1a2b3cppp

Sure, given the constraint that price cannot go to zero and assuming you start with a realistic price and not like 1,000,000 or something where the position sizing would take forever to hit the levels. As I've said (either in this thread or the other thread), if SPY were trading at $1,000 per share I'd have to do things a little differently, but I'll deal with that if it gets there. I would make money over time.

Yes, if you add to a winner and it keeps going in your direction, you make more money. But what if it reverses and starts to trend in the new direction heavily? You can get a lot of drawdown that way, more than if you didn't add to the winner, and when it goes against you by a certain amount you need to add more to lower your average cost, and if you've added to it when it was a winner your average cost is going to be that much higher. I am not comfortable adding to winners. I wrote a pretty long post with charts about why on blog which I'll post here rather than typing it all out again: Source Averaging into trades does not work for me. That doesn't mean it's wrong. That doesn't mean it might not work for you. It just means it doesn't work for me. The way I trade is discussed in detail in the other thread so I'm not going to get too much into here, but let me clarify a few things that people don't seem to fully understand: 1) the market may not actually be random, but I cannot predict it, so it is random to me 2) averaging down on a short timeframe using more leverage than you can afford will eventually blow your account 3) averaging down on a long timeframe in the S&P500 will probably eventually work out in your favor, and as long as you only use the cash in your account and add at the right levels, you won't run out of money or blow your account. 4) I never said this strategy was the right answer for everyone, or that it is the holy grail, or that it is better than some price predictor strategy, or that it beats buy and hold in a bull market. All I said is that, given that I cannot predict price direction, it is the best strategy for me. I expect to get criticism for it, though, since it's basically the opposite of every trading "rule" out there.

Because adding to winners raises your average cost and a small movement against you can turn it into a loss. Since I have no idea where price is going to go, I don't know if it's going to make a small move against me and turn my winner into a loser. Adding to winners only works if you know price is going to trend in a certain direction for a while, and if you know that's going to happen, it would be better to take a very large initial position instead.

[quote=SIUYA;179056Any ways - unless 1a2a3b is using options extensively then this would be for another thread and can be found there. I barely ever use options.

I fully admit price may not be random, it's just in years of studying it, I have not been able to predict it. I agree you can see S/R points in the past, and sometimes price in the future respects them. As you said, I have seen price bounce off the exact same level as it did in the past. But that doesn't mean you can predict it. The chart I posted that was randomly generated also shows price bouncing off previous S/R points. And there are many times price completely ignores a previous S or R point. Until I can find a way to reliably predict when it's going to bounce off S or R vs. going through it, I won't be able to trade based off of them. I'm still working on it, though.

It's cool, I don't see it as an attack. Would you have had an issue if I said "How I Trade Because I Cannot Predict Price"? To me that's all random means. I'm sure someone somewhere can predict it, and probably if you have all the info, it's not actually random, but as far as I'm concerned it is.

Sure it is. Look at the chart I posted in my other thread: That was created with a random generator. The only reason price isn't COMPLETELY random is because it can't go below zero. Price movement is random. Is SPY going to go up/down or sideways in the next minute/hour/day. I have no idea. It's random. Oh look, we're in an uptrend. Is it going to keep going up in a minute or an hour or a day? I have no idea. It's random. It might reverse now. It might reverse on Monday. It might reverse and then reverse again. I have no idea. And neither does anyone else. That's what I mean by random. It might not actually be, but as long as I cannot predict direction, I will treat it as if it is random.

You guys can call it mean reverting if you want. I don't care. I used the term "random" because price is random and I don't know where it's going. When choosing a profit target I'm not basing it on some mean calculation. I'm basically making a bet that price will go back up before it gets to 0. I'm sure it's reverting to a mean somewhere in the process, I just don't think about it like that.

You hedge by buying an option so that if price goes completely against you you don't lose everything. Like if you buy 200 shares of XYZ @ $Y and buy two puts with a strike price less than $Y. Unless you mean hedging against price going nowhere.

