# Trading In The Zone ## MENTAL GAME IS A CROSS DISCIPLINE SKILL The observation draws a parallel between the mental aspects of trading, as described in "Trading in the Zone," and other high-pressure activities, particularly competitive gaming like Valorant. Key points of this insight include: 1. "Trading in the Zone" proposes attitude adjustment as a solution to mental game issues in trading. 2. The core of this attitude adjustment involves accepting that: - No one is owed anything - Wins are not guaranteed - Losses in trades (or deaths in Valorant gunfights) are always possible 3. This trading mindset has similarities to the mental game in other activities. 4. In both trading and other disciplines, elements of fear, hope, or subconscious blocking of information due to hidden beliefs can affect performance. 5. These mental factors can lead to a distortion of reality, preventing an accurate perception of situations. 6. Consequently, this distorted perception can cause a shift in approach or playstyle from effective to ineffective. 7. These principles of the "mental game" appear to apply across various disciplines, sports, and activities. This observation effectively bridges the gap between trading psychology and performance psychology in other high-pressure activities. It emphasizes the universal importance of maintaining a realistic, unentitled mindset for optimal performance across different fields. --- # Can you have a winning attitude all the time? 1. Mental states naturally fluctuate in activities like trading and competitive gaming. 2. These fluctuations can include periods of clear thinking and times of fear or negative attitudes. 3. It's unrealistic to expect a perfect mental state all the time. 4. The important thing is to be aware of these changes in your mental state. 5. This awareness allows you to recognize when you're in a less ideal mindset. 6. Once aware, you can work on returning to a more balanced state without harsh self-judgment. 7. The goal isn't to eliminate all negative thoughts, but to manage them effectively. 8. Being too hard on yourself for having moments of fear or negativity can actually make things worse. 9. A key skill is learning to navigate these mental shifts rather than trying to avoid them entirely. 10. This approach creates a 'meta' level to the mental game - how you handle your own shifting mental states. In essence, the focus is on developing awareness of your mental state fluctuations and responding to them constructively, rather than expecting constant perfection. --- # Short Summary 1. **Strategy and Stock Identification:** - **Developing a reliable method to identify trading opportunities** - **Understanding and consistently applying your chosen strategy** 2. **Risk Management and Position Sizing:** - **Determining appropriate investment amounts for each trade** - **Managing overall portfolio risk** - **Understanding and implementing proper position sizing** 3. **Entry and Exit Skills:** - **Mastering the use of stop losses and trailing stops** - **Knowing when to take profits** - **Developing clear entry and exit criteria** 4. Psychological Preparedness: - Maintaining emotional control during trades - Avoiding common psychological pitfalls (e.g., overtrading, revenge trading) - Developing discipline to stick to your strategy 5. Continuous Learning and Adaptation: - Regularly reviewing and adjusting your approach - Staying updated on new trading techniques and market changes - Being willing to evolve your strategy as markets change 6. Market Awareness: - Understanding broader market conditions and trends - Keeping informed about economic events and their potential impacts - Recognizing how your trades fit into the larger market context 7. Record Keeping and Analysis: - Maintaining detailed trade journals - Regularly analyzing your performance to identify strengths and weaknesses - Using data to inform strategy adjustments 8. Technical Proficiency: - Mastering your chosen trading platform - Understanding and effectively using various order types - Staying updated with relevant trading technologies 9. Capital Preservation Mindset: - Focusing on protecting your trading capital, especially when starting out - Understanding that longevity in the market is key to overall success 10. Patience and Discipline: - Waiting for high-probability setups rather than forcing trades - Consistently following your trading rules and plan - Avoiding impulsive decisions based on emotions This comprehensive approach covers the essential aspects of trading success. Each component plays a crucial role, and neglecting any one of them can potentially undermine your overall performance. The key to long-term success lies in not just understanding these elements, but in consistently applying