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Stress-Free Trader (The Lawrence Chan Blog)

Full time index & forex trader, occasional consultant to hedge funds / institutions, my work leads to my not so normal view of the financial markets. My blog mostly talks about trading, market behaviours and other musings.

Originally this blog is supposed to be organized in a separate website like what most authors do but I don’t think I will maintain it properly that way. So here it is as part of this website.

Schedule – Regular blog post every Friday with occasional additional posts when I feel like ranting.

In case you are curious of what I do outside of blogging here:

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Minor Improvements To The Site

2012 Nov 15 Thu 22:31:32 | by Lawrence

I made some changes to the front page over the past few days and it looks very promising.

  • some code clean up so that the latest comments are showing properly and load faster
  • exclude the symbols from the tag cloud so that the more meaningful terms are showing
  • code clean up so that the front page loads faster
  • overall front page loading no longer takes a long time

Those of you who visit the site last few nights probably saw the front page changed from one style into another several times. The update is done for now so no sudden surprises in the middle of the night again.

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Thinking outside the boxCritical thinking is not just thinking hard or deep into an issue and then decide whether to believe it or not. It is a common misunderstanding that everyone can just do that at will if they try. Most of us has to be trained to have the necessary critical thinking skills to make it functional. I am going to explain what is needed to achieve the goal of developing good critical thinking skills specifically for the purpose of improving your ability to trade.

Critical thinking can be loosely build on three core disciplines. They are Logic, Objective Evaluation, Self-Correction. All three disciplines are related to each other and have overlapping components. Hence making the subject of critical thinking difficult to explain in general.


We often talk about logical thinking as if it is something separated from our normal self. It is a skill many of us are exposed to when learning mathematics and science subjects in school but logic by itself surprisingly is not a required subject. We are trained to use logical thinking to solve academic problems but seldom do we apply such on everyday life situations. In fact, many of us have chosen to think logically only when we are dealing with abstract problems, puzzles, or games.

Personally I think logic (and statistics) should be taught as soon as kids have a basic knowledge in math. But what do I know? A class of logical thinking students is a class of students who will likely challenge their teachers all the time with tough questions. I am not sure if our education system like to see that happening.

Usual symptoms of handling problems illogically:

  • thinking in circles that keep sending you back to the original problem again
  • staring at the problem in front of you while you think you are thinking of a solution but in fact your mind is blank
  • keep trying variations of a solution to a problem without questioning the validity of the approach itself when the solutions you tried are all falling apart

Specific to trading, logic is often used in combination with statistics. In fact there is this specialized branch of mathematics dealing with probabilistic logic but the academic mumbo jumbo is totally overrated for practical trading purpose (most of the time).

What I like to mention here is that using simply logic to apply onto a trading problem (e.g. a sell setup) that is probabilistic in nature can lead to all kinds of wrong answers. The most famous one being efficient-market hypothesis. This particular issue deserves further discussion. Maybe in another article in the future.

If you found that when you are thinking of ways to deal with the markets and you keep suffering from the problems listed above. You need to learn logical reasoning properly. You don’t have to study a college course on logic and stuff. All you need is to brush up your reasoning skills with a few books on the subject so that you can think smartly instead of wasting time on a bad idea or having your mind stuck in places that causes frustration.

I reviewed two books on reasoning skills that are good introduction for anyone to read – The Thinking Toolbox: Thirty-five Lessons That Will Build Your Reasoning Skills and The Fallacy Detective: Thirty-Eight Lessons on How to Recognize Bad Reasoning.

The main goal of having good logical thinking skill is to allow yourself to see what is more reasonable, even though you do not believe so.

The secondary goal is to be able to see what is unreasonable or illogical, even though you strongly believe so.

Logical thinking is a skill not just useful in developing your trading ability, it is also a life skill that will benefit you tremendously with just a little effort in acquiring the techniques.

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When There Is No Match In History …

2012 Nov 13 Tue 17:10:11 | by Lawrence

I was asked a question in my real-time chatroom about the 3-Day Pattern Odds Reports. Specifically if there is something wrong with the tables for Dow, S&P500, Nasdaq 100 and of course the derivatives (DIA, SPY, QQQ, and futures YM, ES, NQ) as they are all blank for today.

I answered that there was no match at all historically based on the 3-day pattern thus today could be something unpredictable.

How true the unpredictability has proven!

All morning the indices were pushing higher and the midday sideway move was totally expected. Then by 2 pm, there was no fireworks. No short squeeze whatsoever. Slowly, drifting lower and lower and then collapsed in 3 pm and sold off to new low of the day.

Very glad that I kept the surprise factor in mind and walked away when 2 pm does not unfold as expected.


Bankable ETF Strategy: VIX Rotation

2012 Nov 12 Mon 9:22:27 | by Lawrence

I am going to present a different kind of swing trading strategy this time using the CBOE Volatility Index VIX to trade S&P 500 ETF (SPY) and Dow 30 ETF (DIA).