It was just an example to show how both short and long positions can be profitable at the same time. You might not add long positions if the initial short is going in your direction. Assume you went long first and the market immediately started going against you. Or, assume you went short and long at the same time, planning on averaging down the side that goes against you and pyramiding up on the side going in your favor. As soon as price goes in the opposite direction, you make money on both sides. I do not actually trade this system intraday, it was just an example. And yeah, if we could identify those short positions then I wouldn't need to trade as if price was random because I would just take big positions in the correct direction and make money

That example I posted was just an idea for an intraday trading system and not how I actually trade for exactly the reason you mentioned (and the reason I elaborated on near the end of my previous post). It can keep going against you forever, or at least for longer than my account can take. Averaging down intraday with the ES requires a huge account. Now on a daily timeframe it's different. I can divide up my account so that I can keep adding as SPY goes lower and lower. But I can't do that for the ES intraday because it would require too much money.

Hi. I missed it originally but just went back and read it. I did notice however that one of my posts which was previously at the bottom of a page was now at the top of the next page, so that must've happened when your post got approved. The main risk control method is not using margin. If you use margin you run the risk of blowing your account (or getting a margin call and having to either deposit more money or close your positions at a loss). You've identified two problems with a system like this. As I said, this isn't the greatest system in the world, it's just the only way I can trade that works for me. What I've been doing for the last few years is using Fibonacci retracements after a decent SPY rally. Of course, Fibonacci retracements are just certain levels, you can really use any and have the similar results. The only reason I used Fibonaccis is I wanted to use something most people were familiar with. Technically, you don't even have to start after a pullback. You can enter whenever you want. I just prefer to wait until a pullback because it gets me a better initial price. The downside of doing that is that sometimes you miss rallies if you're waiting for price to retrace and it never does. Of course, I cannot predict price so I don't know when there's going to be a rally vs when price is going to reverse as soon as I enter, so psychologically I like to wait for pullbacks. As far as when to add and how much to add, one way is to just pick the lowest level you think price will get to and divide up your positions. The safest way is to use 0, but this limits your potential profit. For example, if you decide that you don't think SPY will go below 50, so you add your final position using the reminder of the cash in your account (no margin) when SPY hits 50, and then it drops to 40, you cannot add anymore, and your average cost will remain higher. But if it doesn't go below 50 and then begins going back up, you'll make more money than if you had picked 0 as the lowest level it could go to, because in that case you'd have a smaller position since you were waiting for SPY to drop even lower. Let me distinguish between the two examples here: 1) when I hedge against SPY with SH, it's so I can (potentially) make some extra money if price keeps going against me. Some people will say "but you could just sell off some of your SPY shares and it would be the same thing." This is incorrect. Bigger SPY position = bigger dividends. 2) the example chart I posted above was just an idea for an intraday system, not how I trade long term. In that situation, the reason I go long and short at the same time is because the net gain is bigger that way. Let's look at the possibilities: a) I only do the short side and price goes my way. Cool. But I don't know how long price is going to go in my direction because I cannot predict price. b) I only do the short side and price goes my way. I add to my winning position because I heard that's a good strategy. I don't know how long price will go in my direction because I cannot predict price. Oh no! Price just reversed and now my winner is a loser because I added to a winning position and worsened my average price! c) I go short and then start adding longs as price goes down. One of three things will happen: 1) eventually price will reverse and go back up so quickly that it turns my short position into a loss but the long positions I've been accumulating more than make up for it 2) price will reverse more slowly and I can close out both positions in the profit (such as in the example chart I posted) 3) price will keep going down forever and eventually get to the point where I cannot add anymore longs because averaging down with ES contracts requires a huge account. That is why I do not trade this system in real life. (This risk could possibly be lessened with options or with statistical calculations about how far the ES tends to range, but all it would take is one crazy day to blow through your statistics. And adding options to the mix as a hedge introduces another variable, time, and basically just changes the situation in which you take a big loss) Anyway, that's the reason for going long and short at the same time. I fully expect people to still tell me it's wrong or whatever. But nothing says they have to trade this way. There are a few more ideas for simultaneous long/short positions but I don't want to derail this thread any further. If it is still confusing, think of the long and the short positions as two separate positions with two separate goals rather than trying to combine them into one position in your mind. Imagine you and your friend are trading in the same office and you're only allowed to go long and he's only allowed to go short. Think about how you can both profit in the same market with different strategies at the same time. Think about what it would look like if you looked at your positions at individual points in time. Yes, at a specific point in time 2 long + 1 short = net 1 long, but in the big picture it's not necessarily the same.

