EP 082: How to become the trader you wish you were w/ @FuturesTrader71

Aaron Fifield Podcast 0 Comments


This week, for the second time on Chat With Traders, my guest is Morad or better known as; Futures Trader 71.

As you could imagine, FT is a futures trader, he’s also very short-term and has been trading for about 16 years now. During this time, he was the founder of a successful prop firm and more recently, has started a brokerage; Stage 5 Trading.

First time around (on episode 37) we spoke extensively about FT’s path of becoming a trader, market profile and volume profile, and creating a legacy. This time we spoke about all new topics…

For example; how to learn a new skill, how to measure your progress besides PnL, how to remove attachment to the outcome, how FT uses a regressive risk management strategy, and plenty more too.



Lessons learned in this interview:

  • FT talks about the history of the SOES (Small Order Entry System) Bandits, and how 100’s of traders used a “brainless manual arbitrage” to make a lot of money!
  • How to learn a new skill when you don’t have a structured learning environment; FT leans on his days as a prop firm owner to explain what’s required.
  • A guide to how you can best avoid spending time on things that won’t affect your bottom-line as a trader, and a firm reminder on the power of mastering one thing.
  • We’ve all heard, “trade an approach that fits your personality,” but how do you know what’s a good fit when you’re still early in your trading career? FT explains.
  • FT shares exactly how he uses a regressive risk management strategy to make the market work as hard as possible to take his capital—if it will. Listen carefully!
  • Some of the key considerations you should think about before signing on with a broker. And the ways various types of brokers cater to various types of traders.

“Follow each trade as if it’s the first trade of the day.”

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Links and resources mentioned:

  • ChatWithTraders.com/37 – Listen to the first interview with FT on EP 037 of this podcast. We talk more about market and volume profiling and creating a legacy.
  • Dark Pools – If you’re interested to learn more about the origin of the SOES Bandits and the rise of computers, read this brilliant book by Scott Patterson.
  • The Power of Habit by Charles Duhigg – FT described this as his favorite book, which covers breaking cycles and why we do what we do in life and business.
  • Stage5Trading.com – An independent introducing broker—FT’s role is Head of Risk and Trader Development, and like we discussed, he takes this seriously!
  • FuturesTrader71.com – To learn more about FT you can visit his website, where you’ll find plenty of info and resources, and links to his daily Trader Bite’s.
  • @FuturesTrader71 – Follow FT on Twitter, and tweet him about this episode.

How to support this podcast:

  • For a quick and easy way to support this free podcast, please write an honest review in iTunes. It’ll take you two minutes, and it helps massively—thank you.


Aaron: So if anyone hasn’t heard our first interview, which was episode 37, if you want to check that out at chatwithtraders.com/37, you guys can go and listen to the first time we spoke. For anyone who hasn’t heard that yet or who might be unfamiliar with who you are, FT…

Could you give us a real quick run down on who you are and what you’re all about?

FT71: So the 30 second elevator pitch is, I’ve been trading professionally for about 16 years now. I started out in equities as a SOES trader, a SOES bandit so to speak, and moved to futures. I started out in Florida and Boca Raton and moved up to Chicago to trade futures at a prop group in the Board of Trade and essentially my entire trading career has been in a group setting or in a professional environment and now I’ve moved away from being in a professional environment to creating a professional environment.

I was running a prop shop at the Board of Trade from 2004 to about 2010 and then from there I decided to look online and start working on other things and since then I started a brokerage with a partner, the brokerage is called Stage 5 Trading, and my focus within the brokerage is not to sell the brokerage or anything but to focus on trader development. In other words, my goal is to bring, as much as possible, the experience I had as a prop shop operator – and I was very successful doing that, to the retail public.

My goal is to push back against anyone that is in the business of just signing traders on, giving them the maximum leverage and kind of shooting them off and letting them sink while they work on the next candidate. My goal is to help the industry by helping traders stay as traders for as long as possible. I’m not always going to be successful but I believe slowing traders down and helping them understand risk, and so on, will help them get closer to achieving their goal being a trader.

There’s a lot of misinformation in our business as I’m sure you’ve done so many interviews, I’m sure you’ve come across people who have said that before. There’s a lot of misinformation, a lot of undue strain on traders trying to make it and there’s this veil of secrecy that I don’t think should exist because it didn’t exist in my prop shop and we were successful.

We’re not automated traders or anything like that so we’re not giving away any secret sauce so I feel like the best thing a trader can have is a structured, dedicated, community that they can trust and interact with and that will help them move along as opposed to being with a one-on-one mentor who may or may not know what they’re doing.

So that’s where I am now and now that the brokerage is setup and it’s running, I’m moving towards creating a substantial course that takes someone who’s coming into futures or trading in general and carries them through the process of understanding all the important pieces to actually come out as a professional trader on the other side.

My goal is to now take those who want to pursue this and provide a standardized process for coming out the other end, almost like someone who has an engineering degree or something where there’s a minimum amount of knowledge that they should have and that’s the next big project I’m working on. So there’s a lot going on. The short story is there’s probably too much going on for my own health but I enjoy it all.

Aaron: Always good to keep busy though, that’s right. So one of the things I didn’t pick up on last time when I had you on the podcast, which I wanted to ask you about this time around, is the story of the SOES bandits. They were quite well known when they were around…

Can you share a little background, and some context, around who were the SOES bandits and what did they do?

FT71: Sure. So the SOES bandits started way before my time. They started around 1990. There was a group headed by someone named Sheldon with Datek Securities and what this group did was, for the first time, they managed to get level two access meaning they could see the full depth of the market on the various NASDAQ stocks and they could see what the institutions are bidding and offering on any given stock so depending on which stock is in play. The most common stocks that were in play at the time were Microsoft and JDSU, tech companies like that, and what they did was they found a way to use what’s called the ‘SOES System’.

SOES stands for Small Order Entry System and it was designed to fill small lot orders as opposed to going to a normal clearer or market maker, like Island or what we call an ECN, to fill normal size lots except we were trading anywhere between 10 and 40,000 shares per order so it was an exploit of the system and what happened with the Datek group is they figured out this way of getting quicker quotes than the traditional method by using the SOES System and being able to route these orders across the board as opposed to having to go through ARCA,INCA, Island and so on – a specific clearer. So they exploited this and then built an entire business around it. There was a point where there shop had hundreds of traders in it.

