My second job was working under a guy on an FX desk for a major investment bank whose primary task was to grow the business by means of investments. He would shop around for hedge funds and other aligned businesses, then set up meetings as a potential investor with firms wanting IB money.  Later, he would present them to his bosses, who ran the whole floor, and were of course, the final decision makers.

I'll save you some trouble and say that this was not an admired, or well-respected guy. He is the type that would show up in the morning, and you would say “good morning” 2 feet away from his face, and he would completely ignore you.

One time, I put together his pitch decks, which he would combine and put into one presentation. He had me get them printed, and pass them out to those he was pitching. For some reason, I held onto a copy of this thing. It's about 4-5cm thick.

When I gave it to the head of the floor, his only words to me were “what the f–k is this thing?”.

“It's from George,” I said.

“That makes sense,” he replied.

I'll save you the long, drawn out explanation, but none of those investments were made and George was fired about 9 months to a year later. Don't be like George.

The “profound” thing that occurred to me was the one-liner from the Senior Managing Director who ran the entire floor. Remember, I am young and impressionable at the time. He looked at this pitch deck of pitch decks as if it was completely useless (he was right). George probably spent 3 months putting that silly thing together, scheduling meeting as if it was the most important thing in the world, calling every contact known to man, etc. None of it mattered. The firms were mostly bad investments and half of them went out of business within a relatively short period of time.

Untangling Brains

As a manager (of people), I find my biggest job is to oftentimes untangle brains. The amount of information we consume these days, whether useful or useless, tends to have the shared result of confusion, whether we realize or not. Our actions are the result of our inputs, no matter how the message is received. And when the message is delivered 1,000 different ways, decision making becomes extremely difficult.

Today, I went on X, and willingly or unwillingly, interacted with probably 15-20 different strategies/methods for trading. Compound that over the years, and bottom line, I am tossed an absolutely absurd amount of information. And we're all the same.

When I'm speaking with other traders, I get excited by simplicity. Basic rules, patience, wins and losses treated like a business. It is not about having the “biggest set of balls” or any other nonsense used to get bait engagement. It's about knowing full well what you're doing and how you're going to do it. Being honest. Being firm. Being smart. Attaining result via rational decision-making.

Making a Decision

So when it comes to actually doing something, and putting the wheels in motion, we have to make a decision. These decisions usually boil down to basic, fundamental truths.

Aristotle referred to them as archai. These days, we know them as first principles.

In any market, these exist. After all, these are just markets. But man, would people want you to think they are the most complicated things in the world. Well, they're not. People just do complicated things to them.

I use the word “foundation” a lot when I'm speaking to others. The foundation is the footing, the basis for the execution. Because for obvious reasons, a weak foundation will have a transaction crumbling away in front of you. A strong foundation is just that. A firm footing, a temporary stronghold, where the crowd shows up and shifts in the same direction…..

Unhedged, directional trading is one of the hardest things you can do. And I tell people all the time “it's just a market”. You're at a farmer's market and everyone is selling the same product. At some point, there's a floor on the price except for a couple desperate vendors. They create excess, but price moves back to the generally agreed upon rate of the sales crowd.

Sound familiar? It's quite literally all the same.

Foundations can be built out of a number of things, but for most markets, we keep going back to just generic volumes. I posted a short thread on X talking about a basic concept in identifying volumes, and what they do, as a basis for a foundation. It's here, for context: https://x.com/paracurve/status/1707470219692933155?s=20 Large volume areas (regardless of how or in which market they are identified) are foundations. What price does after these foundations are laid determines follow-through on price. And sometimes, it really is as simple as this.

But of course, old friend ego comes back to tell us: “that's not smart enough…this guy is using XYZ so I need to do the same in order to…..” you get the idea. But what is XYZ built upon? If it's like an imposed, manually calculated result void of foundation, it is likely to have a poor outcome. And this true from the elementary up to PhD levels in trading.

Redundancy

There is a tremendous amount of redundancy in different “things” we look at.

Some examples:

• A recent, more popular one is option gamma. In one use case, many, if not all, of the levels derived from heavy gamma also coincide with large past execution levels observed through generic volumes.
• Heavy support and resistance levels, aka areas where price has rejected over, and over, and over again. These are mostly low volume levels, visible in valleys / node edges on a volume profile.
• Any relative strength, exponential indicator which cycles fixed values. They may be all used the same way.
• Price patterns. There are hundreds of them, and most begin the same way. Years ago, I identified 6 different ways, and nothing has changed. And once again, not even knowing what they are, these coincide with generic volumes.

Behind some of these things are foundational elements. And only one need to be used to make an argument for a transaction. But yes, like all things, we want to put them all on our charts, introduce a macro outlook while we're at it, void of the timeframe we're trading, and move forward in this sense.

If there is even one variation between redundant items we immediately become confused. All the planning in the world does not void us of feelings of inadequacy.

And so again, we go back to a foundation. What's that starting point? Is it telling, or not?

What are you expecting to happen? Base your trade around this.

What are you not expecting to happen? Base your risk around this.

And work from there. Ultimately, the more paths for interpretation, the more paths for adverse effects to sneak in.

You can always tell those who execute well versus those who don't. Their process is simple, and they are not “experts” in everything. There is a core discipline. At least in my own experience, they don't talk a ton. They are not ultra-negative individuals. They know better than to trash talk other methodologies. So while I'll say don't be like George, please, yes, be like this guy.

In a society where we are constantly flooded with information, we seem to put people on a pedestal who appear to have the ability to dissect, and translate it all in short periods of time. But this quality is usually nothing more than an illusion, just like your favorite social media influencer. Understand that this is not something we are meant to do. At least in my own opinion, real strength lies on one's ability to focus on a single problem, and solve it.

So that's all for now. Hope you all are doing well, and will catch you next time.

The post Complicating the Uncomplicated | Making Foundational Trades appeared first on ParaCurve.

As I feel I always need to say, price patterns are lately structural and mostly useful in terms of navigation, less strategy. I wrote about this in much more depth here.

Like all basic patterns, square roots are simple. In a nutshell, they’re nothing more than the market making a new high or low, followed by a double top or bottom. The resulting pattern (if sketching lines around it) resemble a square root.

In the case of highs, a new high is made, followed by a lower high. That high then becomes resistance for a second (or more) push.

In the case of lows, a new low is made, followed by a higher low. That low then becomes support for a second (or more) push.

Like all patterns, they may be measured for approximation of failure. Moreover, it can be confirmed in a similar manner: high volumes, delta, etc., running away from the structure itself.

Square roots are common due to the same market behavior exhibited on others. The market trades high or lower on volume, and that volume then wanes. On pullbacks, price remains close to those high volumes and never pulls down to the previously made high or low area.

In market profile, these are usually characterized as a form of a poor high or low, with V reversals.

Some examples below:

The post Square Roots appeared first on ParaCurve.

Due to the nature of the sequence, they are much less common.

A double / triple top or bottom is made, then broken. In the case of a square root, the spike completes the pattern.

In the case of a high, a double top is made. On the second push, the new leg makes a new low. Price them pulls back inside the range, and fades.

In the case of a low, a double bottom is made. On the second push, the new leg makes a new high. Price them pulls back inside the range, and fades.

The last point of rejection typically coincides with an area showing multiple rejections through the course of the double top or bottom range.

Like all patterns, these are structural only and best used for navigational reference. Here is a link to an article explaining this.

The post Double Top or Bottom Pullbacks appeared first on ParaCurve.

A few months later I received a reply, with a link to the post. People were asked to vote on the responses. Mine was sitting down somewhere around the bottom of the pile.

The top response was from a guy who I knew was basically an online hustler, but his answer beat everyone else's by a longshot. I'm paraphrasing, but it was basically “Have a trading plan, and stick to it”.

I guess there was a reason he was so popular…..he knew what people what people wanted to hear.