I have no idea how long the trade will be profitable. In this example, trading both sides allows you to be profitable regardless of where price goes. The total profit (long + short) is also greater than if you only had the shorts. Remember, price is random and can reverse randomly. Of course, if you begin with a short, and price goes in your favor and you don't want to add a long position, that's up to you. I'm not sure what you mean by "tools." Do you mean the things I trade? In that case, I use stocks 99% of the time and options and stocks together about 1% of the time. When I say I don't use margin it's because I'm not using margin. I will never get a margin call. Using leveraged instruments (SSO, for example) is not using margin as long as you don't buy more than you can afford. If you have $10,000 in your account and buy $10,000 worth of SSO, you're not using margin. It's only margin if you're using the money the broker loans you to expand your buying power. The only thing I've done with options is writing covered calls. I have considered selling puts for future purchases (for example, say my next order to buy SPY was 600 shares @ $140, selling 6 $140 SPY puts would bring in some cash for shares I was going to buy anyway). However, I have not done this for two reasons: 1) I use Scottrade and they don't allow selling puts even with their option agreement. They said I have to go to OptionsFirst if I want to do that. 2) This strategy doesn't guarantee I will get the shares. For example, if price dips down below my buy price but then goes back above it at expiration, I wouldn't end up with the shares. Not getting the shares at the price I wanted may mean that my average cost doesn't get lowered enough for the trade to be profitable. To use the above example, if I wanted 600 shares of SPY at $140, I need to make sure I get them if price hits $140, not that I will get them only if price closes at or below $140 on a specific day. In other words, if I use a limit order, I'll get the shares if price goes down that low even for one day, but if I sell puts I might not.

When I hedge my long SPY positions with SH, sometimes price immediately goes back the other way and I end up making less than I would had I not hedged with SH. But it's not about that, it's about using proper position sizing such that I make money over time and not closing your position while both are negative. Have a look at the final stats I posted for the trade on the first page. There were two profitable closed out SH positions and one that was currently open and negative when I closed out the trade. But the net for the trade was profit. Some people might say "why did you have that SH position open? You were losing money on it. You would've made more money if you did not have it open." And that's correct. But at the time, I had no idea if price was going to keep going down or if it was going to go up. If it went down I may have closed out my SH position for a profit like I did the first two times. But since price went back up that time, I still closed out the trade for a net gain. I won't average into a short position as it goes against me because I don't know how high the market can go and I don't want to be short with unlimited upside. Until I find a way to remedy this, I only average down into long positions and I use appropriate position sizing in the hedges to ensure that it never gets away from me even if price rallies.

