SimCast Ep. 15 – Fractal Nature of Markets w/ Jack Tacher
Tag: day trading
Going from Day Trading to Swing Trading using “Fractals”
Jack Tacher, known as @alphacharts365 on Twitter, came on the SimCast for episode 15 to discuss with us the fractal nature of markets. After sharing with us his trading history and style, we were able to pull out a few correlations between the indexes, TSLA. and a few low float day trades.
Sounds weird, right? What do the QQQs, TSLA, and some little known stock like SBEV have in common? Interestingly enough, their technicals were almost identical, just on different time frames.
For this reason, we thought it would be cool to show our viewers how going from day trading to swing trading doesn’t have to be a huge leap. A lot of the same patterns and setups play out in the swing trading world. The only real difference, besides fundamentals, is the time frame.
About Jack Tacher from @alphacharts365
Jack Tacher twitter profile
Jack is a swing trader from Florida. He has a lot of experience in technical analysis and shares his wisdom on his YouTube channel. In the interview, Jack reveals that he’s a bit of an amalgamation of many different successful traders, from Bill O’Neil to Mark Minervini. Yet, he has developed his own style and process.
He’s definitely worth following if you want to get a feel for larger time frame trades work.
SimCast Ep. 15 w/ Jack from @alphacharts365 Topics and Chapters
Intro
Jack’s Background and Early Trades – 1:12
Jack’s Process & Trading Personality – 6:10
Trade Review on SFM – 13:55
Using the Equity Put/Call Ratio – 19:08
Market Observations – 22:06
GLD divergence w/ the Market – 28:06
Jack’s Fractal Setups – 32:48
Taking cheat entries – 35:25
Analyzing a TSLA volatility contraction pattern – 40:00
Why do paper trading platforms get a bad rap? Is it because the money isn’t real? The emotions aren’t the same? Is it really just a “game”?
As we’ve covered before in our platform review, not all paper trading platforms are the same. But the real problem is the purpose of paper trading. It is often misunderstood.
The Myth of Paper Trading
The myth is very simple, that paper trading does not prepare you for real-world trading. Let’s be clear, this is a complete lie, and here is why.
Paper trading’s purpose isn’t meant to be a game. It is meant to be a preparation tool for the real world of trading. Don’t take our world for it, take the words of the most prolific trading psychologist of all time, Dr. Brett Steenbarger.
Interview with Dr. Steenbarger
Think about every performance field: athletics, acting, music. In none of those do we start out by following people online, doing some reading, and then trying to make a living from our performance. Rather, we recognize that it takes years of practice and mentoring to become a professional athlete, movie star, or recording artist.
When we take shortcuts in the development process, our unrealistic expectations set us up for disappointment, frustration, and pain.
Many, many times the answer to emotional disruptions in trading is to work on our trading.
As I recently emphasized in an online post, the only losing trade is one that we don’t learn from. Our job is to keep our capital intact while we’re learning new things, and often that means starting out in simulation mode. Only once we gain successful experience in practice are we ready for prime time.
All the work in the world on our mindset is not going to provide us with the skills we need to succeed in a competitive marketplace!
Dr. Brett Steenbarger, Ph.D.
How Paper Trading Creates a Stronger Mindset than Real Trading
Let’s focus on the last thing Dr. Steenbarger mentioned above: “All the work in the world on our mindset is not going to provide us with the skills we need to succeed in a competive marketplace.” Let that sink in for just a moment.
The majority of traders are wont to jump into trading by simply by following some advice they’ve received. The barrier to entry is incredibly low. Put money in a brokerage, sign up for a really convincing guru, and then start pushing buttons. Millions will simply flow into your account, right?
The truth is that successful traders work at their craft for hours and hours outside of normal market hours. Listen to what Karan Khanna has to say about his process:
As you can see, backtesting and pattern recognition is the key to unlocking a confident trading mindset. Not everyone is going to enjoy doing these things. To that point, we’d say you’re probably not cut out for a career in trading if you don’t like putting in the work outside the arena.
It’s All a Matter of How You Use It
Paper trading platforms are only useful if you use them constructively. It isn’t about “training your emotions” for drawdowns. It is about discovering an edge in the markets.
Simulation and replay give you the ability to expedite the time it takes to discover patterns in the market. For example, multi-millionaire trader, Kristjan Qullamaggie found confidence by uncovering thousands of examples of gappers. Here’s what he has to say about backtesting and paper trading.
Most traders haven no idea what they are doing. Many of them may think they do, but they don’t. They are trading blind, essentially gambling. I was like that many years ago jumping from alert service to alert service, setup to setup, and almost no one does a deep dive into market structure and find setups that actually work.
Most trading problems like issues with deciding and obeying to a stop without hesitation, entries, profit taking, discipline (whatever this overused word means) and overall lack of profitability and consistency stem from not having mastered any specific setup.
