Chapter 2. “Peter, you have to start putting green days on”

“Peter, you have to start putting green days on,” -these were the exact words from HFT when I realized things were going to change. It’s already been three months of trading, with my account balance only going lower and lower every week. It took me 3 months to get ready for the exams. Currently, it’d been 6 months already without a single check to my banking account. And now this… I’ve been working my ass off with 0 or even negative progress, and now I have to start putting green days on. Stuff was not getting easier at all…

Only in trading! Effort =???

Like many new rookie traders, I was hoping to start covering my living expenses by this time. But trading is entirely different from any job or other effort-oriented industry. If you are considering devoting your time to this career, think about this: several tens of thousands of people have been doing this for decades. The only way to survive in this industry as a full-time trader is to literally be an animal. No one cares about the hours you are spending in front of the screen from 9:00 am to 4:00 pm -everyone does it. What makes the difference is the time outside of these hours. These extra hours you put in before the open and after the close — are the real differentiator; this is the game changer. These people you are trading against or with have been doing these for years, so ask yourself, are you ready to put in extra 3–5 hours a day only to start catching up to them, maybe in a year or two?

Intraday trading has a very steep learning curve. On top of that, the algorithmic backdrop is constantly changing, so you have to evolve too. Now think about how hard it could be to continually stay sharp in this game, where even people with 1 or 2 decades of trading experience are constantly forced to start looking for a new career. Are you ready to join this game where nothing is guaranteed? HFT loved to bring up that some traders are better off working in MacDonald’s, where they will be at least making minimum wage and have corporate insurance… In his own way, he was correct… How can you make your effort worthwhile, considering the time you will dedicate to learning the ropes of trading next 1–3 years? How long can you go on and on without making a single dollar at the end of the month? What would it take to be a great trader?

The Office and Team

Imagine a 15x20 feet room with almost no daylight, since the windows were permanently closed to avoid any direct sunlight on monitors, with 3 rows of trading desks placed with enough space for 2 people to walk comfortably in between. This was our war room, and there was no other place I wanted to be at 9:30 am when the bell would ring. Technically, I had to be there by 8:00 am to be able to be there by 9:30 am. The privilege of starting your day anytime later comes with the territory, which it took me several years to get there. For HFT and MoneyG it was the first place they got after they branched out of the main office. Overall, this was the best place I could have wished for. When you just starting out you want to sit as close to the senior traders as you can. There is an immense amount of knowledge you can absorb just by listening to the seasoned traders' conversations. And man, HFT and MoneyG were on point, by the time I met them, they have already seen a decent amount of unique events, and a variety of market environments.

When I joined the desk, I met Riskless and SSR — guys who joined a couple of months earlier than me. The whole place was set up for 8 trading desks. However, for the most part, it was 40%-60% filled. The main reason for it was simple. It’s tough to find someone who understands what it will take for him or her to even make it to the end of year #1.

On top of that, this person must show severe commitment to trading even before being hired. Ideally, he has to be at least close to being brake even. In my case, it was pure luck I got on hired. I reached out to MoneyG on the Twitter right when they were setting up a new office. Since I did have some trading experience, although consistently unprofitable, they decided to take a shot at me.

Let me introduce the guys on the desk:

HFT

I’ve spent tens of hours sitting behind HFT — and to this day, I still don’t fully understand what exactly he was doing. He was an ultra-fast thinker and was operating on a completely different level. He had tens of go-to stocks for market making. Every day, he would have 30–40 tickers on one screen as a secondary watch, which he won’t trade unless something of interest was happening with the order flow. Most of these names were trading in a 5–15 cent range. When HFT was able to recognize some unusual activity, he would go into the stock and either go with the flow or make a market providing liquidity on both sides of the spread. The trick was to pull out your offers if you saw repeated orders hitting the ask with the size and start covering some of your position after the flip-up. The second part of the trick was to start getting out in the midpoint if a trade was not working the way you expected; for example, you are long, and you think it will flip down on you.