I'm not trying to say this is the best system in the world, only that it's the only way I know how to trade because I cannot predict price. I don't feel comfortable with buy and hold because while you can make a lot of money in bullish situations, what happens if all your money is invested and the market crashes? Since I cannot predict price, I don't know when a crash is coming. In big bull runs I don't make as much as other people who have all their money invested (ie. not sitting in cash), but that's not my goal. My goal was to come up with a consistently profitable method of trading that I am comfortable doing, and to improve it as I go. I'm also fascinated with the idea of being long and short at the same time. I know a lot of people say that's the same thing as having a flat position, or equivalent of being only long or short by a lesser number of contracts (for example, if you are long 2 ES and short 1, that's the same as being long 1 ES). I wanted to come up with an intraday system that was long and short at the same time, averaging down on the losers, possibly pyramiding the winners, and exiting during net profit or when both are in profit, but there's always the possibility that price may just go in a straight line in one direction and you end up with a big loser on the averaging down side (slightly offset by the winning side). Because I cannot predict price, I never am sure if that is going to happen or not, so it seems quite risky. Perhaps hedging with options or something. I don't know. But if you hedge with options you run the risk of price going nowhere and losing money on your options, and then after they expire price takes off in one direction without retracing and you lose even more money. And since price is random, that could happen at any time. It can be confusing to think how a long and short position could both be profitable at the same time, so here is an image to illustrate: It wouldn't depend on predicting price, but you'd be subject to giant trends that could potentially cause you to have to exit for a loss. So then you come up with hard questions like what range do you trade in, where do you set your hard loss, etc. I don't have the ability to analyze the market to come up with reasonable answers to those questions. And of course, you don't have to wait until both positions are positive to exit, you just have to wait until you're net positive. In fact, in that example, the further price goes up to the average short price, the more net positive you will be because your long position is bigger than your short position. So if this is the ES, you're long 14 contracts and short 6 which means each tick upward is $100 ($175 - $75). Of course, you have no idea when price is going to go back down and force you to keep adding to your long position, so you need to exit periodically. There are other variants that involve averaging down on both sides as price goes against you and closing them out periodically. The goal isn't to exit at the optimal place on each position; the goal is to consistently make money and price goes up and down.

I suppose if you want to call it "mean reverting" that's fine. I wasn't looking at mean reversion models when I was figuring out how I wanted to trade, though. There are fewer people here who try to convince me that because Fibonacci sequences may be found in nature that that is therefore proof that they apply to trading. And the discussion here is different. I'm always trying to learn and improve and chat with other people who can contribute new ideas. And I want to contribute ideas of my own rather than just take from other people.

I do use leverage when I use QLD or SSO or whatever, but I'm not using margin on my account (ie. I'm only using cash). This means I won't get a margin call and at worst the position goes to 0 and I lose what I invested. I think they are random but with certain traits, for example, they cannot go below 0, and they will always go up and down, I just don't know when or for how long. So I say they are "random" because they can reverse at any point and go in a new direction for any length of time. So far I haven't shorted a position long term. The markets seem to have a slight upward bias over time (not individual stocks, but the indexes). I would not, for example, start shorting SPY, because what happens if it went to 200, or 400, or 1,000? Is it going to go to 1,000? I have no idea. I can't predict price. There is a hard limit to how low it can go (0) but not a hard limit to how high it can go. So in your example, I wouldn't sell oil on its way from 20 to 120. None taken. I encourage feedback because it helps me think and analyze stuff. Yeah, that's one thing I've considered before. For example, take Bollinger Bands, and say you using them to trade mean reversion (ie. going long when price touches the bottom band). Is there anything special about a Bollinger Band? Of course not. Price often goes back up after it touches the bottom band, but it has nothing to do with the fact that it touched the bottom band, it just happens because price tends to go back up after it has gone down, and touching the bottom band just means price has been going down for a bit. Same thing with an indiciator like RSI. When RSI gets to "overbought" that doesn't mean anything, it just means price has been going up for a while. All RSI does is tell you how much price has moved relative to what it was doing a certain number of bars ago. Also, for a fun exercise, if you code a chart to label the candles when RSI becomes "overbought," you will see that about 50% of the time price reverses, and about 50% of the time price continues to go up. The market doesn't respond to RSI, RSI just tells you what price is doing relative to what it was doing. Same thing with CCI. All CCI does is tell you how far away price is from an MA. If CCI goes from negative to positive all that means is price just crossed over an MA. It doesn't mean price is going to keep going up (because crossing an MA doesn't mean price is going to keep going up). But all these things provide specific points at which people think about entering. So I guess it at least helps them decide. As I've said, there's nothing special about a fibonacci retracement other than the fact that it's a specific point, but you could use any retracement level, too. If you are entering on a Fibonacci retracement, all that means is price has retraced a little bit. It might retrace more or it might go back up, but at least you have a specific point you are looking at to enter. I like to enter when price pulls back because it gets a better entry price. Plus, usually if I buy when price is going in a upward trend, it ends up reversing right after I buy. I have heard the markets are set up such that the majority of players are wrong. Or, it could just be that it's all random. Agreed. That's why the first sentence in this thread said this isn't for everyone. I know most people do the opposite of what they want to do. I held on to some losers when I started out because I was waiting for them to reverse. You know how when you buy a new car and you are so careful because you don't want it to get a chip, but then after the first chip you're like whatever, it has a chip now so I don't care anymore? I sometimes wonder if new traders should open an account and specifically try to lose money just to see how it feels. Of course, trying to lose money with a losing system is just as hard as trying to make money with a winning system (not including commissions), but that's another topic, too. This system can be backtested, and I've been posting 100% of my trades with live calls for years (something other people who share systems never do). For backtesting, just use mechanical add points and position sizing. You can use retracements or just specific levels (eg. every 10 SPY points). Target profit is initially the previous high before you started adding, but after a certain number of adds you lower the target profit (or, technically, you can make it the previous high since we know now that SPY has retested its historical highs but I never assumed that would be the case in real time and so I exited my positions before then because I had no idea how high SPY would go. It's only suspicious when people say "backtesting is useless, don't bother trying to backtest my system, but please keep paying me a monthly fee and buying my books and courses... but don't backtest them... oh and I don't post live trades, just trust me that it works from the after the fact charts." I encourage people to backtest this if they are interested. Forward test it, too, or just follow my trades and check up on the progress every few weeks. Thanks for the feedback.