And the reason I am writing this is because I was again on X and conquering everyone's post along the way was one in regards to trading plans (and naturally, how you're an absolute moron destined to fail if you don't have a carefully mapped out strategy and follow it to a T).

But how is that possible? I have now known a good number of “absolute morons destined to fail” who have fared far, far better than any of these people.

I think the reason “have a trading plan, and stick to it” resonates with so many is because they just jump around when it comes to entry strategies (this is an issue primarily for newer and intermediate traders).

Ask anyone who has been trading for years and they will tell you that they have been to hell, and back. But they always end up……….back.

And what's typical is that in the early days of development, we oftentimes dismiss strong, fundamental truths about what we're looking at for the girl in the red dress. Most of what I do nowadays can be boiled down to basic volume and price analysis. Most other things I have I can use, but don't “need” them.

But as I discussed last week, entry strategies are rarely the problem. Overtrading is the other one. And overtrading is symptomatic of excess emotional expression.

But is a trading the answer to either one of these? No, not usually.

I've always viewed a trading plan as nothing more than a compass that keeps you on track, and avoids the chaos. At least in my own opinion, it should be nothing more than a simple set of instructions, clear, and void of redundancy. In other words, you should not be dragging in information that's not part of the script. This isn't an improv comedy hour. And if at some point you discover something of higher weight, relevance, that's fine. But it shouldn't be the cause of derailment.

You are not suddenly going to become a Harvard researcher turned RenTech PM by staring at social media and looking at what every other human being on the planet is for analysis. Essentially, you will only change so much, no matter how much time goes by. Your tendencies and strengths will be built upon, but your foundation really doesn't change much. So essentially, go for the things that suit you. The things that make sense.

Remember, you're the only one looking at it. We are used to writing for others and I've seen trading plans written to impress, and it is clear the person using it isn't actually using it.

I've always viewed trading as a 3 step process. For the purpose of a plan, you're looking at analysis, execution and risk management.

Analysis is where we arguably spend too much time, but in the beginning, rightfully so. We want to understand something as fully as possible but in order to do that, we hop around a lot in the early years of experimentation. Again, this should be a short list of items, ranked in terms of weight. Certain factors are 100% more important than others.

Execution is just that: your plan of attack. Pretend these three steps are instead people. You have an analyst, an execution trader, and a risk manager. The analyst relays relevant info to the execution trader, who then uses his short term expertise to pull the trigger and achieve a profitable outcome. The execution trader is void of most analytical knowledge and has to follow the instructions of the analyst to the T, not changing the plan, because he is not…….the analyst.

After trade completion, you then have risk management. This is metric assessment. Again, just a short list of items which get to the point when it comes to understanding how to improve your risk and ultimately, P&L. Any backtester and basic risk/reward principles will guide you on this one, particularly for short-term trading. Generally speaking, portfolio management is a different ballgame when it comes to metrics.

I'm trying to keep this brief, so I'll skip right to the point on this final matter: make your list as small as possible (not wordy). Bulletpoints are fine, and should not require in-depth explanations. The entirety of your plan should be limited to a single page, most of which is empty. The more abbreviated, the better. It's essentially a shopping list of what you're looking for when you go out and look for opportunity.

Packing your plan with charts, extensive outcomes and other forms of research, etc. is not a plan. You have just made a textbook which you can use for future study. And that's fine too, but try to bear in mind what it is you're making.

The post Trading Plans: Too Often, Recipes for Chaos appeared first on ParaCurve.

I've talked (over an hour and a half each time) to countless traders over the years now. I'm not sure of the exact number, but it is well over a hundred.  These are people from all walks of life, different ages, and located in many many countries. They are individuals, hedge fund PMs, prop traders, commercial hedgers, you name it.

I enjoy doing it, and always have. But admittedly, many of these conversations will go to waste when it comes to getting the contents of them out there to the general public. I don't record them for reasons of privacy, but I do take notes.

While I realize it it hardly a positive starting point for discussion, I want to talk about the two main reasons I see for failure in this business. They have nothing to do with trading “strategy”. This is just a message of self-awareness above all (in any endeavor).

Simply stated, it's poor execution management driven by a slew of misunderstandings and emotion. I've written a lot about fear/protection, fight or flight, and many other things which are arguably among the worst sins you can commit as a trader, but are a foundational part of our physiological build, for good reason. There is nothing “wrong” with you when it comes to your fear of losing inordinate amounts of money. I would say that's a damn natural thing to be afraid of.

Equity curves are about as honest and basic as it gets.

These two “equity curves” I posted on Twitter, X, whatever it is, are frankly the main reasons for failure in this business:And in case you're wondering which one is more prevalent, I would say hands down the one to the right: “death by a thousand papercuts”.

Other businesses don't have the worry we have as traders and investors when it comes to the ability to wipe out a portfolio (or a huge percentage of it). If mostly taken care of, most run of the mill tangible investment assets will always have some form of value. But both frequent and infrequent errors in investing can have some pretty catastrophic results. Diversity, in this case, means allocation a very small % of your total value to active trading. So this would only be one very small piece of a much larger pie. But of course we know that's not always the case.

And when it's not (and sometimes, when it is) people find themselves of biting off more than they can chew. Leverage increases, fear of substantial loss rises.

So of course, this is mostly a message of risk management.

I'm always getting ideas from the people I talk to, and here are three approaches I've seen to address this over time:

The picky eater: Trade frequency was greatly decreased. The trader became aware that he thrived in certain environments (early session trending, price + executions in line) and failing miserably in all the others. Days would go by where he would not trade. These other adverse environments (at least for him) were largely avoided, although it took a great deal of work to ensure he was only taking action when it counted.

Small positions, gradual entry: Trader was finding himself frequently entering too early, and closing the position for a loss. He would break the trade up into much smaller positions (he converted to micros for this), but in a predefined range (fixed, rarely adjusted for volatility), ensuring the entire position size was added, regardless of the circumstance. I've seen this method quite a few times over the years, and almost all the time for very large positions going on for long short equity portfolios.

Stacked stops, hard limit: One and done position size, but with stacked stop losses (eg 5 lots, 3-5 stops at varying intervals) but a fixed profit target. Obviously, your risk needs to be very clearly defined here, calculated, and unwavering.

As far as risk goes, you can flat out do just about anything as long as you're adhering to basic RR principles. It simply does not matter. But if your math is defunct in terms of your success rate / calculated outcome, your curve will simply not improve much). And sadly, there is no way around this. It's why the bulk of conversations I have with people generally have more to do with execution vs. any “strategy” or method of entering a trade. In other words, the methods behind how a trade is entered is far less exhausting vs. once it is underway.  That's when the real work begins.

Any market is what it is. It does not care about you, nor should it.  They are just markets. People buying and selling stuff. Whether or not you choose to insert yourself into those transactions is your choice.

But bottom line, self awareness above all, and I just wanted to highlight this as I've seen it (too many) times now.

Setting your performance up under your own microscope of scrutiny is perhaps one of the most valuable things you can do. In professional environments, it's required. To some degree, we all commit the same “mistakes” (although I would argue it is just humans being humans). Set some time aside and force your exits. Force your profit. Reevaluate. There are countless ways to do this as you all know how. When we are “forced” to do something positive, the results are usually equally so.

The post No Fight, Just Flight | Death by a Thousand Papercuts appeared first on ParaCurve.

Since then, many, many copycats have popped up and it's easy to see why: this is not the most challenging business to get going, and the money is about as good as it gets for the retail business. So good, that if I was the type, I would much rather run of these these than a brokerage. Competition is easier to get around, payments are guaranteed, and flows are far more predictable. If you already have a big following, all the easier. It all really depends on how it is executed, which you will read about below.

I still take a lot of calls with traders, retail and otherwise, and it seems I can't go a couple of weeks without being asked about these platforms. I can't say I am ever comfortable on this topic, either, as I know most of them are in the business of marketing hope. Here's the gist, as many of you already know:

1. Trader pays a fee to XYZ
2. XYZ gives them a demo account with rules regarding profit targets and drawdowns
3. If the trader achieves the profit target without breaking any of the rules, they will be “accepted” (but not always “funded”…more on this in a bit) where they “get to keep” up to 90% of their profits (but not always…also, more on this in a bit).

