New Week, Hopefully A Good One

Very small gain today.  Hopefully the rest of the week will be better!

By the way, if you like my view on trading, I have a whole boatload of short articles and trading tips that I share with my mailing list.  It is free, you can opt out anytime, and I promise not to bury you with info or sales pitches.

Go here to join my mailing list: http://www.kjtradingsystems.com/signup.html

The Reason For My Drawdown

I figured out the reason for my latest drawdown.  This is a surveillance photo of my trading crew, taken during market hours, when Tradestation and E-Signal should be running.  No wonder!!!!

Downside Breakout

The past week was pretty brutal, and most of that was due to 1 position (see previous post).  Not only did I get in at the peak price, but I entered as a double position (per the rules), and it has lost more money every single day I have held it, except for one.

Am I disappointed with this past week?  Yes.  Am I panicking? NO!!

I'll just continue to follow the rules, to the best of my ability.  That's where having a valid backtest helps.  I know that if I just keep pushing on (following the system), things should turn out all right.  There is always a chance things won't go right - even a casino can have a losing streak - but making decisions outside of the system would be far worse.

If nothing else, I hope readers of this blog learn to stick to the trading plan.  It is by far the clearest way to success, although it does not guarantee it.  It is much, much better than just "winging" it.

Just for reference, my initial margin/equity ratio is about 91%.  A few weeks ago, it was at 40%.  If it reaches 100%, I won't be able to add new positions.

I am in 11 positions right now...

Big Winners:  3  (2 are doubled, and the other I will double on Tuesday)
Small Winners: 5
Small Losers: 2
Big Losers: 1 (1 is double position)


As always comments and questions are encouraged!

Look Out Below!

Contest Update:

Once again, I have proven quite adept at buying at the high.  I did this last week for the trade signal I missed, and it was a double position, so the total loss right now for this one position stands at -$3,080.  

YES, I AM A GENIUS TRADER!!!! HA HA HA HA

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The Trading Process - Conduct Preliminary Research - Step 07

(Note: to see any of the previous steps, look for the heading "Trading Process" in the column on the right.)

At this point in the process, you should have a decent Trading Plan, and you should realize that you need a trading strategy with an edge to succeed.  So, how do you develop an edge?

Edges are all around us.  They can be as simple as trading in the direction of the prior day's close, or as complicated as a multi node neural network based on 5 uncorrelated instruments.  The trick is actually finding them, and then evaluating them.

My best edges come from simple market observation ("hmmm, it seems like the market moves up after candlestick pattern X"), trading books and magazines and from other traders (it is amazing how successful traders freely share - maybe it is because we all realize how difficult trading really is).  Let your imagination run wild, and your mind will come up with some creative ideas.

A couple points to keep in mind:

1.  No idea is bad, dumb or stupid.  Be non-judgmental in this phase.  Be open to anything.  Your later analysis will weed out the bad ideas.

2.  Make sure it fits you.  If you like trying to pick tops and bottoms, don't develop a long term trend following system.  Remember, these are your ideas, so be comfortable with them.

3.  Ideas in books and magazines rarely work as is.  BUT, they are a great place to start.  You can modify core ideas, and create your own winning strategy.

4.  Make sure you have the right tools.  If you are data mining, make sure you have the right software.  If you are looking for patterns, make sure you have an objective way to define and measure them.

Next: A simple formula to help you "see" good strategies.

Big Drop Today

I figured a breakout on my equity curve was coming.  I had hoped it would be up, not down!

Looks like a bunch of new trades will be occurring this week, so I expect the equity volatility to shoot up a bunch.

It Figures

So, last post I explained how I missed an entry signal, and missed out on a 2 day $1,000 open profit.

It gets better...

Thursday at the close, I entered a double position (1 contract for the missed signal, additional 1 contract for the  "add to winners" scheme I am doing.)

Guess what happened?

The price moved against me on Friday, temporarily (hopefully!) causing an $1,100 loss.

It seems like this happens to me a lot - is it because I conveniently forget the times when mistakes go in my favor (and dwell on the negative times), or is the market out to get me?  I know it is the former, but many times it feels like the latter.

Maybe you can relate to this experience.  If so, just realize that it happens to everyone!

Ugh!

I just realized I missed a trade on Tuesday.  So, I just entered it today.

Of course, it was a quick winner, one that I would have added onto.

Total cost for my mistake was about $1,000.

UUUUUUGGGGGGGGGGHHHHHHHH!!!!!!!!!!


(In a future post I'll share how I track fills, mistakes, etc.  It has saved me thousands over the past few years.  But not today.)

Random Noise

Contest Update

Just bouncing around the 50-55% return mark.  Nothing real exciting (equity curve shown at bottom).