I was not in that process, that was way before my time but in 2000 I came across several people who were incubated in that process who were trading actually out of Arizona and had moved to Florida to Boca Raton, Florida, so they were trading the same process that there was a room of about 25 traders, some of whom were making ridiculous money. I mean, the Datek group in general, there were many many traders in there making over half a million dollars a year doing this brainless manual arb, just buying in front of size, selling in front of size. And that what’s we were doing for a while.

So you would have a screen that had maybe 10 level two boxes on it of various stocks and you were just constantly monitoring for size coming in and pushing the book, an institution coming in and just putting a massive order of say 10,000,000 shares to buy and then they start to move that order up because they needed to fill it and you would just be buying from them and then selling to them as they upticked and when they upticked, they upticked in what was called a ‘teeny’, which was 1/8th of a dollar, which is 12.5 cents, so that made the bid/offer spread really large on say 10,000 shares.

Some of the guys I traded with had, not that this is typical, but they would have a couple of hundred thousand dollar days doing this. So when I joined, I was trading 200 share lots. It took me a while to figure out what was going on, I had no idea what a bid is or an offer is and by the time I had it figured out 9/11 had come around and also the market went from teeny’s to decimals. So you went from a 12.5 cent spread to a penny spread and you’re doing this arb, so you’re basically acting as a market maker so all of a sudden a lot of these traders just fell out because there was no edge anymore.

So with high-frequency and the penny spread, that ended up drying up and it certainly ended up drying up with 9/11 when the market was closed for two months. So I took what was left in my trading account, which I ran up from around $54,000 to a lot more. I took that and I bought a home with it, I thought trading was done with – I bought a home in West Palm Beach and was looking for something else to do when I found out that there were still some opportunities in the equities side and I joined Schonfeld in Boca Raton and traded with them for a while and then found out about futures and a friend of mine and I ended up jumping into a car and driving for 20 hours overnight to Chicago to find a spot in a prop shop to trade futures. So my stint in the SOES environment lasted about a little over a year.

I could tell from the very beginning that it was all based on how much money was being made. Compared to the investing and the personal trading that I was doing before it, you could tell that it had no sustainable value overall but, as I said, there were a lot of Porsche’s and Ferrari’s and so on parked outside and there was the allure of showing up. My first day showing up, I sat behind someone who was up $18,500 in the first hour. It’s hard to resist that. SOES was something that was cheap and it was an exploit that, just like all exploits in the financial market, it lasted for a while, a bunch of people benefited from it and that edge disappeared.

Aaron: Really interesting to get your take on that, and the SOES bandits, I noticed, are actually really heavily profiled in Scott Patterson book, Dark Pools. So if anyone listening is keen to hear more about that, that’s a good place to look and also if you want to hear more about FT’s story about how he came into this business, check out chatwithtraders.com/37 for our first interview. So one of the topics I’d really like to dig into now is trader development…

Let’s start by talking about what’s the process of how to actually learn a new skill.

…I think this is a big problem that a lot of traders actually have is knowing the process of how to learn a new skill because when we’re in school, we have structured learning environment but trading we’re pretty much on our own with no structured learning environment. What’s your take on this? How should we go about learning a new skill? Just taking it back to basics.

FT71: That was the biggest puzzle I had to face when I was in a prop shop in futures because that’s the first time when I got exposed to having to responsible for another trader, to train another trader, for a portion of their profits once they made the turn. It was a big part of my preparation for my own prop shop. How do we learn most effectively? I did a lot of sports growing up, I played a lot of soccer (you guys call it football) and basketball. By the way, when I was hiring, I was always favored those who were in a sport on a competitive level.

Actually, I always favored anyone that was doing something on a competitive level even if it’s chess or music or whatever. These all required the same level of focused, deliberate, repetitive consistency and this is the biggest challenge that I see with traders. Traders like to come in they want to take every ounce of knowledge they can get and then they try this and dabble in that, try that and dabble in this and there’s really no measured consistent repeating process which is required for the skill to eventually show that trader what works, what doesn’t, what their weaknesses are and what their strengths are and that’s really important as it’s an important part of the process because you want to play to your strengths.

My strengths is reading order flow but I cannot trade just around order flow so I create a hypothesis on the day, several of them, but I’m really focused on order flow to the point that if my hypothesis is wrong, the damage is not that great and I can always improve my position in the market. To answer your question, what traders need to know is that this is not going to be easy and I know that it sells more books, courses, tools and indicators to say “All you have to do is install this” or “All you have to read this amazing book” and you will have it figured out but the process usually requires longer than you think, is more expensive than you think and it requires a lot more dedication than you think and you will learn a lot more about yourself when you go to trade than you think you will.

In the end, the thing I always told my traders when I was interviewing them is “I can’t guarantee your success, but I can guarantee that no matter what, when you walk away and come out the other end whether you didn’t make it and had to be cut from the prop shop, or made it past your agreement and independent, you will know yourself a lot better” but the process has to focus on the stages of competence.

It’s understood that everybody comes in and they think they know what they need to know or they think they can acquire it by reading books or looking up blogs and so on but what they don’t know is what they don’t know. They have no idea what lies beyond their field of view and so what you need in that situation, first and foremost, is someone else who knows that you can trust. That someone else can be a person or a group, preferably a group, who can help you expand on the knowledge without adding too much baggage, too much fluff and without misleading you and it’s very hard to do in the trading business because there’s a lot out there that is very misleading.

There are a lot of mentors who have never traded professionally. There are a lot of program or indicator or system makers who have not seen success in that system and therefore are selling it – things like that. I’ve seen a lot of things which I was completely oblivious to before 2009 when I came online and started to look around. That’s why my focus is to cut through all that.

I see a great benefit to just say “Here’s what it’s going to take, it’s very ugly. It seems very difficult to overcome at first but in the end, it’s all contingent on your ability to recognize within yourself what needs to change and to make that change.”

So to answer your question, what does it take? It takes a little bit of help and the understanding that much of the time that you’ll focus will probably be on learning a trading system or edge that will make money but really what it’s going to take for you to make money is not some trading system or an indicator – it is your ability to execute something that has an edge in the market. I don’t know if I answered your question there.

Aaron: Yeah, I think that was a really good answer and we’re going to go a little deeper into this as well…

How can we avoid spending time on things that don’t matter?

