Prelude – Reality of the trading world
“The market is essentially designed to cause traders to do the wrong thing at the wrong time. The market turns our cognitive tools and psychological quirks against us, making us our own enemy in the marketplace. It is not so much that the market is against us; it is that the market sets us against ourselves.”
– Adam H. Grimes
If you are looking to get rich overnight, you may as well stop reading this.
Unrealistic and irrational expectations are bound to fail over time, such as knowing how a trade should happen. It is important to embrace that a trading methodology is evaluated over series of trades rather than over a single or few trades. This liberates your mind from unnecessary stress of knowing how every single trade should pan out.
Trading has never been easier. With a few mouse clicks, you are either coming out as a winner or a loser. Anyone can trade and anyone can get lucky – but when you combine those two factors, we end up clicking on a post where someone on “/r/wallstreetbets” subreddit made over 2000% in profits. If that’s why you are here, you have better odds gambling at a casino.
The market will always be there as long as we live in a society.
Imagine playing a game of chess and the pieces on the board represent candlesticks on a chart. Now imagine trading if this is all you saw:
Figure 1.1 – Typical DOM dashboard options
It is very difficult to win a game of chess if your opponent’s pieces were invisible and your pieces were not, right? How would you know how to react? So how would a chart with no data or candlesticks be suitable to trade? In chess, all the data you need comes from your opponent’s move. You don’t need to even see their face or body language like you do in poker. Successful traders react to price action that often has similar patterns or consequences.
What is price action? According to Investopedia: price action is the movement of a security's price plotted over time. Price action forms the basis for all technical analysis of a stock, commodity or other asset chart. Many short-term traders rely exclusively on price action and the formations and trends extrapolated from it to make trading decisions. Technical analysis as a practice is a derivative of price action since it uses past prices in calculations that can then be used to inform trading decisions.
All professional traders I’ve read about or know trade whenever an opportunity arises. They don’t care if they miss couple of plays. If the setup was there, you know where to look; you take the trade, because that’s your edge. There is something liberating about that. You never have to fear if your trade is going to be a winner or a loser. People in trading, especially a lot of rookie traders, trade as if a game of basketball is won in a single shot. No, a game of basketball is won by series of different types of accumulated shots made in a fixed timeframe. That is why it is equally important to take as many trades as you can whenever it presents itself to you.
“I would go 0-30 before I would go 0-9.”
– Kobe Bryant
If I were to fund you 100K by the time you finished this chapter, would you place all the 100K in a single trade without a stop loss? No right, I would, at least, spread it into 70-100 trades or have each trade with 1-3% drawdown. So that if you lose 20 times in a row, you know you have to change something… maybe go back to the drawing board. The game of trading, at least in the beginning, is more about how much can you learn without losing everything. You know what else is crazy; I don’t know a single professional or consistent profitable trade that hasn’t blown up their account, at least, once. That’s why I don’t recommend any new traders to trade with money they can’t afford to lose. I wish someone told me these things years ago but my ego was too big.
You can start by paper trading to develop good habits while practicing and tweaking your edge. A trader’s edge is a skill and “knowing” of when and where to look when certain criteria’s have been made so they can execute without any hesitation and in return, they are consistent profitable traders. To see if you have trading edge, you need to look at profits over a series of trades.
Do you know want to be a consistent profitable trader or trade as if every trade will make you either broke or over-night filthy rich?