While it sounds like a relatively straightforward strategy, the HFT operation was massive back then, and it is probably much bigger nowadays. Usually, throughout the day, he could have 10 open positions with 100k to 400K size in each. When you have this kind of size and these many tickers, you can’t allow even 1 ticker to slip away, neither can you take a leak throughout the day (lol). All your actions have to be on point since losses can accumulate quickly if you don’t know what you are doing, and since your risk is less than 1 cent, you can’t put any stops in place. To this day, HFT is the best scalper I have ever met in terms of size, consistency, and sticking rigorously to his rules. I learned a lot from him about the actual order book/market structure.

MoneyG

MoneyG is the biggest trader I have ever traded with in one room and the most consistent trader I have ever seen. One of the biggest things I’m grateful for is a chance to see how HFT and MoneyG transformed from guys taking home $2-$3k into solid 6–7 fig traders. While HFT decided to stick with his highly predictable strategies on the market-making side, MoneyG was like, fuck this scalping, I’m here for the real thing.

He always had his poker face on. I spent many days in one room with him, while he would be up 6 figs on the day or down, I could never tell. When I’m thinking about MoneyG now, the first thing that comes to mind is Discipline, which starts with the capital D. What is also ironic, we spent so many hours talking about the edge; he would point out tens of important technical elements that he was looking for to enter or exit and trade. Still, he never brought up his Discipline or mental game. I was desperate to learn about it, but I never asked the right questions, and for some reason, he never elaborated on it.

There are many discussions in the trading community about the psychology of the game. Many people point out that without an edge, you might keep thinking you are “mastering your inner game”, while in reality, you are just lost without a proven edge to extract alpha from the market. What I want to point out is if you ever want to transcend from a guy who is making $1K a day to a guy for whom $100K, positive or negative, is just a normal day in the office, your mental game has to be on point, and that’s what MoneyG had — an A+++ mental game.

“Tesla is tight, guys,” or meet SSR.

Imagine a setup: There are massive offers in the order book, the spread is 1 cent or less, and you can’t hit the bid, and all of this is happening… because a stock has SSR — Short Sale Restriction. However, if you could hit the bid, this can often turn into a 10x trade.

For example, there is a 700K offer and 50K bid. If somehow you can get, say 50k or 200K position short, and then it flips lower a couple of cents — you just had a 2–5R trade with massive size. The only way this trade works, in the long run, though, is by never allowing your losses to be more than 1 cent. The ideal case to take a loss with this trade is to cut it before the spread flips against you; hence you need a big offer to get out when you see it’s being chipped away. I’ll outline more detailed mechanics of this trade with charts later in the following chapters, but what is important now is that SSR was really good with this trading strategy. And well before I joined, he already was putting 4–5 figure days on the table with this strategy.

The only drawback here, the actual setup is there only during certain times in the market. Sometimes, it could be days, sometimes only hours when you can take advantage of these opportunities. Hence, what comes first is the ability to sit on your hands and wait weeks or months till this setup reemerges. In the case of SSR — the ability to remain patient was his Achilles’ heel. To keep it fair, almost every trader who has been trading for less than a year and has yet to see enough market regime changes struggles with the same issue. I have for 2–3 years to say the least.

For reasons totally unknown to me, SSR would have $TSLA every day on his screens. Almost every day, he would find a tight setup in $TSLA, and call it out for the whole desk: “Tesla, is tight, guys!” and almost immediately, he would take a loss. He was good with one setup, but he kept confusing setups in $TSLA with the SSR setup that made a lot of money for him. Essentially he kept doing the same thing over and over, hoping to see different results.

The problem was that all his instincts were telling him that is the right setup in $TSLA. FOMO would kick in, and greed added more fuel to the fire, materializing as much bigger bets than his current risk profile would allow. All of it led him to have too tight stops, which were always taken out before the trade worked. He was gone from the desk within 6 months after I joined. Like many traders before and after him, he certainly had excellent learned skills but failed to adjust his behavior in time. Full-time trading is always a race against the clock. You can not always be learning and polishing your strategies. At some point, you have to start making money consistently…

Riskless

Riskless was another junior trader on the desk, and the oldest one, too, making me the second oldest person on the desk. At the same time, HFT and MoneyG were younger than us by 5–7 years. Riskless stuck with the desk almost as long as I did. Through infinite conversations with him, I was able to grasp various trading concepts. He was a consistently profitable trader, but simultaneously he was the most risk-averse person I have ever met.