…How can we be aware or conscious of the things we’re spending time on that they’re actually the right things that we should be spending time on? How do we know where to funnel our focus?

FT71: So that’s the part where it helps to have a group, to be part of a group or to have someone who has some 10 year experience in the market. They help narrow that field down for you. I’ll give you an example, I had an almost a 92% success rate in my prop shop and I define success as a trader completing their three year contract and leaving with positive equity, including membership – that’s my measure of success. My job was to corral that energy.

When someone comes in and they think “Oh my god if I do this I notice that this happens and this happens” and they throw a fucking 500 lot in the bonds to make millions of dollars in one day – “No, we’re going to focus on just this today. Today you’re going to focus on getting in long and scratching the trade. That’s all you’re going to do.”

You need to build trust in your ability to take yourself out when things aren’t working right. You need to build trust in your ability to react to the market without emotion or with as a little emotion as possible as opposed to going out and finding the best curve fitted, optimized moving average possible for the product that you’re trading. To me, that is not something you can grow from.

I think you had an interview with Jeff Davis, who is a friend of mine, great guy and he said a lot of the exact right things as far as just technically push enough to find something that suits your personality that you can then look for an edge in. In other words, test it out whether it’s by clicking in a simulated and penalizing your exits to make up for the unrealistic fills or whatever. Push to the point where you can simply feel comfortable doing something and living with it and then once you’ve done that, you can refine that particular thing and it could be as simple as “I will trade with Fibs.” or “I will take the reversal trade after the market opens and that’s my trade of the day.”

If you can master that one trade, or three of four signals, or three or four setups – if you can just become the supreme commander of those signals, I have money that’s going to stand behind you and say “Okay, let’s turn it up. Let’s go from two lots to trading 10’s, 15’s, 20’s, 500 if we need to.” and that’s the way to make money.

It’s better than this process that I see traders go through where they try what Aaron’s last guest is doing, then the try the next guest and then they get on Chat With Traders later and decide automation is maybe their thing and then they fall back, “Maybe I should test moving average cross-over, this guy’s using Stochastic’s so let me look at that.” and what you end up with is a whole world of traders who have invested amount of time, a commodity that we can not recover, just bouncing from one thing to the next.

All of which could work, all of which might fail, but they have spent so much time at the beginning of the learning curve over and over and over that they have not been able to master that one thing.

So to answer your question, if you find yourself constantly changing and changing and changing the approach that you’re taking to the market then you know something is wrong. For me, it was scalping – order flow, and when that didn’t work anymore I started to look at pretty much everything just like everybody else but then I started to look at volume profiling. I went from market profiling to volume profiling and, with detailed notes, I started to notice that there’s certain things that happen consistently just enough for me to be able to exploit them with size and if I can exploit them with size and keep my targets and stops modest, I’m able to create a positive outcome overall – a positive expectancy.

All that’s left is me to be confident enough in my numbers to put on a good amount of size and that is where the money is made. The money is not in buying the low, selling the high, selling the high short and buying the low back. I think that’s a fantasy. The money is in grabbing small definable chunks of the rotations that happen throughout the day in the time-frame that is suited to you, that you feel comfortable in.

Some people feel comfortable in a 15 minute time-frame, some just want to be in and out in a matter of a few minutes. Just whatever is comfortable for you, the market is there to offer you the opportunity to make money or lose money depending on whether that time-frame is in favor or not.

I know that’s a length answer but I’m combining a lot of different experiences that I’ve had especially with our current clients in our brokerage and my focus is always to not say “Hey look at this additional thing, look at this additional thing.” My focus is constantly to “No, cut it down. No you don’t need 12 setups. You need maybe three or four, maybe five. Become incredibly good at these five setups, whatever they are and that’s where you deliberate, focus practice should lie.

That’s where all of your journaling, tracking and statistics should be built off of – these three or four things that you’re exploiting on a daily basis.” That’s the way to know if you’re completely lost.

How do you narrow down the field? You narrow it down by knowing “I can not be like a weathervane, just switching directions depending on the prevailing wind for that day.” If you’re doing that, then you’re chances are you’re losing something that’s very very important, it’s not the money in your account, it’s the time that slips by and reduces your chances in being able to make the turn and make a living at this in a reasonable amount of time.

Aaron: I really like your emphasis on the time there, FT. I think that’s a really important point to make. One of the other things you said in your response there was finding an approach that fits your personality and this is something we hear quite often, especially on the podcast. From speaking with a number of listeners, I know this is actually something they struggle with. They’re like…

“Well how do I know if something fits my personality? How do I find that? How do I know if this approach is a good fit for me?”

…because the chances are even if you do find an approach that is a good fit for you, you’re still not going to be consistently profitable with it right away. It’s still going to take some time so do you have any tips and pointers for how someone can identify when a strategy or an approach to trading is well suited to them?

FT71: Okay, that’s a fair question. To answer that, I would have to look at the specific person but let’s take you for example. You started out wanting to trade. You deposited, I believe it was, $5000 into an account and you wanted to learn how to trade and that led you to exploring “How do I trade?” and I believe that led you to this broadcast which is a very very successful broadcast. Do I have the history right?

Aaron: Essentially, yeah.

FT71: Okay, so Aaron, how would you like to trade wheat using moon cycles? How does that sound to you?

Aaron: That’s not appealing to me.

FuturesTrader71: Okay, that doesn’t suit your personality. How would you like to trade corn using the price of sugar? That maybe something you will be interested to look into, as long as there’s a correlation? Maybe not but if you do the study and find that correlation, you’ll suddenly find yourself absorbed by this approach. For me it was “The NASDAQ is moving up, the S&P is sluggish, the Dow is starting to move up. I’m buying the S&P, I’m ready to sell the NASDAQ if it doesn’t continue and the S&P starts moving down and I’m going to do that 500-600 times a day trading anywhere between 2000-3000 round turns a day.” That’s all I did when I started training futures and that appealed to me.

It was quick, if I was wrong I was immediately out but overtime it didn’t feel right anymore because it seemed like I was taking tremendous risk for very little return so in my process of exploring other things, I felt that Fibs may be the thing to look at and I got excited about studying Fibs and Elliot Waves and Drummond Geometry and Gartley’s and I’ve looked at all these things but there was always this sense that I don’t get it. This makes no sense.