The Trading Process - Step 06 - The Trading Strategy

The last few steps in the Trading Process series have dealt with developing goals and objectives, and putting these in your Trading Plan.  The idea is that once you know what you want, it is much easier to create or find something that meets your goals.  Of course, depending on your objectives, it still may be very difficult to come up with a strategy.  BUT, that is much better than losing money with an ill fitting strategy.

In the next 3 steps, I'll briefly describe how to take an idea, and turn it into a strategy.  Each step alone could be a book in itself, so I'll just give you a high level overview in those steps.

But first, let's backup a step.  At this point, you know what you want to achieve trading.  So, why not just subscribe to a trading newsletter, or watch CNBC and trade off their reports, or lease or buy a "robot," and start trading?  Many people do just that.  I knew one "trader" who based decisions on the color of the financial commentator's ties!  But jumping into trading at this point is a terrible idea.

The bottom line is you want to have confidence in whatever approach you choose.  The only way to get that confidence is objectively evaluate the system's performance in the past (historical backtest) or in real time.  Without one or both of these "tests," you won't know if you have an edge.  And you need an edge to survive.

What I am really saying here?  Basically, when you start trading, you want to be able to shout "I have a trading strategy with a proven edge!  I can make money trading this strategy!"

Next time we'll discuss the preliminary research you need to do to get a trading strategy.

Base, Before a Breakout?

If there is a breakout soon, let's hope it is to the up side!

Trading wisdom for the day: "Follow the plan, follow the plan, follow the plan."

Still In The Hunt, Trading Process Continued

Contest Update:

Official standings for the contest can always be found here:
http://www.worldcupadvisor.com/worldcupchampionships/default_nwcc2.aspx

Currently, I am in 4th place with 52.7% return.  Equity curve is at the bottom  Right now, I have 7 open positions.  1 good size winner, 3 mid size winners (1 of those is a double position), and 3 small losses.

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Trading Process, Step 05


The Trading Process - Other Considerations

Last time, I discussed that as part of your Trading Plan, you need to have objectives for any performance metric (win percentage, trading frequency, etc - think about it, and go beyoned the few I've given you) that you think are important.  If you don't you'll either create or buy a system that does not "fit" you.  And doing that almost always leads to disaster.

Besides the strategy (which we will discuss next time)and its performance parameters (which I've already described), it is critical for you to figure out some other things, BEFORE TRADING.  Here is a partial list:

Platform - what trading platform will you use?  Does it come with historical data, charts, backtest capabilities?  If it is an order platform, does it send orders directly to exchange, or does it hold oders on the platform's server?  Have you spent time practicing with it, so under pressure you don't mix up buying and selling, mix up limit orders and stop orders?

Time - do you have the time to spend 1) actually trading and 2) researching new trading strategies?  If your approach requires you to check your computer every hour, can you do that?  When I had a full time job, I made sure all my strategies could be run end of day.  Don't buy an off the shelf system before figuring this out.  Again, it is all about "fit" - the system has to match your time constraints.

This list could go on and on, but I hope you see my point - think about all this BEFORE you even start trading!

Next time: The Actual Trading Strategy

When The Right Thing Turns Out Wrong

As you may know from reading this blog for a while, I am big on remaining humble.  The very best traders I know are pretty humble and down to earth people.  I've never met a great trader who was full of arrogance/hubris/self importance.

Interestingly enough, you see a lot of arrogant traders on internet trader forums.  You know the kind "well, I can easily get 1000% per year...I can predict the market with exceptional accuracy...I am the greatest trader in the world..." Maybe these guys are really big winning traders.  Maybe they are just delusional.  Either way, the market punishes hubris over and over again.  You can count on that.

Anyhow, you'll recall that I have determined that adding to winners with my contest system is a great way to juice the returns, at least from historical testing.

I think I am right in this assessment, but I like pointing out when I am wrong.  It keeps me humble and grounded.  Plus, I always realize who the boss is in this deal (the market, not me!).

Here is a trade I closed today.  A $130 gain for one contract became a $450 loss by adding on (right at the peak!).

I'll remember this trade if, at year's end, I am 6% from winning - that's what this cost me.

By the way, I am going to stick to my plan - adding to winners.  The unfavorable results of this one trade (or 2 or 5 or 10) mean nothing.  Only the results of over 500 trades matter to me for this system.

Today's Equity Chart

Trading Process, Continued

Contest

Down a wee bit today.  What I like is that for the past week or two, my equity has not had any wild swings.  Probably because my initial margin to equity ratio is only about 30%.  I've been as high as 100%, a few months ago.  Slow and steady up is my preferred mode, but the market doesn't give a hoot what I like!

