Saturday, December 15, 2012

Update - Discretionary System

If you've been following this blog since the beginning, you know that is has changed a bit over time:

The blog started out as a journal of performance for a mechanical system that I was trading in the World Cup Trading competition.

And then my corrupt broker PFG folded in July, taking most of my account with them.  And the idea for my blog!

A few months ago, I decided to document my development of a discretionary system - my historical weak point in trading.

Along the way, I tried to provide useful information, such as my 15 part "Trading Process" series. Or my free webinars (here is upcoming one on Monday Dec 17th:  "Trading Plan For 2013" on Dec 17, 2012 8:30 PM EST at:

So, as of mid-December, here is where I stand:

I don't have a discretionary system for 6E (Euro currency) ready to go yet, but I have a couple of pretty good, but separate, ideas in development.  With some dedication in early January, I may have something ready to go in late Jan or Feb 2013.

I have a little chunk of money allocated for this new system.  I may or may not enter it in the World Cup competition.  I may or may not post it on, where a third party tracks some of my other strategies (here is just one:

My question for you, dear reader, is where do you want this blog to go.  Some options:

A.  I can continue discussing my discretionary system development, and then actually trade it.

B.  I can talk about trading in general.

C.  I can talk about any system I enter in a contest, which may also be point A above.

D.  I can talk about other systems I currently trade (full disclosure: some of these I also offer for sale, some I do not).

E.  None of the above.

I want to keep this blog informative and relevant.  I know so far it has been, since it was nominated for Best Trading Blog of 2012 (please vote below).

So, if you get a chance, please leave a comment, and tell me what you'd like to see in this blog.  I'm listening!


I am honored that my blog, "A Robot Trader Becomes Human," has been nominated as "Best Trading Blog of 2012" by the good folks at

If you like my blog at, please vote!

A Robot Trader Becomes Human

Thursday, December 13, 2012

Winner Winner Chicken Dinner!

We have a winner in our Trading Platform Survey.  E-mail address ny11*** was the winner of a copy of my Congress ES Trading System.  Congratulations to him or her, and thanks to everyone who contributed.

Here are the results, of approximately 150 surveys:

What trading platform do you use?

I was surprised that 7% use no software at all! Pencil and paper folk?

About 55% of platform users described themselves as being at a beginner or intermediate proficiency level, and 45% were advanced or expert.

51% of respondents have not bought any type of indicator or trading system in the past year.  A Do-It-Yourself crowd!!

For the 49% who had bought a system/indicator, vendor reputation was far and away the most important criteria.

Not surprisingly, most (>70%) system/indicator buyers thought it was "extremely important" that the package they buy be in their platform language.

Finally, 85% of people were neutral to very satisfied with what they purchased.  Only 15% of people were dissatisfied.

THANKS again for participating!


I am honored that my blog, "A Robot Trader Becomes Human," has been nominated as "Best Trading Blog of 2012" by the good folks at

If you like my blog at, please vote!

A Robot Trader Becomes Human

Sunday, December 9, 2012

New Survey

I am giving away a free copy of my Congress ES Trading System, valued at $149, to one lucky winner who answers a short 6 question survey.

You can read about my Congress ES Trading System here:

Of course, I will share results with everyone on this blog.

Please click here to take the survey:

Thanks in advance!


Only one entry per e-mail address allowed.


I am honored that my blog, "A Robot Trader Becomes Human," has been nominated as "Best Trading Blog of 2012" by the good folks at

If you like my blog at, please vote!

A Robot Trader Becomes Human

Friday, December 7, 2012

Survey - Final Results

I am honored that this blog, "A Robot Trader Becomes Human," has been nominated as "Best Trading Blog of 2012" by the good folks at

If you like my blog, please vote!

A Robot Trader Becomes Human


So, what "takeaways" can we glean from this survey?  Here are a few:

Pure mechanical traders are more profitable than hybrid traders, who are more profitable than pure discretionary traders.

Traders who backtest their idea for more than 1 year tend to be more profitable than those who do not.

Trading is TOUGH.  You are more likely to lose than you are to win.

Thanks to everyone who participated!

Wednesday, December 5, 2012

Survey Results - Mechanical Traders

Taken as a group, people who identify themselves as 100% mechanical traders are more profitable than either pure discretionary or hybrid traders.

Only 27% of pure discretionary traders reported that they were profitable the last 3 years.  The number jumps to 43% for hybrid traders, and then jumps again to 55% for mechanical traders.

So, according to this survey, you are twice as likely to be profitable if you are 100% mechanical, as opposed to 100% discretionary.

The other interesting point here is that mechanical traders who backtest for more than 1 year tend to be more profitable.  Not surprising to me, but hopefully it is enlightening to those traders out there who feel long backtests are pointless.

Tuesday, December 4, 2012

Survey Results - Hybrid Traders

For people who identified themselves as "hybrid" traders - that is, they use a mix of discretionary and mechanical methods, the survey shows the following:

Most hybrid traders lose

Hybrid traders who backtest for longer periods of time have a higher chance of success

Monday, December 3, 2012

Survey Results - Discretionary Traders

Of the people who identified themselves as discretionary traders, most perform backtests less than 1 year duration.  Could this be why most are losing money?


I am honored that this blog, "A Robot Trader Becomes Human," has been nominated as "Best Trading Blog of 2012" by the good folks at

If you like my blog, please vote!