Figure 1.2 – Profit over time of a retail versus professional trader
Shown in figure 1.2, there are two different equity graphs. On the left side, we have Graph 1, where it indicates a typical trader on r/wallstreetbets. They oversize their long position and have very large drawdowns. Eventually, this trader ends up blowing their account. They also expect each trade to be a winner, or why would any normal person trade otherwise, right? So when and if the trade goes in red, the following usually happens: They are frozen in fear and in result they are in able to think rationally. Every time the market goes in their favor, even for a split second while they are still in the red, they are convinced this trade will work out…eventually. Then, the market goes against their favor even more, so they are swearing to themselves that as soon as the market goes in their favor again, they will take a small loss. As they watch their profits bleed in red font, the market slowly goes in their favor. Their profits are still in red color, but it seems, now, the market is going back up to break even. They are thinking: I don’t need to take a loss. Who knows...these numbers might turn green. As they stare at the vibrant red font, representing their unrealized loss number, they are not even paying attention to what is happening in the market since they are starting at the red number more than the chart. After waiting a grueling few more minutes, the market - without a single hopeful sign – never comes close to the breakeven point. In fact, it goes back lower than before. Now the trader can’t handle being in this situation. The amount of stress and uneasy feeling makes it too painful for them to hold on to their position. They rather take the loss than ensure another second of this pain. So, they end up closing the position just like that, and their mind is finally free from the burden of looking at the red numbers. Their mind is paralyzed. They don’t how to act, feel or even what to think. They wished it was a bad dream or could rewind back in time. If this has happened to you, firstly congratulations. Secondly, you have overcome the hardest hurdle of your trading journey, because deep down you are a fighter. You are showing resilience and courage, which cannot be taught. There is no shame in that, because it's part of the process for most successful traders. If you don't quit, you will learn a valuable lesson. I want to share my past with you guys when I first blew up my entire savings on a single trade. Prior to that, i also blew up another account during my college years. I figured if I can be a semi-pro in csgo (not that i was but i could have easily been), trading would be a similar challenge.
If you are truly – I mean truly a consistent profitable paper trader – there are trading evaluations out there that can guarantee a funding in just 15 days. If you pass, they will offer you a funded account. When I first went through this process, I learned a lot about my emotional intelligence and daily habits that influenced my trading decisions, such as: being caffeinated, working out, having an x amount of sleep, alcohol consumption, relationships, etc… Luckily, I was able to develop a healthy trading mindset and saw trading as another game. Just like in a video game, like CS:GO, where about 0.5% of ranked players are Global Elites (highest rank possible in the game), I was determined to accept a similar challenge.
Figure 1.3 – Screenshots taken in 2015 of ranking “GE” in 369 wins and then in 50 wins
I was lucky enough to learn some basic things from a childhood friend of mine, Vuong, during our college years. At that time, he was making more money trading part-time than his actual job at Northern Trust. He was mostly trading options. He was a different type of trader – a systematic trader – and I was a discretionary trader at that time. Now I’m a hybrid trader. Let’s not get lost in what all of that means for now, but since we are both different types of people, we found what style of trading best suits us.
When I decided to invest fulltime into learning how to trade, I made a lot of mistakes and absorbed a lot of fillers. Finding out what was helpful and what was not was a long journey. I had to constantly let go of my ego. At one point, I thought I was delusional, because I lost so much of my saved up money. I remember several years back, when Ethereum crashed to $100 - $180 after the 2017 bull run, I longed 241,000 contracts of ETH. I even posted a thread on reddit of this move. Crazy thing is that it worked out right after I posted it. I was so damn cocky and confident that I went to bed with my trade still live.
Figure 1.4 – $ETH reddit post before blowing up my account
Looking back, my chart looked like an amateur made it. These days, my charts are a lot cleaner, because I don’t have bunch of lines and indicators that form meaningless random patterns. It’s useless to know a pattern if you don’t understand why it formed and the implication of it going forward. I went to bed without having any stops, because I thought I had it all figured out. Next morning when I woke up, I immediately checked my email to see this message shown in figure 1.5.
Words can’t describe how I felt. I was so sure that ETH would hover around $180 and not visit $149 overnight. When my entire account got liquidated, I decided to stop trading all together. I stepped away from trading in general for couple of months and start figuring out how to become a consistent profitable trader. After a year and half of just learning more and paper trading, I decided to trade again.
Truth is that everything you need to know about trading is online for the general public, but 90% of it is just fluff. It’s very hard for new traders to know what’s important and what’s irrelevant. But it all started for me 2016. Around early 2016, I found this thread: https://futures.io/trading-reviews-vendors/37023-price-action-kewltech-style.html
I would like to say it saved me from working 9-5 right now. It all really began reading this thread, because I had so many damn questions at the end of it that I kept reading and reading about it even several years later. At that time, the blog was publicly accessible. Now it is invite only. Whoever kewltech is, he has changed several people’s lives. I’ve been trading for several years before 2016, but not the efficiency I do now. It was my first time being introduced to the market from a price action perspective. Since then, I began exploring more resources relevant to anything that would help me understand price action a bit more.
