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Webinar: FuturesTrader71 (FT71) on Risk, Sizing, Scaling and Trade Management
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Webinar: FuturesTrader71 (FT71) on Risk, Sizing, Scaling and Trade Management

  #91 (permalink)
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monpere View Post
In terms of trade management, my experience has been that 'all in/all out' has always proven to be superior. I believe most average traders like scaling out because it makes them feel good. That in itself may be a valid reason to do it, but it generally does not perform better.

With enough skill and mathematical planning, I think 'scale in/scale out' may be quite ingenious, if you have the skill and account size and tools to scale into positions that are going against you, improving your average entry price, your risk/reward ratio, and then scaling out at various points and make the math work in your favor.

But, I also believe that 'all in/scale out' is probably the worst of them all, because when you lose, you lose on many more contracts then when you win. You are actually maximizing your losses when you lose, and minimizing your wins when you win. The only event that saves this approach, is when you get an odd ball extended run on your last contracts that makes up for the inherent weaknesses of this approach. Hoping to get that rare extended run, means you are requiring the market to do something extraordinary in order to make money.

I also believe that ' 'full stop/full target' is superior to trailing stops, and break evens for the typical day trader, and increasingly so, the shorter the chart period you trade. At the end of every trading day, I evaluate the theoretical performance of all my signals using trailing stop, break even, and full stop/full target approaches. The full stop/ full target approach almost always performs better. Of course your mileage may vary based on your particular trading method and trade management, but I think overall the result would probably be the same for most.

I'm including a pic of my excel sheet of the CL signals this Friday, comparing my different trade management approaches, if they were applied to each of the signals. I generally do 2:1 risk/reward with trailing stop and break even, 2:1 full stop/full target, and 1:1 full stop/full target. As usual 2:1 full stop/full target is the most profitable.

All great in theory but at the end of the day none of it really matters, it is all profitable or all not profitable. The problem for most people if not all people is never the method, it is psychology, what is theoretically best tends to cut you apart the hardest where the rubber meets the road anyway.

What is far more important than worrying about the "most profitable" or "best" method is finding ones own personal path of least resistance . You see for FT his path of least resistance is all in/scale out. I can promise you that him using this method which suits his personal style and psychology versus someone striving for "the best" or "most efficient" way of taking points while disregarding other factors, he will win that battle every time.

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  #92 (permalink)
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The All-In/Scale-out sounds consistent with FT's philosophy. You should have conviction in your analysis to take the trade at all (All-in). Once you are in, any of a number of things can happen - news event, HFT crash, etc, so scaling some on the way to an anticipated destination makes sense, since you can only anticipate the destination, not force it there.

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  #93 (permalink)
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DangerBoy View Post
All great in theory but at the end of the day none of it really matters, it is all profitable or all not profitable. The problem for most people if not all people is never the method, it is psychology, what is theoretically best tends to cut you apart the hardest where the rubber meets the road anyway.

What is far more important than worrying about the "most profitable" or "best" method is finding ones own personal path of least resistance . You see for FT his path of least resistance is all in/scale out. I can promise you that him using this method which suits his personal style and psychology versus someone striving for "the best" or "most efficient" way of taking points while disregarding other factors, he will win that battle every time.

Agreed. Even though my daily data tells me all in/all out would be most profitable for me, I generally start trading the strategy with trailing stop/break even and switch to full stop/target after being sufficiently positive. This is most comfortable for me given that I am very risk averse. Because of my personal psychology, I prefer to be less profitable with less stress, then the other way around. Another trader might absolutely prefer to generally take more heat in order to be more profitable.


Last edited by monpere; March 24th, 2012 at 05:02 PM.
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  #94 (permalink)
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Great Analogy Panda

I have following this thread with great interest. I wanted to add to Panda's comment except I wanted to use Bowling as an example because I am rather fond of the sport and as in golf and other sports there is the physical game (the setups) and there is the mental game. If you are diligent and practice correctly what you are doing is trying to perfect your stance, delivery, targeting and arm swing and tune your physical game. Your pre shot routine speaks to your mental game. In trading that pre shot routine I like to think of as doing your homework because a bad shot in bowing or golf often is linked to a poor setup...start poor finish poor. Those are things you can work on. The mental game however is much more challenging, you have to learn to read the lane (or the greens and wind conditions in golf) and adjust to the ever changing conditions. The elite bowlers who win consistently have mastered all the aspects of this. They make a bad shot, they spend about 15 seconds thinking about it, realize that its over and nothing can be done about it, they quickly analyze what might have caused it and they make minor adjustments and prepare immediately for the next shot. The great ones do this instinctively, yet I have seen many people completely fall apart after making one or two bad shots. They over adjust and end up completely self destructing over it.