Floor trader pivots, I’m sure you’ve heard of those, mathematically based numbers that come off of yesterday’s OHLC that are computed news for today’s trading. Mathematically that sounded okay but to me, my personality is such that wanted to understand what is the market trying to do when it is moving up? What it is trying to do when is is moving down? And why does it sometimes move down with no volume and sometimes it moves down with a lot of volume?

So organizing the information in a way that explained these things that appealed to me gave me a hope. So I looked for an explanation in market profile but market profile uses 30 minute time-slots and doesn’t take volume into account at all but when I started to switch, and this was by accident – my trading software which was a CQG integrated client had this option to turn on these volume bars and I turned them on and in fact, on my ladder on my TT X_Trader Pro, the ladder had these bars on the side that showed you how much traded at each one of the prices up and down the ladder and I started to notice that when prices moved towards prices that had very little volume – it tended to bounce the first time as it pushed to those prices.

It would take a small bounce before it failed and it would push through and then it would pull back to that low volume price before it continued and so I started to look at “What if I looked at things from the perspective of volume per price over time?” so I could see yesterday’s volume per price, last weeks, last months, everything since the last swing low or swing high. That made a lot of sense to me and so that became the thing that I got excited about and threw everything else away because that made sense to me. It suited my personality.

I had this particular curiosity whereas we have other traders within Stage 5, for example, who trade tremendous size who are going basically by a Stochastic type of read on multiple time-frames. If I talk to them about volume profiling, they would get glassy eyed and start to yawn. They found what they like, what makes sense to them, what excites them and they’ve spent time focusing on those things.. deliberately testing and checking and playing back bar by bar what is happening as the day develops over time.

Pretty much every trader I know that has gotten anywhere with trading, and I’ve known some really big ones, they’ve [INAUDIBLE] field of “I trade by feel, didn’t do very well. Decided forget the feel, I’m going to go back and just go bar by bar by bar and study what the market is doing. Whether it’s pattern trading, candlestick, using some sort of indicator and so on.”

Each one of those people got to the point where they suffered enough with the poor outcome of their effort to go back and say “Let me dig down and find just what I need. Just basically bare-bones cut back to exactly the minimum amount of information I need to make a decision.” and it boils down to what is the statistically probability of something continuing after a specific event? We have a large bar, an expansion of range on an expansion of volume then every time that’s happened or most predominately when that happens we generally get a continuation, another expanded bar on higher volume but not as high as the first time it happened. Those are what I call impulsive and continuation trades.

I can hardly catch the impulsive trade because it happens without warning, that’s big money coming in and out of the market but I can certainly try to do something with the continuation trade and a continuation trade has a 78% probability of, if it’s an impulsive move up, then a continuation trade generally has a 78% probability, after pulling back, of testing that first high.

So imagine the market moving up all of a sudden with great strength and then it pulls back, creates this flag, and 78% of the time in the S&P Mini’s, it will retest that last high – the original push. That’s something to really get into.

It’s really a function of trying a bunch of things and then focusing on shedding everything else. Whereas most traders spend a lot of time just accumulating and accumulating and accumulating and never really shedding. They’re looking at so much on their charts, it’s impossible to make a decision without second guessing it. So that’s where the word’s “Find something that you’re comfortable with” basically, essentially, means sure go out there and explore but eventually narrow it down to something that you really like and make it as simple as you can.

Aaron: Okay so just to take it the next step and to continue on this point, do you have any suggestions for how developing traders may be able to monitor their progress because the reason I ask that is because, like I mentioned just before, usually when you come to start trading a new strategy or take a new approach to the markets, there is inconsistency in the beginning and often for the first few years…

Is there another way to measure your progress besides profit ‘n loss?

FT71: Great question. I am very anti-P&L as a measure of progress. The example of that is if you look at any profession in which there’s a pretty sizable demand meaning there’s a good payout. Think of Cardiologists or Cardio Surgeon or a Brain Surgeon- there’s a high demand for that kind of skill-set and so we pay a lot for it. Imagine if you needed brain surgery and your surgeon happened to have measured all of his progress throughout med-school, his/her residency and fellowship and everything else was simply making the decisions on your health care based on dollars they earned. “So I am going to do this particular procedure even though you may not need it because it gives me the maximum profitability or I can take care of the same issue by putting you on a course of antibiotics which will make me $100 instead of $100,000 but may save you from going through risky surgery.”

So if we measure by P&L, we find that the world would be in a much worse place and that is exactly what happens with trading. If you’re a trader who’s listening to this, and you spend much of your day trading while your P&L is flashing on your screen, you are essentially putting yourself in a situation where it’s very very very difficult not to start trading that P&L – in other words your trading decisions are not based on market behavior, market structure and the auction. They start to become something that is based on how you feel about the amount of you’ve made or how you feel about how much money you’ve lost.

You’ll notice that most traders who are trading within their plan, they trade very little. There’s a lot of space in between trades because they’re being patient enough to wait for the next setup. Traders who are losing money generally have their P&L on their screen and generally are trading minutes apart. It’s unrealistic that on good days, they have to wait a half hour, hour, maybe two hours in between trades but on bad days they’re waiting two-three minutes and that’s because they’re measuring their performance with their P&L.

If you want to measure your performance, you have to track a little bit more information mainly you need to track your errors. That’s a huge thing. I have shown, in the past, that I have taken someone’s live trades, someone who is very diligent about recording each trade and whether it fit within the plan or if it’s an error trade. Error trades are things like trades where you took a long when you should have taken a short, you have fear of missing out (FOMO), you have chased the markets waiting for it to get to your price, taking someone else’s trade – in other words, there was no trade for you but someone said they just got long and that person just made money on the last trade in the chat-room or on Twitter or whatever so you just decided to jump in with them – that’s an error trade. A technical error trade meaning you click the wrong button or something, and there are two others.

If you track those errors and you take those errors out of your performance, you would absolutely astounded as to how much those errors cost so your goal, as a trader, is not to look at “How much money did I make on a daily basis?” It’s nice, that’s why we’re here – we’re here to make money overall but just like the doctor, the surgeon or the engineer, your next trading decision is irrelevant of what your P&L is. In fact, your current trade is absolutely discrete in nature meaning it has no relation to the prior trade.

