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Glad you asked
Anyone you ask can rattle off a scripted answer on what it takes to be a profitable trader. Books have been read, videos watched, browsers bookmarked to the hilt with important trade resources. All our knowledge combined with sim make us believe that we have courage fortitude and discipline. When discipline slips and you lose big you are grateful that you are on sim. Problem is you have delayed progress and missed a critical opportunity to grow.
You dont bring discipline to the table, the market disciplines you. It can only be learned through adversity. 'excellence in live' cannot be achieved ..sim or not you will regularly make mistakes but its learning how to deal with yourself under real conditions that you should be experiencing and not how you think you will react from the safety of sim.
I find value in doing both the SIM and live trading. The reason I started this thread is that I have poured over countless books, articles and hundreds of hours of videos on trading and technical analysis, yet I witnessed my account being steadily drawn down after more bad trades than good ones. I have gotten some great ideas from this thread, which made me realize that improper stops are a big part of my problem and that OptionsHouse is really the wrong platform for me.
I have found using the On-Demand feature in ToS to be incredibly valuable as it is literally a replay of the market, and I mentally treat my fake account as if it were real. That is what I think of as SIM. The free Ninjatrader SIM seems to be randomly computer generated and not based off actual markets, so it does not appeal to me, for some reason (though I think there are other data feeds that can be used) .
If I keep live trading without reexamining my strategies, I'll keep headed toward a zero-balance, and there is really no sense in that, so I definitely feel there is value to the SIM. I still would like to hear more about the systems that people use or the education that they went through (self-taught or not) that made them profitable.
The purpose of simulated trading is many fold. However, let me emphasize that not all simulated training is equal nor does sim trading serve one singular purpose. You should focus your sim trading on very specific goals to obtain best results. The specific training to focus on are as follows:
1. Creating anchor states to positive emotional experiences. The more discretionary you trade then the more sim experience you require because you need to have better grounding to those emotional states. Every trader will experience great adversity. How are you going to survive that? The only way is that if you have had some sort of sustained success and know you can come out the other side. This is why if a trader wants to trade with discretion and has never had success it will be difficult because they don't have an inner conviction. A good trader should want not to trade but to feel compelled to need to trade because it is an expression of their abilities.
2. Learning new trades. The goal for these days is to trade as much as possible and learn what works or what might work and what adjustments need to be. You need to discount any emotional anchor to losing during this training. That's not what you are doing.
3. Learning to place and actively manage orders. If you place only a couple trades per day then you can probably get that down in a few minutes. But, if you're trying to scalp and manage multiple contracts with micro-risk then you will soon discover that most trading platforms and their DOMs have no idea what the scalper really needs. It is better you discover these limitations in the simulator. For this training, you need to review and rehearse all the tasks.
4. Tracking performance of specific methods over some meaningful amount of time and in a live go-forward way. For this purpose, you want to use the same risk limits, account size, and number of contracts.
As, you can see you will probably want to be sim trading multiple accounts. I think sometimes we focus too much on the "end result". There is a desire for their to be a definitive end result but you may need to go back to the simulator multiple times to work on each of the 4 core goals. For example, if you are successful with swing day trading, taking 1 or 2 trades per day. You should consider that your training, right. It doesn't mean you are trained or qualified to trade another method like scalping. Also, many of the problems that are cited to affect live traders could just as easily be explained by a lack of proper simulated training. There is one benefit to live trading not mentioned, as well which is that it trading live tends to increase focus which actually makes it easier in some cases to bring out a good performance. However, it is better to obtain success through anchor states and systematic focus or else their may be a need to keep increasing the risk to drive the focus and then any lapse in focus will bring large losses.
Great traders will experience mastery. All traders will experience adversity. Recovering from losses, drawdowns, and poor performance requires both learning from any mistakes while discounting the future extrapolation.
Sim has been quite valuable to me over the last few months (after I blew up my first account LOL.) I've been having some success recently, and feel like I have turned a corner... but gonna stick to sim for now until I see valid consistency and only then switch back to live where the real lessons are learned.