My second comment is, and no offense to the other people who have come on Big Mike to do webinars and there was a lot of great information shared, but this series by FT 71 was one of the best I have seen in a long time. The points really hit home with me. And one other comment if I might. I suggest that instead of trying to pick apart and dissect individual parts of FT71's message and look for flaws in parts of his arguments in order to negate the whole thing (you know who you are) instead I suggest for the rest of us it might be better to focus on the entire body of information and the totality of the message he is trying to convey. First and foremost the guy is a pro, he's been in the trenches and has achieved a high degree of success in what can only be described as a very difficult arena with a very high attrition rate. He's made his chops and figured out how to survive and not only that thrive. He has achieve what so many of us here can only hope for. So when people like this offer to give of themselves and share their hard won knowledge with me for free I am all ears! Enough said about that

My background is in Engineering and I have worked with Statistics and Process Control in my career. I was also fortunate to have been an Intelligence Officer in the Military...more in that later. In fact my Masters Degree is in Operations Research and Statistical Process Control. I consider this probably a negative when it comes to trading. Although I'm not a statistician (thank God) I have had my fair share of the maths. So although I have had this background I still consider myself a simple country boy meaning I like to keep things simple so in my mind I have boiled things down to about the lowest level that I can to explain things to myself and perhaps this might help some of the other people around here. With regard to things like Process Control and Statistic's and Mechanical Systems the statistics were invented to describe relatively closed system and processes that have few variables and work best where you can control the environment and measure the results of what you are doing. When things start to vary too much from the mean then you know you have a problem and you start to investigate why things are going outside of your measured limits. When you have a dynamic system with many variables all of which are changing on the fly then normal statistical measures are in my opinion pretty ineffective because there are always exceptions and we are always trying to deal with and explain away ambiguity. Then you are into the realm of using probability, which really can be described as an educated guess because that's all it is a guess. The more data you have to support your guess the better you feel about it but in the end its still guessing. When you get to describing things like trying to predict where the stock market will go you are trying to do many of the same things that scientists and physicists have been doing for as long as there has been math models and computers. Things like trying to predict the weather or the location of a nuclear particle with some degree of accuracy is very imprecise. It is to say the least a virtually impossible thing for most of us to comprehend. What you get is a bunch of answers that boil down to this.. perhaps it will do this or it might do that but in the end we really don't know we can only give it our best guess but we are still going to go ahead and throw a number on it.

This has caused me a lot of problems psychologically in trading because engineers are oriented to deal with things being precise and we wrap ourselves in a blanket of mathematics and statistic's to try to explain the nature of the physical world and our environment. We tend to believe that there is a logical and mathematical answer to everything. Really what we are trying to do is retreat into a mental zone where everything is cozy and safe and has a logical explanation. However good information about this is only true in hindsight.

The whole discussion that FT71 was trying to make, at least I am interpreting it that way, was to say that there is always going to be ambiguity, that making decisions under uncertainty is hard and something you have to learn how to deal with is being wrong because we all like to be right. Nobody wants to be wrong, but its part of the game and you have to learn how to embrace it and get past it and move on . There are certain decision support tools you can bring in to use to help you understand your environment better and gain some semblance of situational awareness, but in trading you are operating in an environment where you are going to be asked to make decisions while in possession of incomplete or imperfect information. That's the rub, yet to be effective you have to learn how to function inside this environment and make your decisions based on the best available information and your judgement but you have to recognize that very often despite your best efforts you are going to be wrong. Personally when I started thinking about this it took me way outside of my comfort zone.

The only defense you have really, as in my bowling analogy, is to recognize very early on that things are not working right. You have to tune your Spidey Senses to see and know if something is working or its not. The faster you can make this assessment the better you are going to be in trading I think. Then you have to have the mental courage to either make an adjustment or get out of the situation, forget about it, move on and reset for the next go and most important be thankful for it. Over a long period of time thinking about this what I have come to realize is that everyone has a relationship to their environment and the trading environment is no different. Your brain is huge sensor that takes in raw data and analyzes it in different ways and applies filters to it based on your individual experience and biases and we all carry a lot of biases with us. The more times you deal with a situation the better you become in handling the variances that inevitably come your way because in markets I believe its ok to say things often rhyme but they certainly don't repeat in exact ways. One thing I have found that helps me in this regard is lots of screen time and really getting to know the action and nuances of whatever instrument you are trading. You can run all the simulators in the world but as pilots will tell you nothing beats actual time sitting in the left seat.

