Getting To The Top Of The Mountain

Friday's U.S. and global action was largely dictated by trader response to INTC's Thursday evening earnings update and Friday morning's U.S. employment data, both of which sent overnight shorts covering in the Globex session.  Yet despite the morning cover rally, both major markets limped a bit into the close for the third day in a row, especially the Nasdaq, which sets up some interesting possibilities on Monday should the intraday trends turn down.

Yet as was the case when we last met, determining the immediate prevailing trends remain key to trade success, with the smallest timeframes providing the better setups in the U.S. market.  Thankfully, the week of May 24 set up some nice textbook first pullback trades on the 13, 30, and 60 timeframes once we broke out of the extended chop.  And while it seemed that we had a chance to begin the routine over again this morning given Thursday's closing intraday trends (yes, I was up trading at 3:00 A.M. ET and will be taking a nap shortly after this goes to press!), trader response to the overnight data and a strong Europe response threw water on any early short plans.

I thought it might be helpful to talk a bit about the types of tangible goals and benchmarks I currently use in my trading business.  Not the qualitative and subjective "trade effectively" or "make good decisions" types of goals, rather the quantitative kind.  As I mentioned in my last piece and throughout April's live "tradathon", the goals themselves don't necessarily reflect the "right" ones, simply those that have worked for me.  As with most aspects of trading, I've tweaked the specifics over time, and those that haven't worked or I found to be detrimental have been tossed in the circular file through the years.

First, I try to carefully distinguish between "goals" and "benchmarks" in that I define a goal as a major objective that, once attained, calls for a distinct pause and celebration.  This differs from a "benchmark" which is intended to measure the effectiveness of one's performance on a micro basis.  If the distinctions sound a bit anal, you're probably right (you know me), but I think they're key so stay with me.

At this end, I've migrated over time to a single quantitative "goal" at the present, specifically a non-time-specific stretch capital growth target which will be attained on some unknown future date.  Please note I chose to include the "will be" comment not for cockiness or ego, merely for confidence as that's how I have to view it.  As over two decades of business has taught me, stretch goals which aren't viewed as attainable will likely never be achieved.  You have to be confident to be successful.  Call it the top of the proverbial mountain, after which there will of course be other mountains.

And while this particular goal is intended to be attained on a longer term timeframe (probably a few years, and a bonus if reached sooner), the "non-time-specific" reference is important to me as it helps lessen the importance of trying to attain a certain amount on a trade, daily, or weekly basis which are largely irrelevant when standing alone.  It's important to note, however, that I do measure progress toward the goal on a daily basis, in terms of % attained using one of those simple fund-raising thermometer charts.  It's a chart that I look at before going to bed, when I first reach my trading office in the morning (which has increasingly been in the wee hours given some of the better overnight setups), and during every trading day.

Now you might be wondering if the goal is intended to be long term, why stare at it on a micro basis?  Back to the mountain analogy, it's simply the peak that helps fuel my motivation.  Plus it helps maintain perspective when digging in the trenches (as in "are you laying bricks or building a city?").  And since I've frankly found this particular measuring stick to be the only tool I've toyed with over the years that has effectively resulted in consistent equity growth while keeping me out of debilitating (psychologically and financially) draws, it's worth staring at.  Heck, I'd stick it under my pillow if I thought it would help.

The thermometer concept of course is similar to a simple equity curve that many use, as we know that a steady climb or pause -- more on that in a second -- in "mercury" will ultimately get us to our destination.  Why a pause?  Think back to your larger draws for which you'd like to take a mulligan -- draws you experienced when you pressed a marginal pattern, traded on a signal from someone other than yourself, or traded with less than optimal focus.  I know I've had them .. call them lessons or whatever, but the pain can linger.  Replace those results with pauses -- as in not trading -- and you'd be spending less time trying to recoup hazardous mercury leaks (pun intended).

OK, so it's great to say you're goal is to shoot 15 under par for the tournament, but since the result won't be accomplished without effective swings and scores on a hole by hole basis, how do we balance the micro with the macro?   Plus, if a goal isn't time specific, what's to prevent one from lollygagging?  (I've been working for years to fit that term into a column … it only took 3 years.)  For me, that's where benchmarks come in.  Benchmarks which by themselves are meaningless, yet can tell how effectively one is swinging the club.  Many of you may recall my past talks and QQQ video where I spoke about the impact of the industry's change to decimalization had on my trading, which set off several benchmark alarms and required a change in trading tactics.  Benchmarks were critical in staying alive at the time.

Current benchmarks I choose to use at this end as a CME trader include % days profitable, bar charts that reflect daily income distribution, largest consecutive positive day streak vs. largest losing streak, and a few others.  Keep in mind, however, that using such targets alone or with a different style of trading, they can be extremely counterproductive and harmful -- one example being how any % profitable target often has no bearing on $ profits, and can often be inversely related with various styles that reflect one fishing at a lower probability rate for the bigger fish.  As  mentioned at the start, this isn't about the "right" way, just "a" way given this trader's style.

One goal you won't see in the list is a specific daily goal -- although I do reference a daily average at times -- for reasons I mention in both educational videos.  Use as a trailing stop to detect loss of focus and opportunity?  Great.  Yet simply closing up shop when a figure is reached as I've seen newer traders do from time to time can lead to significant equity growth challenges.

Whatever targets you choose to use, I encourage you to find that one goal or incentive that will continually motivate you every day and help balance the micro and macro perspectives.  For me, having a tangible and stretch goal has served me well for over forty years from the days of ten-year old lemonade stands to pursuit of eagle scout, MBA, athlete, corporate executive, and effective trader.  Actually, the lemonade stand was a blueberry stand given our backyard blueberry bush inventory, and is undoubtedly more relevant than any other of the accomplishments in terms of trading!  And to continue our ongoing trek of preaching and maintaining humility by sharing personal screw-ups, I only need to think back to the time I shot at the wrong basket in a game not once but twice, as I actually got the rebound of my first missed shot and put it in the second time.  That one gave the stats guy a headache.

I don't know the exact day when I'll reach the current peak.  Of course the day is irrelevant in the larger scheme of things, and there will be another mountain to conquer, lest we stop growing.  What I do know is that the path will twist and turn along the way, the climb will be challenging and filled with hidden pitfalls, I'll get scraped up along the way, and pacing will be key so as not to continually slip back to established base camps.  Yet I can see and sense the destination every day as clear as I could see Mount Rainier when I lived in the Northwest.  And oh what a daily view.