Here is step 4 in the "DEVELOPING A TRADING SYSTEM " Trading Process Series
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The Trading Process - Win Percentage, Et Al - Step 04

Last time, I discussed that as part of your Trading Plan, you need to determine your goal for maximum drawdown.  My advice is to aim for about half of what you think you can live with.  When real money is on the line, acceptance of big drawdowns tends to fly out the window.

When developing your trading plan objectives, you'll likely have some unique requirements, beyond Rate of Return and Drawdown.  Whatever you pick will be important, since your system has to fit you like a glove (or you will abandon the system at the first sign of trouble).

Some of these objectives may include:

Winning Percentage - Pretty much a useless stat, except for the psychological impact.  I'm going to detail in July 2012 SFO Magazine (free at www.sfomag.com) why this is true, but if you have a need/desire to have a high winning percentage, by all means include it in your criteria.

Frequency of Trading - Some people want x trades per day, and maybe no overnight positions.  Others want the opposite, and others don't care either way.  If it might be important to you, include it.  Otherwise, when real money is on line, you'll regret not trading the way you really want to.

Account Size - Make sure your account size is large enough to endure the drawdowns you expect (and maybe 2x or 3x of these expected drawdowns).  You can easily wipe out your account, even with a long term winning strategy. MOST PEOPLE FAIL BECAUSE THEY ARE UNDERCAPITALIZED.  Don't be one of them.

Next time: some miscellaneous trading plan issues you should be aware of.

Latest Standings

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

Drawdown - Don't Ignore It

Contest:

Up 55% or so for the year.  Currently in 7 single lot positions (with 1 being a double).  Profitable in all except 1 - that one has a $12 loss right now.  Equity chart at the very bottom.

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Here is the next installment in "The Trading Process" series...


The Trading Process - Drawdown

Last time, I discussed that as part of your Trading Plan, you need to determine your goal for rate of return.  That is a pretty easy one, and pretty enjoyable too!

Determining the drawdown you can endure is just as important, but not as enjoyable.  Drawdown is the amount your account falls from an equity peak.  Step 3 in the trading process is determining the amount of drawdown you can handle.

For drawdown, you simply need to determine how much money (or what percentage) of your account you could afford to lose.  You might also want to attach a time limit to it.  For example, "I want a strategy that has no worse that 25% drawdown, and that drawdown cannot last more than 3 months."

With a goal like that, you have something to measure any strategy you develop against.

A couple of pointers:

1) If you develop a system by backtesting, your actual real life drawdown will almost always be worse than your backtest.  So, if you backtest says 10% maximum drawdown, count on at least 15-20% maximum drawdown.

2) If you think you can endure 50% drawdown, in reality you probably can only endure 25%.  This is a working theory I have, based on discussions with many traders.  My "Expert Council" (more on them in a future post) agreed with this idea.

EXAMPLE: For the contest, I decided on an "all or nothing" approach.  I decided that I would trade this account until/if I had an 80% drawdown.  I don't use this large a drawdown in my "normal" trading, but 80% fits this particular purpose.  And I can live with it.  That is key - make sure you can live with whatever you decide.


Next time: some more trading plan objectives that you should have.

4 Year Anniversary

Contest Results:

Up approximately  +52% for the year.  See chart at bottom.  Still not in the Top 5 yet, though.
http://www.worldcupadvisor.com/worldcupchampionships/default_nwcc2.aspx

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More importantly...


Today is my 4th Anniversary of freedom from the corporate world!

Transitioning to full time trading has been a challenge, to say the least.

TRADING IS BY FAR THE HARDEST JOB I HAVE EVER HAD IN MY LIFE.  That includes my 5 years in charge of Quality Assurance for an aerospace company - where if I made a bad decision, people could have died (no one did, thankfully!).  Trading is also about 50 times tougher than working on Top Secret government defense projects, 100 times tougher than designing experiments for the Space Shuttle, and 1000 times tougher than being a NASA rocket scientist.

But, all things considered, I love trading, and all things about it.  Because of it, I also get to spend a ridiculous amount of time with my kids.  More than once, I was the only Dad in a sea of Moms at birthday parties, soccer games, etc.  Of course, I'm lucky I have such a supportive and loving spouse, too.  If she wasn't on board with this whole mid-life career change thing, it would have never worked out.

So, I am living proof it can be done.  At least so far. BUT, at the same time, don't fall for people who tell you trading is easy.  Don't fall for people who claim these obnoxiously good backtest results and try to sell them to you - one joker once told me he'd easily be a billionaire within 5 years!  Don't fall for people who claim they can predict the future - if they really could, they'd be rich already.  Most people selling info on trading do not even trade!  In short, don't fall for the "easy" way out.

Trading is not about laying on a beach, sipping a margarita.  Remember that.

Performance - 1st Four Months

Up just over 40% through the first four months of the year.  Still a bit away from reaching the top 5 standings.


Some closed trade statistics (does not include trades where I added to position):