What does it feel like?
Morad, my trading teacher for a couple of years, said, “when you’re in the zone, take note how it feels.”
I had never really been in the zone, before now, so I didn’t know. I’d had brief bursts of wins, in an account that slowly eroded over 2 years.
When the market reset in Feb 2018, it reset me too. When the big volatility hit, the big waves suddenly became crystal clear to me.
The dashboard of market internals, NYSE $tick, up vs down volume, advance decline line for the NYSE…all suddenly were very clear.
These instruments showed when huge sustained selling appeared. Even without reading volume for those days, I could see it in the multiple -1000 ticks, sustained over days. It was like IBD (ONeil’s old school Investors Business Daily) distribution days, seen in real time, on a dashboard. I hadn’t seen anything like that before…certainly not during 2017.
Plus the whole narrative is so well known. (To me, I thought.) Usually the media report reasons for the moves weren’t necessarily predictive. Sometimes they didn’t even seem right to me.
I could see the narrative in the behavior of the markets themselves. I guess that’s the zone. Sometimes when I made mistakes in the zone, it was because I listened to some commentator, even one I’d learned from, like the Shadow Trader, or Morad.
Other media was irrelevant. I paid little attention to it, and it had nothing to do with my market ideas. The idea that the market sold off because a strong economic report meant inflation would go up seemed like a weak attempt at an explanation.
The narrative, in my mind
The real narrative started with those 3 sustained distribution days, in late January, and early February…before the big down days. After a historical record for sustained anemic volatility, it was likely to break out of that hard. It was a years-long “coil.”
The selling wasn’t precipitated by anything. It wasn’t news driven. It was the driver. Someone big was selling on purpose.
Whatever the purpose, big funds liquidating, or giant market manipulation, the effect was predictable, if you had enough selling power. The snap in volatility, and the flush in the market.
If you sell big enough to cause a big enough down wave, to drive up the implied volatility in options (the expected size of the swings in any given stock), it will cause a VIX spike, which will wipe out all those leveraged short volatility derivatives.
So it was like a giant stop, that could be deliberately triggered.
On the other hand, we also know there are HUGE buyers out there.
And it’s been said that the giant company buy-backs since 2009 are in a way a huge short volatility position. The derivatives of volatility were the weak hands. The companies themselves are the strong hands.
Due to Trump tax policies, by Feb 2018, companies had already bought back more of their stock than in all of 2017. Something like $170billion. And that was the tip of the ice-burg, which they’ve now reported. We still expect another $500billion more of buy-backs.
And, 10% is a kind of small correction to trigger the Fed plunge protection team. But reportedly, it did. Their “unwinding” paused that week, and they printed $20billion, instead of dumping $10 billion, which could have quickly become $100 billion+, through fractional reserve
So the point is, there are whales at play. Or rather, a whale shark has entered the scene. Or a giant squid. There were whales before. Company buy backs were the biggest driver of the bull market ever since 2009. But there was no predator for the whale, no one on the other side of the trade. And the volatility dwindled to near flat-line.
The Feburary snap broke a historical one-time framing session, 14 months with higher highs and higher lows. That was the narrative for over a year.
Feburary changed the narrative. The motto before was “buy the dip.” Lately, sometimes sell the rip works.
January was one of the biggest yearly opening months ever, making a huge bullish candle, sticking right out of the top of the 2017 range. The Feb candle took that back and more.
But it did bounce, and closed just outside of the 2017 range.
And where did it bounce? At a double bottom to the tick (in the SP 500 futures), and at a 200 day moving average. Totally technical buy point. But buyers on a huge scale. Not day traders or small fries.
So the whales trade technically too. It’s just that they look for bigger, more obvious levels (on the buy side).
It’s almost childishly simple, if you can see that point, and know the story, who is probably there with a catcher’s mit. Those are massive one day moves, and if you can catch the exact bottom, like I did, based on this story, it can change the narrative of your life, if you played it right.
On the other hand, someone huge, like the seller who started it all, can start a move like that out of nowhere, which they did. It wasn’t even a technically good high. They created a level, which is now enshrined in the auction, and forever hence, we will regard it with awe, and attention, which will fade over the years.
In one month I made back more than 2 years of losses, and more. For 2 years, I’d been wrong more days that right, especially all through 2017. The low volatility was torture for me.
In a low volatility up market, things never move to down targets, which means shorts don’t win, and it’s hard to find a buy point for longs. And then, after all, even if you get long, and are right, the move is so slow and sluggish (the so called “market melt up.”)
It seems like I never got a firm footing in stage 3, then moved directly to stage 4, which is a concern.