So your P&L is creating this artificial link in between all of these trades that are completely unrelated. Whether you made money on the long last time, does not mean you’ll make money on this long this time because the short may be in order. So it’s better to track, first and foremost, is your execution in line with your plan?

You need to start tracking your errors and you need to start tracking how each trade has performed on its own and the way I like to track a series of trades is not through overall P&L but through expectancy. So we’re looking at, essentially, what the average gain or loss is over a large sample and the minimum sample size for anyone to consider whether or not they have an edge is probably about 50 trades – the absolute minimum.

So your stringing together this expectancy and we’re looking for expectancy in terms of ticks or points instead of dollars. Let’s keep dollars out of this. Let’s keep dollars to book keeping on the weekends but during the trading week, you want to track “Here’s my plan, here’s how I executed all my plan.”, “I executed every trade on my plan.”, “I executed one out of five trades.”, “I executed five out of five trades.”

Who knows, but you want to focus on how are you interacting relative to what you planned to do. That’s so much more important because your exercise, your attention to become a professional is on the moment-to-moment execution, not the fact that you rode a 10 point run in the S&P on a 12 point range day and you’re a superstar. To those people, I say “Watch out. Watch your risk, you’re about to get whacked by the market because that sort of thing gives people false confidence.”

But even if you’re trading for me, and you came to me and said “Look, I lost $5000 this month but here’s my log.” and I see that you have essentially followed your plan, for the most part, and you have very few errors I would say “Great job, keep going.” because it just means that your executing your plan but your plan does not have an edge for that particular period of time and every edge disappears and reappears and disappears and reappears.

There are times where the market’s imbalanced, there are times where the market’s trending and you may be someone who has a plan that has more emphasis on balance than trend so you will lose. It’s kind of like an automated trading system – everybody has an edge for a period and everybody has a draw-down for a period, it’s just the nature of the business. Does that make sense?

Aaron: Absolutely, that was an awesome answer. I really liked how you explained that. This next question might, sort of, prompt for a similar answer but I’m going to ask it anyway and you can give me your take on it…

Traders are often attached to the outcome, now that’s quite a problem. What would you say about this?

FT71: Yeah, huge, huge, huge issue and I know there are some trader psychologists who focus all their attention on this. I’ll try not to get spiritual on you – attachment is a key source of suffering and I’m not a Buddhist or anything like that but it is true. Let’s take the typical new recruit to my prop shop, so I put up $25,000 in futures for the next trader into a sub-account, I go out and do this extensive process of selecting a new trader – a lot goes into that and then that trader comes in and starts to go through a course of understanding what a futures contract is, how to create an index and all this theory and that’s about a week and then very quickly they switch over into a simulator and understanding all the different order types so still a technical part of the process that we’re about three weeks in then that trader spends about a month on sim, and the month on sim is really dedicated to the process of watching the market tick by tick by tick from the time they get in to the time they leave, documenting what they’ve done and they develop an understanding of how their particular market flows and all traders start out on a thin index like the Dow, something slow enough to follow along but I never tell them “No, you need to trade the Dow” or “No, you need to trade Crude”, “No, you’re going to do the Euro stocks or the DAX” or whatever.

It’s really a function of looking at different markets and deciding which one suits your personality, sort of – which one is not boring you to do death really. So once they’ve done that, they’ve pretty much accumulated all the technical skills that they need and have a false confidence in their edge and I know this and so they start to trade live. It takes a trader a process of burning through, out of the $25,000, they’ll burn through about $18,000 in general. Somewhere between $15,000-$20,000 so we’ll average about $18,000 in losses as they work out their issues and so on.

So the technical side of things really gets all wrapped up at about five to six weeks and then they spend the next four to six months getting over the personality psychological problem. The great majority of the cost of backing a trader or turning a trader from an absolute novice, who has no idea what a trade is, to someone who’s clicking every day and consistently seeing a positive outcome on most days, 80% of the time is spent on the psychological personality issues and a huge chunk of that 80% is the attachment problems – what I call the attachment problem. It is the fact that we are unable to let go of what has happened and to look at it for what it is.

The fact that you lost money yesterday because yesterday was a choppy day or whatever and it wasn’t your type of day – you have to look at that in its own box and you have to take that box and kind of put it away and look at today as its own discrete new session just like you have to look at every trade today from trade to trade to trade as its own discrete outcome and each discrete outcome has an equal chance of either winning or losing, 50/50, even though you might have a 70% win rate, even though you might have a profit factor of 1.5:1 or something – it doesn’t matter. The very next trade has an outcome that is absolute unknowable and I think I talked about this in our first session but it’s so hard for people to see that.

I’ll give you an example, imagine if Messi, every time he would go to the goal he would miss, he would take a shot at the goal and he would miss. Imagine if, for the rest of the game, he is measuring his next shot at the goal based on the last shot. “Okay, I went too far to the right so now I’m going to shoot to the left and I’m doing with the heartache and I’m doing it with anger and resentment and I’m disappointed in myself.” Just imagine if that happened every time he kicked the ball – he would be a terrible player just as there are many many terrible players in many many sports who are angry at the fact that they missed an easy shot or they should have smashed the ball and they hitting it outside of the line in the tennis court or whatever.

What you have to do, as a trader, is the same thing you have to do as an athlete and that is to recognize that every contact you have with whatever it is – the market, the ball – every contact is discrete. Its outcome is absolutely judged within itself and that is so hard for people to get.

Now don’t mistake this with the fact that you need an overall edge that if you string all of these discrete outcomes together, you get an end sample of data and the overall outcome of that entire sample has to be positive, it has to be profitable, in other words you cannot have a system that loses 70% of the time and makes 1:1 profit/risk or profit/stop and expect somehow to make money. It’s mathematically impossible.

But if you know that “Hey, my very next trade has absolutely no connection with my very last trade then I can trade freely. I can just look at the market for what it is right now.” and that’s detachment. So detachment should not be mistaken with carelessness like when I say “Hey, Aaron, you need to be detached from the outcome of what’s happening.” It doesn’t mean forget about risk or “I don’t care what happens.” that’s not detachment – that’s just carelessness, foolishness. Detachment just simply means “I am not defined by this trade.

I am not define by a series of today’s trades or this week’s worth of trades or this month’s worth of trades. That is not who I am. I’m not a good trader just because I had a good month. I’m not a bad trader because I had a poor month. I am just trading my plan and my plan says that if I follow the process and follow my risk rules then the overarching outcome is going to be positive.”