Once you understand a setup in depth you will never have these issues again. Throw away all your trading psychology books. Psychology was never the problem to begin with.
Once you master a setup, where you know dozens of variations by heart and in which market conditions the setup works well and when it doesn’t and having conviction holding through drawdowns, you will reach any financial goals you may have.
Kristjan Qullamaggie
How to Master an Edge or Setup Using Paper Trading
Qullamaggie goes on to say that he flipped through 10s of thousands of charts, looking at the same type of setup/event – gap up days. He then looked at the intraday charts of all of those to find similarities. Once he’d found a pattern, he was able to exploit it.
Why is this important? Because unless you actually study your own strategies, instead of taking a guru’s word for it, you will not know what to do. You will not know when to stop out, when to enter, when to exit.
This is the very crux of confidence in trading. NFL quarterbacks are confident in games when they have studied the films of the defense they are playing against. They become intimately acquainted with the defensive strategies and the subtle nuances of players on the other side.
So it is with trading. Until you spend time in a simulator or paper trading, you will not “understand a setup in depth” enough to master it, as Qullamaggie says.
Trading is pain, so get into a paper trading platform!
Spending time in a simulator or paper trading should be done for one reason, to master a setup. And for that reason, it is a huge myth that paper trading doesn’t prepare you mentally for real trading. In fact, the opposite is true.
The less time you spend in a simulator, the more pain you will experience in real trading.
Why Simulated Trading Increases Your Odds of Success
Successful trading is a game of probabilities. This is what it all boils down to. If you take enough trades with a risk of x amount to a reward of y amount, over time you expect to come out on top.
The late Mark Douglas was a master of explaining this. In his seminal book, Trading in the Zone, he makes it very clear that systematically taking a setup in which you understand the probabilities ahead of time is the fastest way to consistency.
Therein lies the secret to paper trading – discovering your probability for success on specific strategy. Without this knowledge, you will always succumb to being right or wrong, winning or losing. Likewise, your frustration will continue.
Who It Takes to Get Into a Simulator
This may ruffle some feathers, but it takes someone who isn’t lazy. Most traders are lazy.
You might be thinking, “how dare you!” Well, prove me wrong.
Sure, you may have worked hard your whole life and have come to this point with a nice little nest egg of cash just waiting to be deployed in the market. But your unrealistic expectation of what it takes to succeed will chip away that hard-earned cash faster than you think.
Along those lines, you must ask yourself this:
“If you were willing to put in the time and effort working for someone else, why not put in the needed effort to succeed for yourself?”
It takes a disciplined, measured, and hungry person to spend time in a paper trading platform until the time is right to put real money to work.
Why Simulation and Market Replay Isn’t Just for Beginners
With all that is being said about paper trading, is also important to note that it isn’t just for beginners.
Often we hear of seasoned traders who spend time recording their screens or backtesting new strategies. Just as Tom Brady doesn’t take anything for granted with a team he has played before, so seasoned traders stay on top of their own games.
Markets never stay the same week in and week out. Yes, there are similarities and patterns, but markets shift continually. What was working as a setup last month, may not be working this month.
The ability to adapt quickly is what separates the haves from the have nots.
Over time, the goal is to create a repertoire of strategies that you can employ and tweak as the market shifts. Paper Trading Platforms allow you to do this by quickly referencing the price action of recent days and weeks to find ways to exploit the new changes.
Conclusion
While this may not seem like earth shattering news, we hope it dispels some really harmful stereotypes about paper trading platforms. You are not a “sissy” if you paper trade. In fact, like the tortoise who eventually beats the hair, you’ll likely end up crossing the finish line of profitable trading long before your “fast profits” colleagues do.
Take the time to check out TradingSim, our content, and reach out if we can help you.
In this post, we’ll discuss the best stock simulators that allow you to replay markets in order to study in your free time. We’ll cover the pros and cons of each, and best practices for how to use trading simulators.
Not All Stock Simulators are Created Equally
Generally speaking, you must enroll with a brokerage in order to use a simulator. There are plenty of these on the market. The problem with most of them is that they only allow you to simulate trades in real-time with the market during live trading hours.
This creates an issue for being able to learn. Not everyone is going to be able to “practice” trading at 9:30am EST each day of the week. Not only that, but it limits you to being able to practice your craft outside of normal market hours. Thus, the dilemma.
The Best Stock Simulators Allow Realistic Trading Outside of Market Hours
While not everyone can trade during working hours each day, many would love to learn in their spare time, like weekends. For this reason, we have narrowed our picks for the best stock trading simulators to only a handful that allow realistic market replay, on demand.
Think of it like a DVR for the stock market. You want to be able to replay and relive the market each day, each week, as though you were trading during live markets.
