personal relationship with it, you don't need to get revenge; it has no idea about you and it's not after you. Free yourself from things that don't work. Focus on what does.


dmitry said...


I have been reading your posts, very insightful, thank you for sharing. I am trader in the making, going on 6 months full time. I have a question: why stocks, why not futures or currencies? Care to elaborate please?

Thank you,


Vadym Graifer said...


thank you for good words, and best wishes in this endeavor.

Why stocks and not futures: well, futs is OK, I do trade NQ now and then. The thing is, however, I like futs as supplementary trading vehicle, not as the only one. The reason is fairly simple. Now and then you run into days or even longer periods when the market is unreadable in terms of your trading system, or locked in too tight range, or moves too erratically. With stocks you are more likely to find some trading candidate that ignores the market and moves on its own merit - for instance, even during all the selling of last days there were stocks hitting new 52 week highs, or moving in some different manner, thus giving you more choice. Also, I found that lately I am more incilined to trade QID rather than NQ as a way to follow NASDAQ.

All this doesn't mean there is something inherently wrong with futures. Just my approach.

Now, currencies... that's different story (again, for me). I don't like them. I am yet to hear about consistently winning intraday FX traders. I am not saying there are none... but it seems way less than in equities/futures. Maybe situation changed since I last looked, but when I did, I hated the idea of "no commissions" trading where you actually trade against a bucket shop and not in true market.

Hope it helps

dmitry said...


I meant currency futures or interbank market, not the bucket shops - those are a losing proposition no matter how good a trader one is.

Do you find stocks easier to trade than futures? I trade ES and NQ and they both backfill all the time.

What is QID please? I use Interactive Brokers (IB) and when I search for the symbol, it shows as
QQQ Ultra Short Proshares AMEX.

Best regards,


Vadym Graifer said...

Can't really put it in terms easier or harder... It's a bit different, and more comfortable for me. I started trading long before e-minis appeared, equities is kind of my "home territory" :) I find e-minis an effective stop-gunning machine if I try to place and trail stops in the same way as with stocks... and I hate to widen stops.

QID is ultra short, yes, I simply use it as opposite to NQ direction wise. Meaning I short it if I see NASDAQ setting up long, and go long QID if NASDAQ sets up for a drop.

Huan said...

Hi Vadym,
I've been reading your book "technique of tape reading recently". it's a very good book, in particularly part 1. I am an interbank fx n interest rate derivative trader. I make market and take sizable prop positions. I have been making money in the past from entering a trade early and completely avoid it when the story start to get market's attention. After reading your book, i've changed my trading style a little bit, that I have pushed back my timing into a trade, which means I would wait for the correct price action first before entry and exit after it starts to turn.

I find I'm much more accurate in intraday movement but I'm becoming too focused on tick by tick movement and missed out quite a few big movements, also after completely abondoned my fundamental analysis, i feel i'm just merely following the market and always enter the trade too late and end up making no money, but again, a much more disciplined s/l also saved me quite a bit money as well, so net net since having read your book, I had been flat. but I do consider myself lucky that rest of the desk had a very difficult month but i am still in good shape.

do you have any suggestion between the delimma of respecting the price action and completely surrender yourself to the market and just follow what smart money do? There's just too many smart money in the interbank world.


Vadym Graifer said...


first of all, I am not sure you can use last month performance as an indication of how well your new approaach works. It wasn't really normal trading environment, it was very choppy and hectic. As you said, a lot of traders around you had a rough time while you held your own... sounds not bad already to me.

Second, about tick by tick watching. Yes, it will narrow your time window so much that utilizing bigger movements becomes impossible. But, why watch and act on tick by tick basis? Pick YOUR timeframe - be it 1 minute chart or 15, or 30 or wheatever it is you want to operate in.. Tape reading is not limited to this very second happenings, just read to see what I mean by that.

Third, I am not sure what you mean by dilemma you refer to in last paragraph. I don't see contradiction between respecting price action and following smart money - it's the same thing, isn't it?

Huan said...

Tks for the fast reply Vad,

Sorry for my bad grammar since i've been away from canada for a good 3 years.
what i meant is that now i face this dilemma of relaying too much on price action and completely ignore the macro picture.
amazingly in the last 3 years i really look at charts yet i made a lot of money by purely sensing the market's sentiment and was able to identify the part of the trading cycle one particular trade is at. although i felt related when i was reading your book, i still think chart is deceiving. I think my struggling from last month was due to blindly trying to apply everything in your book to my current trading, which i only make 1 or 2 trades a day and let it run for at least 3 days-2wks in the past. But thanks to your book i think i am much more prepared and flexible in terms of facing s/l situation and manage my p&l. I think the first part of your book is gold and will recommend to any junior traders starting in any market.

Huan said...
This comment has been removed by a blog administrator.
Vadym Graifer said...


I understand what you mean. just not sure why you say chart is deceiving since it's obviously working for you :) Don't read too much into last month performance, this was not a normal trading environment. All the shocks of financial sector disasters, of oil movements, nervousness caused by general feeling of imminent doom led market into very erratic behavior. I see long term and swing traders abandoning trading for a while until market sorts things out; I see some of thme switching to day trading; what's more, I see day traders that performed quite nicely struggling with this market like never before.

If you read our (RealityTrader) trading logs day by day, you will see that our trading is somewhat uneven as well; we move from brilliant days, like Friday 11th to quite mediocre ones where we barely keep our head above the water or even finish in red - and we pride ourselves in being very flexible and careful. My point in all this is, you can't decide that your whole method is non-sound because it didn't perform this last month as well as it did over last three years... Adjust and roll with the punches - markey will always change, in this or that way.

Huan said...

Thanks for your reply! what i meant was i *rarely* look at charts (really need to relearn how to write...haha) I will keep punching and come back with more feedback in a few month. again tks for the great book!

Huan said...

the same thing happened again this week, i cought the turn perfectly on thursday during asian time that the equity is bound to turn and yes, my position showed me a decent profit on paper on friday asian morning after US broke lower. but then again friday after asian close the market bounced right back and i didnt caputre anything. That tells me one thing. the market now is bascially absent of amatures and general public interest. whoever remain in the market are the best of the best. you can see how easily the commantary turns from bullish to bearish then to bullish again. market right now is extremely flexible and with very little chance for them to make mistakes. So let's stop wasting money and wait for the general public come back to the market. maybe in sep?

Vadym Graifer said...

It pretty much depends on one's personal approach... As far as I am concerned, this is the most active summer of my trading career. Usually July - August, and to certain degree June, is wasted time. Not this year so far. No way I would let it slip away. Maybe activity goes down in August, who knows... and I am going to take a week off starting Aug 8 anyway for Alaska cruise, but the rest of the time, with sharp moves caused by oil tides and turmoil in financial sector, I am confident I will squeeze more out of this summer than of any before.

Sure, things change on a dime these days but that's just a matter of a time frame. If you don't get trends lasting a week, why not utilize those that last a day or two?