CBOE VIX is a measure of the implied volatility of the index options on the S&P 500 cash index. Traders give it the nickname "fear index" as it shows the traders’ expectation of volatility in the stock market over the next 20 to 30 days time span. The special characteristics of VIX make it a perfect candidate for the construction of breadth based trading models.

The Performance

Following chart shows the approximate net points gained on SPY since 1996.

SA VIX Rotation_20121108_130401

Notable characteristics of the model:

1. Impressive overall performance

2. It does not produce much profit when VIX is locked in tight range

3. No significant drawdown from #2 implies driving bias is very strong

4. Performs well in both long and short trades

5. Average duration per trade is about 6 trading days

6. Combined win rate stands at around 66%

7. Stable win rate across many years

8. As good as price based models

9. Works equally well on DIA due to the high correlation between SPY and DIA.

10. To control risk from news shock, a 2.5% stop can be employed. The performance on the model with stop is about the same as the raw model as the 2.5% stop is rarely triggered.

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… continue from Part 1

The Difficulties In Accepting Changes

One of the reasons why many people fail to do something about their bad trading habits is that they cannot feel it. Knowing something is not good for you is one thing. Taking actions to change the situation, however, requires your full acceptance of the knowledge.

Let’s look at a simple situation here.

When you are revealed the truth that a bottle of poison is placed right in front of you, you will not drink from it. You have this strong conviction to refuse to drink that bottle of poison because you know it will kill you. You fully accept the fact that it is bad for you.

Now, as long as the knowledge you acquired in trading does not produce the same assertion or immediate impact to your mind like the bottle of poison does, it is very difficult to enforce yourself to make changes following whatever the knowledge entails.

Many people can be critical of themselves. Some may even to able to tell themselves how bad they have behaved and feel remorseful about that. But only a few have the willingness to completely utilize both the useful and harmful knowledge they identified and then live by the new rules from the understanding of these acquired knowledge.

This quality in a person that separate those who can and those who cannot make the necessary change has many names. Some people call it determination. Some call it moving out of your comfort zone. Some call it willingness to change. The name does not matter. What matters is how you can too learn to stop doing harmful things to yourself and your trading.

Write It Down

There are many methods people use to force themselves to change.

One of the simplest and effective method is to write it down. Not type it out. Just write it down. Somehow, when we write the things in our mind, it will pay more attention to what we have written and enforce the idea back into our head.

For those who are still struggling in trading – dig deep and be critical on yourself. Once you identified the issues you have, write them down. Make yourself face the problems right in front of your eyes. That way you are forced to see it and be reminded that you are hurting yourself if you continue to trade the same way.

If it is a bad habit you documented, then make time everyday to sit down and read what you have written down yourself. Visualize how that can ruin your trading, your career and your life. Do it until you absolutely hate that in your guts.

If it is a better way to trade that you know it is good for you, then do the same rituals but visualize the happiness and satisfaction you can get from following the path. Do this until you feel natural to follow the new rules when you are trading.

You will know when it is no longer necessary to follow the rituals.

End Note

Wrote this piece to honour one of my mentors. He is a self-made millionaire trader who trades Chicago futures. He is like a big brother to me as he is just 10 years older than I am. This technique to correct bad trading habits comes from him.

He likes to keep a journal of his trading and reflects on his weaknesses often. He always said the journal has to be kept secret (private) so that you will feel safe to write whatever you feel is necessary to criticize yourself. I find this to be true and necessary for the journal to be effective.

Long time ago I always took profit too early and cut short my positions pretty fast for no good reasons. It took me better than several months to truly resolve this problem after documenting the issue in my own journal. It must have been several years since I last wrote something in my journal although I keep it at my desk all the time. Maybe one day I will need it again.

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2012 Nov 8
Essence of Trading: Importance of Critical Thinking And Why It Is Not Enough (Part 1)

Critical thinking is a concept that we learn partially throughout basic education. For some who eventually enter graduate studies, it suddenly becomes a requirement. It is as if the concept does not require learning at all. I find this very odd indee …

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2012 Nov 5
Questions About Rochdale

In the news, Rochdale Said to Be in Rescue Talks After Apple Trades Sour. Rochdale claimed than due to unauthorized trades made by a rogue trader has caused major stress on the company’s financial position and that it is looking for investors to res …


2012 Nov 5
Time To Slack Off

Over the weekend I reviewed my performance so far this year. I know I have reached my own base line trading goal for the year since September. At the end of October, I hit my ambitious goal as well. Whenever that happens, I reduce position size and t …

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2012 Oct 31
Essence of Trading: Trading Is Easier Than Most People Think

We were told, by traders before us, that trading is difficult – difficult to learn, difficult to turn a profit, and difficult to master. Their words, together with almost every book out there written on the subject, have painted a very grime pictur …

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2012 Oct 27
Essence of Trading: Modern Financial Economics Is Just Alchemy In Disguise

Economics Is Social Science Many people confuse economics as a science like physics or medical science. Economics is part of social science. It is not the kind of science that can produce precise projection or accurate forecast . In this sense, mo …

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