I have read other reviews on these platforms prior to starting but frankly they are all either extremely negative or overwhelmingly positive because they are pushing affiliate links. So my primary goal here is to be as objective as possible and inform, while observing perspectives and offering alternatives.

And to be clear, all links in this article are “no follow” and do not contain affiliate tracking of any kind.

These businesses are tempting to many people for obvious reasons. You get to use other people's money and have a chance at simply eating what you kill, so to speak.

Throughout this, I tried to put myself in the shoes of these business owners as much as possible. To reiterate, you need to look at it from all perspectives in order to be objective.

What's written below is not meant to be an attack on any of them. In fact, I am deliberately using “some” and “they” to avoid direct conflicts – I have zero interest in getting into petty fights online. The goal here is to highlight the fine print over large font marketing so people can make an informed decision.

Though I will admit, red flag #1 and my main motivation for writing this today was when I found out who was behind the scenes at a couple of these. Bottom line, these are not the most trustworthy characters (in a couple cases) and so the antennae went up. When I visited their websites, there were some obvious, outright lies stated both on the website and in videos by founders, etc.

So the question becomes: why lie? If the product is as it is, what's the point of doing that? I think it is simply to try to make themselves stand out from their competition, because at the end of the day this model is a very simple one.

I like to think of it is a clear path with a bunch of crap thrown on the ground essentially acting as obstacles for aspiring traders.

Red flag #2 is the borderline obscene amount of marketing involved. During the process of writing this, I tested out a couple services (mentioned below) and I received a marketing email daily, flooded with promos and specials. 50% off. A “$50,000” account for the cost of the “$25,000” one.  You will see why these account values are in quotes below.

Are they impossible? No. Many people pass these tests. There has to be some kind of rate of success or they would never survive. But the halflife on those who pass the test is usually quite small, hence the reason many “funded” traders are not even literally “funded” these days.

So here we go:

A Brief History of the Model

This business model is an old one, redone in 2010 by (I believe) TopStep Trader. They are the ones who seemed to have really put the wheels in motion and marketed this to the nth degree, spawning it into what we see today. Prior to TopStep, there were a range of prop shops in major cities where you would show up and toss down a good pile of cash for similar opportunity (albeit more than many of these current platforms). In the past, the fee was said to cover everything from education, platform and data fees, office overhead, all the way up to initial margin on the accounts themselves. Models like this still exist, but in smaller numbers. Fees usually ranged anywhere from $2,000 to $20,000. But with online retail trading becoming what it currently is, this was just the next evolution. So here we are.

The Gist of the Model. Touted Rules vs. “Knowledgebase” Rules

Most operate off of a subscription fee. Depending on the touted account size selected by the user, the fee increases along with it. Upon signing up, credentials are received to a demo account where the trader essentially has to prove themselves.

These fees can get extremely high for what they are.

The trader is imposed a set of rules, which they are not allowed to break. There are typically two sets of rules: those stated on the homepage / pricing table, and those found in the FAQ's and knowledgebase.

Of course, those in the FAQ's and knowledgebase can be very nitty gritty. For example on some platforms, accidents on exposure are allowed by the system but will invalidate the account if broken (so why not just disallow them in Rithmic or whatever platform is used…this 100% can be done). If it was a real account, the trade would simply not be allowed to be opened.

Bottom line, it can get very complicated and ethical boundaries are very oftentimes crossed. Depending on the company, “Knowledgebase rules” can get very specific and one tiny slip up causes the account to get blown, forcing the user out and requiring he/she pay a (usually) $100 reset fee to start all over again.

So bottom line, there are a string of “Gotcha!^TM” scenarios which would invalidate accounts.

Over time, other companies have learned that people get very frustrated with these seemingly “Gotcha!^TM” scenarios, and tout very simple rules. So naturally, one would assume their pass rate is higher without them.

However, withdrawals on initial gains are stretched out. After a user passes the test, they (in some cases) don't even trade live after “funding”. They are given yet another demo account. Once they hit their initial $10,000 profit (or whatever), withdrawals on that money is stretched out over a long period (up to 4 months).

So in other words, they leverage time vs. “Gotcha!^TM” scenarios, banking on the trader giving back his gains while they wait to withdraw their money.

Marketed Rules

Here's a quick, objective look at the main rules, using a “$100,000” futures account as a sample.

Bear in mind, these numbers mean nothing vs. your ability to get paid. I stress reading about: 1. how the onboarding process works and most importantly 2. if your withdrawals are stretched out over a long period of time. This is never advertised and always in fine print.

• Cost: $205-$325/month
• Max 10-14 contracts
• $6,000 profit target
• $3,000 – $3,500 trailing drawdown
• $2,500 daily loss limit
• First $8,000 100%
• $100 balance reset
• and on some, a $2,000 daily loss limit and/or $2,000 weekly loss limit

Knowledgebase Rules – If You Read Anything In This Article, Please Read This

Open an account and trade it. Simple, right?

Pretty much all of these websites are two different sites: the main site, where all the marketing is and where you sign up, and the support or knowledgebase site (usually on a subdomain), where the fine print is.

On few sites, there are very few additional rules in the knowledgebase. But on others, there are many. And these these rules usually have an enormous impact. Some of them were so bad that most traders would need the equivalent of the “holy grail” to pass and maintain the account, making it very clear that some of these business have zero interest in actually funding traders.

Again, I stress, not all. I did come across a couple companies who genuinely seem to be working in the best interests of the customers while protecting risk. But here are a few examples of rules and other items which frankly, I would be avoiding like the plague if I was looking to join one of these services:

1. Unrealized Trailing Drawdown – when your open trade P&L peaks, regardless of whether the position is closed, it counts. Personally, I would only employ something like this if I had no interest in actually funding accounts and was looking to squeeze out the trader.
2. Rules Changing Dramatically After “Funding” – I found several companies that advertised fixed drawdown (vs. trailing) as a selling point. But then I quickly discovered that once “funded” or entering another “phase”, the trader trades on another “live” sim account (it's just a demo account, kids), with trailing on unrealized drawdown (the worst case scenario). So in other words, they simply hook people in by stating one thing, then commit the worst offense by adding another layer to their process.
3. Promotion of Trading Multiple Accounts – If I find an excellent trader, the last thing I am going to try to do is get him to pay me $1,000/month in subscription money for multiple accounts. And yet I found several companies promoting (and even providing copy tools) for traders to sign up for “as many accounts as they wish”. Again, this is a conflict between what these companies claim to be seeking, with actions clearly stating otherwise.
4. Stretched Out Withdrawal Periods – Again, something that has no benefit to the trader and probably the worst next to unrealized trailing drawdown. Here is how it works: once you are “funded” and earn your first $XX,000.00, they break up the payments and release it once a month or x number of trades, over a long period (up to 4 months). The assumption is that the trader will give back what they earned during this timeframe and it will never have to be paid out. This is becoming more and more popular among these platforms for obvious reasons. I only assume most people signing up have no idea this even exists because these companies only state it deeply in their knowledgebase. I see why this is appealing to people running the business; payouts are very predictable as a percentage.
5. Same contract size cap on micros: Micros have roughly 1/10 the required margin of their standard contract big brothers. These programs impose a cap of usually 3, 6, 12 and 15 contracts depending on the lot size. Some do not change this, even for micros, forcing the trader to overleverage themselves back on standard lot sizes and blowing the account.
6. Companies claiming they have funded X millions, etc. With leverage, this is simply not true in most cases. They are overstating / lying about the value of their accounts.
7. Scaling plans allowed by the system, but invalidate accounts – A “scaling plan” refers to allowed increased lot sizes according to account balance or some other metric.  Many people are completely unaware these scaling plans even exist, and yet they are allowed by the system. Once a trader goes 1 lot too high, the account is closed and the trader is forced to reset the balance for another fee.
8. Trading during certain times of day, allowed by the system yet disallowed by rules – Again, something which can simply be disallowed by the system but is not, and “get” the trader to blow the account.
9. Extremely high commissions – Inflated commissions during evaluation in order to hinder performance. I came across several companies who were charging up to $5 per contract on micros (each tick = $1.25). All in, it should be around $0.60 up to $0.75 or so, retail. This is not even close to the real world and provides no value at all. It simply works against the trader. In a real prop firm, these commissions would be bottom of the barrel in order to maximize P&L.