them in your day-to-day trading activities. Remember, becoming proficient in all these areas takes time, practice, and often involves learning from both successes and failures. Starting with paper trading to practice these skills without financial risk can be a wise approach for beginners. Ultimately, successful trading is about developing a holistic approach that combines these elements into a personalized, effective trading system that suits your individual goals, risk tolerance, and lifestyle. --- # Order Types - Limit versions of orders are more specialized than market orders, offering price control but with potential non-execution risks. - Trailing stops are generally more effective than regular stops, but have drawbacks in volatile markets where they might trigger before a trend gains momentum. - Market-On-Close (MOC) and Limit-On-Close (LOC) orders are niche tools with specific use cases. - There's a trade-off between ensuring execution (market orders) and controlling price (limit orders). - The effectiveness of different order types depends on market conditions and specific trading strategies. --- # Risk Reward Ratio If your risk-reward ratio is 1:2 (risking $1 to make $2), you only need to win at least 33% of the time to break even. This is because your average winning trade will be twice as profitable as your average losing trade. Here’s the math: - Winning 33% of the time with a 1:2 risk-reward ratio means: - For every 100 trades, you win 33 trades and lose 67 trades. - If you win 33 trades at $2 profit each, you make $66. - If you lose 67 trades at $1 loss each, you lose $67. - $66 (gains) - $67 (losses) = -$1 (approximately break even when rounded). So, winning slightly more than 33% would make you profitable. --- # Determining Stop Distance - **Set your risk amount:** This is constant and based on your risk tolerance and account size. - As you become more experienced, you can - increase risk amount for high probability setups - increase risk-reward ratio for swing trades, for example - **Analyze and decide on a stop loss distance:** Based on technical analysis or volatility measures. - **Calculate the position size:** Using the risk amount and stop loss distance. - Exiting # elements of a trading journal 1. Date and Time: • Record the date and time of each trade. 2. Asset/Stock: • Note the ticker symbol of the asset or stock traded. 3. Trade Type: • Specify whether it was a long or short position. 4. Entry and Exit Points: • Document the price at which you entered and exited the trade. 5. Position Size: • Record the number of shares or contracts traded. 6. Stop Loss and Take Profit: • Note the stop loss level and the target profit level. 7. Risk-Reward Ratio: • Calculate and document the risk-reward ratio for each trade. 8. Trade Outcome: • Record the outcome of the trade (profit or loss) and the amount gained or lost. 9. Reasons for Trade: • Note the rationale behind entering the trade, including technical or fundamental analysis and any signals or indicators used. 10. Market Conditions: • Describe the market conditions at the time of the trade (e.g., trending, volatile, earnings report due). 11. Emotional State: • Reflect on your emotional state during the trade (e.g., confident, anxious, impatient). 12. Post-Trade Analysis: • Review the trade outcome and analyze what went right or wrong. Document any lessons learned or adjustments to be made. --- # Federer Example 1. Win Rate vs. Risk-Reward Ratio: • Successful traders do not need to win every trade. A win rate of 35-40% can be highly profitable if paired with a favorable risk-reward ratio, such as 1:2 (risking $100 to make $200). 2. Federer Example: • Just as Roger Federer wins tennis matches by winning slightly more than half of the points (around 54%), traders can achieve overall success by maintaining a win rate that, when combined with a good risk-reward ratio, leads to profitability. 3. Example: • With a win rate of 35% and a 1:2 risk-reward ratio, a trader can be profitable over time. Over 100 trades, winning 35 trades and losing 65, the trader can achieve a net profit due to the higher rewards on winning trades. 4. Long-Term Perspective: • Trading is similar to a marathon. Focus on consistent application of a well-defined strategy and maintaining discipline over time, rather than aiming for short-term gains. 5. Emotional Resilience: • Managing emotions and maintaining discipline is crucial, as both winning and losing streaks are part of the process. 