All the traders usually start within either of the camps, some are risk-averse, and others are risk-adverse. It’s not optimal to be keeled over one side, but this is human nature. It is common to be long or short-biased, but no one talks about our innate perception of risk. You can do nothing besides slowly rewiring yourself to get better balanced. Many traders are too aggressive, and this aggressiveness is what stops them from being successful. In the case of Riskless, I’d say he lacked aggression big time, he would go for weeks with the same size, and no one was able to push him to add even 10% more risk exposure. But he kept at it. Eventually, he was hitting bid with some decent size in a year or two.

In reality, you want to be super sensitive to the slightest cues you are getting from the market and use this information to manage your position subtly, press the most when needed, and lighten up when it’s time to close the trade. It is hard to accomplish, leaving you with another realization that you will never get the whole move, and it is ok.

While striving to be better traders, we were also scared for our seats. Shit was hitting the fan for real, especially with the recent SSR departure, we had to perform one way or another. At the end of the day, young guns are always waiting to get their chance at the desk. It boils down to either you are making money or you are taking someone’s place. Trading is an ultra-competitive and high-performance sport, with only one indicator that compares everyone on a quite fair basis — your PnL.

11:30 am trading Strategy

Since I was struggling and it was unclear whether I would make it, Riskless shared his approach to trading: Stop all trading after 11:30 am. He was super secretive about it since it was working for him, but he showed me all his stats. He was green almost every day, like 90% of the days he was green. Size — what was challenging to him. He was so comfortable with locking in $60-$120 daily that any attempt to add more size would immediately trigger higher than usual loss, creating a massive panic in his mind about how it was all going to go down the shitter.

He was stuck in the negative feedback loop; every attempt to add more size was met with an outlier loss, which was nothing by itself. But it was affecting the bottom line of consistently small wins, so he would back off all his efforts for a couple of weeks or a month after every try. It took so much heart from him to get to this position, where he could be in control of his PnL, that he feared giving away this control to get to the bigger numbers. Essentially at the moment, he didn’t want to lose this small amount he was making, and it was not letting him grow into a bigger trader.

For HFT and MoneyG, it was a tough situation. They had a consistently profitable trader who could not scale up. They tried everything: increasing his lockout to much higher levels vs. where it should have been and having regular weekly talks about using more size, they were almost begging him to start pressing more, but Riskless won’t budge. He was like a perfect risk-controlling algo. He had his own risk parameters and even if he wanted to, he couldn’t break his own behavior pattern, regardless of how lucrative it might have looked. Again it’s the exact “behavior change” you need to invoke in yourself first and then be able to follow through with. Adaptation — this is where most of the traders slip and fall. The ability to constantly adjust what and when needed is the difference between those who make it and those who are looking for another job.

These words are also valid for me. My life has taken a much happier turn emotionally after finding a job in a company with which my values align instead of being a full-time trader. In addition, my trading has lost 90% of associated stress since the number of trades I open weekly went down to very few, as I shifted my trading to 2–6 week swings vs. engaging in intraday drama every day.

MIC and other trading chat rooms.

Around this time, @modern_rock and @AT09_Trader decided to open a chat room called MIC — “My Investing club” Bao has been trading for decades, and he was Alex’s mentor. Both traders were legit, so naturally, many people were drawn to their offer. This is one of the reasons why the 11:30 strategy worked for Riskless or, rather, why our strategies were destined to stop working after 11:30 am.

MIC chat had a significant impact on the overall small-cap trading landscape. First, there are several groups of professional traders, some trade small caps, and others prefer to trade big and large caps. Small-caps biotech are unprofitable (for the most part) businesses that don’t have too many means to raise capital to fund their operations.

However, since most of these companies are unprofitable, it is very easy for predatory companies that are not making money and not running a real business to blend in with normal companies and try to raise money. There are several ways how these companies operate regarding raising money. It is more important to understand that 99% bias for all these companies is to go lower. Therefore, most of all, the spikes in price are considered a liquidity event meant to use uninformed retail traffic to dump useless bags of common shares on it.

One of the longest schemes that have been playing out for the last several years is $AMC. Adam Aron — CEO of the company, has single-handedly lured millions of retail investors through relentless promotion and various financial offerings, including introducing a release of special dividends called $APE units or giving away popcorn for every shareholder.