So put it all together and bottom line: many of these platforms impose conditions which have absolutely no basis in the real world. In a standard live trading account, these would not be present. Some are blatantly imposed to to work against the best interests of the trader and actively seek to blow accounts, others less so.

Gotcha!^TM

So after all my research here, I decided to test one of these out and went with a company I thought was “good”. Well, even I fell into a “Gotcha!^TM” trap on day one. For me, it was max position size. I signed up for a “$50,000” account, and neglected to change a setting on one of my widows (it was set to 5 contracts). I was already up about +$400 for the day trading one contract (total target was $2,000). Well, you know the rest. Trade executed, was allowed by the system, but broke a max position size rule by 1 (max was 4).

And that was it. Less than 2 hours. I contacted support via live chat, because it honestly felt like a cheap shot. So I asked them a simple question: why allow it by the system? I can very easily implement max position sizes on my backend….why don't you?

But do I really need to ask…

She went on to explain that she could do it, but people have to request it, first. So that answers the question of whether or not they have the ability to limit it on the backend. And the only plausible reason I can think of as to why they wouldn't apply it by default is that they need to fail accounts in order to remain profitable.

So you have somebody like me, with 20 years of experience under my belt, making a mistake going between two accounts and whoops. The rep was quick to explain that if I coughed up more money for an account reset I could have another “chance”.

Ha!

In the chat, the rep kept letting me know I broke their rules (she mentioned it three times…and of course posted links to the knowledgebase rules). I was literally laughing. The effort put in to get me to guilt trip was something else.

And this is why I think a lot of these companies get a pass from the review standpoint. They make traders think everything is their fault but indeed they place incredulous obstacles all over the place. But something like this should not even be a rule in the first place. If I was running the show and had capital at risk, there is absolutely no way I would leave something like this up to chance. It would be blocked on the backend.

So you could argue I'm an idiot for doing something so blatantly “dumb”, but it is hard not to ask the question: “If not this, then what?”. Honestly, I am glad I realized this in less than a two hour window. Had this process been stretched out, and I dedicated a month of my spare time to this, I would have likely been pretty angry.

Granted, I would be lying if I said I took the evaluation very seriously anyway. I mostly signed up to click buttons and see what the fuss was about.

And there are many other scenarios the trader is put in under these types of platforms. Yes, you can say it was my fault from a black and white standpoint, but keep reading those knowledgebase articles and you'll find many more examples where quick misfooting wipes you out in the blink of an eye. Seems like it is just a matter of time with the vast majority of people.

This is not how professional prop firms work by any means. Not even close. So if you want to go by what defines a true “prop firm”, simply look at how they operate.

Sound Evil?

Ok, sounds evil, eh? But think about it: if I am in their position, and the people signing up are perfect strangers with no resumes, vouching, etc., do I really want to just start forking over money knowing nothing about them, and under these conditions? Of course not, and I don't think anyone reading this would want to do it either.

Even traders moving forward successfully over many months are capable of a major loss of funds, so there is never any way to ensure it wouldn't happen.

Frankly, I don't claim these people behind the scenes are all evil. But I do claim the model is very clearly tilted towards them making lots of subscription money over the profiting of the vast majority of their clientele. This much is dead obvious to even a casual observer.

So is there a better way of doing it?

Well yes, there is always a better way. But the better way is not as advantageous to the platform owners and in some cases would even make them unprofitable.

So maybe the model, in general, is just a terrible one for the customer…

I did make an attempt to contact two of the platform owners and get an idea in terms of profitability, how many traders pass, etc. One ghosted me and the other basically refused to provide any info that wasn't on their website. I only assume he thought I was going to throw him under the bus even though this was not the case. It was obvious by his tone that he did not trust me at all, so that's the way it goes, I suppose.

The Upside

But here's something else to consider:

I have worked with traders of all sizes over the years, from just-getting-started retail to the largest, a multi-hundred million dollar portfolio manager. The former is almost always misinformed in some way, and (typically) believes they are better at trading than they actually are. Hope trumps reality. I have read countless stories over time about people depositing large chunks of their life savings into futures, forex and crypto accounts, only to blow it all in a short period of time.

So what's better?

That person depositing $75,000 into a futures account and taking it down to $5,000, or that person paying one of these companies $120 to learn that they don't actually yet know what they're doing?

And this is the biggest benefit, as I see it, to these platforms. They place people under an umbrella of accountability and force them to exercise prudent execution/risk management. The fee they lose to these companies doesn't even come close to what they would have lost in a live account. They will learn very quickly whether or not what they are doing is sustainable in any way.

The Account Sizes

Quite frankly, I have never understood the touted account sizes on the pricing tables. Here is why:

These models have their roots in futures markets. Futures have initial and maintenance margin. Unlike FX et al, they can fluctuate. The initial margin on futures contracts is quite low, negating the need for large accounts to manage a good amount of leverage. Most, if not all of these platforms, impose a rule where the trader needs to be flat at the end of every session. So essentially this means that they're only paying (day trading) margin, if anything at all.

So for example, the initial margin on a standard ES contract on a specific exchange is $400. Exchange margin (should you hold it overnight, but which is mostly forbidden by these platforms) is $11,500. So bottom line, to open 15 contracts, all you need is $6,000. Even if it were $1,000 per contract, that's only $15,000. For most of these platforms, 15 contracts is the equivalent of a $150,000 account. If you hit drawdown on it, positions are force closed anyway. So ultimately, these account sizes are clearly marketing over reality, because that kind of capital, along with the rules stated on these websites, is simply not necessary to manage that kind of leverage.

So bottom line, despite the stated account size, only a very small fraction of it is necessary to deposit in order to manage that number of contracts.

This is all especially true for the FX platforms. Especially those based outside the United States, they have access to massive leverage. Again, just do the math. I honestly don't understand why this is even a “thing” when we're talking about basic arithmetic here.

Life After “Funding”

Elephant in the room: why is “funding” in quotes? Because some of these platforms have learned not to fund accounts due to the rates of failure after acceptance being asymmetrically tilted against the trader.

In the case of several companies I was told are “better”, their “funded” traders don't trade live accounts. Some refer to this as another “phase”. This is actually a very normal practice for this type of model. In other words, any profits actually sent to the trader is simply coming from other people's subscription money, not the market.

I found this to be especially true in case of companies employing a slowed withdrawal process. Basically, they hold onto your money for up to four months with the expectation that the trader is going to give back what they earned.

This IS NOT the case with all of them. In fact, I found only one company which is upfront and honest about this and gives the trader the option of which route they want to take.  Account conditions are modified for both and rules change / are extremely harsh vs. the evaluation period.

Some companies stagger (the most I saw were 7 stages of progression). In a nutshell, here is how it works:

1. Evaluation phase – demo account, follow the rules
2. “Funded” phase – demo account – for people who have passed the evaluation. Many people blow these accounts which is why these places *still* don't put live money on the line. In the case of some companies, this phase is broken up into several, and keeps going, and going, and going…
3. Live phase – real account, only given to traders with extended track records. After several months or trading days, the account actually, finally, goes live.

Now as a trader, who cares? As far as I see it, I just want to get my P&L, whether it's based on Monopoly money, or not.

But the sheer fact this is done tells you everything you need to know about the business model. Again though, I get it. Customers are total strangers and forking over piles of cash to them is generally an awful business strategy.

