Monday, May 7, 2012

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.



2 comments:

  1. Kelvin, did you ever have a back-up plan in case the whole thing didnt worked out?

    Meaning, all the 'risk-money' got washed out.

    I have, I would go back to working in corporate world.

    ReplyDelete
  2. I still have a backup plan, and I think I always will!

    ReplyDelete