First Quarter In The Books

Up 18% for the first quarter.  Lot of bouncing up and down, which I expected for a contest account.

Hopefully the next 3 months I can build on that!

What A Market Wizard Thinks About Trading Contests

Up  40.35 % for the year.


Contest standings can be found here. http://www.worldcupadvisor.com/worldcupchampionships/default_nwcc2.aspx



In an earlier post, I mentioned that I would tell you what a Market Wizard (from Jack Schwager's books) thought of trading contests.  Here it is...


I'm sure you've heard of Dr. Van Tharp (www.iitm.com).  He was interviewed in the book Market Wizards.  Van has studied the habits of many successful traders, and currently helps traders succeed.

His work has helped me quite a bit.

Back in 2006, Van had this to say about my performance in the World Cup contest:

"And although Kevin has been trading and learning for 15 years, most people that win in trading contests are doing some very dangerous things with position sizing. So notice your reactions. Are you impressed with the people that win competitions? Or is your gut reaction to learn more about how to trade effectively in any market – and just stay in the game!"


Keep his thoughts in mind as you follow this blog.


(By the way, my results this year will not depend on dangerous position sizing.  I have pretty simple rules for sizing, and adding on to winning positions.  Right now, I always start with 1 lot, and add only if appropriate.)

Back To The Start

After almost 3 months of up and down, I'm still about where I started...

Spinning My Wheels

Up down up down up....

Currently up 10.8% for the year.

One problem with this equity curve is that many people, when faced with a similar curve, will try to "force" trades, take bad signals, "flyer" trades, or overleverage, in the hopes of breaking out of this funk.  Usually, that ends in disaster.

I won't do that.  If I end in disaster, it will be from following the system!

What I Hate About System Trading

For any trading technique, there are disadvantages to it.  For example, if you trade in a discretionary fashion, your mood (state of mind) might influence your results - if your last 3 picks were losers, you might be hesitant to pull the trigger on the next trade.

For that reason, many people like mechanical trading (where you just follow the rules) better.

BUT, I have never heard anyone talk about the main drawback of mechanical systems: HELPLESSNESS.

Let me explain, using my recent equity curve as an example...

Before the contest started, I spend quite a bit of time developing a system, running simulations, evaluating performance, etc.  During this time, I was doing a lot of thinking, trying to develop (but not over-develop) a winning approach.  I was in control of the process.

Once I was done, and the contest started, I basically just follow the rules.  Sometimes the rules work (and equity goes up) and sometimes the rules don't work (and equity goes down).  In the short run, anything can happen - the market is in control.  But over the long run, I expect my system to prevail.  The key point here is that once the system is running, I am not thinking too much, and I am NOT in control of the process (unless I completely shut the system off).

Once the system is turned "on," the market is in control, and I am helpless.  That is the way I have felt the last couple of days - helpless.  All I can do is follow my system.  Intervening/changing the rules/making emergency "fixes" may reduce or eliminate my helpless feeling, but I can guarantee that in the long run it will hurt my performance.  Whenever I tried that approach, I always ended up worse off (so I do not do it anymore).

I have young children, and I suppose system development is similar to raising children:  you do your best to set the child (system) on the right path, but one day you have to let the child (system) go and face the real world (market) on their own.  If you did things right early on, the child (system) will thrive.

So, right now, I feel a bit helpless.  But next week, I may feel like I am back in charge.  Or not.  That uncertainty is just part of the trading game!

Trading Articles for Dr. Van Tharp

I am sure you heard of Dr. Van Tharp - he was profiled in Jack Schwager's famous book Market Wizards.

Dr. Tharp has helped my trading a whole lot.

I recently wrote a three part article on exactly how Dr. Tharp has helped me.  You can read about it by signing up for his weekly newsletter, and you can read Part 1 below.

Part 1 of article (halfway down the page):

http://www.vantharp.com/Tharps-Thoughts/568_Mar_14_2012.htm

Sign Up for Dr. Tharp's Newsletter:

http://www.iitm.com/regform.asp

Just Follow The System

I exited my most profitable position today, not because I wanted to, but because the system told me to.

I am now left with 7 open positions, with about -$3,700 in open equity:

2 Big losers
3 Little losers
2 Little winners

Not exactly the way I like to see things - I like to keep the winners, and jettison the losers.  But, the losers haven't reached their stop points, so there is still a chance (ugly word: "hope") that they will recover.

Remember: my position is always to follow the system, until the system shows that it is no longer viable.  So, there are times where I don't like what it is doing, but from experience I know that following the system is best in the long run.

Some Historical Statistics

Here are some details on the strategy I am trading for the contest.  These results are all based on historical testing.  Please consider them as hypothetical.  Once I have enough trades in 2012, I will compare the actual contest results to these values.

These results are from approximately 2006 to end of 2011.

Update, and a Comment Answered

The end of week update is at the bottom.  Currently, I am up 22% for the year.


In case you don't look at the comments, there have have some excellent questions posed.  I like to answer a couple of them here:


"There are 2 sets of numbers, one where the system is traded mechanically, and one where the system is traded by a live human being.


1. I was thinking if you compare those numbers (for the live trader) for the 2 contests that you won previously (if available), would there be any major differences?


2. Would you use those numbers (for a live trader) to measure how you have improved over the years?"

These are really neat questions, since they bring up psychology in trading.  For example, what good is an historical  backtest, if the live trader (by thinking he is smarter than the system) deviates from the system?