For each simulator, we’ll discuss the following criteria:
Benefits of a Simulator with Realistic Replay
Too often you hear gurus and internet personalities decrying the uselessness of simulators in trading. “You don’t experience the real emotions of trading,” they say. And they are likely right about that in some ways. But the unfortunate damage of this advice is that it has led to the demise of many, many traders in the long run.
Here’s why.
As we’ve written about before, stock simulation and the ability to replay the market is one of the fastest and most reliable ways to self-sufficiency. What do we mean by this?
Educators and gurus have their own style of trading. Typically, they have “made it” in the market and are consistently profitable. Understandably, they no longer have a need for a simulator or replay engine because they’ve found their niche and exploit it day in and day out in the markets.
New Retail Traders Need to Find Their Setup in a Simulator
However, as an aspiring trader in year 1-5 of your career, you really have only a few objectives.
Learn as much as you can, as efficiently as you can.
Settle on one or two strategies that you have discovered a high probability of success with.
That’s it!
Once you’ve found your strategy, it’s all a matter of hammering that setup every time you see it.
The problem with most retail traders is that they want to follow a guru into trades, but have no idea what to expect once they’re in that trade. That’s where the best stock simulators can help.
“There are those who think they are studying the market–what all they are doing is studying what someone has said about the market…not what the market has said about itself.”
Richard D. Wyckoff
How the Best Stock Simulators Can Help
While simulation doesn’t “train” your emotions for the inevitable price swings and drawdowns that inexperienced traders will face, it will train your mind to expect patterns. This, in turn, is a huge boon to your confidence when trading real money.
Think about it this way: would you rather send in a military force to accomplish a mission who had practiced the mission in a mock environment every day for 3 months? Or, would you rather send in a squad of soldiers with no idea what the setting looked like, no idea where support would come from, no idea who the enemy looks like?
You see, simulation is about training your chart eye to see a pattern, test its outcome, and study all the subtle nuances of multiple variations that you encounter. There is no faster, more efficient way to learn to trade.
That being said, let’s take a look at four of the best simulators on the market that allow stock market replay, in no particular order.
DAS Trader Pro Stock Simulator with Replay
DAS is a fantastic trading platform geared towards active retail traders. They pride themselves on very stable software and fast execution. As day traders ourselves, we can vouch for the quality of the trading platform. It does what it says it will do.
As part of your subscription with DAS, which can be a bit pricey, you can opt into simulated trading, and replay trades.
In order to replay trades, you have to choose this feature in one of the menu options, then go into replay mode. This is the box that pops up:
DAS replay mode stock simulator from Dastrader.com
Notice here that you can toggle the “Quote Mode” between replay or real-time. Once you’re in “replay” mode, you will have to choose a single ticker and then download it. Once the symbol is downloaded for the specific date that you choose, you can then manipulate the stock according to your needs, just like a DVR.
Keep in mind that at time of publication DAS does not yet have the ability to see the Level 2 in replay mode, and you can only trade a single ticker at a time.
DAS Replay Pros
Realistic price action
Simulation in a real platform
Ability to make trades
Hotkeys
Time and Sales data
Historical data
Multiple replay speeds
Pre-market and After-hours replay
DAS Replay Cons
Only one ticker at a time
No live historical scanners
No Level 2
Expensive
Cannot trade live while in replay
Equities only depending on broker
DAS Trader Replay Summary
While DAS is a great trading platform for professional traders, it is really expensive as a market replay engine. In addition to the DAS fees, there is no way to see what was hitting the scanner on the day you are trying to replay. You must generate trade ideas from other historical market scanners, like trade-ideas.com.
If you are simply looking to replay a single ticker at the end of the day, this might be useful for you. However, if you’re looking to practice trading in your free time in a realistic market environment, DAS is very limited.
ThinkorSwim OnDemand Stock Simulator with Replay
Another of the best stock simulators with replay is a product from TDAmeritrade. It is called ThinkorSwim OnDemand. Like DAS Trader Pro, you must change the operating mode of the trading platform to be able to use it.
Despite this, like DAS Trader, if you are familiar with the platform as a ThinkorSwim user, it might be useful for you.
Backtest trading with thinkorswim OnDemand. Source: tdameritrade.com
ThinkorSwim actually allows you to trade with stocks, forex, futures, and options. Unlike DAS, it has a historical scanner that replays with the simulator. It also has Level 2 data, and tick by tick replay.
If you want to use this platform, it is free. However, you must have a brokerage account with TDAmeritrade in order to qualify.