A Robot Trader Becomes Human

Thursday, November 29, 2012

Survey Results - Part 1

Thanks to everyone who participated in my survey.  The next 2 or 3 posts will present the results.  Hopefully, knowing the results of a large group of people will give you some guidance into what is "best."

As a reminder, here were the questions:

1. What kind of trader would you consider yourself?
2. Do you perform historical testing before trading a strategy with real money?
3. For the past 3 years, how would you describe your real money trading results?

Here are the results:

1. What kind of trader would you consider yourself?

2. Do you perform historical testing before trading a strategy with real money?

3. For the past 3 years, how would you describe your real money trading results?

In the next post, I'll dig a bit deeper and try to find out answers to questions like:

"What type of trader is more likely to be profitable?"

"Does backtesting length influence future profits?"




I am honored that this blog, "A Robot Trader Becomes Human," has been nominated as "Best Trading Blog of 2012" by the good folks at

If you like my blog, please vote!

A Robot Trader Becomes Human

Monday, November 26, 2012

Survey Still Open

I still have the 3 question survey open.  The link is below, and I will share the results with everyone.

Thanks in advance!


I am honored that this blog, "A Robot Trader Becomes Human," has been nominated as "Best Trading Blog of 2012" by the good folks at

If you like my blog, please vote!

A Robot Trader Becomes Human

Monday, November 19, 2012

Discretionary Trading - Update

I am still testing and evaluating possible techniques to trade, so I have not gone "live" yet.  I am struggling with a couple of things right now:

1.  How much historical testing should I do?

2.  How much discretion should I build into the system?

I have thought a lot about these topics, but I still don't have solid answers to these questions.

I suspect I am not alone in this regard.  So, I have created a survey for all readers.  It is simple, anonymous and only 3 questions long.  I will share results in a week or so with everyone who takes the survey.  I think it will be a big help to all of us.

Thanks in advance!


I am honored that this blog, "A Robot Trader Becomes Human," has been nominated as "Best Trading Blog of 2012" by the good folks at

If you like my blog, please vote!

A Robot Trader Becomes Human

Friday, November 16, 2012

Award Finalist - Please Vote For This Blog!

This blog has been honored with a nomination by for the Best Trading Blog of 2012.

If you've enjoyed this blog, from my contest account discussion to trading process steps to my current journey into discretionary trading, please vote for me below.

Your votes will encourage me to continue to provide quality information to you!



A Robot Trader Becomes Human

Sunday, November 11, 2012

Whoops - Sorry!

As you may know, I have fairly regular free webinars on trading.  I try to announce them on this blog.  Unfortunately, my last one, "Unorthodox Entries," I neglected to inform blog readers about.

Good news is that I recorded it, so if you want to listen to it, just shoot me an e-mail.  I will immediately respond with the link for you. kdavey @


Now for my discretionary system...

I gave up on the Forex broker I was going to use, as I could not trust their charting platform.  I got my deposit back over the weekend.  The odd thing was I was actually a bit worried about getting it back - that's how "spooked" I am about this whole industry since the MFG and PFG scandals.

As far as a new forex broker, I am now looking at Euro futures, not Forex.  This is a major switch.  I trust the data better, don't have to worry about dealing desks, and it is more regulated (although being more regulated, I'll admit, did not help me with PFG!).  But the position sizing will be tougher (which means, I'll have to risk more to get the same return), and I'll probably pay more in transaction costs.  Pros and cons to each market.

I am still looking at entries for this system.  I don't know if it is good or bad, but I seem to be turning this project into a mechanical system - one that can be automated.  I'm not sure that is where I want to go - it certainly is not where I planned to go -  but I am keeping an open mind.

Maybe I am evolving this way because historically I much more successful at mechanical trading (for example: my World Cup contest accts, my Trender, SFE and Congress ES systems on my website) than I am at discretionary trading.  That is not to say that I am a "bad" discretionary trader, but I was not a consistent earner with such a method, not necessarily a net loser.  To me, that is "bad."

So, we'll see where this journey takes us!  

Tuesday, November 6, 2012

Houston, We Have A Problem

Well, it seems like I cannot get this strategy off the ground and trading real money...

My latest problem is on 1 minute bars, with the proprietary platform of my forex broker.  If I use their MT4 interface, everything is fine.  If I use their proprietary platform, and shut it down and turn it back on, I get different looking 1 minute bars.  See below:

Since I did my backtesting with this platform, I consider ALL RESULTS INVALID.

So, I have multiple options at this point:

1.  Just keep going with the incorrect proprietary platform, realizing that my live results will probably not match my backtest, due to the charting issue above

2.  Use my broker's MT4 platform (which has a terrible order entry window, although I could change it if I learned MT4 programming).  I'd redo the backtest in this platform

3.  Go to a different Forex broker, but likely pay higher spreads.  Redo backtest.

4.  Use the Euro futures instead, although this means that some of my position sizing (using micro and mini Forex lots, in addition to regular size lots) will be invalid.  Redo backtest, although I could likely program most of what I am doing.

5.  Chuck the whole project, move on to something else.

I am going to evaluate each option, and come to a decision soon.  Until then, no paper trading, and no real money trading.  VERY disappointing!

Sunday, November 4, 2012

Getting Closer

OK, I am getting closer to trading live.  Here's an update...