Below are those resources I have accumulated from 2016 – present
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The Art and Science of Technical Analysis: Market Structure, Price Action, and Trading Strategies by Adam Grimes
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The Art and Science of Trading: Course Workbook by Adam Grimes
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Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude by Mark Doulglas
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The Logical Trader: Applying a Method to the Madness by Mark Fisher
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Technical Analysis Using Multiple Timeframes by Brian Shannon
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Volume Price Analysis by Anne Couling
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https://futures.io/trading-reviews-vendors/37023-price-action-kewltech-style.html
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https://school.stockcharts.com/doku.php?id=market_analysis:the_wyckoff_method
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http://chartsview.co.uk/learning/First-touch-rule-trading.html
So, when I started trading again, I decided not to use my own money. I thought there no way I could convince rich people to let me invest for them where I keep a large cut. I didn’t have a good track record to show. Luckily around the time I began dabbling with the resources shown above, there were several emerging financial technology firms evaluating day traders’ performance in real-time simulated accounts. Traders who pass the company’s evaluation earn a funded trading account using the firm’s capital. Within the year, I was able to get funded on 5 different occasions. Currently, I manage one funded account under Apex Trader Funding. Shown below are the 5 times I’ve been funded: 4 times with Earn2Trade and once with Apex Trader Funding.
In chapter 10, I talk more in-dept about the process of being funded from when you first start the evaluation to when you sign the contracts for their live accounts. You will also see all the trades I took for each of these 5 accounts and much more. You don’t have to live in USA to become funded. Unless you live in North Korea or somewhere without a computer or internet access, you can’t be funded. So let’s get started.
Professional bodybuilders try to minimize their body fat while maximize their muscle mass. In trading, the end goal is to minimize losses and maximize profits. When I got funded, I took trades that had the best risk to reward ratio. Trading is always about protecting your capital first. 90% of traders or whatever the percentage is these days fail to realize that you need skill and experience to take a nice loss. Yes, a “nice loss”. Learning how to take a loss is harder than taking profits. Championship teams have one thing in common: a decent - excellent defense. The only thing left to do is taking your shots whenever they are presented. Why do casinos make consistent money on an event that has a random outcome? Because they know that over a series of events, the odds are in their favor. They also know that to realize the benefits of the favorable odds, they have to participate in every event. “If you asked me to distill trading down to its simplest form, I would say that it is a pattern recognition numbers game. We use market analysis to identify patterns, define the risk, and determine when to take profits. The trade either works or it doesn’t” (Mark Douglas). Since we have tons of data points nicely wrapped up in a chart, we can easily find reoccurring patterns that happen over time.
“…a greater probability of one thing happening over another. In a sense, technical analysis allows you”
- Mark Douglas
Understanding how price moves up, down, or sideways, requires one to identify basic market structure and cycles. There are two ways I can explain market cycles: through two indicators: MACD and slow stochastic or through Richard Wyckoff’s way. We will save the two indicators for another chapter, as it wraps up my thoughts well when I’ve explained some few concepts.
As shown below in figure 1.6, is Richard Wyckoff’s market cycle published in early 1900s of accumulation, markup, distribution, and markdown from stockcharts website.
Figure 1.6 – Wyckoff’s Market Cycle
Let’s pretend you are training to compete for the Olympics so you can be the next Usain Bolt. On a long narrow track, your trainer will be recording every movement you’re making that is relative to time and distance. Your job for this particular training is to reach one checkpoint to the next. Sometimes, the next checkpoint can be behind you. Your job for this exercise is to reach just these 2 checkpoints as fast as you can: checkpoint A is 250 meters north from starting point. Check point B 300 meters South from A, so 50 meters south from starting point. Okay, so you take your mark….and ready…set….go!! You start of slow but very rapidly you’re gaining velocity. You are now halfway through checkpoint A and you are in full sprint. You know that your next checkpoint is behind you. As you arrive to A, you know you can’t just touch checkpoint A and immediately turn around and head to checkpoint B without losing velocity or coming to a complete stop for a fracture of a second. If you want, you can stop and rest as long as you like, because you might be too out of shape and need to catch a breather (I call this “null point” but rookie traders call this consolidation). But you’re not out-of-shape. In fact, when you arrive at A, you slow down at the very last stretch, touch check point A, turn around 180 degrees, and start heading to check point B (distribution or accumulation occurs here). You slowly gain velocity and eventually you are sprinting past where you started.