TOS OnDemand Pros
Realistic price action
Multiple assets available
Scanner
Level 2 Replay
Time and Sales
Simulated trades
10 years of data
Pre-market and After hours data
TOS OnDemand Cons
Some lag in data feed
Inability to trade live while in replay
Inaccessible to non-TD brokerage clients
Not web-based
ThinkorSwim OnDemand Market Simulator Summary
All in all, if you are a TDAmeritrade brokerage client, OnDemand could be a good option. It provides many different tradable asset classes, and it also allows you to use historical scanners as well. This allows you to practice as though you were present in a live trading environment.
Despite the pros, some users have reported slowness in the application. Like DAS, you cannot use your TOS charts during live trading while having OnDemand going at the same time.
TradingView Stock Market Simulator with Replay
TradingView is widely used for its dynamic charting platform. Having gained huge market share in recent years, they now serve millions of traders.
Tradingview is different from ThinkorSwim in that it isn’t tied to a single brokerage. More like DAS, TradingView has a handful of brokers that integrate with its API in order to place trades through the application. You can place trades through crypto exchanges like Gemini, or other brokerages like Tradestation, etc.
When it comes to replay and simulation, Tradingview offers two choices. You can either simulate in a realtime market environment through paper trading, or you can use their “rewind” in order to set a stock to a certain day. Here’s what it looks like on the chart:
Tradingview chart replay
While this is a “replay,” it is only viewable as bar by bar. For that reason, it might be difficult to examine the way bars are forming in real time. It’s also important to note that data only goes back so far depending on your data subscription. With the premium account and Nasdaq subscription, only about 1.5 months of 1 minute data is available.
Tradingview also will not allow you to replay multiple charts or time frames. So, you’ll find yourself replaying the minute chart of a ticker while the other time frames remain in present time.
TradingView Replay Pros
Widely used and loved charts
Fast entry to replay mode
Replay while watching other stocks
Simulated trading
TradingView Replay Cons
Only allows bar-by-bar
No multi-timeframe sync
Limited history
No Level 2
No historical scanner
TradingView Market Replay Summary
Of all four choices, Tradingview stock simulator with replay is the most basic. It doesn’t allow realistic price action like the other three. It also won’t help with reading Level 2 or Time and Sales.
For all intents and purposes, if you just want to do bar-by-bar analysis, it works pretty well, but that’s about it.
TradingSim – One of the Best Stock Market Simulators w/ Replay
The last simulator we will review today is our own product, TradingSim. TradingSim has been around for over a decade and is one of the best niche simulators and replay engines on the market.
One of the positives of TradingSim is that it is web-based and accessible no matter what brokerage you use. As one of the best stock simulators for backtesting, it has over 3 years of intraday data. Unlike the other platforms, you don’t have to toggle replay on or off. It’s like a DVR that is always ready and waiting for you to push play.
TradingSim also offers realistic Level 2, time and sales, simulated buying and selling, and analytics.
TradingSim Level 2, Market Scanners, and Extended Hours
The Importance of a Historical Scanner
What really sets TradingSim apart from the others is its scanning engine. This allows you to scan for market gainers, float criteria, market cap, gap percentages, and more. The best part is that this is available for every single historical market day available in the application.
If you want to practice a strategy and backtest it over 3 years of data, you can do this with the scanners, then test your results in the analytics.
TradingSim Market Scan Filter
Data is available for premarket and after hours, or you can turn those off in order to hide them. Easily create watchlists, choose from over 100 indicators, and view multiple charts.
TradingSim Pros
Standalone application
Web-based
Scanning engine with filter
Simulated trading w/ multi-order types
Level 2 replay
Time and Sales
Pre and post-market trading
3+ years data
Tick by tick
Futures or equities
Post trade analytics
Hotkeys
Trade multiple stocks
TradingSim Cons
No live market data
No Forex or options
Might be addictive
TradingSim Market Replay Summary
Because TradingSim isn’t a brokerage-based chart platform, its focus is strictly upon creating a replay for the market. For this reason, it is a very niche product for traders who are serious about backtesting and studying historical market environments in their free time.
TradingSim offers a wide range of features that most will find accomadating, whether its the indicators, the charting tools, the scan filters, and more. The only downside is that TradingSim doesn’t offer realtime data for traders wanting to trade from its charts in a live environment. Data is downloaded at the end of each day and processed for replay by 5pm EST.
The Four Best Stock Simulators with Replay Conclusion
We hope this helps in your search for a market simulator with historical replay. Not all the simulators are created equally, but all offer different value points.
If you’d like to take TradingSim for a test-drive, feel free to sign up for our 7-day free trial. It’s a great way to get your feet wet and get a feel for how the simulator works.
Derrick Oldensmith was nice enough to drop in on the SimCast this week! You don’t want to miss this episode as he shares his wisdom on trading and what it’s like to trade at a prop firm. Derrick has been trading for well over a decade and is the Vice President of Trading and Education at T3live.com. He manages over 130 professional traders at one of the largest prop firms in the world.