There are very few complaints online (with any of these companies) about funded traders not getting paid. They all seem to pay the bill when it is due, which is comforting to hear. But again, my emphasis was more of an objective observation on the model, nothing more.

What Would I Do?

If the actual goal of these companies was to produce profitable traders then the vetting process would look very different.

Some random ideas as to what I would do:

1. Lower the entry threshold. It costs a fraction of what these places charge.
2. Create long-term, sustainable risk metrics which emphasizes quality over quantity. Most times people fail is because they are attempting to hit a goal on a deadline, forcing bad trades.
3. Lengthen the time to complete and remove the “you have to trade every day” criteria (if it exists). Yes, we want to keep money productive but these are leveraged accounts. Different rules most certainly apply.
4. Upon completion, vet the trader and the strategy. Resume and video interviews. It's a job, part-time or otherwise.
5. Stress test the strategy based on executed positions.
6. Forbid anything I don't want on the backend. This eliminates a large majority of $100 account reset nonsense. This is intentional and obviously a big source of revenue for these places.
7. Set people up for long-term positive effects. Hold regular meetings with people who have a clue about what they are doing while being open to other methodologies.
8. Fix a strategy for capable individuals. This is what professional firms do. The strategy is dictated and traded according to plan.
9. Emphasize execution, above all. Bad traders react to active signals. Good traders seek foundational signals that offer asymmetrically favorable execution on pullbacks, etc. Trading is an execution game, less one based on strategy. Always has been.

…and I'm sure there is more. The best traders out there rarely have their potential seen. Those who have landed on my own desk have usually done so as a result of who they knew, not what they could do. I can only imagine who is out there in the world….

Again, my goal here is to just be objective.  I want to think that many of these places are looking out for the long-term interests of their clients, but the reality is different as always.

If I am looking for traders, I'm looking for traders. The last thing I am going to do is play games with them by doing the equivalent of putting up a wire fence in front of them…

But…possible? Yes.

Sustainable? Extremely low odds. Best you can probably hope for is a hot streak, get as much money as you can, then leave the casino before the house odds kick in. Your biggest obstacle once funded are the dramatically modified rules for live accounts.

And I do imagine, if you are with a place long enough it would be like anything else: they would get to know you, and might work with you outside of the standard website criteria. But who knows. This is of course a very subjective topic.

So there you have it. I really do wish I was a little more cheerful on this one but even the “good” ones I found were still playing games. If I had to classify these places, I would as such:

1. The standard churn and burns: those seeking to knock out traders with non-real world trading conditions. This group constitutes the majority of companies out there (and to a very high %).
2. The real deals with poor checks and balances: these are the ones assuming the highest degree of business risk. They fund traders after shorter periods and are essentially better versions of #1. There are very few of these.
3. Those attempting to mirror a true prop firm: they pay less as a % (but more overall), dictate some of the strategy, and provide routine support. I only saw two of these.

I tell everyone: If you can truly trade, money will always be there. Finding good traders is exceedingly difficult to do and sadly, a lot of huge potential is blown out the door by the poorer of these platforms.

*Please do not ask me for referrals.*

I have outlined both the good and the bad here and it is your responsibility to do your own due diligence. They stick out like sore thumbs once you know what to look for. With no commentary, here is a list of companies I delved into while writing this article. THESE ARE NOT IN ANY PARTICULAR ORDER.

Pay to Prop Platforms

The post Funded Trader Platforms: A (Seriously) Objective Dive Into How They Work (No Affiliate Links) appeared first on ParaCurve.

There is a reason why, as we get older, more of us tend to say things like “the world is going to hell”. We are programmed from a young age to conform to certain norms, many of which change through our lifetimes. The world moves faster than we do, and every generation sees a modification of the one before it.

Both authority and conformity play a role in investing of any type.

I saw someone quoting Peter Thiel the other day, essentially praising him because of his continual investments in FAANG stocks when everyone else said they were overhyped, expensive, and likely to fail. We love a good non-conformist story when it works out. Of course had he been wrong, I never would have read that quote as it would not have been posted. Michael Burry, George Soros, etc. No one would know who these people were had they been staunch conformists. And yes, many of them are one-trick ponies, meaning their actions were one-offs and they really are no different than anyone else on this planet.

There is a never-ending list of these types of stories. And we study them, arguably too much, because the ultimate path taken was simply the opposite of the crowd. This behavior is typically recognized as admirable, because deep down, we know how hard this is to do.

These days, we live in what many describe as a very divisive and tense society. I still “blame” social media for this, for a very simple reason: people are persuaded and live by the rules of their peers vs. an authoritative figure with no direct impact on their lives. Peers provide people with a cushion/comfort/an “army”/backing/validity.

Social acceptance is absolutely massive to us, and our actions to achieve this are deep-rooted in our brains. Major news networks, or any other ideal-leaning publication is incapable of doing this. But the crowd does this very easily. Social media gives people the venue at-scale to achieve this, not present before.

This is not to say any authoritative figure is incapable of persuasion. Quite the opposite. But the effects are typically far shorter-lived and far less-likely to trigger deep-rooted actions on behalf of the “subject”.

And as people pick their sides and find their respective communities, the end result is a very, very high contrast scenario. Things become “ultra-divisive” because all sides have become locked in by a way of thinking, backed by an enormous community of peers.

Two people looking at the same picture will see two completely different things because they enter with a preconceived notion of what that image is.

These days I live in the suburbs. Many of my older neighbors rely on an app called Nextdoor to communicate about well, just about everything. And like every other social media app out there, each and every day things get tense and people start arguing about one thing or another. Most people would place these fights in the political bucket, but not always. It is almost shocking because you see the actions of their day to day lives, and yet you observe how “strong” their words seem, shaped by their online communities. To most people, it doesn't add up. But to those familiar with most of the experiments on this list, it makes perfect sense.

The “Best” Positioning Arrives from Conformity, I Mean, Non-Conformity, I Mean,….

So what's the point, you ask…

Trading is weird, because it is the only profession I know of which teaches non-conformity from the get-go. And while you might think this would lead to instant success, the inverse tends to be true. If everyone is non-conforming and buying a low, then it turns out they are in fact conforming, and ultimately get ripped to shreds in an aggressive trend downward.

So the people who think they are not conforming are in fact conforming by extension of overall agreement of non-conformity. Whoops. Don't go crazy on me just yet…..

Let's look at a hypothetical “holy grail” example:

The market is trading higher. Delta (executions) are bullish. The order book is bullish. A level is hit. The trader executes short. Suddenly, those bullish executions turn bearish. The order book becomes bearish. Price drops. All of this occurs at or after the moment of execution. The trader profits a tremendous amount of money.

This trader has just done “the impossible” by calling the direction prior to any confirmation. He decided to be a non-conformist, and it paid off. If he posted the trade to a platform like Twitter, he would be getting thousands of likes and praise from the community.

Now let's look at a worst case scenario:

The market is trading higher. Delta (executions) are bullish. The order book is bullish. A level is hit. The trader executes short. Suddenly, those bullish executions turn even more bullish. The order book becomes further bullish. Price increases. All of this occurs at or after the moment of execution. The trader loses a tremendous amount of money.

The trader has just done “the normal” by getting mowed down in an aggressive trend. He decided to be a non-conformist, and he got slaughtered as a result. If he posted the trade to a platform like Twitter, he would be getting ridiculed, laughed at, and retweeted for his shameful behavior.

In both scenarios, the same action led to very different results. Toss in the social impact, and the euphoric or devastating nature just compounds. Some people can deal with this somewhat well, but most cannot. Again, we are creatures of social acceptance.

It is not my goal today to dive into trade specifics but merely highlight the fact that trading involves somewhat of a double-edged sword, and it is perhaps one of the most unnatural things we can attempt to implement.

Take trend trading for example. I call this divergent trading, because we are essentially going with the path of least resistance, whether it points towards a mean, or not. When we “mess up”, one of the first things we do is attempt to change our subsequent behavior.

