Don Miller on Trading and Improvisation

TradingMarkets is proud to introduce a new series we will be running on weekends along with our Big Saturday Interviews. The new series will feature observations, thoughts and reflections by traders that will discuss how we as traders relate to the world around us – and how that world helps shape us and what we do, as well.

Our first piece in this series comes from Don Miller, short term trader, TradingMarkets contributor and author of the Don Miller Trading Journal, who approaches an issue that is central to most traders: the balance between improvisation and “following the rules.”

Enjoy! And look forward to more articles, columns and reflections in the months to come.

–David Penn, Editor, TradingMarkets

A few weeks ago, I had the pleasure of attending a concert of the state’s top high school musicians, of which my daughter (who plays violin) was a part. The concert participants consisted of a chorus, jazz band, symphony orchestra, and concert band. And the music was simply incredible, especially considering that those involved had just two practice sessions together (Thurs and Fri), although they’d of course each individually practiced their pieces for a month or so leading up to the event.

Yet when the jazz band took over, I couldn’t help my mind drifting back to trading throughout much of the 20-minute session. The reason was that I saw similarity after similarity between the players, each of whom took a turn to step out of the band to do an improvisational solo, and futures traders. And here’s why.

Throughout the performance, there was an underlying rhythm — a pace which was kept by the director subtlety through some simple finger snaps — as well as sheet music, which was of course used as a guide for the players. Yet when it was time for the improv pieces, up stepped each player to the front where he/she performed without sheet music, playing the tune as he/she saw fit from the heart. And while the underlying beat provided by the director and rest of the band remained in the background, the inspiring improv solo performances clearly reflected each player’s soul, vision, and individuality, and they combined for a truly outstanding performance.

Yup, here’s where I segue into trading. Those of us that take up the “instrument” of trading and are “students” of the market are indeed those improv soloists, where the market provides the beat and we are free to trade as we interpret the piece. As I’ve often said, there’s no right way to trade (except I suppose for ultimately making sure net purchase prices are less than net sales prices after expenses like any business), just as there’s no right way for an jazz saxophonist to play his/her piece.

I’m sure there were a few missed notes, momentary loss of the underlying rhythm, and some performance stress during yesterday’s jazz band set … which also happens to describe almost every day of my trading career. Yet I certainly didn’t notice them as they were buried in the net performance, which was all that mattered.

There may very well be as many ways to trade as there are ways to interpret one’s musical soul: Speculating, providing liquidity, hedging, swing trading, scalp trading, range trading, breakout trading, trend trading, 5-minute chart trading, 60-minute chart trading, emotional extreme contra-trend wholesaling … not to mention the thousands of trading “instruments” out there. There’s simply no “holy grail” or “right way”.

Someone asked me last night why I didn’t short into the shallow 30-second chart pullbacks on Friday’s opening cliff drop. My response was essentially that I wanted to short, but personally rarely take shallow pullbacks on market spikes as I prefer lower-risk deeper retracements, which may appear as the first pullback on a larger timeframe (my eventual short was the first pullback and bear flag on the 5-minute chart). And as I’m waiting, I may very well test the waters and provide some liquidity to those bailing on pure emotion, which eventually snaps back at some point … often hard.

And while the question was completely appropriate, perhaps my response should have been more along the lines of yesterday’s soloists, in that it’s probably as irrelevant for me to look back on how I played a given pattern as it would be for me to ask why the horn player chose to pass on the screeching high-“C” climax and instead took a momentary breath to rejoin the band’s rhythm. Neither was right, yet both were right.

As a quick aside, I also read a recent piece that essentially concluded that one can’t profit from trying to time short-term price movements. Wowzer … talk about a head-scratcher.

I suppose we are all market “players” in the truest sense of the word. We must learn the underlying market beat of course, yet the best players seem to play their own tune that reflects their individual strengths, heart, and soul.

The sheet music will always remain unwritten until we step out of the band and up to the mike to write it.

Don’t be afraid to step out of the crowd and up to the mike in trading — or life — and play your soul. Don’t be afraid to write your own music.

I suspect that some of the greatest tunes ever contemplated were never heard because they remained on the composer’s desk or in the solist’s heart. And perhaps some of the best trades ever considered were never made because they remained in a trader’s mind for fear of doing something unique or against popular convention.

Have a great and inspiring week.

Don Miller is an active independent futures trader and member of the Chicago Mercantile Exchange who focuses primarily on the U.S. and Foreign Indices including the U.S. S&P E-Minis and German DAX.