In this episode, we get an inside look at some of Derrick Oldensmith’s strategies and his mentorship style. He also offer an insider’s look at what it’s like to start out at a prop desk. Derrick has been managing his own desk of traders since 2013, at T3live.
You’ll get to hear some great stories about Derrick’s kickboxing career, early set backs, resilience, and how he beat Scott Redler in a pushup contest!
Also, feel free to download Derrick’s free ebook here:
The Pro Desk Virtual Trading Floor w/ Derrick Oldensmith
Derrick Oldensmith’s VTF trading floor
Every day, Derrick leads a room of hundreds of professional traders in market analysis and potential trading opportunities. You don’t have to be a professional prop trader to join, and Derrick is always conducting live mentorship in the room.
SimCast Ep. 13 Topics and Chapters
Don’t miss out on these great topics. Midway, we cover one of Derrick Oldensmith’s recent trades in DKNG as we analyze the trade together.
Derrick’s Background – 1:10
Sales Trader to Prop Firm – 8:30
Derrick’s Style – 14:45
Mentorship – 21:50
Kickboxing – 26:25
DKNG Walk-Through – 31:30
Worst Losses – 59:30
Outro – 1:08:00
As traders, there are so many facets of our lives that can affect how we perform. In fact, if you didn’t already know, trading is just that, a performance sport. It’s akin to professional gaming in a lot of ways. To that point, a lot of your performance rests upon your mental edge and how well you cultivate it.
The Mental Edge in Trading
There are many aspects to building a strong mental edge in trading. In fact, there are many that you probably haven’t even considered.
Building Blocks of the Mental Edge slide from Créde Sheehy-Kelly
To help us visualize this, our friend Créde Sheehy-Kelly from Créde Performance has created a number of resources in her practice to help traders build their mental edge. She was kind enough to share one of her slides with us. Not only that, but she’s made time for us to discuss some of the inner workings of this important performance piece in the trader’s process.
Créde Sheehy Kelly
Créde is a Chartered High Performance Psychologist who has worked with professional athletes, singers, fighter pilots, and traders throughout her career. She regularly works with trading prop firms and other organizations to bring value through performance coaching to floor traders and driven retail traders.
She is highly qualified to speak on the subject. Be sure to check her out at CrédePerformance.com. Also, if you want to learn more about performance coaching with Créde, be sure to check out our recent podcast with her.
So without further adieu, we welcome Créde and her wisdom on the topic of “building the mental edge” today.
Building Blocks of the Mental Edge Interview with Créde
TradingSim
Hi Créde! Great to speak with you again. How are things going with you? How’s the baby doing?
Créde
Hi John, it’s always a pleasure to chat with you! Everything is going great thanks. Kaia has figured out how to stand but not how to sleep through the night yet so I’m hoping that’s the next thing she masters lol
TradingSim
Ahhh! Gotta love those early years! That’s great to hear and glad everything is going well for you! Thanks for making time for us.
We’d like to start with a more general question about the building blocks and their importance in trading. As a performance coach, why is this piece so relevant to trading — after all, we’re just pushing buttons, right?
Créde
I guess if trading was just about pushing buttons there would be many more millionaires in the world! The real challenge in trading, especially in retail day trading, is being able to master yourself. Learning the technical aspects of trading takes a while but this can be perfected with time and practice. Mastering yourself however is not guaranteed, even over decades.
Most traders will reach a point in their journey where they know exactly what they should be doing from a technical perspective, but in the heat of the trade they just don’t follow the plan. This is a prime example of someone’s psychology tripping them up.
It takes conscious and deliberate focus to understand how your mind and emotions are impacting your trading and to cultivate the mindset that will support you in achieving your trading goals. It’s not something that just happens on its own.
Créde sheehy-Kelly
The best way to approach this is to systematically level up each aspect of your mental edge piece by piece. This is why representing your mental edge as a jigsaw puzzle or a series of building blocks makes a lot of sense. Your mental edge is the outcome of having perfected all these individual skills and techniques on the psychology side of your trading.
TradingSim
Alright, so we were definitely playing devil’s advocate there. But your point is well taken.
You do raise an interesting thought, though, that proper mindset doesn’t just happen on its own and can even take many years to develop.
In your years as a performance psychologist, what are the most common building blocks that seem to be the peskiest to overcome in your athletes, traders, etc.? Is it a varied gamut or do you find more condensed patterns in people?
Créde
That’s a really great question!
I can definitely say that confidence is something that nearly all of the people I have worked with have wanted to improve. So the flip side of that is that people are experiencing feelings on inferiority or self doubt at every level of performance.
But in terms of being the peskiest to overcome? I think that would be the skill of focusing on the process rather than the outcome. Whether someone is a professional athlete or a day trader, everyone is invested in the end result.