The point being: you can tell by looking at any chart what phase the market is in relative to the timeframe. When it’s in accumulation or distribution, the market is slowing down from a full sprint (markup/markdown). The market is never in a phase where it’s “deciding” or “consolidating”. We are always, always, always…. in one of the 4 phases. In other words, when people say, “oh the market is deciding what to do next… it’s under consolidation”, it’s simply not true. TA assumes everything is always priced in. Accumulation follows after a down move from market to nullify the heavy sellers. Distribution follows after an upward move from the market to nullify the heavy buyers. It happens in all time frames and types of charts (volume, tick, time, etc…). Price action goes either up or down over a period of time; so in order words:
Where P = Price and T = Time
ΔP ÷ ΔT = PRICE ACTION
Using the analogy I provided above, where S = speed (distance over time):
ΔS ÷ ΔT = VELOCITY
Shown below in figure 1.7 shows you on a very basic model of how price action looks like from Wyckoff’s model to our sprinting analogy and finally back to how we see a typical chart.
Figure 1.7 – Translation of Wyckoff’s model
If
ΔP ÷ ΔT = PRICE ACTION
Then
ΔPA ÷ ΔT = PRICE ACTION MOMENTUM (PAM)
Using the sprinting analogy, where V = Velocity:
ΔV ÷ ΔT = ACCELERATION
We can gauge indicator (MACD) and a leading indicator for MACD (Slow Stochastic). For now, let’s not get into the details, since I don’t want to overwhelm you guys.
Shown below is a screenshot of a private discord message, where I warned a friend of mine of an upcoming bitcoin and Ethereum sell-off. I wasn’t bold about this prediction, because I had some insider information or Elon Musk texted me about his next tweet… Everything about the chart told me that we were in distribution phase on a higher time frame.
Figure 1.8 – Bitcoin prediction on 05/09/21
In-order to understand why I was able to predict such a move requires me to explain you how price action behaves the way it does—and not because some old model from early 1900s told me to do so. This requires labeling the market with an objective perspective from being aware of the context: if… price action behaved like this…and it’s currently behaving like this… then, I will execute my edge when I see price action behaving the way I want it to.
Here are several more bitcoin predictions I made when the market sentiment was very bullish for nearly all crypto trader/investors. I have a lot of these types of calls on my twitter feed:
Figure 1.9 - $BTCUSD short play reads 1/4
Figure 1.9 - $BTCUSD short play reads 2/4
Figure 1.9 - $BTCUSD short play reads 3/4
Figure 1.9 - $BTCUSD short play reads 4/4
Okay enough bragging. Reading a chart should be the easy part. Knowing how to take advantage of the chart is the other half of the battle. We briefly just talked about price action behavior through the lens of a technical analysis. I know the phrase ‘technical analysis’ (TA) gets thrown around so much that rookie traders have made it appear that it is on par with people who believe in astrology. They have no idea what they are seeing in the chart. They let a single indicator dictate if they will be rich or broke the next day. It is these guys that misrepresent what TA is used for. TA is a lagging indicator in itself of an objective analysis of foreseeable price action movement of an asset through patterns, indicators, trends, multi-time frame analysis, etc... I would argue that if you’re trading based on fundamentals alone, you are that astrology person.