For me, I can tell you that when I had discretion in what I did, I almost always did worse.  I don't have any hard data to support this, but there have been times where I would develop and test a system, and then haphazardly trade it real time.  By that I mean sometimes I'd overrule the entry, and skip the signal, or stay in it longer when I should have exited.  I also sometimes added to losing positions, which really got me in trouble.

My general feeling was that my "monkeying" around with the system in real time was almost always bad in the long run.  The kicker was that sometimes, in the short run, my discretion was better, and that was enough positive reinforcement to keep me doing it.  Kind of like winning a little bit playing slots.   Plus, my stress level went up, since I now had to make more decisions, after ignoring earlier system signals.  

Now, I take every signal, as is.  Without fail.  I don't try to get cute and skip or overrule signals.  Since I trade 10 different systems now, I really couldn't deviate from the systems, even if I wanted to.  I'd be confused very quickly!

I wish I had numbers to back me up, unfortunately it would be a major research project to prove all this.  But my conclusions are:

1.  It is better, monetarily and psychologically, to trade well researched and tested systems AS IS.

2.  Trading systems without questioning the signals leads to less stress.

3.  Over the past 6 years, my performance and ability as a trader has greatly improved by following rules 1 and 2.

I may have more to add on my trading progression since 2006, from an article I have recently written.  I'll give details when it is published.


In a future post, I'll also show how I now track my performance (systems signal results versus actual results).

Real or Fake?

Someone asked me if my equity curve updates were legitimate.

I guess in this industry such concerns are to be expected.  Financial "wizards" tend to be everywhere on the internet - at least they look that way in the darkness.  Turn on the lights, though, and the "gurus" scatter like cockroaches.

It is pretty easy to turn the light on this blog, and there is no scattering here...

You can always check the contest leaderboard at:
http://www.worldcupadvisor.com/worldcupchampionships/default_nwcc2.aspx

If you see my name there, my percentage return should match my equity curve.

If you don't see my name on the Leaderboard, you can assume my percentage return is below the 5th Place person.


So, it is quite easy to verify that what I post is legit, especially if/when I start doing better, and finally again show up on the Leaderboard.


Really, the question is a sad commentary on the futures industry - so many people out there are used to con men, snake oil salesmen, fraud, etc.

They don't know what to believe, so they either believe all of it, or believe none of it.


I can't speak for other stuff out there, but you can rest assured what I post is accurate.

Coiled Like a Spring...

Consolidating in the $8,000-$11,000 range, getting ready to EXPLODE in a breakout move!

Just kidding.  I have no idea what my equity curve is going to do.

I've heard people describe markets that way, though.  Guess what?  They don't know, either.

No one knows what will happen in the future.

The sooner you understand that, and incorporate the uncertainty of the future into your trading, the better off you'll be.

No More Discretion

Although the "base" system I am using for this contest was set in stone (ie, no discretion), the "add on to winners" portion of the strategy, where I increase size as the profit in a position grows, had discretion in it:

Initial entry - 100% mechanical, no discretion
Exit - 100% mechanical, no discretion
Additional entries, for profitable positions - 100% discretion


Although I liked the idea an adding on to winning positions, and tests I have run with other systems show that the idea is sound, I did not like the discretionary aspect of it.

So, I decided to fix this.

I went back, and divided the historical trades roughly in 2 - an in-sample "test" period, and an out-of-sample "verification" period.

I ran a couple of simple ideas (for when to add on) through the "in period" and chose one, based on test results.

I then checked, and the scheme holds up on the "verification" out-of-sample period.

Normally, I'd like to run this in real time (without real money) for a few months.  But, in this case I am going to put it to use immediately.

So, here is what this system looks like now:

Initial entry - 100% mechanical, no discretion
Exit - 100 mechanical, no discretion
Additional entries, for profitable positions - 100% mechanical, no discretion


Why am I eliminating discretion?  I'll talk about my reasons in a future post.

We will see how this works out!

Contest Update:

LeaderBoard: http://www.worldcupadvisor.com/worldcupchampionships/default_nwcc2.aspx

My Performance:

End of Week Update

In positive territory for the year, but not by much.  That could easily change in a day.

Sticking to the plan - that's where a lot of people get tripped up - they are too quick to "pull the plug."

I have 8 open positions right now:

2 highly profitable
3 around breakeven
1 moderate loser
2 significant losers (1 will be closed on Monday)

$1425 in open trade equity right now


Have a great weekend!

Don't Try This At Home

There is a right way and a wrong way to trade futures.

This blog is starting to turn into an example of "how to trade the wrong way."

Why do I say that?

Well, just look at the equity curve.  Ignoring the near 50% drawdown for a moment, just look at the equity curve.

So far, in just 2 months of trading, there have been 13 days where the account equity has risen or fallen by 10%.  Think about it...that is a 10% change IN ONE DAY!  And it happens a lot with this account!

In just the past 2 days, my account has risen 28%.  It could just as easily fall that much in the next 2 days.

This is reckless.  It will either lead to big gains, or more likely, disaster.

I am trading this way because of the objective - to win the contest. PLEASE DO NOT TRADE YOUR OWN ACCOUNTS LIKE THIS! 

If the objective was to make a living trading, this would NOT be the way to do it.  (As a side note, my other real money accounts are nowhere near as volatile.  Otherwise, I would have been out of the business a while ago - either super wealthy from reckless trading, or more likely, out of trading capital.).


So, I hope everyone reading this gets 2 messages out of my performance:

1.  Trading in a contest is different than "normal" trading.
  
2.  This type of trading usually leads to disaster. 



Sometime soon I'll post what one of  Jack Schwager's Market Wizards thinks about trading contests...