That’s what happens to people who get emotional or fight the market – they are in a deep process of attachment and let me tell you something – this is much easier said than done. It requires an awful lot of maturity and introspection and most importantly it requires a tremendous amount of self-awareness to understand that “Oh look I’m starting to get hot here. I’m starting to get irritated. It’s time for me to take my hand off the mouse and go for a walk, go make lunch, go refill my cup of coffee or whatever. Let’s break the cycle.” and that’s the old cue routine reward that’s covered in “The Power of Habit”, one of my favorite books by Duhigg. You have to break that cycle, and the only way to break that cycle is to bring light to it in the form of awareness.

So if you find that you took a great trade, you wanted to get long in the ES today before this rally up – you took a long and you just put your stop and that stop happened to be the low of the day and the market hit your stop and it turned around and ran up 16 points like it did today. You can’t attach all this “They’re watching me”, “I’m cursed”, “Nobody can do this”, “It’s a lie that people can trade and make money. This is all rigged.”, “This is all for the big guys.” – none of that is relevant.

You have to understand that there is a statistical probably that your stop is going to be the high of day or low of day and it just so happened that time that was your time and if you look at it from a journaling perspective you’ll find that that occurrence, the fact that you caught the entire range of the day or the fact that you got stopped at the high or the low of the day, the occurrence is a lot less significant than your mind thinks it is and the mind thinks that it happens a lot more often and you’re the unlucky guy because you have this strong attachment to wanting every trade to be a winner and that’s what most people do when we do a trader intervention as a normal feature of being at Stage 5.

I did a trader intervention on a guy named Michael today on his live results and I really wanted to impress upon him the fact that how he remembers things because the issue he’s having really is he is not keeping good track of what’s happening, he has this confirmation bias in his mind – he’s remembering things not really as they are and we all do this. We spend a lot of time avoiding the loss. I can not, as a professional trader, spend all of my time figuring out how I can avoid a loss.

For me, I look for a measured loss that is balance with a profit target for every trade and my job is to take every trade. If I can manage it a little bit better because I have an insight, maybe the market’s not moving in the direction I’m looking for very easily or it’s moving in the opposite direction very easily or some size is coming in and pushing the market in the opposite direction, I might use that as a queue to reduce my unit size. I might go from a 48 lot to a 12 lot or a six lot but I still have to take the trade because I know that I can not attach myself to the fact that my last trade was a loss and so on. Does that make sense?

It’s really an important topic and it’s really hard to get beyond it but it’s a big part of those people who are struggling to make this happen. It’s a big part of the issue, just understanding that what happens right now is really not connected to what happened last time and can not be connected to what happens in the future because the past is unchangeable, the future is fabricated, all I can do is focus on what’s the trade right now and saying it is easy, I know, but it’s your job to sit there and really focus your attention on the idea that I have to follow each trade as if it’s the first trade of the day. Follow each trade as if it’s the first trade of the day, all day, every day.

Aaron: Wow! What a brilliant answer, that was really really good. I’m pleased I asked that and thank you for going into so much detail with that answer. I think that’s going to help a lot of people listening to this podcast right now. One of the other things I wanted to ask you, while we’re on this subject…

Do you have any tips and pointers for how to properly manage periods of draw-down, or periods of losing trades, when you’re on a run of losers and you feel like nothing can go right?

…I know you kind of hit on it there with not getting attached to the outcome but how should a trader properly manage a draw-down and maybe if you could touch on the risk management aspect of that as well?

FT71: Okay, that’s a really big part of staying in the game. So I could tell you, in my career, I’ve gone through rough patches every single year that I’ve been a trader. If anybody has ever told you that they come in and they make huge money every day of the year, every year, then you’ll want to check that traders credentials. The fact is, most of the money is made in a short period of time – a short segment of the year.

The rest of the year is simply staying afoot with the market so that when that opportunity comes to push, for example, the China correction in August, the big drop, you had to have been in the market and consistently in the market and following the same routine all the time to be able to participate in that in any meaningful way and part of the process of having a few short weeks of really really good trades, good returns, a lot of weeks of just grinding a long making a living just like everybody else but then there’s also that rough patch.

We call it “the rough patch” and I’ve had rough patches that have lasted anywhere from two weeks to 10 weeks and they come and go with time and most of the time, they simply force me to go back to stage three of competence – what we would call conscious competence, in other words, consciously, deliberately, “focused-ly” following some sort of plan or our original plan or a modified plan to suit the current market conditions.

The way to manage rough patches is to have an understanding of when one has occurred and the way you know one has occurred is to look at the streaks that you have and this is, again, the conversation is always going to go back to really good record keeping – you’re running a business.

Just imagine you’re running a bakery or an auto-dealership or something, it would be crazy to think that you’re selling something or you’re running a business without some really accurate book keeping. Trading is a business and book keeping is a huge part of this business and so you can always go back and understand that. For me, a losing streak is four consecutive down days in a row and I’m speaking about consecutive down days where I’m actually doing what I’m suppose to do as opposed to going off the handle and starting to fight the market or something – those don’t count as consecutive down days, it just counts as me being emotional and stupid which means I need time off and that’s what I force myself to do is just to detach, just move away but if I have four down days and I’m following my plan then it tells me that something has dramatically changed and so my response to that is to– and I’ll go into how I’m managing risk through this process, my response to that is to simply take the following day off.

The probability of being down four days in a row is 0.5 which is a 50% probability of losing to the power of four so there’s a 6.25% chance that I would have four losing days in a row so it’s like flipping heads four times in a row. So it’s 0.5 to the power of four, or 6.25%. I know that, for me, to hit that kind of probability – that’s almost Two Sigma or the second standard deviation.. wait, I’ll back off the statistics a little bit but for me to hit that – it’s pretty hard.

For me to hit three down days in a row, and that’s down days meaning I’m down on my P&L plus my daily fixed costs (rent, software, all that stuff broken down on a daily basis), the fifth day, I’m off. I’m not trading the fifth day. The fifth day is me watching the market, doing the homework and everything – watching the market and I’m spending the day just going through trades from the past, just running through what has happened, pulling up higher time-frame charts and really trying to see the goals to see, “Has something changed dramatically enough in the market to tell me that some thing’s wrong?”