In divergent trading, we are moving with momentum. Going with the crowd, not against it. Conforming. In the case of the second trader above, based on his unsuccessful actions, may start executing long or short based on an underlying trend. But then he finds himself buying tops and bottoms on a routine basis, making matters even worse. Damned if you do, damned if you don't.

He has failed to see that his actions were in fact largely correct as far as the market and specific environment was concerned. His public ridicule would have likely added to his decision to change his behavior. “Don't upset your peers.”

Trading is double-edged because the vast majority of the time people have to both conform and non-conform, based on the interval.

For example, the market is trading higher. We want to conform to this move, in order to take the path of least resistance. But in order to get profitable positioning, we need to be non-conforming and buy when the market is trading down on a pullback. Shifting gears like this is extremely difficult for us to do. It does not come naturally.

We are essentially saying, “I'm accepting this, but not this”. Once you realize how deeply programmed we are to accept certain outcomes, you will also realize why this action makes zero sense on the whole. But it is what's necessary to keep on moving forward and maintaining (literal) positive equity.

It's a clumsy process and usually takes many years of conditioning in order to achieve. Mechanical knowledge can only assist us in so many ways. This is why the “execution” skill of trading is so unique. It relies on a process which both agrees and disagrees with the crowd. And naturally, we only go on one side or the other.

Twitter, FB, LinkedIn for the Conformity Win

Many of you reading this today clicked a link on social media in order to get here. In THAT world, we are flooded with both conformists and non-conformists, but rarely those who split the two. I joked the other day with a friend and said “what is this CNBC?” when he asked for an armageddon-style price target. Analysts are the most common types of guests on those networks, and analysts love to give exorbitant price targets.

They are almost always late to the party, but rightly so. Their job is to proclaim to the public their position on a stock, future, currency, or crypto, so they tend to take the most socially acceptable route. They wait until slowly but surely, most of their peers head in that direction, then “call the shot”. Of course by this time, it can be too late. They waited for social acceptance and reacted to that vs. what was likely very bluntly staring them in the face months prior.

Analysts are of course at the center of conformity. On social media, we are driven to do the same. Whether we realize it or not, we are constantly being funneled in one direction or another, our opinions becoming stronger based on preconceived notions (usually “planted” there by a group of peers). I never want to imply any of this is good or bad, either, but simply is what it is.

All of these topics are covered in the documentary posted below. It's from Russia, and yes, it's old. The entire video is about conformity and cycles back to the Asch Conformity study completed in 1951. And also yes, I found this through social media. It does have its positive traits.

This stuff always interests me not just for trading, but for about everything else in life (especially these days). I feel as though the older I am, the more independent I become, but that opinionated “pull” never seems to vanish out of sight. Creatures of habit.

The post Conformity. appeared first on ParaCurve.

Interpretations of any market are often nothing more than an extension of the past experiences (or lack of) of the observer himself. And while we want look at any market through lenses which allow us to view them in the most complex of forms, they are, at the end of the day, relatively simple mechanisms.

People buy. People sell.

Price goes up. Price goes down.

For something which, at its surface, seems so simple manages to consume extraordinary amount of time and effort because:

Making money is the primary motive of any market.

Because of this, people quickly introduce a slew of descriptions which are usually nothing more than myopic. “Surface level” is about as far as most people go, but at the surface level, we're really dealing with nothing more than a distortion of reality.

So, What Is Price?

The final product of any market is price. It is the last thing to occur in a long, drawn out decision-making process, most of which is reactionary to events. These events are the work of different types of participants, behaving in many, many different ways. They could be driven by news, the actions of other participants, or anything else.

Price is the surface. Imagine if we knew nothing about what's underneath our own earth's surface. And then an violent earthquake hits, or a volcano erupts, catching everyone off-guard. At one point in time, this is exactly the way things were. Without retelling the stories of Pompeii, etc., we all know what happened.

We can make structures/patterns out of price, and this is why I view price action as simply that: structural.  But like the earth's surface, it gives us plenty of clues in terms of what's going on underneath.

For example, I can look at a long, drawn out range and also know that there is a huge concentration of volumes somewhere in the center of that range, relative to everything around it. Time, volumes and ticks are all highly correlated.

Think of it this way: of all the common price patterns ever created, should you measure their effectiveness, most won't deliver any greater than a 60% success rate verbatim. Toss on common user execution, and you are very likely well under the 50% mark. Candlestick patterns tend to be even worse because, well, the market doesn't care about what interval you're using.

People who want to knock on the “indicator” crowd tend to flaunt price action as the one and only usually because it “does not lag”, which simply isn't true. Again, it is literally the final product of a drawn out decision-making process, and if that isn't lagging than I don't know what is.

So is it useless? In the way many people tend to use it, I wouldn't say there's much benefit to it at all. But it is certainly misunderstood.

We Are Used to Categorizing Just About Everything…

In everyday life, it is helpful to categorize things.

I need a loan. I go to the bank. My financial situation looks very different than the person who came before me. I have a different job. I have kids. I have additional income. While I look very, very different than the other individual, we are put in the same category. We get the same loan with the same interest rate, based on overarching factors. The bank has categorized us, because when all is said and done we are kicking back a similar financial output.

I may pay my loan, and the other person defaults. The bank knows that based on our categorization, 1:8 customers will default. Should the macro environment get bad, that number could go as high as 1:5.

In a nutshell, this is what price action (or anything else) does. It guarantees nothing as far as future output goes. It just allows us to categorize things based on what has already happened. Stats can help us determine the likelihood of what's going to happen next, but won't explicitly tell us.

Process, Strategy, Execution

When most people begin investing or trading, instinct #1 is “find a strategy”. A+B+C=D, right?

But A, B and C are never the same. Never.

Also based on this instinct, is to take any piece of information and immediate formulate a directional strategy from it. Price action says this, we go long. Price action says this, we go short.

Yet there are vast amount of items commonly used for analysis that are completely non-directional. AND THAT'S OKAY, as long as we understand this. Many items falling into the price action bucket fit this bill 100%.

Common support and resistance levels are one of them. What guarantees do you have that a level is going to simply reverse price? None. And this is always the case. The sooner most people realize this, the better.

A few years ago I took a look at what I was doing everyday and decided to just rip it apart into 3 separate categories,

“Trading is a process” has been said so many times at this point that it seems cliché. I view process as only step one of any regular routine. Think about what an average person does in a day when it comes to analysis. A technical trader (or a fundamentally driven trader looking for better timing) will plot levels, monitor various times of the day where prices tend to flip, look at heavy areas of open interest, plot the previous day's settlement or daily / weekly / monthly opens, closes, highs and lows, etc.

How much of this directional? Barely any of it. Some of it is to a slight degree, but certainly not much. Again, no guarantees any of those levels will do what the trader hopes they will do.

So why do it? Let's say you're going on a hike in an area of rough terrain. You know you need to hike over/through a patch of mountains (no option not to). You could look at a satellite map to see trees and open fields, or you could look at a terrain map and view elevation grades. Trees can grow on steep cliffs. You could end up losing elevation you would have to gain later. The satellite map won't tell you that you will expend 5X the amount of calories, and time, to get from point A to B, but a terrain map will.

You're looking for the path of least resistance. And this is where price, or anything structural, shows its greatest strength. It has more to do with the path vs. the point.

The point is what most people focus on: exactly where to get in and out.

But then the trade opens, and the struggle begins. Let's say the person executed too early. Why? They failed to see that the current path of least resistance was against their trade. Had they focused on the path, not the point, actions likely would have looked very different.

Volumes and prices are of course related, and volumes equal friction. A high volume node will correspond with a range in prices, or just an area that poses a high degree of friction. In other words, it's a resistant path. So it's not only important to realize what a block of prices will subsequently do to price hitting it on the second time around, but why those prices are there in the first place. Again, volumes, prices and ticks are all highly correlated.