I might add that I only sim real time with the market; to me it adds a level of realism that isn't present on a replay.
These are the 5 key areas of research that helped me. I think regardless of one's trading style, these will hold the same value to anyone in the game.
1. Understand the gambling nature of the business: Day trading, investing, scalping, etc. are all forms of legitimate gambling and as such you should approach this just like you would gambling in Vegas. Before you do anything else, you need to identify, what is the game I am playing, what is my bet, and what is the house edge? The same science applied to sports betting or casino games should be applied to trading. There are 50 + prop bets at the super bowl, and similarly there are trading styles that do little more than make prop bets. Everyone is betting in some way shape or form, but often people forget this and instead start to believe that they can predict the future.... In the trading business unlike Vegas there is a serious advantage that you have, and that is that you get to set your own betting line. This is a huge advantage that most people don't think about. But you get to set your profit target and stop loss and decide exactly when and where you are taking this bet. If you think about these tools from the perspective of gambling you will find that there is no other place where you can walk in, make your own rules of the game, and call your own betting line.
2. What is your bet based on? If you think 51% of the time when variables x,y,z are in place outcome A will occur how did you arrive at this conclusion? Most rookie traders make unqualified assumptions and take bets that have no statistical backing. Before you spend one dollar of your money you should come up with a statistical model that gets you over the 51% line on at least one aspect of what you are betting on. Otherwise you should play the lottery. For example if your system is based on trading long when this line crosses that line and you think that 70% of the time this will produce a winner, how did you come to this conclusion? Did you quantify this by deconstructing the data and running tests on hundreds of thousands of data points over years, or did you just look at a chart one day, and say... Hmmm I think I see something interesting. Basically the moral here is don't be the guy that thinks he called the DJ dropping 1,000 + points in one day because he spotted an unsuspecting doji on a chart somewhere.
3. You should know what game you are playing: There are tons of different trading games that do work, but often times these get lost in translation because traders don't really understand the rules of each game well enough to know what game they are even playing. For example, scalping uses a higher stop loss and a tighter profit target traditionally, and this type of game does well when the market moves inside of tight range. If the PT = 3 ticks and the SL = 8 ticks and the market moves inside of an 8 tick range mostly, then you will hit your PT considerably more than your SL and even when you do hit your SL occasionally, the math works and you beat your expectancy. Now when volatility doubles and the market makes small moves of 5 ticks and big moves of 15 ticks, using a tiny PT and large SL will kill you. Does the person applying this type of strategy know the rules of this game well enough to adjust their strategy? I could give countless examples of different trading styles, game theory, betting logic, but the key is just to know the game you are playing and know the rules of the game.
4. Understand the house edge. This is key, and most people don't even bother to deconstruct the house edge down to see where there break even line is at. Market Orders - 1 tick, Commissions - $3- $5 dollars per trade, Slippage - 1 to 2 ticks, Toxic fills, 1 tick on limit orders. This adds up to a house edge against you. Depending on your order types, your broker, your platform, your trading style, there will be different cumulative house edges, but you have to know this. Because in the end you have to not only cross the 51% threshold on just your betting line but also account for beating the house edge.
5. Building a good SIM model to test your trading ideas. Once you have identified the type of game you are playing (Point 3), understand gambling theory (Point 1), know the house edge in the game you are playing (Point 4) , have some type of quantifiable edge to be betting on (Point 2), you should put all of this together in a simulation to see if you can make your ideas work. This is the hardest part. And beyond the obvious challenges of just coming up with a proof of concept that can beat the house edge and be a consistent betting idea you have to contend with retail level SIMs. SIMs can often give wildly inaccurate backtest results and it is your job to reject anything that looks too good to be true even if it breaks your heart. Just to save you the time, here are a few things to stay away from.
a. Any SIM that uses exotic bar types. Renko, Line Breaks, etc. Most retail SIMs will show you crush it and make an obscene amount of money with these. But this is all just a fantasy.
b. Simple HLOC backtesting that uses limit orders. This considerably understates your toxic fill rate
c. Checking the evil box NT has (Enforce Immediate fills on limit orders) again understates your toxic fill rate, and overstates by 100 x magnitude your winning trades.
d. 0 latency backtesting of any kind. Your not likely to ever be int he front of the queue, so these are unrealistic.