As I mentioned before, at least some of my trading strategy is based on Bob Volman's Forex Price Action Scalping book.  He uses a 70 tick chart.  I am not, because:
1.  The tick count for my broker's platform depends on the first bar in memory, which is different each time.  So, trying to backtest it yields unreliable results - sometimes a signal will trigger, but if tick count is off a little bit, sometimes it won't.
2.  Tick count in Forex mean different things to different brokers, AND probably will not match up well.  I want a method that is broker agnostic.

So, I will be using a 1 minute chart.  Then, I should be able to pick just about any broker, should the need arise.  Plus, I really do not like the platform of my current broker, so I may move soon (I do like their spreads, though).

I am still at 2 unique entries, and 50/50 entries (meaning, for example, 10 pip profit or 10 pip stop).  Of course, those aren;t really 50/50 entries once you factor in the spread.

Volman also advocates using market orders to enter.  I may do this, but I am also looking at limit and stop entries, to get more consistent fills.  I think entering at market all the time will cost me money.

SO, the plan is to trade sim for a few more days, and maybe go live mid week.

I still owe you a post on how I'll track my performance, and that will be coming soon...

Friday, November 2, 2012

Still Working out Details

I am still working out some details on my new discretionary system.  I think I am on the right track, and I may start live on Monday.

So, be sure to check back Monday afternoon/evening!

Tuesday, October 30, 2012

Live Trading - POSTPONED!

As I mentioned earlier, I am using a 70 tick chart for my charts.  I assumed that the tick count started at the beginning of the session each day.  With the platform I am using, that is apparently NOT the case.

I noticed this because of end of session, I print a screenshot of my entries and exits.  When I went back to the platform (and closing and opening it), I discovered completely different looking charts.  It looks like the start point for counting is not session start.  Maybe it is the first bar in memory.  I don't know.

What does this mean?

Well, for starters, it means that all the backtesting I did is worthless.  So, I have to go back and do it again.  This time I will use 30 second bars, or 1 or 2 minute bars.

Bottom Line:  I am not ready to trade this live, until I re-evaluate things.  Maybe the beginning of next week.  I am in a hurry to trade live, but not in a hurry to lose money!

Monday, October 29, 2012

My Entries and Exits

I will talk about "Tracking My Progress" in the next post...

OK, so I am on track for starting live trading Thursday.  After spending some time this weekend working on things, I have settled on 2 basic entries, and 1 simple exit.

Earlier, I had mentioned that I was using the book by Volman** to guide my discretionary trading with this system.  After working through the book, though, I now will be using a very, very small portion of his book, at least initially.

Here are my entry and exit rules, and other assorted info...

1.  Volman's** Second Break entry.  BUT, I have modified it.  I have specific criteria for when it applies, and even then, the signal could be in either direction, depending on the shape of the pattern.  My technique is unique and unorthodox, and I probably will not be sharing any more about it.

2.  Entry 2 is based on a specific chart pattern.  It occurs multiple times per day, usually a couple of times between 9-11 AM.  The trick is that once the pattern is established, it can go long or short depending on the shape.  Again, unique and unorthodox.

Because I think my edge is in the entries, I probably will not be showing exact details on it.  I may show the bar of entry, and direction - we will see.

3.  I will take entries in sequential order.  If, for example, Signal 1 triggers a long, and 3 bars later, signal 2 triggers a short, I will reverse to a net short position.  If I am long, and another long signal comes along, I'll just ignore that second signal.

4.  Profit target always 10 pips.  Stop Loss always 10 pips.  No changing or moving of either one.  Exit at end of day, if neither is hit.

5.  Trade from 9-11 AM ET.  But, I won't neglect an entry at 8:58 AM, or 11:04 AM, if I am at my trading station.

6.  Usually, these 2 entries will have about 4 trades per day total.  My goal is to extract 5 pips per day.  In backtest and real time simulation, I have averaged about 13 pips per day.  But, backtests and sim testing is always better than real life, right?

7.  Doing the math, with 4 trades per day, and aiming for 5 pips per day, if I average 56% winning trades, I will achieve my goal.  I think I can get to 60-65% winning trades, which would mean 8-12 pips per day. 50% wins or less, and I am a net loser.

8.  I have not included slippage in item #7 calculations.  Also, with the spread, a totally random strategy should win about 45% or so.  So, I have to do a lot better than random!)

** The book "Forex Price Action Scalping - by Bob Volman"

Friday, October 26, 2012

My Goals and Objectives

My overall goal with this discretionary method is for 5 pips per day.  Eventually, I'd like to get 10+ pips per day.  Of course, I have no illusions that I'll get that 5 pip average right off the bat.

To get this, I am willing to risk 50% of my initial capital.

With the position sizing I intend to use, where the percent risked will vary from 1 to 3 percent per trade (details to follow soon), this will provide a nice income stream.

As stated earlier, though, to get there I want to first have a profitable week span on the simulator.

Week 1 was terrible.

Week 2 was much better, very close to breakeven, but still negative.  The last 3 days were the best, after I incorporated a new entry technique.

So, if the first 3 days of next week plus the last 3 days of this week are positive, I will start live trading on November 1, 2012.

Next post:  How I will track my progress in this blog.  (Spoiler: I'll be tracking avg pips per day, percent risked and error rate).

Thursday, October 25, 2012

3 More Reasons Why I Fail at Discretionary Trading

Last time I told you about how I was going to overcome 2 reasons I have failed at discretionary trading.  Here are 3 more reasons, and how I plan to defeat those.