Being an Intelligence Officer has taught me that when you are dealing with human behaviors that individuals are totally unpredictable yet group behavior often is somewhat predictable. FT71 used a great example with stop placement...retail traders often place their stops a tick or two above and below a well known reference point. Does this mean that all retail traders place stops here or even a majority of traders? No it means that if you probe those areas you are very often going to find that there are indeed stops there and very often a sufficient number to make it worth your while probing there when you have a chance. How does he know this? Experience taught him this or the experience of others who told him that this was true. Those who have traded this kind of thing probably tested the idea over time and found out that it worked more times than it didn't. Is this an edge? Can you measure it? Probably if you do it 1000 times and you come away with evidence in the form of a bunch of ticks and put cash into your trading account. And doing this gives you a confidence factor and that is all. Isn't that all an edge is after all statistical or otherwise? For those who want to rely on metrics and backtesting and all of that stuff go ahead knock yourself out if it gives you that security and support to make decisions around. Because psychologically what are you really doing after all except trying to convince yourself through the use of math and stats that some observed behavior that you measured happens more times than it doesn't happen. So arming yourself with this body of facts gives you a greater confidence that when you are faced with a situation that looks similar to that which you measured that the data suggests you have a greater chance of being right than you do of being wrong and you feel less uncertain about the decision you are going to have to make.

So my takeaway from FT71 in this regard is this. Trading is decision making under uncertainty at its best. When you see the situation or setup develop do you really know with 100% certainty that if you take the trade and put money on the line that its going to work out? Because its uncertain and its a binary situation (either you are going to make money on the trade or you are not) you cannot know the outcome of the next event with certainty but if you have a lot of experience and what you see agrees with whatever decision support tools you use to help you chose to go or not go you can gain some sort of edge.

Actually things are getting better for me mentally because I started saying to myself that every trade I make is likely a loser until proven otherwise. That simple thing dumb as it sounds really helps me because I'm not worried about winning I'm focused on what is going to bite me and I'm looking for signs that things are running off the rails I'm keeping one eye always on the exit. Believe me for myself this was giant shift in the tectonic plates with regard to my mental attitude about trading and making trades. When I win a trade now I am surprised and I pat myself on the back mentally because I did something right to avoid losing money. In closing I also liked FT71's example about putting the chair next to you and imagining your Monkey is sitting there. For me that is easy I have my Thinkorswim Monkey sitting right on my desk looking at me all the time to remind me that my demons are always present.

Thanks for reading and I look forward to the continued discussion about these topics

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  #95 (permalink)
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Big Mike View Post
There are two outcomes to the next trade.

Win
Lose

Scratch = loss, commissions/time

Two outcomes = 50/50

We are talking only about the very next trade. Not a string of trades.

If you could predict the future, and you knew the next trade was a loser, why take it?

If you could predict the future, and you knew the next trade was a winner, why not trade 1,000 lots?

Mike

This is the only way you can look at trading. Each time you click that mouse, it has to be 50/50. This is an immutable fact. Because you cannot predict the future, with accuracy.

You can, however, become a profitable trader by the way you manage risks, buy the way you position your trades, by the way you manage your emotions, by the way you manage your business.

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  #96 (permalink)
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thank you Futures Trader 71 for a great webinar! i am an equities options trader nonetheless got alot out of it - very helpful indeed.

re the 50/50 argument, 90% of which i didn't even understand, nonetheless my guess is, people are confusing the fact that they themselves can be accurate more than 50% of the time - my own stats have gone above 50% for periods - with their ability to predict the outcome of the next trade. but our "accuracy" as traders is not so much accuracy in knowing which way the market goes, as in knowing when the *** to get out!

this said by a woman who is now ~ 20% invested in underwater AAPL calls, lol. however, the darn thing isn't breaking the 3mo connect-the-lows trend line, and that's my stop for these april & may contracts.

wow, now i know why i don't trade futures - 70K per contract?? eeeeek!

and "the monkey" - great image.

are there any musicians in the room? u know those electronic tuners. well, don't u wish u had one for yourself? so you cd breathe deeply until your thoughts are no longer sharp or flat.

such a good idea to divide yr account size by how many trades u think u will need to become profitable & make that the position size. see above uncomfortable AAPL calls situation

2 things i suspected, confirmed: backtesting is a form of procrastination & "confirmation" = too late! u gotta get in *b4* the pattern perfects or u just can't make enough money.

i think the best use for indicators is in trade *planning*, not execution. the night before, study those bollinger bands and rsis and god knows what else, make yr watchlist, then forget them next day and trade what unfolds.

confused though abt scaling out: are you using the *profit* from the 1st scale out as yr stop, or the whole amount of the sale? not sure how i cd incorporate this strategy into the options trades i'm doing but wd like to think about it anyways.

thanks again for a highly useful webinar.