For those of you interested in following this, I've also started buying USLV (3x weighted SLV) last week @ $10.85 after commission. Normally I don't stray from the indexes but decided to buy some silver after the big drop and am thinking about getting UGLD, too.

No, I've never heard of it. Googling now. edit - looks like that book was published in August of 2011 which is a bit after I started my profitable journal thread. Maybe he's a fan? My system is not buy only, though (well, it is if you buy SH instead of shorting SPY). We'll talk about that in the future, though. Most trading books I've read have been crap. I actually just sold a big stack of them to a used bookstore a few months ago. I might look into this one, though. edit 2 - found a sample of this book on scribd. It looks like he's doing equal purchases at each level. That's not how I do it, but maybe that's just for this one example. Seems like a bunch of overly complex terms, too. Securitization? Monetiziation? Why not just say buy and sell?

If the S&P drops further I will buy more. It's not like there's a hard level beyond which I lose (unless it goes to zero). Proper money management and position sizing helps with this. Now, if the S&P went to 10,000 or something that would change my game because it would mean huge levels between entry points, but until that happens I'll keep doing what I'm doing. Absolutely. Adding to winners makes it easier for a winning position to turn into a loser. Since I cannot predict price I never know when an uptrend is going to turn into a downtrend and turn my winner into a loser (which will happen sooner if I added to a winning position). I have a whole post about why I never add to winners. I'm not saying never add to winners; I have heard that with certain strategies it can be helpful. It works great if you get in at the beginning of a trend and add all the way up. But since I cannot predict direction I have no idea if it's going to be a big trend or a little trend. Adding during every pullback sounds like a good strategy but it's not something I'm able to make work consistently. I'm not saying never do it or that it's wrong, just that it's not something I have been able to make work. If you are able to add to winners and are a profitable trader then by all means, keep doing what you are doing. Like I said in the first post, I expect to get criticism because I add to losing trades. It doesn't bother me, however. I know that's one of the "rules" you're not supposed to break but remember that I do it in a calculated manner.