6. Use of a Trading Log: • Keeping a detailed trading log helps track performance, analyze outcomes, and stay committed to the long-term strategy. --- # Read these 3 books first - "Trading: Technical Analysis Masterclass: Master the Financial Markets" by Rolf Schlotmann and Moritz Czubatinski (2019) - "The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management" by Dr. Alexander Elder (2014) - Trading in the zone --- Automation Find an API that serves my purposes to continuously scan for moving average crosses and other indicators I want to know the state of the market without focusing on the market --- ### Catalysts Tracking for Day Trading **Fundamental Catalysts for Stocks:** - Earnings reports - Earnings warnings/pre-announcements - Earnings surprises - FDA approval/disapproval - Mergers/acquisitions - Alliances/partnerships/major product releases - Major contract wins/losses - Restructuring/layoffs/management changes - Stock splits/buybacks/debt offerings #### Tracking Methods: 1. **Earnings Reports, Warnings, and Surprises:** - **Earnings Calendars:** Manually review to find potential trades. - **Google Alerts:** Use comprehensive search terms to capture relevant news: arduino Copy code `"earnings report" OR "financial results" OR "quarterly earnings" OR "annual earnings" OR "earnings season" OR "earnings calendar" OR "earnings warning" OR "profit warning" OR "revises guidance" OR "updates outlook" OR "lowers forecast" OR "raises forecast" OR "preliminary results" OR "pre-announcement" OR "earnings surprise" OR "beats estimates" OR "earnings miss" OR "falls short of expectations" OR "unexpected earnings" OR "earnings shock"` 2. **FDA Approval/Disapproval:** - **FDA Alerts:** Subscribe to these FDA email notifications: - MedWatch Safety Alerts - Recalls, Market Withdrawals, and Safety Alerts - FDA Press Releases - CDER New - Drug Shortages - Generic Drugs Updates - Oncology Drugs - CDRH Recent Device Approvals - CDRH Medical Device Safety and Recalls 3. **Mergers/Acquisitions, Alliances/Partnerships, Major Product Releases, Major Contract Wins/Losses:** - **Think or Swim Live News Gadget:** Use the live news gadget for real-time updates. - **EDGAR RSS Feeds:** Monitor filings such as K8, DEF14A, 425, S-4, F-4, K8/A for significant updates. 4. **Restructuring, Layoffs, Management Changes, Stock Splits, Buybacks, Debt Offerings:** - **Think or Swim Live News Gadget:** Again, use for live updates. - **EDGAR RSS Feeds:** Follow the same feeds as above for these events. 5. **Sentiment and Social Media:** - **CapEdge:** Utilize for sentiment analysis and social media monitoring. - **Twitter:** Follow traders, analysts, and financial news accounts for real-time updates. ### Routine: **Synchronous Activities:** - Study the earnings calendar for upcoming reports. - Review EDGAR RSS feeds daily. - Monitor CapEdge for sentiment changes. - Use Twitter for instant trading insights. **Asynchronous Activities:** - Subscribe to FDA email alerts for immediate notifications. - Set up comprehensive Google Alerts for earnings and FDA-related news. - Use X (formerly Twitter) notifications for important tweets. **Future Additions:** - **Overall Economic Calendar:** To stay updated on broader economic events. - **Form 13F:** To monitor institutional trading activity. - **Options Activity:** For insights into market sentiment and potential price movements. ### Research Topics: 1. **How to Trade Earnings:** - Learn strategies for trading around earnings reports, including pre- and post-announcements. Timeframe: 1-2 weeks in advance. Requires fundamental analysis. 2. **How to Trade Major Company News:** - Understand how to interpret and act on significant company news such as mergers, acquisitions, and product releases. Requires fundamental analysis. 3. **Setting Up a Scanner:** - Learn to create a scanner for unusual activity, including volume spikes and price movements. 4. **Educational:** - **How to Trade Options:** Gain knowledge of options trading strategies. - **How to Trade Futures:** Understand futures markets and trading techniques. - **How to Trade Forex:** Learn about the forex market and strategies for trading currencies. --- # Gamblers Fallacy, Scale Fallacy The scale fallacy or gambler's fallacy in this context refers to the mistaken belief that past trading success can be scaled up to generate even greater returns, without properly accounting for the increased risk exposure. Specifically: The Scale Fallacy: - Assuming that because a $1,000 trade generated a $300 profit, increasing the trade size to $5,000 will proportionally generate $1,500 in profits. - Failing to recognize that the level of risk and potential for losses also scales up significantly when increasing the trade size. The Gambler's Fallacy: - Believing that past winning trades somehow make future winning trades more likely, even though each trade is an independent event. - Overestimating the predictive power of a small sample of successful trades and extrapolating that to much larger trade sizes. In essence, the fallacy is the irrational assumption that past performance can be linearly scaled up to generate outsized returns, without properly accounting for the increased risk exposure. This type of flawed thinking can lead to disastrous results when trading or investing. The key is to maintain a disciplined, risk-managed approach focused on consistent, sustainable growth - not chasing unrealistic gains by recklessly scaling up winning trades. Recognizing and avoiding these cognitive biases is critical for effective risk management.