The stages of trading are supposed to be
- Unconscious incompetence, when you don’t know how to trade, and you don’t know you don’t know how to trade. You may win big now and then, or for a while, but likely will eventually lose, and move to stage 2
- Conscious incompetence, when you realize there is something to know about trading, and that you don’t know it, and you set out to learn, and read, and go to webinars, and so on, and you keep trying until you reach stage 3
- Conscious competence, when you can start to make headway, make money, when you really try, and work hard, and pay a lot of attention, follow rules, take stops, hold to targets, follow a plan, etc. until you reach stage 4
- Unconscious competence, when all the hard work and practice of stage 2 and 3 becomes so ingrained that you don’t even have to think about it. You just see the trades, and take them. You see the stops and take them. You hold to targets without pain or surprise. It’s all about the levels in the chart, and the behavior of the auction, not the amount in the account.
Morad’s brokerage, Stage 5, imagines a further stage beyond 4. But notoriously, anyone can fall out of stage 4, and back to earlier stages.
And I had leapt to stage 4, having never really succeeded during stage 3.
When the volatility kicked up, I would sit down to my computer, to possibly trade, probably lose, and maybe try to just follow the story line, not trading.
But the trades would leap out at me, they were so obvious, that I compulsively took positions. I hadn’t made a detailed plan, or an effort. In fact, several days, especially after big wins, I came to the day, telling myself to hold back, not trade. But right away, the market was on the move again, and the story seemed clear, and was usually exactly what it looked like (not chop).
The big waves moved far, so you could pick out far off targets, both up and down, and you’d get there. With 2 or 3 contracts, which is still all I was using, in each of NQ, ES, RTY and CL, (futures in the Nasdaq, SP500, Russel and crude.) I could get intermediate targets and scale out some profits, so it was seldom painful.
I could get chopped up at a turning point, and lose $4k in an hour, but then the move out of that area was so big that I’d end up $15k on the day (after years of losing my account in tiny dribbles.)
So, suddenly I was in stage 4. I could see the plan, without writing it down. I had a couple of $10k loss days, but quickly took them back.
If my trading performance was a chart, it would be wildly bullish right now. One giant up month, that engulfs, what, 30 down months?
But this was all fake money. (What? Later.) And one big danger is going live, which often stirs up subconscious psychological things that trip up traders.
And in my particular case, a danger is going live, and then having the volatility dry up.
It’s crystal clear what the change was, that catapulted me from stage 2 to stage 4. Leaping in to a high volatility market. Usually, volatility fades. Trend days are only 20% of the market (although even inside days can be big when volatility is high).
I was suddenly a stage 4 trader but it could be a Flowers for Algernon kind of thing.
I do understand trading. Even when I was losing, I understood the charts, and the auction, better and better, up to a point of course. The problem was probably me. Sometimes I was fighting what I saw, for whatever reason.
Moving from a fake account to a live account is a well-known danger. A point of common failure. But a necessary passage.
After losing some real money, I moved to a fake account, with the attitude, if I couldn’t make fake money, what was the point of playing with real money. And for over 2 years, I couldn’t make fake money.
But to me, it was still pretty painful. I didn’t try to learn to trade, spend years of seat time and study, and money, just to play a game, in which I perpetually lost, by a thousand cuts. So in many ways, it has been very costly to me.
And embarrassing. Since I think I’m at least moderately smart and capable. And yet it was often said that it’s easy to make money in a fake account, but much harder in a live account. But I couldn’t even do the former.
So there are dangers. But the point for now is to bask the Zone. I’m in it, lately, at least. So I’m trying to make some notes about how it feels.
I can say how it doesn’t feel. Crappy. I felt crappy when I lost money, even fake money. Losing is painful, in a special way in trading.
I don’t feel giddy or euphoric. I’m happy about the success. But I understand why it happened. It wasn’t random good luck.
Looking at trading from the outside in, it seems, if you can make money trading, it’s so cool. But if you lose money doing it, sheesh, what a loser.
If you could make money, think how much! If you lose money, what a putzy thing to do, frittering away money…on what? On nothing! On less than nothing. On misery.
In the Zone there is none of that. There is just the trading, what the charts are saying, where the levels are, scale outs, stops, mistakes, corrections, and it flows, and the account grows, without looking at it.
I don’t know if this will last until tomorrow. It could easily end at any moment. I come to the computer many days, thinking I should just rest, preserve my winnings. But the set-up is there, I take it, and it’s worked, 80% of the time lately.
