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.

Wednesday, July 11, 2012

Contest Account

Here is my contest account.  At this point, it is psychologically better for me to just assume the account is just wiped out by the PFGBest theft (what was left of it, anyway!).

If and when I have a check in my hands, or a new account with the PFGBest balance, I'll assume this account is $0.

Tuesday, July 10, 2012

Fox Business News Link

They say television adds 10 pounds to you.  I think it added 20 pounds to my FACE!

Anyhow, here is the link to the interview.

I sure hope we all get our money back!

Fox Business News

I will be appearing on Fox Business Channel's "Closing Bell with Liz Claman" at 3 PM EDT today, to give perspective from a PFG account holder.

I figure if it helps people, even a little bit, get their money back, it is worth my time.


Bad Day

You know it is not a good day when you are quoted in the news, because some broker stole your money...

But, I feel fortunate because 1) I have multiple accounts at other brokers and 2) let's face it - my contest account was going downhill quickly anyhow.

So, don't feel bad for me.  Feel bad for some of my trader friends with big PFG accounts.  I've talked to a few of them, and tried to cheer them up.  They are somewhat in shock.

Also, feel bad for the honest people at PFG Best, Robbins Trading and  I know a bunch of people at those places, and I'll hate to see them lose their jobs because of a scumbag crook.

I'm not sure where this blog will go from here, since there is no more "contest."  There are usually 100-200 people reading this blog each day though, so if you have any suggestions on this blog's future, please comment below.

I may also be interviewed later today on a major TV business network.  If so, I'll post details.

Protect Yourself

It is obvious that after MFG and PFG that the people who are supposed to protect customer accts are not doing so.

Hopefully people reading this post now realize that records can be faked, financial reports can be misleading, etc. I think there are a couple of lessons here (at least that I have followed since MFG):

1. Have multiple accounts through different clearing firms.

2. Put as little as possible in each acct - tell yourself you'll be OK if any one account suddenly vaporizes.

3. You could also wire money in and out every day/week/month, to not leave extra idle funds sitting around in a futures brokerage.

4.  Don't trade futures.  Not an option for many of us, but it is something to consider.

The net effect of doing this will still leave you open to an industry collapse, which I guess could happen. It also will effectively deleverage you (not necessarily a bad thing), since you won't be using margin optimally.

I'm guessing this debacle will lead to SIPC style insurance for futures accounts. A year ago I would have thought that idea was crazy. But after MFG and now PFG, it makes total sense.


Here is the latest message I got from PFGBest.  In past times of broker failure, open positions were simply transferred to a new broker.  Not this time.


Tuesday, July 10, 2012
As referenced in a customer email sent on Monday, July 9, NFA and other officials have put all PFGBEST customer funds on hold.

PFGBEST's clearing FCM will liquidate all open positions still held by PFGBEST customers. Please note that the liquidation may not be reflected on BESTDirect platforms when you logon on Tuesday.

We will update you as any new procedures are stipulated and with any further information as it becomes available.

Monday, July 9, 2012

Contest in Chaos?

The trading contest I am in is being run thru PFG Best.

I have no idea how the e-mail I received below will impact the contest, but I do not think it will be good...


Monday, July 9, 2012
Due to a recent emergency involving Russell R. Wasendorf, Sr., a suicide attempt, some accounting irregularities are being investigated regarding company accounts. PFGBEST is wholly owned by Mr. Wasendorf. Therefore, the NFA and other officials have put all funds on hold, and PFGBEST is in liquidation-only status with our clearing FCM. What this means is no customers are able to trade except to liquidate positions. Until further notice, PFGBEST is not authorized to release any funds. We will update you as any new procedures are stipulated and with any further information as it becomes available.

Friday, July 6, 2012

Contest Update

You know things are bad when you have to keep adjusting the Y axis scale, to allow lower and lower levels of equity....

And yes, I am trading with real money (unfortunately!)

Wednesday, July 4, 2012

In Case You Like My Advice...

Tomorrow, Thursday July at 8 PM EDT I will be giving a free live webinar on "How to Trade Like A Champ."

I won't be discussing my abysmal contest performance, but I will be giving some (hopefully) good advice on trading.  I'll also be talking a bit about my SFE Trading System (full disclosure: I do offer the SFE System for sale).

If you've enjoyed this blog, I think you'll see the same kind of truthful, down to earth advice during the webinar.

Anyhow, if you are interested, you can get more information here:


62% Max Drawdown - Yikes!!!!

Well, I recovered a tad from my low point.  Still, I'm down about 35% on the year, with a whopping 62% maximum drawdown.

You know the warnings at the bottom of the screen during reckless TV commercials?  I think that warning should be my new blog title:

"Don't Attempt This At Home!"

Seriously, I hope my adventures in this contest make everyone realize that trading can be a roller coaster, can be nerve wracking and can be hazardous to your financial health!

Sunday, July 1, 2012

A Half To Forget...

Not too much I can say.  Ended the month, and the first half of the year, at an all time low.

I'll keep pushin' on, though!