Unfortunately when people are focused on the outcome while actually trying to perform, it really heaps on the pressure and ultimately causes people to deviate from their plan. It seems like a simple skill to build – “focusing on the process” – but in reality it is one of the hardest skills to actually perfect.
Tradingsim
That’s really interesting, Créde. I’ve heard this before from a famous football coach, Nick Saban. He’s known for preaching “the process.” And in recalling some of his old speeches, he often talks about players needing to “buy in” to the process and the coaching.
That being said, how do you, as a performance coach, get your clients and traders to “buy in” to the process instead of focusing on the outcomes, the intangibles. Are there other building blocks of the mental edge that help cultivate process focus?
Créde
To answer your question properly it might be helpful to clarify exactly what I mean by the “process” versus “the outcome”.
The process refers to all of the things that you need to do well in order to produce the outcome that you want. The outcome is usually a very concrete and incontestable thing. In football so, the process would be accurate passes, maintaining discipline in a match, having a clear understanding of the plays etc. And the outcome is just the score.
Process Focus for Mental Edge
In trading, process refers to things like entering trades at the right time, only taking trades that match your A+ setup, only exiting a trade when you have hit your target or have a technical reason to do so, etc. The outcome is the P&L.
As you correctly suggested, there is no one way of getting a trader to focus on the process. It really depends on the specific challenges that the trader is experiencing and also, the root causes why they are experiencing these challenges.
Mental Edge Building Blocks associated with process
That being said, there are a number of building blocks of the mental edge that can be really helpful to assist with this. From the diagram above, the most useful building blocks to put in place if you are trying to cultivate a process-focus in your trading would be:
Practising getting into the flow state
Cultivating self-compassion
Seeking only internal validation
Effective short term and long term goals
Self-awareness
Having a mental preparation routine
Conducting a daily review
Understanding how emotions impact trading
If I had to boil it down to a few key building blocks, the key ones to focus on would be:
Self-awareness (this is basically the foundation of the mental edge)
Effective short term and long term goals (these help you to hold yourself accountable to aspects of your trading other than the P&L)
TradingSim
That’s really eye-opening. And it all makes sense. The more you focus on the here and now like practicing awareness, being present in the flow state, not worrying about external validation (success theatre), etc., the more you become process-centered and less concerned with outcomes.
I think that’s really important for new and struggling traders to hear.
And to build on that, taking the two most important mental edge building blocks that you’ve mentioned — self-awareness and effective short/long-term goals, what advice would you give to someone struggling with these two?
Maybe this trader has an “idea” of wanting to be financially free someday, but lacks concretely structured goals. Or maybe another trader has great goals, but struggles to be aware in the moment that he’s sabotaging his efforts.
Créde
That’s exactly it. The struggle with seeking external validation is a significant one for most people.
Mental Edge Self Awareness
In terms of self-awareness, I would say that even people who are not necessarily struggling in this area can benefit from understanding themselves to a deeper level. There is no end to the amount of benefits this can bring to your trading.
Self-awareness is really just about gaining a greater understanding of how your own beliefs and thoughts are influencing your emotions, and how your emotions are influencing your actions.
So, any technique that helps you to understand this pathway better in any aspect of your trading could be considered a technique that helps to build your self-awareness.
Some great examples of practical ways to do this would be journalling bullet points about what you were thinking or feeling after you complete a trade. Or even just starting out your trading session by rating your physical, mental, and emotional state out of 10.
This helps you become aware of what mindset and energy levels you are bringing to your trading on any given day.
Mental Edge Goal Setting
Goal-setting is absolutely crucial for every trader too.
Without clear short, medium and long-term goals you are trading in a vacuum. You have no way of knowing whether you are on track with your overall vision. So this lends itself to having very harsh or unrealistic expectations of yourself and also to trading from your emotions as opposed to from your trading plan.
To start off with, just try to nail down some concrete targets that you know you want to achieve in your trading. Then, try mapping them against a realistic timeframe. And lastly, make sure that the targets are concrete and measurable.
The trader in your example would start by first defining what “financially free” actually means to them. Is it replacing a salary of X dollars? Or paying off X amount of debts?
The more specific the target, the easier it is to achieve it.
Mental Edge Performance Goals
For the other trader with great medium and long term goals, who struggles in the moment.
This trader would benefit from setting some key “performance” goals (for example 90% or more of all trades taken fit my A+ setup criteria). Then, tracking their performance against these targets every single trading day.
With this level of awareness, most likely the trader will start to see patterns as to when they tend to deviate more from their trading plan. As in, what additional factors influence their discipline.
When they have a greater understanding of the context within which they tend to break their rules more, it’s much easier to start to isolate the root causes of the self sabotage.
TradingSim
That’s incredible insight, Créde. Really love how you create tangible building blocks to foster effective processes in trading.