The reasons I fail:

Overtrading/Revenge trading - sometimes in discretionary trading, sometimes everything looks like a signal.  Worse yet, sometimes I'd force signals to get back lost money

Too Many indicators/rules - Confusion reigns supreme, when the charts get complicated

Not Practicing Enough - Many people don't practice at all!

My plan for overcoming these obstacles:

1.  I have a set list of approximately a half dozen setups.  The potential trade HAS to be meet one of the setups. This will take mental discipline, and I might resort to step 2 to ensure I am not overeager to trade at the start of the day.  I may or may not be sharing these setups later on.

2.  At the beginning of the day, I am usually amped up a bit, and excited to trade.  Many times, I notice that I "see" setups that aren't even there!  So, I will track my first trades of the day.  If they look to be particularly bad, I might do one or two crazy things:
    A.  If I have enough indication that I am doing things backwards with the day's first trade, I might just take the opposite of the intended signal.

    B.  If I notice that I constantly take first trade signals that are not there, I might just take a random (coin flip) entry, and manage the exit.  This might take away that "first trade of the day" excitement.

   I'll be the first to admit that these options are pretty wacky, and I don't want to use them.  But realize what I am doing - I have identified a specific weak spot in my trading, and therefore developed a plan to overcome the weakness.  That is the takeaway lesson here.

3.  I am only going to be trading from 9 AM - 11 AM each morning.  That will leave me time for all the other trading activities I do (writing, developing mechanical systems, consulting, etc).  In that 2 hour period, I'm guessing 5 trades should be my maximum.  So, to prevent overtrading, I'll never take more than 5 trades in one day.  I think most days will be even less.

4.  I estimate I should hit 50% wins.  So, the odds of getting 3 losers in a row is 12.5%, or about 1 day every 2 weeks.  Since "revenge" trading usually hits after a string of losses, I will shut down for the day after 3 consecutive losses.

5.  For indicators, I'll just use candlesticks, and an EMA line.  I may also have a few pattern detectors programmed in, but for the most part I'll keep it very simple.  Simple is usually best.

6.  Every night, I will practice, either looking through days trades, old charts or by studying reference material.

Next time, I'll write about my specific goals and objectives.

Tuesday, October 23, 2012

Overcome Backtests, and Emotions

2 of the biggest reasons I think I have historically struggled at discretionary systems are:

No backtesting possible - makes it hard to have confidence in trading a new method

Emotions - decision making under stress is always tough

Here's why these are a problem (for me), and how I will get around them.

Backtesting - I cheat on discretionary backtests.  I go through trades, and invent reasons that I would not have taken certain losing trades.  So, I end up historical results that will never occur in real time.

The good thing is I know I do this.  I suspect most people who do this do not even realize it!  Trading books are notorious for this.  How come you only see examples of when a setup worked?  Wouldn't it be more appropriate to show some of the same setups that lost?  

Emotions - In the heat of trading with real money, I sometimes let emotions get the best of me.  I make trades I should not, and trade differently that I do if I am doing historical testing, or even trading on a simulator.

So, here is my plan for minimizing the impact of these 2 roadblocks to discretionary trading...

1.  I am not going to do a traditional backtest at all.  My method is based on a trading book, with some other setups added in.  I will make the assumption that these reference sources have given me solid ideas to work with. I may be totally wrong on that.  We will see.

2.  I am going to test the method, in real time, using a realistic simulator.  If you don't know what a "realistic" simulator is, or for example the difference between a simulator and an emulator, I HIGHLY recommend you take the time to find out.  Working with an unrealistic simulator can be worse than random guessing.

3.  Once I have 1 week of profitable simulator testing, I will jump to live trading.  I realize this is really quick.  (By the way, my first week on sim was REALLY bad, so it may be a while!).

4.  With real money, I am starting out with an amount that I consider insignificant.  If the money doesn't matter, then my emotions should be in check.  If this doesn't work, and I still notice emotions clouding my judgment, maybe money isn't the issue.  In that case, I'll have to do more self examination.

5.  Since this will be "on the job" training and testing, I will start with risking 1% of equity per trade.  On days I make money, I'll bump it up by 0.1%.  On days I lose, I'll drop by the same.  There will be some limits to this, but the idea is that until I get consistently profitable, I won't be risking much.

There might be some other things I do, but I think this is a good start to overcoming the lack of backtest, and minimizing emotions.

Comments and questions are always encouraged!

Sunday, October 21, 2012

Why I Think Most People (Including Myself) Fail at Discretionary Trading

If you've read through this blog, or found my history on the Internet, you'll know I'm a much better mechanical/systems trader than a discretionary one.  I suspect there are a lot of people like me (or at least people who fail at discretionary trading).

Here are the main reason why I think I have failed at discretionary trading:

No backtesting possible - makes it hard to have confidence in trading a new method

Emotions - decision making under stress is always tough

Overtrading/Revenge trading - sometimes in discretionary trading, sometimes everything looks like a signal.  Worse yet, sometimes I'd force signals to get back lost money

Too Many indicators/rules - Confusion reigns supreme, when the charts get complicated

Not Practicing Enough - Many people don't practice at all - they just start trading!

The good news for me is that I have a plan to overcome all of these issues.  I'll be presenting them in the next few blog posts.