I have enough cushion now that the down days don’t hurt as much, including $10k down days. But I am not dreaming of how, now it’s guaranteed that I’m gonna get rich.
I’m just doing each thing as it appears to me. Will I get chopped up when the volatility dries up? Probably. But hopefully, I can be aware enough to minimize that.
One adage is, profitability in trading isn’t about how much you make, but how much you don’t lose.
The pain of trading badly went on so long and up until so recently, my optimism is quite cautious.
I know it’s absolutely possible to go from stellar performance with fake money, to losing real money. So I am downright afraid. That would be a new and special kind of pain, to finally succeed, so swimmingly, with fake money, after years of work, and then go lose real money.
But I know I have to take the leap, and hope I can trade some of my long meticulous preparation for some of the known pitfalls ahead.
One thing is, I never used big size in my fake account. It started at $50k, smaller than my real account. And added another $50k after I lost that. And I never used big, unrealistic #s of contracts.
So that could have good and bad points. On the good side, I didn’t get this performance with unrealistic size. On the other hand, if this size was so in my comfort zone, why wasn’t I using real money?
I’d much rather that all my losses before had been real, if it could have made my recent winnings real. Now I have the difficult transition to reality. I’m a late bloomer.
Notes to Self
I know that I can have this performance in a high volatility market. But just as low volatility led to high, it will oscillate back…and low volatility stretches tend to last longer than high.
So on one hand, there is the difficulty of navigating the deserts of low volatility. But the oases of activity are worth the journey.
And this volatility might not dry up too quick, considering the length of low vol that led to it. Plus, there are MANY things I could think of, that could each cause massive market waves: Central banks unwinding, Asian recession, EU spasms, interest rates leading to a credit collapse (and with $13 trillion in corporate debt, plus auto and student debt, a little default might do you….a 25% default rate could be massive!) Just to mention a few. Not to mention war, robot revolution, ETF contagion, and so on.
It’s only a matter of time. But the time might be now-ish. Or next fall. Or early next year. But probably not 2029. The time of bigger waves is now, and if they die down, they will probably kick up again pretty soon.
And, remember charts of the 1929 crash, or the dot com crash, or whichever, crashes in general. Giant smooth perfect waves, that stop and turn at big fat technical reference points…great longs and shorts that travel. But it only happens once in a blue moon. Once every decade or so.
And then, when the dust settles, and the Fed goes for QE4 or 5 or helicopter money or whatever it may be, go long. Stop trading. Invest all the money you hopefully made in the fall. Buy a handful of good companies, and assets. And go to the beach and retire. And in 10 years, get an AI upgrade, and survey the weird landscape after QE went supernova to cover social security and the like.
The above isn’t a comprehensive description of the features of the Zone or how I feel here.
I forgot to say that I long since stopped taking any classes or lessons, or listening to anyone else’s market prep, or ideas for the day.
I’d also given up hope. I forgot to say that. I had big dreams, that I could fund with trading. But that seemed long since like a lost cause.
So I was no longer doing it trying to get anywhere. But I was addicted to watching the market. And trading was kind of fun, even if I was not very good at it. As long as it was fake, no harm there.
And I’ve also noticed I’m addicted to trading. Which is probably a danger to me. It’s hard for me to look at a chart without immediately forming an opinion about where it’s going, and take a position.
Also, tempo, and time frames. Part of being in the zone is having a sense of the pace at which things happen, and when they are likely to happen, how long they are likely to last, how they are likely to
And note how the tempo changes. These waves lately are very big and fast. It’s been a long time since something like this. Many years.
And there are time frames in the day, like early overnight is the Asians trading futures, then the Europeans. But they are all guessing, on stocks anyway, since the market is closed.
So they tend to be short term, weak hands, and often the market proves them wrong, first, even if they were ultimately right…except in the situation where conditions seemed certain enough that overnight traders took the market well beyond the former day’s range, and caused a big gap…in which case, they are probably right, or half right.
The first thing in the morning, supposedly in the first hour, if there is big money, that’s when it will come in. It sets the direction.
Then it quiets down until 1:30 pm on the east coast, when big traders apparently come back from lunch.
And supposedly big money doesn’t come in late in the day. But the rules changed on that in this recent waviness. So old timers have to stay fluid.
Also, the big waves in bitcoin were a harbinger. I noticed I was able to read that chart really well, when it made big swings.
So even though I said I’m doing this unconsciously, there are a bunch of things I’m aware of. It just seems effortless and obvious lately.
And there is a weird sixth sense, where it seems like I’m reading even clearer than the commentators who were my mentors. Which is a little spooky.