While an immense number of people used the stock or crypto market to dump their bags on the crowd, I doubt there is any other company or CEO who was able to turn so many people into “forced investors.” Happens when you are buying a stock with the hopes of a quick price appreciation, but it keeps dipping on you, essentially going much lower so fast that, at some point, people feel that a loss is too significant to close the trade. Therefore, people naturally decide to hold on to the bags and hope the price returns to at least breakeven.

The edge in trading these names comes from several parts:

1. Understanding who is who and whether the company is real or not. There are many well-known small-cap POS companies that constantly engage in cash-raising activities. They don’t have any other means to sustain their life cycle, so by design, they are predetermined to participate in active pump-and-dump schemes.
2. Nevertheless, understanding who you are dealing with is only 1 part of the puzzle. The second step is familiarizing yourself with how they can actually do it from the regulation standpoint. Ironically enough, even well know pump and dumps schemes are heavily regulated (if they are listed on the main exchanges like NYSE, NSDQ, and others). They have to file all the documents — in a trading language, all this paper trail is called fillings.
   If you are interested in operating within a small-cap realm, the best starting point is the Youtube series by @RickyAnalog. I respect Ricky greatly, and I have learned a lot throughout my years of following him. He is a must-follow if you haven’t already.
   Back in the day, I usually was at my desk by 7:40 am, looking for gappers within small-cap biotech names and studying their fundamentals on bamsec.com. There is no need for me to elaborate on this topic since most of what I know I learned via Ricky’s channel.
3. The third part of this trade is to get the timing right. Over the years, I saw many traders being wiped out just because they thought certain names didn’t belong to the price levels they were at. This is one of the most important lessons of all time; price action or price itself is the only and the primary gauge of what stock can and can not do. If the price keeps going up, it can and, for the most part ( it will ) keep going up way beyond all of your estimations, and this is how shorts are being blown up usually. No one loses their account when the move makes total sense. No, usually, moves that don’t make any sense at all attract most of the traders. Since there are so many people involved, this is where it all starts with “ this pos should never be trading at this level” and ends with “ omg, it won’t stop; it just keeps grinding up.”

The worst thing you can do when you are caught off guard is to take a loss with you overnight because the next day, there might be either no loss or no account. This is a pure gamble, and if you want to stay in the game, you should not be gambling but instead focusing on controlling your risk, even if it means taking a massive loss. Sometimes it is the only way to live another day…

But I digress. For years, small-cap trading was done by a tight close community that understood who is who, how to read filings, and how these companies operate. MIC founders were the ones who had a deep understanding of the whole game, and they started sharing their knowledge with the community, attracting more and more retail trading volume in these names.

The trading landscape was getting impacted by more and more newcomers to trading who were starting their journey from shorting small caps. Order flow in these names kept increasing. The liquidity kept improving, essentially attracting more players with bigger pockets to the game.

What would you do if you were an active day trading long-short hedge fund who could easily take a $5-$10 million position in these cheap ass scam names, which everyone knew should not be as high as they were? You have capital and access to MIC chat, where you can see tens and hundreds of traders shorting the same name every day around 9:45. In your eyes, this is relatively uninformed retail traffic with tight risk parameters. The only thing you need now to make money every day like clockwork is to slowly sit on the bid in one of these names MIC was shorting. You can keep propping it up when they are done without allocating too much capital until you initiate a mass exodus of the traders, which you can use to sell into your long position — this is called exit.

All these say thousand people got short, but the price is slowly going up instead of going down. At some point, all these traders will want to get out. Remember, it’s a small-cap biotech name with poor liquidity, so now all the 1000 traders who got short around 9:45 are realizing that the best bet is to start getting out of their position. All over a sudden, all these sellers are turning into buyers who have to chase the price to get out.

Eventually, MIC adjusted to it and started closing trades proactively on a timely basis. If the price is not going down by 10:30 — just get out, and enjoy your life. They coined the term “zombie hours” since all these beaten-down names would keep rising from the dead. While we were not a part of the MIC community, the actual shift was quite clear, so Riskless, being himself, was diligent with his risk management rules. Strictly at 10:30 am, he would have several alarms going off, reminding everyone at the desk that it was time to close their position. In hindsight, it was a significant adjustment and probably the best way to make money this summer of 2019. Still, I kept trading, making the hole in my account bigger. Sitting on my hands was just not possible for me.