‘Bruh, we are going to make all-time highs today, because $TSLA is expected to beat earnings today.’ ‘Fuck, we did beat the earnings today but today’s unemployment numbers weren’t so good. No wonder why we had a sell off instead. Damn unemployment numbers, I swear Obama is not even an American.’ ‘Obama is about to hold a press conference…bet you more bad news’ ‘YESSS!, he just said he will sign a 1.2 trillion stimulus package tonight…dude I’m buying tons of $SPY calls the second the market opens to tomorrow.’ ‘…why did the market just tank dude?’ – crypto guru 1
‘Didn’t you hear? Elon tweeted a picture of a bear…bro I swear you never are up-to-date with the news’ – crypto guru 2
In some discords, we have bunch of traders that follow every news that push their narrative of how they view the market. Overtime, they come across several pieces of news that eventually contradicts their analysis and biases set in, because they will believe what they want to believe. If I wanted to Bitcoin to go to 100K, I am more likely to read bullish news over bearish news no matter how objective you are. Your emotions will always get the best of you.
Have you ever noticed how biased most due diligences (DD) are? Why is it when the news releases that we are often too late to react? How the heck do you trade when you assume this news will be an upward or downward catalyst to the market? How many times have you heard of a stock beating earnings and still dumping the next day? How do you gauge the importance of a specific news in context with the global market, let alone how do you interpret a single headline in grand scheme of things? Why does your interpretation matter more than a hedge fund with billions of dollars? It is why most traders are so confused and when they type out their DD, they sound like that one astrology person they dated that turned out to be totally delusional fuck. They will use confirmation bias to confirm any problems they want to explain. It is why most traders quit due to frustration. They set themselves up for failure because they expect all or most news have a direct correlation to the market. They are in this constant loop where they don’t question if their process is even valid. They have nothing concrete to base their trades on. They lack a premise that is consistent and pure.
With all the tools available for today's traders, why even have charts, volume, indicators, time frame, DOM, etc…if all you need is a DD on interpreting news. It’s almost like psychiatry or astrology. Out of all science branches, psychiatry is the most unscientific branch of medicine. How can you explain or let alone measure something you can’t comprehend, because of our own limitation of our conscience mind? The science of psychiatry is just like the fundamental news traders – full of contradictions. Unless you are batman, fundamentals will not help you become a successful day trader. All news does is act as a catalyst. Luckily for you, the way I approach my trades does not care if there’s a world war 3 going on. Shown below are two charts of before and after pictures of a $BABA trade I was so confident about. Not only did I post it publicly on my twitter feed, I decided to also post it on r/daytrading discord, as well.
Figure 1.10 - $BABA after a few weeks from the tweet and discord post 1 of 2
Figure 1.10 - $BABA after a few weeks from the tweet and discord post 2 of 2
‘After a heavy sell off from low 200s, $BABA hits a significant level and trend line at 142.49 causing price action to nullify as MACD and slow stochastic show clear accumulation from mid-September to early October. Therefore, we bought off to the next significant resistance right above 171.75. Although price never gained above our 171.75 resistance on higher time frame, we saw $BABA distributing on lower timeframe for a markdown and re-tested to previous intra-day support at 163. Our intra-day support is being respected and we are accumulating more buyers for a possible uptrend continuation to the next significant resistance. It retraced to the previous low on slow stochastic on lower time frame but has much more room to retrace on higher MACD timeframe. A MACD divergence is about to form on higher timeframe if $BABA continues to fail to get above 171.75. If that happens, I’m looking to enter a buy limit order at 153.75 if it decides to test an untested, significant, support before we test 171.75 again to make new ATHs on lower timeframe. Stop being below 142.49.’
Do you see how much better this sound than the fundamental guy – even if you don’t know what I’m talking about right now since its only chapter 1? We have a framework that can be modified and tweaked. It’s repeatable technical analysis. The blind news trader doesn't see this price action behavior, because they have already made up their mind from some bullish DD they read in r/wallstreetbets. Some setups take weeks to form on higher timeframe and often these news traders will go long near top or short near bottom. They are always using the same timeframe for all their trades.
TA, according to Investopedia, “differs from fundamental analysis in that the stock's price and volume are the only inputs. The core assumption is that all known fundamentals are factored into price; thus, there is no need to pay close attention to them. Technical analysts do not attempt to measure a security's intrinsic value, but instead, use stock charts to identify patterns and trends that suggest what a stock will do in the future.”