Thinking ahead, I hope to give all readers a good process for developing and trading a discretionary trading. I may or may not reveal exact details of how I am trading (and honestly, it probably would not matter if I did), but I think knowing the steps to take will help everyone.

Next time, I'll probably talk about the first few steps.

By the way, if you are looking for a blog with lots of good info, MBA Gearhead's Blog is the place to go:   It is one one the few blogs I follow, mainly because his experience is so similar to that of most traders.

Thursday, October 18, 2012


Why in the world would a successful mechanical trader try a discretionary approach?

Throughout my 20+ years of trading part time, and now full time, I have had much more success with mechanical systems than discretionary ones.  Hopefully that is pretty obvious to anyone who has read my bio.  Winning 3 World Cup Trading trophies, all with mechanical systems, should convince you of my ability to create successful mechanical systems.  I guess at heart I am just a numbers guy, and creating rigid rules appeals to me most.

But, there are things about mechanical systems I just hate:

First, once you turn a mechanical system on, you basically lose all control.  And since most of my systems run for days or weeks, the day to day variation sometimes gets emotionally overwhelming.  I resist the temptation to interfere, but it is always there.

Second, in the back of my mind I always wonder if/when a mechanical system will stop working.

Third, sometimes mechanical systems take trades that make me think "what did the strategy just do?!?"  Many times - but not always - these trades turn out to be losers.

Finally, I've always had limited success in creating a day trading system with mechanical rules.  Maybe it is the way I test, maybe it is the market, but since my goal is a day trading system, I need to look beyond mechanical type systems.

There is definitely a challenge here that motivates me: "Can I become a great discretionary trader?"

So, I added that all these reasons up, and concluded that a day trading, discretionary approach is what I should be looking at.

The problem is that throughout my trading career, I have very limited success with discretionary trading...

Next post: Why I Think Most People (Including Myself) Fail at Discretionary Trading

Tuesday, October 16, 2012

Intro - New Approach

As you may have noticed from the new title, from this point forward the blog will be focused on a new discretionary trading approach I am trying.

During the 20+ years I have been trading, I have had a lot more success in mechanical/robot type systems than discretionary/human systems.  The 3 times I won trophies in the World Cup trading contest, I traded with a mechanical system.  In 2011, I tried a discretionary approach.  I failed.

Just to be clear, here is what I mean by those terms:

Mechanical/Robot System:
1) Any system where the rules have been fully defined.
2) All the trader has to do is to enter orders, or if the system is automated, just monitor that orders are placed correctly.
3) There should be NO trading decisions made with such a system.
4) Ideally, the system can be accurately tested on historical data for the last 5 to 15 years.
5) Since the trader is not making any decisions once the sytem is developed, during drawdowns he will feel helpless - since he is not in control (unless he shuts the system off).

Discretionary/Human System:
1) Any trading system where the rules are "fuzzy" - where the trader has to make entry/exits decisions to some extent.
2) This might be because the rules cannot be programmed, or because the rules evolve with time, etc.
3) Such a system may have rules or guidelines, but ultimatley the trader has to process all pertinent info and make a decision.
4) Typically, these systems can only be sufficiently tested in real time, with real money.  Emotions may play a big role in decision making.
5) Backtesting such an approach, or trading on a simulator, typically leads to overly optimistic results.

Next post:  Why in the world would a proven successful mechanical trader try a discretionary approach?

Monday, October 15, 2012

Changes Coming Soon

Ever since PFG stole my money, and ended the 2012 trading contest, I have been looking at ideas to keep this blog going.

I finally found something that will be worth your time to read (and my time to post about).

So, coming soon, this blog will be embarking on another trading journey.

I have no idea how it will turn out.

I hope you will join me!


Sunday, October 7, 2012

Still Waiting For My Money!

3 Months after the PFG theft, I'm still waiting to see even a dime of my money.  Soon, they say.

I'm not holding my breath, hoping it will come soon!

In other news, I am putting on a VERY informative webinar this week - on Position Sizing.

Best news: it is FREE!

Please register for "Position Sizing 101" on Oct 9, 2012 8:30 PM EDT at:

How can position sizing influence results? By using optimal position sizing, can you really get unlimited reward with limited risk?

In this 60 minute webinar, we will look at 5 position sizing techniques, applied to my Trender Euro and Trender Gold system. We'll investigate some of the common position sizing myths out there, and hopefully give you sound advice for your own trading.

After registering, you will receive a confirmation email containing information about joining the webinar.

I hope you are able to join me!!!!

Wednesday, September 5, 2012


Some people think that to be a successful trader you need to be trading all the time.  Not true!

I always knew this, but every once in a while I need a reminder.  I found one such reminder recently in the great book "Street Freak - Money and Madness at Lehman Brothers."

In this Memoir by Jared Dillian, a Lehman Brothers trader, Jared relates how he made well over $100 million trading (most of that went to Lehman).

Regarding overtrading, Jared says:

"I had made, by that point, about $6 million simply day-trading S&P futures.  After seven years, I had finally solved the mystery.  Trade only when you have an edge.  Otherwise, don't trade.  Out of the first 125 market days of the year, I had traded on perhaps 10 of them, and made $6 million.  I didn't have to be involved in the market all the time."

Something to think about, if you take 5, 10 or more trades per day...