Path of the least resistance

As a general rule, stocks tend to always follow the path of the least resistance. We, as traders, can not allow the same mental gravitation to the path to the least resistance to be happening to us in our early stages of development. Here I’ve attached a separate post with the main mistakes I kept making the first 6 months. This behavioral correction/adjustment takes a lot of work to achieve. HFT kept telling me, you need to learn to catch yourself…

While the suggestion sounds easy enough, how exactly do you implement it? How TF am I supposed to catch myself doing stupid stuff if my guts are telling me, “this it, I must be in the trade?” Overall the self-awareness topic is a subject for a separate post, and we’ll dwell on it sometime later; however, what is important — I struggled. I struggled big time, I kept shorting bottoms, kept choking trades, and kept playing in and out game without giving enough breathing room to stocks.

It’s been 6 months on the trading desk, and I couldn’t help my impulse trading. It was not looking good for me, and at this point, I was trading not for money but for my seat on the desk. One day after I got double locked out in a matter of minutes right after the open HFT, and MoneyG got fed up with my inability to incorporate changes myself, and they prohibited me from trading a live account.

Paper trading

I felt like this was the worst thing ever that could happen to me. I loved trading so much, yet I was forced to miss all the great opportunities that the stock market would present in the next several, whoever knows how many days.

How does it work? You still have to come to the trading desk, you still need to do the same everyday prep, and you are still watching tape all day long. The only difference is you sit there and wait until the proper setup comes, then place your bet on the paper and track all the ensuing entries and exits on the paper as well.

This simple-to-implement move did miracles for me. I sat in front of screens with 0 trades besides the paper ones for 5 days. As days went by, the fear of missing out evaporated little by little. The actual picture got much clearer.

After this demo experience, I went on my best green streak, and how I was trading changed a lot. I learned to be patient, or at least I got a glimpse of it. Remember we talked about risk-averse and risk-adverse traders? While Riskless had a pronounced risk aversion that was not letting him place enough bets throughout the day, I was the opposite. I was overtrading like a maniac, and this first demo experience cured 50%-60% of the FOMO I had in one swoop, allowing me to keep my seat for a bit longer. I was still unprofitable, but I showed that I can adjust, and it was good enough to buy me a couple more months.

To this day, I’m firmly convinced that trading on paper is one of the best ways to quickly stop impulse trading and get some clarity on what is wrong with the current approach. Demo trading is one of the best FOMO killers out there.

Teamwork

While trading is a solo endeavor, it doesn’t necessarily mean you must spend your days in solitude. My focus was on learning the MATA setup, which I shared here. We, as a team, worked on creating a Think or Swim volume forecast script.

First of all, regarding the MATA setup, I don’t recall exactly why we called it that. Still, we can call it the Moving Averages Technical Analysis setup for clarity. The premise for it is finding a dominating Moving Average in a trending name (it is meaningless in the chop) and combining chart patterns, say break out of 5 min candles with the shift or touch of this moving average. Here you can find an example of what I was looking at. However, It’s not something you can just make money off right away. I’m using it more like guidance as opposed to the main trigger for a trade. Suppose you think about algo-driven price action and how algos are being coded. In that case, MATA setup makes total sense since most of the algos are tracking some variety of a moving average for intraday entries or standard deviation distance for mean reversion trades.

At the time, we were working on creating a daily volume forecast. We got this idea from AllDayFaders. This is another must-follow account with an immense amount of trading knowledge. It had to be a team effort since we had to manually curate a list of the small-cap stocks in play daily and track every small detail about it: I/O, float, filings, etc. Fundamentals were assigned a specific weight significance, but the main equation was calculated based on premarket volume: the first 5–15–30 minutes volume.

The premise of the volume forecast was to spot outliers early on and treat them differently. Usually, by 10 am, we could see what names are tracking in line with it and which names are exceeding the volume forecast by a considerable margin. It was an exciting research project for me, although I was never able to achieve consistency while trying to trade off it, and eventually, I just gave up on using it actively.

If you think about standard volume distribution in the small caps, volume usually tends to fade away after 10:30–11 am. If you are spotting consistent volume after this time, more likely there is some agenda behind the price action. Nevertheless, it was fascinating to see how accurate it was when a stock produced the same volume as calculated.