“It’s the ability to believe in the unpredictability of the game at the micro-level and simultaneously believe in the predictability of the game at the macro level that makes the casino and the professional gambler effective and successful at what they do.”
– Mark Douglas
We are constantly monitoring our charts and emotions so that we can react adequately.
Knowing how a game of basketball is played does not mean you can start playing ball and perform like Michael Jordan. Historically, Jordan in the 1990s has been winning more rings than not. In the same sense, historically, Amazon has been more bullish than bearish. Likewise, it was wiser to bet on Jordan’s last few years that there’s a significantly greater probability Jordan hitting a fadeaway shot than not. Jordan shot a scorching 82% on the fadeaway in the final two seasons of his career. In the same sense, historically, Amazon keeps making all-time new highs as economy continues to boom as opposed to making lower lows (when price continues to drop lower and lower, without making newer highs). But when Jordan does the most unpredictable buzzer beater shot to win the series, there’s not a likewise. But in fact, most traders trade like they are betting on Jordan hitting the buzzer beater shot. Therefore, 99.99% of all traders are “passive traders” without them even realizing (we react to what “active traders” might do) An active trader influences the market’s price action to their desire (this is different than market manipulation, which is illegal I thought Elon Musk? Apparently for the billionaires and people in power). But most traders trade like they are active traders, or they are Michael Jordan. Active traders make those new highs and lows. They have more buying power than 99.99% of traders. Jordan hitting the game winning shot is like calling the all-time high before a market crash. Where I am trying to get at is that, trading successfully works the best when you are thinking in probabilities. Our mind does not think in probabilities. We feel before we think. This is only helpful when it comes to feeling your sense of mental state before trading. Our job is to predict, predictable movements, such as the Bulls winning or Jordan scoring a fadeaway shot…. something that has a historical high pattern of occurrence (your edge). The market will always have these patterns occurring over and over; it happens in every type of chart. You can have all types of trading styles and plans because all human beings are built different. But regardless, I want to show you guys how I approach my trades that has been back tested and got me funded to trade like a professional. I want as many people as possible to learn what I know without them using their own personal money. My goal is to get many people funded.
“Putting on a winning trade or even a series of winning trades requires absolutely no skill. On the other hand, creating consistent results and being able to keep what we’ve created does require skill. Making money consistently is a by-product of acquiring and mastering mental skills.”
– Mark Douglas
As you keep reading, I will explain why price action behaves the way it does, why are certain places better for long/short trades, why my stops, entries, and exits are where they are, and how to avoid TA paralysis through multi-timeframe analysis. All of this and more that can be easily modified or even copied so that it adds value to your current understanding of market price action behavior. It is however for the best to completely throw away what you think you know is right or wrong about the market, and I welcome you to continue this course with an open mind and critical mind. Just like anything in life, it takes practice. Not even kidding, I’ve blown my account 5 times before I became consistent. A good trading strategy is when you gain more profits than losses over a series of trades, preferably, 100+ trades and minimum of 30 days traded. Again, to trade every single time as if your life and future depends on it is not what we do here. We only trade setups where price is over bought or sold. Another word for this trading style is called trading “initial reactions”. Without getting too technical, it’s basically when price action approaches an area of a market where it’s oversold or overbought. Usually when these areas are “significant” and price action touches it for the first time, it will create volatility due to traders around the world having a similar physiological affect. We trade the volatility or the markup/down towards that untested support/resistance. Do not worry if that doesn’t make any sense right now. To understand that I need to explain trend, significant tested/untested support and resistance, momentum, “initial reaction”, and multi-time-frame analysis.
Keep in mind. Trading is not like poker, where you can see the chip leader’s tell, facial expressions, or even their chips. I cannot see people trading on the other side of the monitor. All I can see is what is present and what has happened. If my edge gives me 75-90% probability of one outcome occurring over another, then that’s all I need to be a successful profitable trader. By now, I hope you can visualize why this has worked for me for years. Without an edge, you’re essentially just gambling away your hard-earned money to the market. Those of you guys that are reading this again, does it make more sense the second time around? Any thoughts or concerns please contact me. I would be happy to clarify.