Sunday, August 26, 2012

Update on PFG, et al

The big update with PFG Best, the broker that stole my money (and thousands of other's money too) is that there is no new information.  The lack of communication is pathetic!  I'm still guessing I will eventually see about 40 cents on the dollar, but when? is the big question.  I wish I had even a clue on that!

Regarding the blog, I haven't posted as much, and I miss your questions and comments.  So, I am going to have a free webinar later this week, where you can ask any question you want!!

Ask any trading question you wish, and I will try to answer. We will spend 15 minutes on each of these topics: 1) Building Your Own Trading System, 2) Buying a Trading System, 3) Trading Psychology, and 4) Anything Else. 60 Minutes webinar

Wednesday, August 22, 2012

FREE Webinar Today - A Few Spots Left

Who hasn't been burned by hypothetical results?  Not me, that's for sure!

Learn how you can avoid 8 different hypothetical trading traps, at my FREE 60 minute webinar. TODAY!

You can register for "Hypothetically Speaking" on Aug 22, 2012 4:00 PM EDT at:

After registering, you will receive a confirmation email containing information about joining the webinar.

I hope to see you there!

Saturday, August 18, 2012

Trading - Acres Of Diamonds

I am sure you have probably heard the famous story "Acres of Diamonds."

It is a story of a farmer who hears about other farmers in his area getting rich off diamonds found on their property.  Exciting by the thought of being rich, and not having to farm, the farmer sells his land, buy prospecting tools and sets off to find his riches.

Years later, of course, he dies, broken and penniless, never finding any diamonds.

The land he used to own - the land he sold to fund his diamond search - turned out to hold the richest diamond mine in the world.  He owned, free and clear, acres of diamonds, and yet he never looked on his own land.

Think about this story when you reflect on your trading.  Maybe you bought a trading system you barely studied (and later put it on a shelf), or a trading book that you never read.  Or maybe you had a great idea for a trading strategy, but never bothered to test it or pursue it.  Maybe you have a system you trade, but you don't trade it with the proper number of contracts, thereby limiting its potential.

Most people trading are in an endless pursuit of the trading equivalent of "acres of diamonds." You never know, you might already have that diamond mine in your possession...

Tuesday, August 14, 2012

Trading Process - Step 15

The Trading Process - Review and Monitor - Step 15

However you trade, make sure you review your performance regularly.  Some people do this every day, some every month.  The point, though, is to know where you stand, and once you determine something is seriously statistically wrong, make changes.  Don't wait until your account is empty before you take action, but also don't make changes after the first losing trade.

Have a scheduled "business review" and you'll be better prepared than 90% of traders out there.

Next: That completes the series on "The Trading Process"

Wednesday, August 8, 2012

Hypothetically Speaking...

Have you ever wondered about some of the secrets that make hypothetical results look so good?

Hypothetical trading results can be deceiving, to say the least. Learn at least 8 ways you can be fooled by hypothetical results, and concrete ways to avoid them. - 60 minute webinar.

I will be presenting at this FREE webinar. Please register for "Hypothetically Speaking" on Aug 22, 2012 4:00 PM EDT at:

After registering, you will receive a confirmation email containing information about joining the webinar.

Friday, August 3, 2012

Execute Flawlessly

The Trading Process - Execute Flawlessly - Step 14

As traders, we all make mistakes.  We buy instead of sell.  We forget to turn automation on or off.  We don't have backup internet or computer access.  We forget about positions in our account.

The point is that mistakes are part of the business.

One way to get "incentive" to correcting mistakes is to record them, and record the amount of dollars involved. You can easily do this with a spreadsheet.  Just compare your actual fills to your "perfect" fills - the fills you should have obtained if you had executed flawlessly.

You can also use this spreadsheet to account for slippage in stop and market orders.  Many unscrupulous people out there show results without slippage - they obviously aren't trading!

I recently looked at my actual fills versus what Tradestation performance reports said.  I had assumed $35 for commissions and slippage per trade.  When I analyzed my real money results - which include some late trades, mistakes and of course normal bid/ask slippage - I found that my actual commissions and slippage was about $30 per round trip trade.  So, I am doing better than I had expected, and that is great to know.

Sometimes mistakes will work in your favor, and sometimes (most times) they will cost you money.

The key though, is that you can only correct what you know about.  Keeping a record of mistakes is the first step on the road to getting rid of them.

Next: Review and Monitor

Wednesday, August 1, 2012

Free Webinar

I am putting on a free webinar tomorrow.  I'll walk you through the steps I took to develop a Gold and Euro Trading System...

Please register for All That Glitters Is Gold on Aug 2, 2012 8:30 PM EDT at:

Learn how trading Gold and the Euro Currency using Kevin's Trender system can be a great way to expand your trading portfolio. Basic rules for Trender Gold system will be revealed - 60 minute webinar. 

After registering, you will receive a confirmation email containing information about joining the webinar.


The Trading Process - Don't Overleverage - Step 13

Probably the biggest mistake I see traders make is with overleveraging.  Basically, their "bet" size is too big for their account.

I realize that many small traders almost have to overleverage (or else not participate at all), but some people mistakenly think if they have a $10,000 account, and day margin is $500, they should trade 20 contracts!

As a trader, your first goal is really just to stay in the game, until you have a proven method.  Until you reach that point, staying small is the way to go.

With any new system I trade, I almost always start with 1 contract.  As profits accumulate, so do the number of contracts I trade.  But, it is a slow process.