I increased my net worth during the recession in 2009 by buying when everyone else was selling. I was typing pretty fast and it's possible I made some errors. I never know how much price will go against me when I enter, but at the time I didn't think $60,000 in drawdown was a bad thing. I had no idea how far SPY would go down or when it would go back up. Reviewing my notes I was planning on buying more (in the form of SSO) if SPY continued to go down. In that case, the total profit would've likely been higher than $42,000. Because of this, I'm not sure if it's necessarily correct to assign a risk:reward value. Sometimes trades go immediately in my favor (for less profit given the smaller starting size). For example, I've had 200 shares of QLD since November 2012 at an average cost of $53.31. Today that position is up $1,724 plus another $58.50 from 2 covered calls in Feburary that expired OTM. Like I said, sometimes I don't make much when price doesn't go anywhere. I had no idea QLD how QLD was going to behave. It's normally a pretty trendy beast, but of course just because it did something in the past doesn't mean it will continue to do it in the future. Cool, thanks for your interest.

I made a new thread so as to not get this thread off topic. http://www.traderslaboratory.com/forums/technical-analysis/16226-how-i-trade-if-price-random.html

My original method, the one used in my journal thread, was based on Fibonacci retracements. Keep reading before you flame me: I don't think Fibonaccis are special, and I joke about people who think they have magic powers. I do not believe that a 38.2% retracement is really any fundamentally different than 38.1% or 38.3%, or 43.6%, or 19% or 39.4%, or any other number. Literally any number will work just as well because, say it with me, price is random. Do you think price goes "hey, this is a 38.2% retracement! Time to go the other way now!" No. And do you think the market makers do that? I do not believe Fibonacci numbers are special. I know that some people are pretty serious about using Fibonacci number tick or volume charts as if the Fibonacci number is somehow magic and will work better than any other number. That’s all nonsense. When I first shared my method elsewhere a few years ago, the discussion quickly turned into an argument between people who think that because Fibonacci numbers may sometimes be found in nature, they are therefore applicable to trading, and the people who think that’s a bunch of crazy talk. I decided to share this method because of a few conversations I had been having with people who were paying a monthly fee to some “guru” to learn how to trade with Fibonaccis. None of them were making any money (other than the “guru” who was collecting monthly subscriptions), and the thing I noticed is that these “gurus” were always extremely vague. They would post after the fact charts where price happened to bounce off of a Fibonacci level and say “see?! Fibonacci retracements work!” The gullible students would say “wow u r so smart! Here pleez take my money to teach me!” But the people who had more accurate BS detectors see that that is all nonsense. Without knowing ahead of time if price was going to bounce off a Fibonacci level, and if so, which one, such a method is useless. I originally used two methods: one for daytrading the ES, and one for long term trading SPY (or SSO). The daytrading system is much crazier and I will talk about it later. Since I don't daytrade regularly anymore, let's just talk about the longer term system. This is a long term system so we're using daily charts. The general idea is that since price is random, we know that it goes down and up, but we don't know when it's going to either, nor for how long. We do know that it can't go to negative, and we have a pretty good chance that the S&P will not go to 0. Do not use margin. You are going to be averaging down quite often. Using margin is a good way to blow your account when SPY goes one penny further than you can afford. If you do not use margin you cannot blow your account. The initial profit target will be the previous high. Depending on how far your position goes against you, you may wish to change the target in the future (for example, if you start buying SPY at 140, and it eventually drops to 90, you might not still want to have to wait for it to get back up to 140 before you close your position). Step 1: Wait for SPY to make a pullback. You can use Fibonacci retracements if you want. I did for the sake of proving the point that Fibonaccis can be traded profitably but it really doesn't matter. You can use 25% increments, you can use 30%, or 42%, or 51% or anything you want. There are no magic numbers. When price has pulled back to your level, buy a small amount. Step 2: Buy more SPY when it goes against you another predetermined amount (perhaps the second Fib retracement, perhaps a random percentage, etc). Step 3-x: Continue to buy more SPY when it continues to go against you. Again, you can use Fibonaccis, or you can divide its current price into increments (such as if SPY is at $140 and you buy every time it drops $10), or into percentages (such as if you buy every time it drops a certain percentage), etc. Remember that each add is going to be bigger than the previous. This is averaging down. Remember that you are not using margin. Begin your first add with a small enough size that you can continue to buy more as it goes against you. If SPY is $145 and you keep buying all the way down to $100 and then run out of money and then SPY goes down to $80, you did it wrong. Remember, price is random so you have no idea how far it's going to go down. Some of the trades will be awfully slow and boring. I currently have a trade in QLD that has been open since November of 2012 and has barely gone anywhere. I didn't know QLD was going to chop for a few months when I bought it. Patience, remember. Not every trade will end up in a huge winner. Some of them will just be small winners. Ok I've been spending a few hours writing this now and need to take a break. There is much more to discuss, including: - hedging a SPY position with SH to make money when your SPY position is drawing down - uptrends and random entries - using covered calls in slow boring uptrending markets And some more rules to be discussed, such as why I never add to a winning position. And now to preempt some of the inevitable questions and criticisms: 1) "Dude you are so dumb, this isn't trading." Well, I'm making money buy buying and selling stocks, so yeah, it is trading. And I've been consistently doing so for years with every trading posted in real time, so... yeah. 2) "This system sucks and doesn't make money in big up trends. That's when all the big money is made. I know because some "guru" told me so. You would know that if you were a real trader. Trend following for lyfe!!1!1!!!!" Yeah, I don't make much in big up trends unless I happen to have a big position from a previous downtrend. That doesn't always happen. But I also don't have big losses following downtrends the way most people do. And when price goes up and down I do pretty well. 3) "You idiot, you are basically just throwing a lot of money at the market and when it eventually rebounds, you make money." Yup. Since I cannot predict price, this is how I have to do it. I view the markets as a mathmatical random sequence rather than whatever you view them as. If you were going to make money from a random sequence, how would you do it? Averaging down, that's how. Look, this is not everyone's holy grail. Sometimes it works very well. Sometimes it doesn't produce big winners. If you can predict price, keep doing what you are doing. If I could predict price I would just enter in the correct direction with my entire account on each trade. There would be no reason to start small and add more as price goes against me. I fully admit that this method is inferior to price prediction methods. But I've never seen anyone who could successfully predict price, and until I am able to do so myself, I will continue to trade this way. To give you an example of a complete trade that lasted a whlie, on October 27, 2011, I closed out a trade that had been open for a while. This was the previously mentioned trade that at one point was drawn down over $60,000. On October 31, 2011, the dividend was paid and the final numbers looked like this: SPY: $31,115.00 (closed) hedge: -$3,281 (closed) $27,834.00 (SPY gain + open hedge loss) $1,223.60 (realized hedge gain) $2,931.69 (realized hedge gain) $1,129.72 (dividend) $3,562.22 (dividend) $5,221.55 (realized hedge gain) ———————— $41,902.78 (total for trade) I had a SPY position which I had been continually adding to, several SH positions that had been closed and reopened, two dividend payments, and a currently open SH position that was closed at a loss. That's how I trade as if price is random.