So often, as traders, we are wont to simply jump in and fly by the seat of our pants. This really emphasizes the need to slow down, think about what we’re actually doing, and put structure to often overlooked variables of ourselves and our performance.
With that, we really appreciate you taking the time to share a small portion of your wisdom and framework for helping traders. If we can end with one more question, what would you say is the amount of time it takes for a budding trader to develop these habits, and judging from your experience, who are the traders most likely to succeed at this?
Créde
Great question! By putting in focused effort to building your mental edge you can really accelerate the learning curve.
Cultivating your mental edge is a two part process as I see it.
First you need to learn a system for actually working on your mindset and emotions. By this, I mean having a framework to apply to cultivating your mental edge and actually learning the techniques that can help you shift your mindset and transform limiting beliefs and habits. It is possible to get a good foundation in this in as little as 2-3 months.
The second part is where you actually consistently implement your mental training routine and these techniques in your day to day life. This is a process that never ends, as it is an integral part of your trading process. Typically in my experience, traders do see tangible results in terms of their trading stats within weeks of introducing this aspect to their trading. Obviously the longer you work on your mental edge the more impact the techniques will have on your performance.
I can definitely pinpoint the traders who see the greatest results from this. It’s those traders who are willing to really face themselves, be brutally honest, and to put their ego aside in order to level up who will ultimately succeed to the level of their true potential.
TradingSim
That’s awesome. It’s encouraging to know that these pesky habits can be overcome with diligent work.
Thanks again for stopping in and sharing with us, Créde!
Créde
My pleasure!
Practicing Your Mental Edge Building Blocks
Here at TradingSim, we believe in a holistic approach to training for the markets. For technical analysis, screen time, and simulation, we hope you find value in our application. However, there are obvious mindset issues that a simulator might not uncover.
We hope this conversation has benefitted you. Be sure to reach out to Créde and put forth the effort you need to build out your trading process, uncover hidden setbacks, and be the trader you want to be.
For more great articles based on Créde’s work, check out our blogs on the lifestyle and physical habits you should cultivate. And don’t miss our article on mitigating stress and anxiety in trading.
In recent months we’ve seen a number of liquidity traps showing up as a result of the “dead cat” bounces from oversold conditions in many stocks. We’ve written fairly extensively on this setup before. So if you haven’t read up on the liquidity trap basics, be sure to do so, along with our explanation of Days to Cover. In this post, we’re going to dive a little deeper and uncover some more advanced entry techniques for liquidity traps.
What are liquidity traps?
We’re not going to spend much time here, because we assume you’ve taken the time to read the articles linked to above. However, as a brief reminder, liquidity traps can a very explosive and profitable strategy when trading lower float, lower priced stocks.
The concept revolves around a large volume day, usually a high-volume gap up. Because these stocks gap so frequently, they become prime targets for short sellers. More often than not, the large gaps end up being what many day traders refer to as a gap and crap scenario.
Usually, these are companies that bleed cash and hire PR firms to pump their stock to retail traders, only to sell more shares into the pump. This dilutes the company, obviously. It happens over and over again in the market. To learn more about it, be sure to watch our recent SimCast episode with Rick Analog.
Often times, one to many gaps that fail trains short sellers, like Pavlov’s dog, to slam the bid on day one. Fast forward a few days, add in a million more retail traders than prior years, and you’ve got a recipe for a fast 2-3 day short squeeze.
Here’s a liquidity trap example:
Example of AACG liquidity trap
Notice a few things here. One, you’ve got a big selloff from the prior high volume day noted on the chart. Two, you have another “pump” day. But then, things get interesting.
In day 2 and 3 of the most recent pump, you get diminishing volume characteristics while price remains elevated. By the fourth day, shorts are in hot water as price breaks to a new high there, enough for a move from $2 to $3. That’s a huge move!
It’s the anticipation of the big secondary move that we call a liquidity trap setup. But how can we zoom in and find our best entry? That’s the question we seek to answer in this tutorial.
Advanced Entry Techniques for Liquidity Traps Using the VCP Strategy
Using the example of AACG above, let’s zoom in on a 15 minute chart and see if we can find the Volatility Contraction Pattern. This should allow us to set our risk levels off of “higher lows” in the formation.
AACG advanced VCP techniques on 15m chart
As annotated on the chart, we have the initial run, like a flag pole. Then we have consecutive pullbacks that get tighter and tighter while maintaining key support levels. It’s our job to find an area to risk to in anticipation of a breakout.
The question will be, what happens on the current pullback, the 4th pullback. But let’s not jump the gun. Let’s use more technical analysis to help us time our entry.
Using VWAP Boulevard and Support/Resistance Lines as Advanced Liquidity Trap Entry Techniques
Now that we have some indication of a potential setup. Let’s look more in depth at the key levels on the chart.