The best advice I can give (for any type of scalping system, or any system that relies on limit orders for a large portion of their P&L), and this sucks honestly but it is very accurate.... Just get the level 2 data and reconstruct each price level, simulate your own queue positioning, and build your own assumptions about fills yourself. Even the better retail SIMs have serious flaws.
The best advice I can give (For people using mostly market order), just assume a reasonable amount of slippage, and pay up the spread in the SIM and assume a lot of latency. Don't ever give yourself credit for any of the wick of a bar, you likely will not get filled here.
Once you put all of these pieces together you might have something viable.
Happy Trading!
Ian
In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
Hey everyone,
I quickly scanned through some of your responses and I thought I'd throw in my limited knowledge on how I am becoming successful at trading. Understand i am currently only sitting at an account size of 10k so it is nothing to brag about, but I have been working, reading, and testing for several years (yes that includes using and losing real money).
The first thing that started me on the course to understanding how to be a successful trader was understanding that day trading is never a good idea, unless you have a large and I mean very large account. Majority of day traders lose their money and those that are good at it usually are good at it because they mastered a system that works for themselves. I have been a member of several sites that promise you will be rich (most recent being optionplayers.com and tradecrew) with their day trading system. What they do not tell you is that they face several loses and usually have a substantial account to make up the lose and cover the commission. Once I learned that day trading on a $5000 account was not a smart move I found myself making more money in the long run and losing less of it.
The second thing I learned was to always have a stop loss that provides room for fluctuations. Trading futures and stocks you may notice that daily fluctuations can be drastic and expensive. I usually look at a 5 year weekly on my futures and I gauge how it does weekly first before I dive into how it does daily. My stop loss typically is the previous weeks low if it is on a trend and the previous weeks high if I am looking to enter. I do not yet have strategy for entering based on daily but once I am in I typically set it for the previous days close (this has proven to work sometimes and not others)
The third thing I had to learn is that indicators are garbage. I know for some this statement is blasphemy and I say it loosely because I do use indicators for my trades. I do not use my indicators as a be all end all signals. I typically have them there to confirm my previous rule about entering the previous weeks high to confirm a trend. Even then I make sure at least 3 of my 5 indicators line up before I go into a move. There have been multiple times that my indicators never showed a move but I entered anyway and made a nice profit. Personal opinion, i feel like indicators are like a security blanket. They want to serve a purpose but end up hurting us in the end. Again I do have indicators and I do use them, but only to confirm my move and even when they dont line up I typically may still get in a play.
The fourth thing I learned was that the phrase "trading is hard" is too general of a statement. By no means do I think trading is the easiest thing in the world, but I believe this statement depends on what kind of trading you are doing. TO me option trading definitely applies to this statement. If you stick with your system and fine tune it you should be able to keep your losses at a minimum.
This post is getting long, so I will end it here. Please understand this is just my opinion based on my experiences trading. I would love to hear feedback and opinions of others. Thank you for all your time and happy trading guys
Don't want to share too much because it's not my product, and the guy mentoring me is just getting started. I just went live this week and I've been profitable so far. He uses 4 indicators, and preaches discipline, and not being greedy. His indicators are spot on, but the best part of the program is the one on one interaction with the guy who created the system.
Amazing post! I also see the value in specializing in a few set ups where you have completely mastered it. Also loved your advice on finding great trades and studying it to create filters that maximizes the profit potential.
With that said, I do think it's a little tough for someone who has no coding experience to back-test the strategies on historical data more efficiently. It takes a while to manually go through all the charts and see how it works. Have you hired a programmer to back-test for you, and did you learn how to code? If you learned, how long did it take you to be able to code out the strategy?
Thanks, and definitely enjoyed reading what you said!