In fact last week was one of these weeks where the market was dramatically unusual. We had several days where the market gapped up in a row and never closed the gap, it just continued in the same direction. That’s unusual behavior. I didn’t have a draw-down during that streak but it tells me be careful, something has changed.

How do I manage the losses or the risk intra-day? I use a regressive risk strategy and so let’s say just for relevance sake let’s say that I generally trade 10 lots in the ES and if I start out the day and I’m trading 10 lots and I take a trade and I take a loss and my daily loss limit let’s say is $3000 per day which means that my average up day needs to be around $3000 per day for me to stay in business in the long term. If I reach a third of the way down then I am cutting my size to six contracts. If I get half way to $3000 down then I’m only trading five.

If I get three quarters of the way down then I’m trading two and I continue to trade two contracts until I hit that limit and it’s very rare that I hit that daily loss limit but I want to hit my daily loss limit with the minimum size possible now that’s not possible if you’re trading one contract in the futures or a small share size in equities but my goal is not to make back the $1500 that I’ve lost this morning or the $2500 or whatever – that’s not my goal. My focus is not the P&L. It really isn’t. It took me a long time to actually be able to accomplish that but my goal is to find my alignment with the market.

I’m going to repeat that – my goal is not to make the money back, my goal is to find my alignment with the market. In other words, get in the zone and get in gear with the market to find that wave to be able to recognize that wave that’s coming and to be able to paddle my surfboard on top of it and to finally stand and ride that wave back to shore.

That’s my goal and I’m not going to be able to do that by insisting on trading 10 lots and 10 lots and 10 lots and taking losses and then boom, five losses, five trades on a 10 lot and I’m out $3000 and I have to stop for the day. That’s not going to help me.

What I want to do is hit that $3000 loss limit with my smallest size possible because if I can’t accomplish that with two contracts where I can find my alignment and start building my account back up with a series of really good positive trades then I’m not giving myself enough sample size or enough samples of trades to be able to find that alignment. So imagine the opposite, imagine if you traded 10 lots and you have a $3000 limit for the day before you have to stop for the day. Imagine if I go half way through and I lose $1500 and then all of a sudden I put on a 20 lot trade and that 20 lot trade wipes away the rest of the $1500.

So out of the $3000, I was able to participate in the market twice with two trades. Two trades is not nearly enough to show me that something is wrong or that my plan does not have an edge. My goal is to maximize it. If I’m going to give away $3000, I need to do it with as large number of trades as possible because what happens is eventually I start to find what the market is looking to do and I start to find alignment and if I cross and get down to $0 to $1500 to $2500 to $2800 and all of a sudden I find myself from $2800 down on two contracts, I start to come up to $2000 and I’m back to four contracts, I get to down $1500 and I’m up to six contracts or five contracts.

Now I have alignment, now I can start building that position back up. I have the confidence to push those trades or to take the trades that are paying off. I’ve found the edge again and I’m building back up. To me, every other way I’ve tried for myself and my traders has not worked. I’ve had traders use a constant– doesn’t matter how far you’re down, just keep trading the same size and most of the time they just limit out for the day and the account is locked and they’re done for the day.

What I do is I regress. I look for a regression in the amount I’m trading and my goal is to create as many opportunities to read and trade the market and I know that most people don’t do that but if I hit three days in a row on limit using that method – something is dramatically going wrong. It really is.

If you’re trading one or two lots, just start out with your two lots, half way to your limit, let’s say your limit is $600 – you’ve lost $300 on your two lots, switch to one lots and get really picky about your trades. Just find the trades that you are most confident in, that you have the highest probabilities on and stake your one lot on that and it should give you about four trades before you lose the entire amount.

What you don’t want to do is take your two lot trade, lose $600 on one trade for the day and that is it – that’s a very binary way to lose money. My intent, always, in trading is to make the market work as hard as possible to take my money away if it will take my money away and it often does but I want to do it on as many trades as possible. I want to do it fighting, not the market, but I want to do it fighting the negative probabilities. Finding that positive probability, the alignment with the market. I hope that makes sense?

Aaron: Yeah, absolutely. One of the things I did want to ask you before we wrap this up here, and I actually wanted to ask you about it last time but we sort of ran out of time then also. Just a couple of questions around brokerage, you’re obviously the right man to ask. When starting out, opening a brokerage account can be somewhat of a daunting task…

What are a few things that traders should take into consideration before deciding on a broker?

FT71: Okay, so even though I’m affiliated with a brokerage, the brokerage is a way for me to fulfill a vision and eventually I want to get back to prop using the brokerage – being able to vet people out through the brokerage. That’s my goal. So my comments are not going to be from the perspective of “Hey, come to Stage 5 Trading. We are the best of the best”, that’s not the goal.

What I want to say is you want to be with a brokerage that gives you as big a number of solutions to whatever trading method or software that you want to use as possible. Stage 5 Trading is an independent introducing broker, in other words we have relationships with multiple clearing firms providing many many many different types and combinations of software and our brokers are trained to be able to find what it is you’re trying to do and to match you up with the lowest cost solution that actually fulfills your need.

Keeping costs down, especially at the beginning, is quite important so we want you to connect with a piece of software that gives you the data that you need without having to pay additionally for data or to give you the software and charts that you need without having to pay additionally for charts. Sometimes you have to pay for additional charts because of the features that you’re looking for. So having a broker with a vast number of outlets for solutions is important. The big thing about brokerage, and I wish they would change this at the exchange level, is the fact that people are out there advertising $300 per contract margins – that is just 8% or 7% of the required exchange margin in futures.

So for the S&P, the required exchange margin is around $5000 and that $5000 is really 1:20 leverage compared to the value of the S&P 500 so you’re already getting a lot of leverage with the exchange margin and then you have these brokers out there that are giving you 10x that – so 200:1 leverage and what that leverage is doing and people see that advertised everywhere so they think it’s important that somehow they have to have $500 margins – we don’t want to do that.

We have access to that and certain certain certain circumstances and I manage risk for Stage 5 as well as monitor traders, there have to be some really exceptional circumstances, a lot of experience or good streaks or something that would merit someone getting that much leverage but we want to delever people. We want you to trade at 50% of required margins. We want you to slow down. That’s the thing that most brokers don’t do and I think eventually they will.

