Focusing in on the Numbers

Site Administrator | December 8, 2011

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Today's session shared several valuable nuggets of wisdom.  One overriding thing was to try to block out the noise, focus on the numbers and stick to the plan.  This means throwing bias, noise and talking heads out the window and have the discipline to focus on the actual market as opposed to allowing distraction to creep into the trading plan.  We have posted a recap and a copy of the recording below for your review:

Trader Talk 12.8.11

Steve Papale –

Aamar Hussain –

Chuck Crow –

How did you get start in the markets?

Steve – I got involved back in 1986 and joined a proprietary trading shop down iat the CBOE.  I became a market maker in 1987, I traded in a small SPX pit, and continued on for about the next 13 years.  In the mid 90s I started my own trading shop.  In 2000 I moved upstairs and started managing about 100 options traders.  Been doing a lot of education consulting for discover options for about 4 years now.

Aamar – I am part of that lost generation that doesn’t want to work for a living. SO when I graduated I started to try to open a bunch of business and failed miserable.  I took a job as an IT director and hated it, so I learned about trading and have been doing that since 2007.

Chuck – On the investment side I started at 10 years old.  I inherited about $10,000 worth of stock at the time and they told us that was how we were going to college.  The great thing about the markets is that you can get in and not have to work for a living.  It was very easy to make money when I started trading.  In 1996 or 1997, I met Tom Busby of DTI.  We were watching the Globex machine and I got into futures.

What strategies are working best for you in the current highly volatile market?

Chuck – We throw around this phrase “volatility.”  We certainly have higher ranges, but its not higher than we’ve ever had.  In 2008, we were back at 80 on the VIX.  I think that I take it as it is what it is.  Enforce discipline to handle a chaotic situation.  Look at specific numbers and how they have an impact.

Steve – The VIX is what it is.  We’re non directional traders, that has sort of been our core program.  On the floor, I traded with no directional bias.  SO I grew up in a non-directional bend.  We’re in a volatility environment now, but we continue to be successful with non-directional trades.  We have a very defined protocol that we use to get in, manage, and get out of our trades.  We can trade the trade.  But we can’t really trade the market.

Aamar – That’s a tough question to answer. The analysis of support and resistance is what I look at first.  The right method for the right point and type.  I am identifying the key methodologies for whatever it might be for that particular inurement.  The next step is the set up and execution.  The set ups typically don’t change.  I don’t classify this as a high volatility market.  In a market like the 2008 market, I throw support and resistance out the window.  The thing that does change is the management of the trade.  I adapt that continually on the environment.  In a high volatility, I take a small amount initially and use order tools to help me manage the trade.

What is your favorite all-time trading setup?

Aamar – the Pump and Dump.  It’s a high volatility move.  I’m looking for price to shoot up to a major support or resistance area.  I look at the dollar tick, the bollinger band, and the dome.  That’s the key method I use to pull the trigger.  Once I place the trade, the management comes into it.

Chuck – In the first half hour of day trading, you get a message out of the market.  Until the noise out of Europe has settled, it's pretty difficult to get into that market.  After that first half-hour, you’ll know what you have to work with and when to make a move.  That’s a little skewed from what we’re hearing out of the European market.  It makes morning trading a little more difficult time to trade.

Steve – We don’t do too much in the way of technical analysis.  We’re non-directional guys.  We have a protocol that keeps us in or out.  We’re almost like the house in Vegas.  Statistically, over time, we have an edge.  At any given time, we have a loss, but over a longer period of time, we’re going to come ahead.  We always like to see the implied volatility of the options trading at a higher level than the statistical or underlying volatility. The market adjusts how we reset our positions every month.

What is your opinion about what’s in store for the market in 2012?

Steve – We’re non-directional, but we still watch the news and everything that’s going on in Europe.  We don’t do a lot of fundamental analysis, but we do a little research.  We don’t try to predict markets.  That’s not how we trade.  At some point, we do have some issues that will come to roost.

Aamar – I am a bad person to give you content on this.  My opinion is that I have no opinion.  I am a short term trader.  My view of the market is literally for one day.  I believe that you can’t predict the market long term.  The honest answer is I have no idea.  And I don’t think anyone else does.  I would like for the dollar to get really strong and the pound to stay weak. That would be my ideal.

Chuck -   One of the most difficult things in the world is to be both an analyst and a trader.  When you’re trading, you have an opinion of what you want to see and you trade based on that.  An analyst needs to be predictive.  Back in 2009, we laid out a preparation on how we would trade the year.  We missed the low of the year by about 7 points and the high by 1 point. That’s not typical.  You need to separate the analyst from the trader. We don’t care where the market is next week or next month.  That’s not our responsibility.  That’s for the Federal Reserve or Department of the Treasury. We’re going to make money trading, and that’s what really matters.

Steve: What advice would you give to an options trader who has taken a big loss recently on a credit spread?

We plan our trade before we put the trade on.  We try to do all of our thinking before we trade.  Once that trade is on, we become robots.  We know that we have planned our exit and adjustment points ahead of time.  My advice is to forget about it and compartmentalize it.  Understand why you’re taking the loss when you’re taking the loss.  If we continue to see losses over a pattern, then we’ll revisit the protocol itself.  It’s a cost of business, move on.

Aamar: What is the difference in a support and resistance number and a PowerZone and how do you use them?

I am not your classical technical analyst.  I’m a statistical analyst.  There are many forms of support and resistance.  I’ve found in my research that all of these methods fail and all of them work.  You must find the right method for the right time.  You might find that Fibonacci works really well for a few months and bad for other months.  PowerZones are about combining short term statistical analysis for the right environment.  You need to adapt with the market, and use the right method at the right time.

Chuck: What advice would you give a trader struggling with the current volatility?

Anytime you have a market that’s getting into expansive ranges, the only real advice you can give is cut down your size.  Instead of trading a 10 lot, trade a 5 lot.  You want to practice consistent risk management.  Volatility becomes more of an excuse than anything else.  Today’s market is not excessive volatility.  Higher range markets move in higher ranges.  Be disciplined.  Look at the market, see what it's doing, and trade what it's doing.  Trade the market you see, not the market you want.


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Risk Disclaimer: Past performance is not indicative of future results. Futures trading involves substantial financial risk. Views of guest commentators do not represent those of  Article intended for educational purposes only and not meant in anyway as a soliciation to buy or sell certain securities.  Please consult your personal financial advisor before using this information for your own trading purposes.