​​​​​​​​​​​​​​​​ --- # Ways to "Practice" paper trading technical analysis prediction exercise - anki flashcards? manual charting exercise (The Art & Science of Technical Analysis: Market Structure, Price Action & Trading Strategies, Chapter 1) # tentative strategy 1 You propose developing a stock scanner using the Elliott Wave Theory, which involves identifying stocks in an impulse-retracement-impulse pattern. The key components of your idea are: 1. **Elliott Wave Theory**: This theory suggests that market prices move in repetitive patterns, typically consisting of five-wave impulse phases followed by three-wave corrective phases. 2. **MACD Oscillation**: The Moving Average Convergence Divergence (MACD) indicator, which oscillates around a zero line, will help identify stocks currently in the negative phase of the oscillation. 3. **Stock Criteria**: - **High Market Cap**: To ensure the stock is from a well-established company with significant market presence. - **High Volume**: To ensure there is sufficient trading activity, indicating liquidity and interest from other investors. 4. **Manual Review**: After the scanner identifies stocks meeting these criteria, you'll manually review the charts to determine if they align with the Elliott Wave patterns and represent a good trading opportunity. The goal is to find stocks fitting this model to potentially make consistent profits by trading based on the identified patterns. # TASTA - Practical Trading Templates Failure tests - aggressive countertrend trades. clearly defined trade - test support or resistance, which can precede a strong countertrend. pullbacks - with trend pullback - against trend pullback - complex pullback Anti - rigidly disciplined entry at potential trend change breakout - 3 variations ## Trade 1: Failure Test - overextended, primed for reversal, mature extended trends - indicator: momentum divergence, consolidation under resistance - breakout - triggers stop orders beyond a significant price point without - because there is no real conviction behind the move, the breakout will fail, leading to trapped traders and reverse momentum Ideas: - find market data to manually backtest --- Step 1: Identify High-Volume Stocks • Sort Stocks by Volume: Regularly monitor stock volume. • Unusual Volume Detection: Look for stocks with short-term unusual volume spikes. Step 2: Observe Before Acting • Avoid Rushing: Rushing leads to reckless decisions driven by greed and overconfidence. • Market Adaptation: Trade like a guerrilla - enter and exit based on market movements rather than forcing your strategy. Step 3: Analyze Initial Market Movements • First 10 Minutes: Be wary of stocks that experience significant drops within the first 10 minutes. • Trend Reversal Assumption: Assume the trend has reversed unless price action microstructure indicates otherwise. Step 4: Manage Trade Size • Comfortable Share Volume: Trade a maximum of 250 shares or a volume you are comfortable with to manage risk. Step 5: Filter Out Risky Stocks • Risk Management System: Develop criteria to filter out stocks that could unpredictably dump and pose significant risk to your account. Summary of Key Principles 1. Volume-Based Selection: Focus on high-volume stocks and unusual volume spikes. 2. Patience and Observation: Do not rush into trades; observe market conditions first. 3. Trend Analysis: Pay attention to early market trends and reversals. 4. Trade Size Management: Keep trades within a manageable share volume. 5. Risk Filtering: Implement a system to avoid stocks with high dump risk. [2024-07-31](2024-07-31) Todo: - Learn the thinkorswim platform - concrete workflow - Get more familiar with patterns (ondemand sim) - Have a concrete pullback/breakout strategy # SCAN ## Finding stocks that are "in play" - Top volume in the premarket - Highest percentage gainers or losers - Market cap - stick to mid caps (2B-10B)  - Float size - can't be checked inside TOS, only "shares" - Relative volume - UNUSUAL VOLUME - todo: figure out params - Price - any (for now) - Gap percentage - gap up only? - goal: identify stocks using the stock scanner that have seen a huge gap up to prepare for ABCD or Bull flag patterns. TRY: Study > Price performance > gap up (5/15 minute time frame)