Foundation for growth

While I struggled to start making anything I could live on, I established the routine framework that was helping me with getting better incrementally.

I’ve outlined several things that were working for me. It’s essential to understand that you constantly need to adjust and adapt to the market as a trader. Suppose you are more on the quantitative side. In that case, I’d assume you could focus on creating some personal gauge indicators that will allow you to deploy strategies that are more likely to win in the current market conditions.

However, when your trading is mostly discretion driven, your only option is to work on yourself. Regardless of how funny it sounds, it would help if you had tools ( or constantly come up with tools) that would allow you to overcome your current shortcomings) This is how my routine looked at the moment:

1. Goal = Start the day with your small cap fundamentals homework done. Solution = allocate at least 1 hour premarket to go through filings for all the small-cap gappers.
2. Goal = Get mentally in the zone before trading starts and avoid impulse trading.
   Solution = create a mental checklist and go over it before the open every morning.
3. Goal = Stop choking trades + focus on proper trade management. Solution #1 = take PnL off completely. Focus on adequately trading the chart with the correct stops and exits. This is excellent exercise. I traded without PnL on my screens almost for 3 months, which helped a lot with the focus on trade management. However, it has a downside: you can not allow yourself to be chopped. This is how you can get locked out within minutes if you can not see the losses you are taking. Overall, this exercise is great for focusing your trading only on reactive setups vs. anticipatory ones like scaling in the front side. Unfortunately, it took me a couple of years to overcome this kind of FOMO.
   Solution #2 — Refocus my journal review from an overview of how you traded a specific ticker to how I traded every setup in a particular ticker. When you manage a trade you are in, there are specific inflection points where the trade is still valid, and you can add or trim some size. On the other hand, there are inflection points where the setup becomes invalid. At this moment, you need to shift your mentality from trying to manage a position to a completely hands-off approach and introduce a cool-off period while you are waiting for a new setup to emerge. Instead of breaking down how I traded a ticker, I concentrated on how good each setup was and how well I traded/managed my position while in it.
4. Goal = identify 20% of the mistakes that can help the most to my bottom line.
   Solution = introduce weekly reviews. Here are a couple of examples. What I was trying to do is to find mistakes with frequent occurrence and have them as weekly / monthly goals or identify mistakes crucial to longevity ( say scaling in the frontside) and focus on eliminating them as weekly / monthly goals.
5. Goal = keep incrementally approving.
   Solution = constantly work on your mistakes. Trading is a complex way of making a living. For the most part, it’s the only job where you can put in 100+ hours a week for years and still lose money. Hence no one knows the final destination when they start, simply due to the lack of information and understanding of how it works. It’s almost impossible to get to a particular destination you’ve never been to before and probably never heard about, so the only consistent path to success is eliminating mistakes that affect your bottom line the most. Mistakes by themselves vary deeply from trader to trader. Still, the framework to success is the same: take under control what you can, focus on it, and work on incremental improvements.

Intraday trading year 1

Overall the first year is all about setting proper expectations. It is the year to try many different setups, to keep your risk super tight, and to have 0 illusions that you will be making money ( but if you are, congrats!) This first year is a constant fight with yourself to avoid doing stupid things. In a way, it is conditioning your nervous system for what is ahead. This is the time to create good habits, not make real money ( but again, if you are making real dough, congrats!)

It is all about Discipline and not having FOMO. To advance, you need a lot of screen time, which takes time to get, and you need to stay afloat in the game.

New beginnings

Right around my paper trading time, we moved into the new office. This was a fantastic place, with big windows, high ceilings, and finally, enough room for 8 trading stations and for us to chill. It was time for a brighter future and new beginnings for all of us, things were finally starting to shine, or at least they were getting ready.

Stay tuned for our next endeavors — creating a money box script for Think of Swim and diving into selling naked options on $AMZN >

Read next: Chapter 3. In search for the new edge — Trading naked — way to get a heart attack or blow up the whole desk! (in production, stay tuned)

Read next: Chapter 2. Trading Journals 38–101

— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —

Resources

1. Connect with me on Twitter, Linkedin, or hit me up on Telegram
2. Table of contents — everything posted up to date.
3. Subscribe below to get new post notifications.