So this is process, in a nutshell. Finding paths of least resistance and entry and exit levels as a biproduct.

Strategy is directional. Certain inputs are used for this, all of which have the single goal of determining one thing: up or down. Like process-oriented items, many different things can be used for this, the most common being fundamentally-driven or in the technical (execution data and technical analysis world) book depth and executions, or a release (range expansion) from a range.

Execution is a basket of items unto itself, and needs to be regarded as such. Most people are generally good at process and strategy, but far less so at execution (or vice versa). Once a determination is made, action needs to be taken. And in any market, preemptive, late, or a lack of action is going to unravel the ball of yarn. And this is all just an individualistic effort.

So again, much of this is perceptive and just understanding what you're dealing with when it comes to different forms of analysis. There is nothing “wrong” with any of it, it's just that it is commonly misplaced.

Price Action Can Lay a Foundation

Years ago, I used to study all the different price patterns until I more or less came to the conclusions stated above. Looking through a book of over 300 price patterns I think it would be odd not to at least ask just once: “who the heck is going to remember all this stuff?”. I cut them down to just 6 different price structures because at the end of the day, these are the only ones that form around each and every turning point on your chart. Why overcomplicate it…

What they demonstrate is a temporary lack of volatility or pickup point for a continuation. The reason I would even want to look at any of them to this day is for means of timing. Knowing that an outcome is possible (a third thrust in a triple tap, or a right shoulder in an over and under, etc.) has its advantages.

Price action is easy to identify, and I think that's part of the attraction to it. I could teach a complete novice how to find a support and resistance level in a few hours and that very night, they're doing it. Find a wedge, find a head and shoulders, etc. But there is a reason most people cannot trade these patterns, also stated above.

But again, that doesn't mean there's no value; far from it. A shape or structure on a chart is better than none. Ask Ferdinand Magellan if he would have liked a map of what was around him and I'm sure he would not have turned it down. And for a moment, let's assume he had one. He still wouldn't know what's in front of him.

The only way forward is forward, so better to have the wind at your back vs. not. And that's why I talk about the “path of least resistance” so much. If we're trading, obstacles are the enemy.

Knowing where a high volume node exists (typically circa the price range center) has its value because nothing stops price more than a massive concentration of volumes. Knowing where a smaller concentration is at the top of the range following a breakout is important because this is typically the last-chance retest before prices make their move, on an expansion.

And so prices (and profile) can tell us these things. But as far as direction goes, we are in the business of reacting. See A, do B, etc. I have always though blind price forecasting is a bit useless for this reason.

Assumptions Made In Hindsight Pose Danger for Real-Time

Accumulation and distribution. What are they doing, essentially? Telling us a direction. Like price patterns, there's simply no way 100% positive way to determine if a range is accumulating or distributing with price action until a subsequent move has occurred. The same goes with supply and demand (essentially the same thing). While they serve their use in hindsight, it's hard to stress how important this is to understand.

Lately, I see a lot of Wyckoff distributions online. And sure, when the pattern plays out, its as if I can hear a symphony playing in the background. But these types of distributions have not showed their hand until price is back at an extremity and making its final movement. And of course many times, they don't do this at all.

And much of this boils down to situational awareness. When a top-level is hit over and over again, fading every time, what's happening? Could be a few things.

1. You have a dense order book. At-the-market executions are positive, but limits to sell are overweighing

2. At-the-market executions are selling the level. It may not be a lot, but it's enough.

3. Both are selling. Revisits become unlikely and you're dealing with a deep pullback or potential reversal.

And all of this is under the hood.  The most simple accompaniment to price action is simply volume profile. Bottom line, it tells us where the volumes are (therefore friction).

So as a structural base, it is more than adequate, but of course there is always more to the story.

As a Meter for Volatility

Directional forecasting just refers picking a direction, up or down, for any given x period. This period is usually determined by length in price, rather than time, or any other measure. As price is hitting the brakes, this is what I've viewed as just raw price action's biggest strength: determining what's next based on range-based structures.

Humans are interesting creatures. We really do like to repeat the same processes over and over again, whether we realize we are doing them, or not. No structure is ever identical, but the sequences are extremely similar, like anything else in nature.

At the end of the day, we're looking at the inception of a common pattern based on average behavior in order to determine the future output. Once that structure is completed, however, what most people call “randomness” takes the wheel. I don't like to think that anything is truly random because it can all be measured, but other factors, not just prices, would tell us this.

This is obviously counter to what I learned in my early days browsing through technical analysis books, where we are identifying completed structures in order to “figure out what's next”. It always seemed like a recipe for craziness, at least to me. Because in the real world, most people have a serious problem pulling the trigger on something you can't see with bonafide consequences.

So it is the inception of patterns, in previous high-volumes areas (or areas of high resting volume) that tend to display the highest amount of interest.  Aside from being early, it is the recognition that prices are rotational in high volumes areas. Tops and bottoms deflect, and in common ways we bucket into patterns.  This is why the 300+ price patterns out there don't interest me anymore. By the time they're done, it's too late.

Regardless, anticipating patterns can be less precise using price action alone, so there's a degree of “wiggle room” that can be made up for by way of volumes.

Ultimately, it's the aggregation of volumes which tell the story; how large the range will be, inner and outer edges, etc. And these groupings shape the patterns you see on your charts.

In the End…

When I first started writing this blog years ago, there really wasn't a whole lot posted out there. Today, it's the exact opposite. It is also likely one of the reasons I have slowed down so much writing this blog over time here – how much more do people really need? Yet with all things typical in learning just about any market, surface levels tend to take over, because it's what stares us in the face. And this is what I (and likely you) most commonly see out there.

So if it helps, great.  And as usual if not, that's okay too. I always just encourage everybody to use common sense and see things for what they are. In this case, it's understanding that you're only looking at a surface and the value is usually less obvious than it initially seems. Literally anything can be turned into a “strategy”. Price action, executions, or what time my son gets up in the morning. Every business has it set of tools, and we have those tools so they can do some work for us. But we never want to use them incorrectly; otherwise might as well not use them at all.

In the end, I view it as finding a pathway, and importantly, knowing what I'm likely to see around that path. Terrain maps are useful. 

The post Taking Another Look at Price Action appeared first on ParaCurve.

It's the headline cascade. One bad thing after another hits the wires, and price shoots down another percent, or two, or four. My intent here is not to say we are back in 2008 economically, because we are most certainly not. I'm talking about the price action in relation to how things are developing in the news. My focus has always been looking underneath the hood of price – its liquidity, who is buying and selling where, when, and through what means. And so this is the lens through which I am writing here.

Wall Street's primary concern should be economics. But when Amazon's price to book is over 15, or Tesla over 18, it's very easy to argue that this is not always the case (big shocker here).

I do also believe that headlines are exacerbated even moreso now versus then due to increased toxicity in politics. Sensitive subjects are also the easiest subjects to leverage when you are attempting to turn the opinion of a crowd. Many journalists have become more shamelessly biased than I can ever recall. This adds fuel to the fire. For what it's worth, Wall Street does a decent job of self-regulating the nonsense that eventually ends up on click hungry websites.

What is happening lately is a wake up call to the potential economic impacts of this virus. Throughout the week, a series of headlines hit, all explaining one major thing: it is coming to the US, and will have further economic impacts right here on our own soil. It usually starts with retail sales and trickles its way down the economic food chain.

The market is seesawing dramatically and with exceptionally poor price-by-price liquidity, large swings will all the more common. One false step is all it takes and its why I recommend sidelines for the vast majority of you reading this.  This site has historically attracted a short term crowd which is why I write any of this here.

I sorted these out by Z-Score so you can get an idea for the volatility vs. what everyone is used to (high school refresher: z-score=1 standard deviation). The US ranks #1 here out of most major developed nation ETFs, hence the reason everyone is flipping out even more. This is not even close to what we are used to from a volatility perspective. Many option traders are, in a nutshell, describing things as “off the charts”. And so especially if you plan on trading intraday or over the course of a few days, there are extremely low odds that you've ever experienced anything like this before. These are yesterday's numbers.