One way to do this is using the concept of VWAP Boulevard. We’ve written an ultimate guide on this subject, thanks to the education efforts of @team3dstocks on Twitter. Be sure to check out both links if you aren’t familiar.
Applying vwap boulevard to our 15 minute chart and daily chart, we gain insight as to where the majority of the stake holders are present. This gives us clues as to where the “whales” might be supporting either their long or short positions. It also might represent who becomes the bag holder, and where that line is drawn.
VWAP Boulevard Support Lines on Daily Chart
In TradingSim, we’ve built a vwap boulevard drawing tool that allows you to select a range of candles from dates that you want. Here, we’ve selected only the closest candles to the recent high volume day. The key level for the highest volume day is 1.91.
Just a quick glance at the chart allows you to see that this remained a key support/resistance level in the days to follow. It’s a great way to manage risk over/under.
We’ll leave this drawing up, then head back to the 15 minute chart to see how these levels correspond.
VWAP Boulevard On Lower Time Frames for Advanced Liquidity Trap Entry Analysis
Coming back to the 15m chart of AACG, you’ll notice that we’ve left the key vwap boulevard lines from the daily chart, but have also drawn a second set of vwap boulevard lines based off of the 15 minute bars. This gives a bit of insight into the more granular “control lines” intraday.
Using vwap boulevard lines for advanced entry techniques in liquidity traps
Interestingly enough, the two black lines which represent the closing vwap of the largest volume candles create the channel for AACG’s consolidation. Why is this so cool? It gives you an idea of where to risk for long or short.
If you’re wondering what the other pinkish lines represent, they are vwap boulevard lines also — but not for the most significant volume candles.
So far, we’ve seen that we can use a volatility contraction pattern and vwap boulevard to help us build our advanced entry techniques for liquidity traps. Now, let’s look at the volume and price analysis.
Using Intraday Swings and “VooDoo” as Advanced Entry Techniques for Liquidity Traps
No, we’re not talking about black magic or dark arts here, even though it might seem like it the more you see Volume Dry Up into these patterns. This lack of supply often precedes large moves as shorts begin looking around wondering when their reinforcements are going to arrive.
We’ve written extensively on pocket pivots and vdu (“voodoo”) thanks to Gil Morales’s teachings. They go hand in hand with consolidation patterns like volatility contraction patterns. For that reason, let’s apply them to our AACG chart and see what we can glean for another advanced entry technique in this liquidity trap.
We’ve left the vwap boulevard lines up, zoomed in just a little, drawn a descending diagonal trendline, and thrown in annotations for VDU and Pocket Pivots. Pay close attention to how the fourth day has a quick washout at the open. This then finds support at vwap boulevard yet again.
After the rally, we pull back into the body of those significant rally candles and find support on a higher low. Most importantly, volume diminishes during this pullback. As shorts begin to realize the impending squeeze, it leads to a pocket pivot of demand up and out of the trading range.
We test the upper vwap blvd briefly, then break to new highs.
Advanced Entry
You might be asking, where would I enter the stock long?
Using these advanced entry techniques, you could have entered long as the morning washout reclaimed the lower vwap boulevard level. We’d call this a spring move. Your risk would be set below that wick.
If you missed that entry, you might consider the pullback. We like to time our entries as volume moves from vdu to pocket pivots, risking the most recent vdu lows. In this case, you’d go long around $2.00-$2.05, risking just below $2 or $1.91 depending on your risk personality.
Analyzing Intraday Swings for Advanced Entry
We’d like to touch on one other technique for advanced entry in liquidity traps, and that’s intraday swings. Intraday swings are essentially the prominent trends that form throughout a consolidation in a stock.
Using the 15 minute chart, what we notice, in addition to the higher lows, is that the stock is losing its downward momentum over time. In other words, the slope of each downward swing is less and less. Take a look:
Diminishing intraday swing slope analysis
What this tells us is that the big picture could be bullish in the intermediate timeframe. If each day represents the force of supply, then it’s safe to say that supply is waning into the apex of the consolidation. This is typically bullish.
As traders, it is our job to consider this context as we anticipate and build a thesis behind a trade. It gives us the detail, along with all the other components of the structure that we’ve examined, that bolsters our conviction for the entry.
Conclusion
We hope this has helped you with the broader framework behind choosing a “setup.” Sometimes it’s as simple as seeing a pattern and pushing the buy button. But we think that the more boxes we can check with analysis, the more confident we can be in our trade.
Advanced early entry techniques like these provide opportunities for low risk, and higher reward. With enough backtesting of these strategies in the simulator, you may find your own niche. Breakouts can then become add-on points instead of high risk entries.
As with any strategy, it’s always best to test it in a simulated environment and track your results before putting real money to work