Let's talk account size for a bit. This is not to brag, but just to paint a realistic picture of where I'm at. This style of trading is not going to be feasible if you have a $5,000 account. Ever since college I have been very frugal and tried to live below my means. This isn't meant to be a financial lesson, but just because your salary increases doesn't mean your expenses have to increase. I'm sure you've all read "The Millionaire Next Door" and that type of books (if not, read it. Cliffs notes: rich people are frugal, poor people are flashy). This is especially true in trading. If you have a normal salaried job, you know that every week you will get paid $500 or $1,000 or however much you make. Although your salary may be limited, it still allows you to plan for future expenses. If you own your own business (trading is included in this) then this is all uncertain. You may make $10,000 one week but that doesn't mean you won't make $0 the next week. Or -$10,000. Being frugal helps ensure your survival. Lesson over, back to trading. Let me back up even further and say that the reason my account is where it is today is because during the "recession" of 2008, I averaged down heavily into weighted index funds (QLD, SSO). This is already breaking two "rules" that traders love to quote: 1. don't average down, 2. don't use weighted ETFs long term. Everyone else was freaking out and selling. "Oh noes, the economy is collapsing!" No it's not. It hit me that this could be a great buying opportunity. My first thought was to buy as much SPY as I could afford, but then I learned about the weighted ETFs which were not only cheaper per share, but also double weighted, so for example, if the S&P 500 goes up 1%, SSO goes up 2%. I picked the indexes because I had no idea what would happen to individual stocks but I was pretty confident that the indexes would not go to zero, and if they did, I had bigger problems than blowing my account. While I watched everyone on the forums talk about the collapse and how they were selling, I just continued buying more every time it dropped a certain %. "Be greedy when others are fearful." I can't predict price direction, but I was pretty sure those funds would go back up. So, remember when I said I regularly break commonly-accepted trading rules? What is it, 95% of traders lose? And they all probably follow those rules. - Never add to a losing position - Never let a winner turn into a loser - Never risk more than 2% of your account - The trend is your friend Let's talk about those: - I regularly add to losing positions. I do it within certain boundaries, never with margin, and never with risk of blowing my account. - My winners often turn into losers. I have no idea if price is going up or down. Sometimes they go against me. - My drawdown sometimes goes well past 2% of my account. - Every trade I make is counter-trend. "The trend" is a bunch of nonsense and is a great topic for another post. Let me summarize it like this: - price can reverse at any point and the "trend" only exists in hindsight. Just because whatever trend identification method you use (MA slope, higher highs/higher lows, whatever) happens to say "hey, we are now in a trend whereas one tick prior to this we were not in a trend" doesn't mean price is going to keep going in that same direction. (continued in next post)