I monitor major volume nodes in order to gain perspective on many different things, but mostly locations. When markets get illiquid, they go on the hunt for liquidity. Beyond theory, when prices range, traded volumes accumulate and on revisits back to those zones, liquidity is present yet again. It is one of the reasons why major areas of previously executed volumes (or large amounts of open interest) regularly attract price. The liquidity is there. Executions once impossible, are far more likely to be so in locations such as these.

Nobody likes to trade in a hurricane, and this is why limit orders get removed from the market in masse when major events are underway. This is what's happening lately. Without anything to slow them down, at-the-market executions move prices relatively easily.

People regularly confuse lots of traded volume with price-by-price liquidity, but these two things are very different. Liquidity is literally just resting orders waiting to be executed….that's all. Volumes are just that – finalized executions. Time is a factor here. Without adequate time to adjust for large price swings, liquidity becomes far more dispersed. It is a chain reaction that takes time to normalize.

This is a snapshot of executions from 11:43am EST. These are just ES futures. To say these are weak on a price by price basis is an understatement. On the left side of each bar is the Bid x Offer. On the right, net executions to buy or sell. Bottom line, it is taking very, very little to move this market one tick at a time.

Additionally, markets go down faster than they go up. Whereas dollar cost averaging over time is the norm, selling is typically done in one shot.

Today, we hit the POC of this entire upper leg going back to 2017, or just the last time prices were up here. Chop is likely the next thing usual course of action, and these will be large swings. It is going to take time for things to get back to normal, explained above, although at the present it appears we are looking at a new normal. Red lines on this chart on there only to display where the largest chunks of volume have been traded over time.

Some recommendations moving forward here:

-Large, illiquid upwards movements are not uncommon in situations such as this. This is not necessarily a sign that things are outright reversing. It is just a lack of liquidity. We had a ton of late session buying coming in today, seemingly out of no where. $100 in the afternoon alone.

-Take (bad) news that comes out, moving forward, seriously. Be weary of well above average, dramatic price reactions.

-Liquidity will not return to normal anytime soon. It will not take much to punch prices much higher or lower, in a minimal amount of time.

-Node edges will deflect prices as usual. Monitor rejections of opposing nodes to gauge the future direction of the movements (price “jumps” from node to node on a regular basis).

-Don't be a hero. Large swings are carrots on a stick for newer traders/investors. Lucky once does not equal lucky again if you are a novice.

I see both sides of this story getting discussed online (a lot): the bearish, stock market total crash camp, and the bullish, “get everything at a discount” camp. Just do what you do best and manage your risk. People love to talk. I'm writing this from the angle of “wow, I haven't seen this in many years” when looking at executions. So just tread carefully. Thanks all.

The post Virus Headline Impacts on Liquidity, Volatility and Locations appeared first on ParaCurve.

One of the largest issues any trader will ever face boils down to getting things done when they need to be done. After all, prep work is largely in vain if we are never able to follow through on the very thing for which we prepare so long. And still, this topic takes a huge backseat in the educational part of this world, with (seemingly) few people realizing the magnitude of the issue itself.

“Psychology” is a common go-to when it comes to the blame game of losing trades. And while we want think “psychology” is a huge component I find far too often that it is improperly placed or simply overused for things that can, usually easily, explained. Not knowing that a rush of orders and lack of movement in price shows accumulation, not follow-through is a mechanical problem and has nothing to do with psychology, although one might blame psychology for buying into highs at an improper time.

Like them on the whole or not, with all of these books, I find value. Almost all the time, I find at least one sentence/paragraph/chapter that speaks to me, helping me in some way, shape or form. So they are never a waste of my time, as I see it.

Over the course of the past year I have delved through a number of books, all surrounding this topic, coming from a discretionary angle. I didn't enjoy writing book reviews in school any more than the next kid, so here they are, with brief commentary and (likely most relevant) how I see they relate to the business of trading:

The Hour Between Dog and Wolf (link)

This book speaks to traders as it was written purely from this angle (frequently referencing the experience of numerous former bank traders), but applies to just about any discipline in life, not just this one. When it was first released, it received a lot of praise, as it does to this day.

It dives deep into the science behind why we do what we do when taking certain types of risks. Understanding how all of this ties together gave me an incredible

One of the more satisfying things the author does is “proof” his writing with studies. There is little discussed by Coates in the way of opinion and if it appears it is, is backed by a study.

But as far as application, this is where the book explains less (to be clear, this was not the intent of the author, but rather a personal wish of mine, as we are all looking for solutions to common problems). Oftentimes, however, the solutions present themselves when all the facts are known. And this book does an incredibly thorough job of outlining the facts.

Our body and minds are tied together in many, many ways, and this book explains (from a non-Platonic perspective) why this is so important when taking risks.

Biggest Take Home:

Our bodies feedback our minds just as much as our minds over body, if not more. So get on a treadmill more often and understand that what we feel is often associated with other things. Fears and other reactions are oftentimes caused by human instincts (eg fight or flight) intended for other purposes, but serve us poorly as traders. What we refer to as “instincts” are deeply programmed patterns realized through continual observation and action to similar circumstances.

Thinking in Bets, Annie Duke (link)

I almost skipped over this one due to a couple Amazon reviews, and I am very happy I chose to ignore them.

This book proved to be hands down the most applicable of the bunch, albeit took a big dip in my opinion towards the center of the book (starting strong and ending less strong but still decent).  For those of you who don't know the author, Annie Duke, she is a championship poker player and knows a thing or two about pulling the trigger in high pressure scenarios.

One of the most memorable items in this book were the continued discussion around skill and luck. We have a common tendency to mix these two, improperly labeling things out of our control a result of our skill, and vice versa. Like trading, poker is a game involving a component of luck, which can be mitigated (sometimes a great deal) through skill. And while we don't like to make comparisons to a game like poker in the trading world, winning the two have a great in common.

Biggest Take Home:

Skill versus luck, and sheer importance and future ramifications of properly labeling each. Acting without haste, reinforced by concepts discussed in Coates' The Hour Between Dog and Wolf.

Annie has a great blog, and no doubt her tactfulness as a writer has only gotten better over time. Worth your time.

It might also be worth nothing that Daniel Kahneman's best selling Thinking and Fast and Slow was referenced in both of these books. Also worth your time.

Algorithms to Live By (link)

I took a chance on this one, hoping for ideas along the lines of organization and strategy assembly.

The book itself is by all means very well thought out / contrived / written, but one which I had a hard time relating. I found myself taking the point of the context and just modifying it in a way which I knew it would stand a chance when it came to application, which I just assume is rather typical. Obviously, this book is not geared towards traders, but neither are most when it comes to getting things done.

The biggest comparison I found myself making while reading it was Ray Dalio's “Principles”, where Ray essentially creates his own rules by which to live, whereas this book applies common preexisting theory found in economics, statistics, etc. applied to the purpose of living your life.

Frankly, I have a hard time with these kinds of materials. For me at least, they fall in the category of short-term interesting, fleeting thereafter. It really takes a great deal of effort to implement practices such as these if you are not naturally inclined to do so. And few people are, in my humble opinion.

But we love soaking it in as we are thought to have a lot of “ah ha” moments along the way.

Biggest Take Home:

The power of optimization and more specifically constrained optimization – we are seeking far too specific parameters. “Waiting for the perfect trade” until we metaphorically die from it. We do this a lot when seeking highly rigid parameters for trade entry and exit.

To be clear, there are many other concepts in here which newer traders are likely to have a good amount of interest (eg overfitting, game theory, sorting and caching etc.). It could be that at this point in my life I am also well accustomed to many of these theories. Ultimately, this is a book about making decisions and offering (perhaps too many for my personal taste) ways to do it.

The post A Few Books Relating to Execution appeared first on ParaCurve.