So, how do you know if you are overleveraged?  Here are a couple of guidelines:

1.  Risk only 1-2% of your account on any trade.  So, if you have $10,000 account, your max loss should only be $100.  Due to market noise, $100 is very, very small, and maybe you should wait to trade when you have more risk capital.

2.  Your account size should be 2-3 times the initial overnight margin requirement, AT A MINIMUM.  So, for example, Euro currency initial margin is currently $4,050.  If you have $10,000 - $15,0000 account, and trade 1 contract, you MIGHT be OK.

3.  If you go to my website ( and sign up for my e-mail list, I'll send you a link to a Monte Carlo spreadsheet.  Simply enter your trade results and your account value, and you'll see what your risk of ruin and median drawdown over 1 year of trades is likely to be.  If you find your risk of ruin is say 75%, you are overleveraged!

Just remember, it is better at first to trade very small.

Next: Execute Flawlessly

Sunday, July 22, 2012

Trading Process - Step 12

The Trading Process - Follow The Plan - Step 12

I see comments like these everyday, especially in many of the retail trader blogs:
"I had a losing day today, so I think I need to add a filter..."
"After 4 consecutive losses, I have to go back and re-test..."
"Starting today, my plan is now that I will double my position after a loss, to recover more quickly..."

Maybe you've even said one of the above.  All of them spell Trouble.  With a capital T.

The lesson is simple:  Once you have a well thought out, well researched plan, STICK TO THE PLAN!

Next: Don't Overleverage

Wednesday, July 18, 2012

PFG Update

Here is an excellent article on what to expect from the PFGBest bankruptcy.  The people who wrote it were heavily involved in the MFG case, so they know what they are talking about...

Tuesday, July 17, 2012

Update On Everything

PFGBest Update

Haven't heard much on the PFGBest front, other than what I read online.  Seems this debacle has been going on for 20 years.  I wonder if they'll do clawbacks from profitable accounts from that time period?  That will really stir the pot.

I am assuming all my positions are closed, although the last statement I got (after the fraud) shows open positions and incorrect positions.  Oh, and it also says my equity is -$20,631.74.  Maybe they plan on billing me that amount, to pay off others.  Who knows.  Good luck if they do.

Personally, I'm just kind of numb to this whole thing.  I'm not mad - although I looked that way on Fox Business News.  I feel really bad for people who lost much more than me, and the honest people who lost their jobs.  A bit depressed, for sure, but I've still got 3 other accounts (1 forex, 2 futures) that I have to trade.

With the PFG building and technology sitting idle, I'm sure some vulture will try to buy it, and try to resurrect the brokerage.  I pity that fool.  No futures trader will come within 100 yards of anything that even smells like PFGBest, for at least 25 years.

When all the dust clears, after assets are sold, and the gold fillings in Russ Sr.'s teeth are forcibly removed and sold, I still guess I'll see 30-40% of my money.  For the sake of people who lost much more than me, I hope I am 100% wrong.  I really do.

Contest Update

Obviously I am sad the contest is over.  But, I wonder if Robbins Trading (the people who really sponsor the World Cup contest) will be able to survive this hit to their reputation.  I hope so, because they are pretty good people.

Contest System Update

I am still trading the contest trading strategy, at another broker.  I have been trading it there since the start of the year.  The only differences were 1) position size and 2) I do not add on to winning positions in this remaining account.

The contest strategy is still struggling, and I think a lot of it is due to the drought this year.  Lots of prices behaving abnormally.

At some point in the next month or two, I will update its performance.  I still have confidence in the strategy, even with its poor performance.

Blog Update

I will continue to post here, but frankly it is not as exciting for everyone, myself included, without the contest account to track.

If you really have a craving for my writing, or my expertise, head over to my website for free articles, videos, webinars, etc.

I plan on doing some free webinars in late July and August.  One will be 100% attendee Q&A, which I've never seen anyone do before.  If this interests you, signup for my e-mail list and you'll get an invitation before anyone else.

Trading Process Update

I have 4 steps to go in the Trading Process series I started on this blog.  Look for the next 4 steps over the next month or so.  Somewhere on the right side on the blog there is a signup box for e-mail, and then you won;t have to keep checking for new posts - you'll be notified automatically.

That is all for now!


Saturday, July 14, 2012

Trading Process - Step 11

The Trading Process - Know Your Exit Point - Step 11

One of the most important items in trading is knowing when to quit.  No, I am not talking about any particular trade, and where you should place your stop loss level.  I am talking about when to quit trading a system, strategy or method.

If you want to save your trading capital, it is CRUCIAL that you know when you will stop trading a particular method.

I wrote about this in an article (shown below) for SFO Magazine (which is now defunct, since it was published by PFGBest).

The most important thing I found, which most people do not do, is you need to write it down BEFORE you start trading.

It might be: "I, Kevin Davey, will stop trading XYZ strategy when I encounter a 35% maximum drawdown."

Share this pronouncement with a trading colleague, or your spouse.  This will make you more likely to follow it.

Simply put: Without an exit point for stopping trading, you are likely doomed!