Let me start by saying this style of trading is not for everyone. I expect a lot of criticism and people to tell me I'm doing it wrong. I pretty much break every trading "rule" in every trade. More on that later. Let me also say I'm not selling anything nor am I a vendor, nor do I accept "donations." This is all free for the sake of discussion and creative thinking. I have a website and a Twitter account but there's nothing for sale on any of those, either, and all I really do on them is call trades and write about how to avoid trading scams. No one is going to steal my edge and prevent me from making money unless they somehow manage to make the market go up forever without ever retracing in which case my retirement accounts will thank them. Let me start by talking about my "edge." I hate that word because it gets thrown around all the time on the forums by people who don't always know what it means (the same people who calculate risk/reward after the fact). My edge consists of: Account size - I know there are stories of people starting with a $10,000 account or whatever and building it up to $1M. I'm sure that's possible if you can predict direction, but I can't, and this is not one of those stories. Discipline - I don't have trouble following rules. I'm also patient. Some of you may have been following my journal thread for the last few years on another big trading forum where I've posted live calls for every trade and remember a point when I was sitting on around -$60,000 of drawdown and everyone was telling me I was doing it wrong and I should close the trade before it gets any worse and etc. I didn't care. I sat through big drawdown for a while, collecting dividends and profits from hedging the other side (more on that later) in the process, and ended up closing the trade for over $40,000 in profit. This was all posted in real time with daily updates, and that forum doesn't let you edit old posts so I couldn't change anything if I wanted. Good thing I didn't listen to those people who told me I was doing it wrong. Patience - I know that there are some times when I won't have any trades. Sometimes the market just slowly trends upward over time and I don't make very much money. I don't care. Focus on the big picture. Money management - I never use margin. I plan entries and exits ahead of time. I know how to hedge the other side. I never use margin. Also, I never use margin. Knowing what I don't know - I cannot predict price. I've studied every indicator, I've reverse engineered some of the popular ones, I've created my own. All useless. I've studied price action. I've studied volume analysis. I am still studying these things in my spare time but currently am still unable to predict direction, but maybe one day I will. But until that time, I'll continue to trade the way I do, having no idea where price is going tomorrow, only knowing that it's going to go up and down. (continued in the next post)