Du sublime au ridicule, il n'ya qu'un pas. ~Napoleon Bonaparte
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  #97 (permalink)
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Private Banker View Post
......

I mean no disrespect to FT71 as I'm sure he is an excellent trader/teacher or whatever and this is an example of just one day but I had to step in here as opinions vary. I guess this makes the market move as people have different ideas on what is happening or will happen based on their trade set ups, etc.

Cheers,
PB

No disrespect but maybe an analysis such as the one provided should have a prominent disclaimer. Have been inspired by the most recent commentary from Lance Begg:

"There is a tendency called hindsight bias in which the human mind views past occurrences as having been more predictable at the time than they actually were. And there is a confident belief in the fact that you would have entered at the right time, and quite likely would have targeted just the right area for maximum profits. The reality is far different. Uncertainty prevails at the hard right edge of our screen and there is actually no way we can know how we would have felt, decided or acted, were we actually trading this live. So... while this analysis actually will appear quite simple, it may not have been so obvious at the time."

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  #98 (permalink)
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Big Mike View Post
No trader wants to lose money.

But if you take the Derrick Rose example, embracing losers or being a good loser would be equivalent to Derrick missing a lay up. If he flips out, loses control, throws out all his strengths of how to play good ball and just starts fouling everyone and hoarding the ball, missing shot after shot after shot, then he is going to have a problem.

He doesn't do this. He is a good loser when you equate a loss to a particular shot within the game. He keeps his cool and doesn't focus on the missed shot. No. He moves on to the next shot, because that is what matters.

Traders need to be a good loser in the terms they need to learn that missing a lay up is part of the game. It is not a big deal, so don't make it one. By being a good loser on these individual plays, or trades, then the game as a whole (trading session, day, week) can come out on top as a winner because you've remained in control and allowed your experience as a player prevail.

Mike

This is a good point. Babe Ruth held the record for most strike outs for years ( the records has since fallen). However, if you were trying to put together a baseball team, among average players, would he not be your first pick?

If the Babe got a big hanging breaking ball that looked like a balloon over the plate, and he popped it up, a ball he had hit for an HR 100 times before, would he have accepted that and said oh well? Doubtful.

But on his next at bat, I dont doubt he would be fully engaged taking his hacks.

Its not about losing, its about how about how one handles the loss Losses are a fact of trading. They happen. You learn more about yourself as a trader, as a person, by losses, more so than wins. Losses are a motivator, losses help you learn how to deal with adversity.

And losses in trading, are a fact.

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  #99 (permalink)
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trendisyourfriend View Post
No disrespect but maybe an analysis such as the one provided should have a prominent disclaimer. Have been inspired by the most recent commentary from Lance Begg:

"There is a tendency called hindsight bias in which the human mind views past occurrences as having been more predictable at the time than they actually were. And there is a confident belief in the fact that you would have entered at the right time, and quite likely would have targeted just the right area for maximum profits. The reality is far different. Uncertainty prevails at the hard right edge of our screen and there is actually no way we can know how we would have felt, decided or acted, were we actually trading this live. So... while this analysis actually will appear quite simple, it may not have been so obvious at the time."

Soooo true.... unless you are a mechanical trader hehehe

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  #100 (permalink)
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omni72 View Post
This didn't go against any rules he set up. Trades 5, 8, & 14 had a best scale out (BSO) of 5-ticks and got stopped out on the second contract. On trade #5 he didn't have a 1-tick stoploss; there was slippage of one tick when he took the 5-tick stop on the second contract. On the other two trades, the net was zero because one reached the initial 5-tick target and the 2nd reached the 5-tick stop instead of the 10-tick target. Trade #11 experienced a 1-tick slippage on the stop as well. He also experienced positive and negative slippage on full winners.

I didn't perform the actual tests but that's what my critical examination and due diligence indicates to me

Precisely. There was no movement of the stop. This is the Russell and so it sometimes trades THROUGH a stop or target. Part of the reason why I like trading it.

I think people want to see a fault no matter what is in front of them sometimes. That's ok too. In the end, I will take the next trade that comes along; no due diligence necessary since I know my risk has been handled.

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