We want you to slow down, we don’t want you to trade 10 lot on a $5000 account. You’re going to kill yourself within a week or two and it’s a waste of your time, it’s a waste of your money, it’s a waste of our time and it’s a lost opportunity for everybody including the trader. We want to avoid that, we think that’s a disaster. It’s kind of like handing a child a loaded gun, the outcome is not likely to be good.

So a broker who is concerned about you and understands traders and trading should be helping you manage your risk and that’s what we do best, I believe, on a best effort basis. We want to give you the tools to help manage your risk, we want to delever you, we want you to start slow. You know, $500 margins benefit the broker. Every broker wants you to come in and trade 10 lots and trade and trade and trade and churn because the broker only gets paid when you trade live. So they want to give you as much buying power as possible.

I’m not interested in making money off traders right now, I’m interested in a longer term relationship which includes the process of being in this community. It’s very important for me to have quality traders as part of our chat community, our weekly webinar community and helping us build a sustainable long-term business and a lot of traders who start out trying to trade but their job gets in the way, it gives us an opportunity to put them in our S&P automated trading system – a professionally created trading system or to invest their money in managed programs, managed funds that are fully regulated, fully transparent, things like that.

I want to mention that investing in futures in not suitable for everybody but at the same time we want to make sure that we slow someone down. If you have a broker who’s very anxious to quote you a commission, to give you your login and password and that broker is gone and they’re not doing anything for you, they’re not informing you, they’re not helping you trade better, they’re not intervening – this is a typical structure that I see in our industry and this is what we’re changing.

We want it to be a more personal thing. Name anyone in a chat room out of 200 some odd people that are in there on a daily basis out of more than 2000 accounts – I’m able to tell you something about that person, I’m able to tell you what their general performance issues are, are they chatty? Are they not focused? Are they focused? This is what we want, we want more and more of a community based structure and if your broker could offer that – great. If they can’t, Stage 5 is ready and willing. Not to sound like a commercial but that’s an important thing for me and that’s, by the way, is what’s available to professionals.

When I went and started my prop shop at Advantage Futures when they first started in 2004, that’s what I got. I got the Senior VP making sure he knew who I was and who the names of every one of my traders and made sure I got the best pricing I could and made sure we’re comfortable while we rented office space within their office, had the best connections possible, had the best servers possible.

You really build loyalty and now all you need to focus on is the market rather than “Could I get a commission somewhere else?”, “Could I get a better margin somewhere else? Maybe I could squeeze my broker for five cents or 10 cents.” It’s irrelevant, if you’re hemorrhaging thousands of dollars every day because you don’t know how to manage your risk – what difference is five cents or 10 cents going to make in our commission structure?

It makes no sense but that’s what everybody focuses on because that’s what everybody in the industry is advertising – better commissions, lower commissions and lower margins but in the grand scheme of things, if you want to be a professional – those seem like a priority, but they’re not.

Aaron: So one of the things I’d just like you to clarify and sort of make us clear on is you describe Stage 5 as an independent introducing broker…

How does an independent introducing broker differ from a typical retail broker? Someone like E*Trade, just to name a name.

FT71: Okay, so let’s take E*Trade, TD Ameritrade or Thinkorswim. They are, for one, offering you a large number of services. I know this doesn’t exist anymore and I’m dating myself a little bit– think of going America Online or Prodigy or Compuserve to get an internet connection.. What you’re plugging into it is a service that is built around providing you with as much as possible internally and then giving you market access. Whereas if you go with an independent broker, you’re generally getting direct market access. Someone like TradeStation, for example, has options, has futures and has equities and they’re not exceptional at any one of those but they’re giving you all of those outlets.

I would not go to Thinkorswim or E*Trade or Scottrade or Ameritrade as a professional, I would go direct. I would be seeking, if I’m trading futures, I would want to go with a futures broker, a direct broker. If I’m trading equities, I’m going to want to go with a direct equities broker and so on and so forth. That’s really the difference. The connection you get from an IIB or an independent broker is not focused on “What service can I get you to be aligned with so that I can sell you on the service that I have?” so that’s “I am forcing you to fit what I am offering” and in general, much of what happens after the accounts opened is automated. You call because you’re stuck in a position and you get a computer that walks you through the process and so on. With us, we tailored the service to you. We’re going in the opposite direction.

So if Aaron wants to come in and he’s someone who has used CQG Trader and wants to power his multi-charts using CQG – I’m not going to sit here and say “No, you have to use our Thinkorswim platform and that’s it.” I’m going to get you the CQG Trader, the same environment, the same charts and I’m going to make it work for you at the best possible cost – that’s what your broker should be doing as opposed to forcing you to align yourself with what I have to offer because it’s hard enough to trade. It’s hard enough to align yourself with the market, now you have to learn a new platform and you have to learn a new process and figure out how to get your charts to look the way they did. That’s not what we do.

We just reach out to as many vendors as possible, as many clearing firms as possible and try to provide the solution. If we don’t, our brokers are required to basically say “We can’t do it, we’re sorry but here’s the number of someone who can.”, even if we don’t make money off it – you’re off on your way to getting what you need.

You need to have access to equities plus forex plus futures, well we’re a futures only broker, here’s where you should probably go and that’s really the difference as opposed to a giant organization that is already set its course kind of like a big ship and it’s hard for it to turn with the technology and what’s being offered. It’s hard for it to integrate that until much much later. We are very malleable because we’re small and we have access to all these pieces and we don’t own or maintain any of the software – it’s someone else’s, we just make it available to you. That’s all.

Aaron: Alright, let’s wind this down…

Where is the best place to go if a listener wants to find out more about you?

FT71: So you can find me online at futurestrader71.com, hit the contact link and drop me a note. If I can help you, I’d be happy to do it. Otherwise, you can find me on Twitter – @FuturesTrader71 and I’m participating in there all day long, everyday while the market’s open and, as always, if I can guide you in the right direction – great. If I can’t, then I’ll let you know.

Aaron: Awesome, I appreciate that. I noticed you just had the website redone recently, it’s looking good.

FT71: Thanks! It’s a slow process to redo those websites but this one’s a lot more friendly I hope.

Aaron: Alright man, well it’s been awesome to have you back on again. Really incredible insights, so thank you very much for taking the time to share with us.

FT71: Always a pleasure and I really appreciate your broadcast, I think it’s probably helped more people than you think you have.