Next: Stick to Your Plan


Know When to Quit a Trading System
August  2010
By Kevin J. Davey
Text size: A+ a
Congratulations! After a great deal of investigation, you have decided to “go live” with a new trading system. At this point, it is usually easy to determine when to start trading it—as soon as possible! The excitement and anticipation of assumed future profits makes this simple.
The real decision, however, should not be when to start trading the system, but instead when to stop trading it. Unfortunately, most traders never think of this until it is too late.
Why is it important to have a quitting point for a system prior to even starting to trade it?
Before answering that, just to be clear, I am not talking about exits or stop points for any particular trade. That is embedded in the trading system itself. I am talking about ceasing trading on the system itself. And as critical as individual trade exit points are, a system quitting point is probably even more important.
Two key points drive home why it is critical to have a stopping point for any system.
First, protection of capital always has to be your primary goal. Dreams of profits are nice, but preparing for the downside is how most traders stay in the game. Because once your capital is gone, you are out. So you need to have a quitting point that does not ruin you. Even the best systems can go bad, and you should be prepared for that.
Second, in the heat of trading, emotions will run high, especially as losses pile up. A good trader knows that making decisions during this stressful time usually backfires.
Most traders tend to quit at the absolute worst time, probably because they finally have reached the breaking point with the system and threw in the towel.
Having a quitting point written down before trading starts removes the emotion and makes the decision much easier.
Once you are convinced of the need to establish a quitting point for any trading system, the question becomes, what criteria should be used for quitting? Some popular methods—and some unorthodox ones—are discussed here.
Probably the most popular approach is to base the quitting point on the maximum drawdown (The decline of a financial instrument from the peak price to the trough.). This can be established in dollars or in percentage terms. One problem many people have is they establish this amount based on their personal preferences, which is good, but they do not take history of the system into account, which can be bad.
For example, they might decide to quit after a $10,000 maximum drawdown, which is usually perfectly reasonable. But it is not reasonable if the system’s history shows multiple $10,000 drawdowns, as shown in...
Figure 1.

This might seem obvious, but most people never bother to match the system’s expected drawdown to their personal preferences. Neglecting this is just guaranteeing inevitable failure.
A second popular approach is to quit after a certain number of consecutive losers. In this approach, if the system’s history showed six losses in a row, then if six consecutive losses occur in real time, the system is stopped.
The problem with this method is the randomness of wins and losses could easily lead to more than six losses in a row, depending on the system. Just because six was the longest streak in the past, does not mean it will be the longest streak forever.
One hopes as part of your trading plan, you have listed goals and objectives for any system you trade. For example, your goal might be a 50 percent rate of return with a 25 percent maximum drawdown.
When you picked the system, you thought it would meet your goals, so every six months or so, you should compare your goals to your system. If there is a big divergence, perhaps it is time to stop trading the system—even one that is showing profits.
The key here is that you should have another, better system ready to take its place that also meets your goals.
Whether you are trading your own system, a black box system or following signals of another trader, you should always be on the lookout for drastic changes in the system methodology. For example, if the system history is based on trading the E-mini S&P on the open, and all of a sudden it starts trading in late afternoon, run, don’t walk, from this system.
Or if you find yourself rewriting or tweaking your system rules to show better historical performance, your original strategy is no longer valid. The system is now something different, and you need to stop trading it until you reassess the strategy as if it were brand new.
Because the decision to stop is ultimately personal, you can use whatever criteria with which you feel comfortable. A certain amount of money lost in a week or month, or a system winning percentage dropping beneath a certain threshold are two examples.
Basically, if it can be measured and it makes sense to you, then it is a valid criteria to use.
Just as there are standard, simple methods on which you can base your quitting decision, there are also complicated ones.
In manufacturing, the quality of most processes is assured by a technique called statistical process control (SPC). An example SPC-run chart is provided in Figure 2.

In a nutshell, SPC uses knowledge of the process to determine what is normal and what is abnormal. If certain criteria are violated, corrective action (changes to the machine or shutting down the machine) is taken.
This method, although complicated, can be highly effective, as it uses actual trade results to make its decision.
Many people apply technical analysis to the equity curve of...
the system and trade based on this. An example of this is given in Figure

 3, with a moving average of the equity curve. When the equity is above 

the moving average, the system is turned “on,” and it is turned “off” when

 it is below the moving average.

Although this sounds appealing, two troubling aspects emerge.
First, what length of moving average should be used? Picking the “best” one based on history is just like optimizing a system variable—the best in the past rarely works best going forward.
Second, unless there is trade dependency occurring (if the results of the last trade depend on the trade result right before it), there is no mathematical reason why this method should work.
Other popular technical approaches, such as using breakouts or patterns in the equity curve may work, but they are prone to the same issues, such as overoptimizing or hindsight bias, that make the methods tough to use on price data.
Because most people exit a system after a period of bad performance and the majority ultimately lose, what would happen if you stopped trading a system at a new high? The theory here is that a peak will inevitably be followed by a dip, and at the dip trading can resume.
Psychologically, this method is probably a killer for most traders. Why would one stop trading a system that is doing well, only to pick up when it is doing badly? But it might just work, because it is the opposite of what most people who are losing would do.
By now, you realize the importance of having a quitting point for any system you implement. Additionally, you may have a few more ideas for how to implement one.
The key is that your personal quitting point must be written down before you start trading a system. And, of course, you must follow it.
If you do not establish and record it prior to beginning a trading system, then chances are you will make a rash decision to quit based on the heat of the moment. Or worse, when a quitting point is inevitable, you will bury your head in the sand and continue trading until there is nothing left. As a result, deciding when to quit trading may be the most important decision you make.