I think you are now on the right path. You have identified a strategy with 1 or 2 setups (more then that, I believe will be increasingly negative), you have backtested them, you have figured out the expectancy, you have written down the rules, you review the rules everyday to internalize the setups. You identify and review all of the day's theoretical signals everyday, and compare to actual performance (This also trains your mind to recognize the setups on sight. I still do this exercise for all my favorite instruments everyday after 5 years of full time trading). You don't deviate from the rules during the trading day. You tweak the rules after market, not during live trading, and you repeat the entire process from scratch after tweaking any rule. If you have a sound strategy, and you resist the urge to cherry pick trades on the fly, and you start by trading a contract size that is comfortable for you, then you should be on your way to profitability.
Last edited by monpere; July 14th, 2011 at 07:51 AM.
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Me , I did . Without stepping into the crossfire ( I hope ) , a mechanical approach is what turned my trading around . My journal documents me playing out a mechanical method where entries , stops and targets are all defined in advance - https://futures.io/elite-trading-journals/10516-mavericks-pa-16.html . Scalping , swinging , investing etc. are all different ways to play the game and if you look at your trading as a game you can succeed . If you dont and you get upset or elated by anything whatsoever that happens to your account the game will eat you up whole . I found that approaching trading as a swing trader allowed me to take a few trades in the direction the market has been heading , not be glued to the screen and analyze myself and my actions in a structured objective way - like Im my own shrink .
"Trading in the zone" helped me to understand WHY I need to look at trading as a game . Its tough to explaing because unless youve practiced trading for a long time (years) you wont have the experiences teaching you "why" . To me trading is the same as playing lotto with the same numbers every day - "mechanical" or better yet "boring" .
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it is not hard to see that trading is a game of odds... really, not sure why a book has to teach that.. in any event, to me trading is not so much a lotto game, but rather a game of blackjack... it requires skill and knowledge and the ability to calculate the odds...
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Especially if you're trading using a mechanical (or automated) system, then trading becomes very much like playing blackjack. When I lived abroad (on an island, no less), one of the entertainments available was a casino and I learned how to play blackjack according to the "standard strategy" (which doesn't make money over the long-term, but gets you very close to breakeven - counting cards is the only way to make money over the long-term in blackjack).
What I learned playing blackjack is that no single hand really "matters" as long as you play every hand correctly and your strategy has a positive expected outcome. It becomes a process of making little bits of money incrementally, like a machine that you put a dollar into, turn the crank, and out comes $1.01 or $1.015 on average. Each turn of the crank is nothing exciting (and shouldn't be), but crank that machine enough times and you could be very wealthy.
Before striking out on my own as a trader, I previously worked for a trader who has made many millions of dollars by trading for himself and others. This guy was (and still is) the real deal, and he's probably the best trader I've ever met.
A couple of quick insights:
1) He had worked as a broker first, while also trading futures for himself. He told me that it wasn't until about 10 years or so into his career as a trader that he became confident that he could do this for a living - and this guy is really smart, very hard working and very focused. The point is - it takes time. He didn't make the really big money until he had been trading for over twenty years;
2) By his own estimate, he made money on roughly 40% of his trades. I saw firsthand time and again how he would buy the high tick of a move and sell the low tick. However, when he had a winning trade on, he had little compunction about adding to the winner, so that when he caught a big move, he made a lot of money on it - a lot more than he lost on his losers. I'm not saying that this is a winning strategy for everyone, because scaling up while the market is moving higher is contrary to what most people want to do (which is to take the profit off the table) - my point is, he was able to take a lot of small losses and stick around for the big moves. Not a lot of people can have 6 out of 10 trades be losers and step up to the plate the next time. The fact that he can do it while most people can't is probably one of the reasons he's so successful.
Anyway, just my two (or three) cents.
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Well, anything I learned from him came from observation, mostly. There was no training program, and I think it would be wrong to characterise the relationship as one of "mentor/student" - my job was to make sure he could make money from trading, and my tasks included everything from helping with marketing to dealing with brokers to interacting with our auditors. It was not glamorous, but it was financially rewarding.
His trading style is also very different from my own - he's completely discretionary, and holds positions for days and even weeks, using short-term setups and catalysts to trade around core positions that were informed by both macro-economic fundamentals as well as technicals. Although he focuses primarily on fixed income futures and foreign exchange, he'll also have trades on in energies, grains, metals and individual stocks.
Now, with all of that being said, here are some insights I gleaned, both from watching him as well as interacting with other professionals there:
1. Low volatility = low opportunity
2. Rarely does a trade which was performing poorly suddenly turn around and work in your favor. Depending on your time horizon, the trade should work immediately (i.e., by the end of the day)
3. Good setups seem to come in waves: sometimes you see a lot of them at the same time and they hit; other days, there's really nothing and you shouldn't push the market to provide you with a good setup every single day. It doesn't work that way - markets work in waves or cycles. You must strike when the iron is hot and have the patience to wait for the setups.
4. When trading across markets and sectors, always be mindful of relative strength: which markets are trading best? Which markets are trading worst? What does that tell you?
5. A trend will forgive a thousand mistakes, a choppy market will make even the most brilliant thesis seem like babbling.
6. If you're attempting to capitalize upon a strong market move, that move should be confirmed the following day (assuming that you're holding it for more than one day). If the market doesn't confirm the action the following day, it's suspect and should be watched very carefully.
7. Never assume you know where a trend move will end - that is probably the most dangerous thing you can do - the last part of your position should always be stopped out on a trailing stop (as opposed to a profit target).
8. When doing macro-trading, it's important to understand the main macro arguments (the pervasive arguments) which are supposed to explain what the market is doing -- and then evaluate whether the market is, in fact, validating that view or rejecting it with subsequent price action. For example, if gold is supposed to be rising due to inflation, and it sells off following a higher inflation number, watch out.
9. Remember, if a great setup fails, that tells us something very important, besides being disappointing - it tells us that there is something else driving prices that is overshadowing or overpowering the typical drivers of market action. Some of the best trade setups can come from catching other traders when they're "trapped" by a traditional setup that fails to pan out.
10. If a move starts to happen before you get on board, you need to get on for part of it at least (maybe not a whole position) but don't let the train leave the station without you.
11. When a market that is showing oversold conditions refuses to bounce at all, that's the signal that it should be sold more ... it's not getting any help from its oversold status. Same with overbought.
12. A market that has been in a prolonged trend will most likely exhibit position-covering before a big number.
13. The key is defense: if you've got a lead on a trade, protect it. If a trade is not working, then lose it. If it's acting well, press it.
Again, these are things I gleaned. This is all based on my interpretation, and it's possible that others would argue against them. Still, I found these insights useful.
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Automated is a subset of mechanical or rules based trading.
You can trade mechanically and do it manually (or you can manually trade based on discretion or gut feeling, etc), but I'm not sure it's possible to trade automatically and not have it be rules based/mechanical.
"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."