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And I thought systematic trading was supposed to remove emotion!
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And I thought systematic trading was supposed to remove emotion!

  #1 (permalink)
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And I thought systematic trading was supposed to remove emotion!

Last year, I made the move to systematic trading as I discovered that my emotions were preventing me from making the most profit out of the market moves I participated in. Too often, as a discretionary trader, I found myself taking profits too soon, and watching the market continue in my anticipated direction, far further than I thought they could go. Very frustrating. I believed that, by making the move to systematic trading, I would be able to remove the emotions from my trading, and return better results.

The move to systematic trading was not without its bumps - over a year or so, I had put together a portfolio of several intraday trading systems in the US stock index futures. I started about a month before the US financial markets went haywire with the federal debt standoff last August. While things went okay, the extreme volatility we saw on the days early that month led me to take a couple of "large" (relatively speaking) losing trades, which prompted me to avoid taking a couple of subsequent trades that would've turned out to be big winners (more than making up for my losses). Lesson learned: systematic trading means taking every trade, no matter what. In this episode, I had let my emotions (fear of losing) keep me from making some strong gains.

It was a good lesson to learn: while I experienced choppy, slightly positive performance for the following couple of months, I maintained my discipline and 2012 turned out to be quite a good year. In March, April, May and June, I had long strings of winning days ... the kind of trading days where it seemed you could do no wrong, the kind of trading days that when the market moved against you temporarily, you were almost sure it would come back in your favor. And it did. One particular trading system I was using proved to be very exceptional - day in and day out, it was producing profits. It got to the point where I began thinking I should increase my size with that trading system, to capture its strong performance.

... and this is where the emotions crept back into my trading. For a month or two, I vacillated about whether to take more risk with this system, as in the back of my mind, I feared that as soon as I increased my size, I'd experience a string of losing trades. In July, the run of strong gains continued with this system, and so I finally took the plunge to increase my size in trading it - the first time I had increased my size in a long while.

And, of course, what happened? In the past 4 days, the system gave back HALF of the profits it had made in the past year. Half of the profits. In 4 days.

None of these losses are anywhere near the size that would prevent me from trading in the future, but God, is this frustrating! After the most recent loss this morning, I've decided to go back to my previous trading size.

Here's my question: in order to succeed as a trader in the long run, I know I will have to increase my trading size, but with this frustrating setback, I don't want to be so discouraged so as not to ever increase it again.

How do other traders, systematic or otherwise, decide when to increase their trading size? In some ways, I worry that I will be gun shy in the future, and afraid to increase my size when I should.

I thought systematic trading would remove the emotions from my trading effort, but it seems like I need to systematize this aspect of my trading as well!

Does anyone have any thoughts on this?

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  #3 (permalink)
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furytrader View Post
Last year, I made the move to systematic trading as I discovered that my emotions were preventing me from making the most profit out of the market moves I participated in. Too often, as a discretionary trader, I found myself taking profits too soon, and watching the market continue in my anticipated direction, far further than I thought they could go. Very frustrating. I believed that, by making the move to systematic trading, I would be able to remove the emotions from my trading, and return better results.

The move to systematic trading was not without its bumps - over a year or so, I had put together a portfolio of several intraday trading systems in the US stock index futures. I started about a month before the US financial markets went haywire with the federal debt standoff last August. While things went okay, the extreme volatility we saw on the days early that month led me to take a couple of "large" (relatively speaking) losing trades, which prompted me to avoid taking a couple of subsequent trades that would've turned out to be big winners (more than making up for my losses). Lesson learned: systematic trading means taking every trade, no matter what. In this episode, I had let my emotions (fear of losing) keep me from making some strong gains.

It was a good lesson to learn: while I experienced choppy, slightly positive performance for the following couple of months, I maintained my discipline and 2012 turned out to be quite a good year. In March, April, May and June, I had long strings of winning days ... the kind of trading days where it seemed you could do no wrong, the kind of trading days that when the market moved against you temporarily, you were almost sure it would come back in your favor. And it did. One particular trading system I was using proved to be very exceptional - day in and day out, it was producing profits. It got to the point where I began thinking I should increase my size with that trading system, to capture its strong performance.

... and this is where the emotions crept back into my trading. For a month or two, I vacillated about whether to take more risk with this system, as in the back of my mind, I feared that as soon as I increased my size, I'd experience a string of losing trades. In July, the run of strong gains continued with this system, and so I finally took the plunge to increase my size in trading it - the first time I had increased my size in a long while.

And, of course, what happened? In the past 4 days, the system gave back HALF of the profits it had made in the past year. Half of the profits. In 4 days.

None of these losses are anywhere near the size that would prevent me from trading in the future, but God, is this frustrating! After the most recent loss this morning, I've decided to go back to my previous trading size.

Here's my question: in order to succeed as a trader in the long run, I know I will have to increase my trading size, but with this frustrating setback, I don't want to be so discouraged so as not to ever increase it again.

How do other traders, systematic or otherwise, decide when to increase their trading size? In some ways, I worry that I will be gun shy in the future, and afraid to increase my size when I should.

I thought systematic trading would remove the emotions from my trading effort, but it seems like I need to systematize this aspect of my trading as well!

Does anyone have any thoughts on this?

Humans are emotional beings you are never going to remove the emotional element to it unless, you have no attachment to that thing, and in this that thing is money. Just because you automate something which kinds of distant you from the operational side if yo have an attachment to that money you will feel the emotion. If you don't I will send you my account number for you replenish. I hope this helps.

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  #4 (permalink)
Fortitudo et Honor
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furytrader View Post
Last year, I made the move to systematic trading as I discovered that my emotions were preventing me from making the most profit out of the market moves I participated in. Too often, as a discretionary trader, I found myself taking profits too soon, and watching the market continue in my anticipated direction, far further than I thought they could go. Very frustrating. I believed that, by making the move to systematic trading, I would be able to remove the emotions from my trading, and return better results.

The move to systematic trading was not without its bumps - over a year or so, I had put together a portfolio of several intraday trading systems in the US stock index futures. I started about a month before the US financial markets went haywire with the federal debt standoff last August. While things went okay, the extreme volatility we saw on the days early that month led me to take a couple of "large" (relatively speaking) losing trades, which prompted me to avoid taking a couple of subsequent trades that would've turned out to be big winners (more than making up for my losses). Lesson learned: systematic trading means taking every trade, no matter what. In this episode, I had let my emotions (fear of losing) keep me from making some strong gains.

It was a good lesson to learn: while I experienced choppy, slightly positive performance for the following couple of months, I maintained my discipline and 2012 turned out to be quite a good year. In March, April, May and June, I had long strings of winning days ... the kind of trading days where it seemed you could do no wrong, the kind of trading days that when the market moved against you temporarily, you were almost sure it would come back in your favor. And it did. One particular trading system I was using proved to be very exceptional - day in and day out, it was producing profits. It got to the point where I began thinking I should increase my size with that trading system, to capture its strong performance.

... and this is where the emotions crept back into my trading. For a month or two, I vacillated about whether to take more risk with this system, as in the back of my mind, I feared that as soon as I increased my size, I'd experience a string of losing trades. In July, the run of strong gains continued with this system, and so I finally took the plunge to increase my size in trading it - the first time I had increased my size in a long while.

And, of course, what happened? In the past 4 days, the system gave back HALF of the profits it had made in the past year. Half of the profits. In 4 days.

None of these losses are anywhere near the size that would prevent me from trading in the future, but God, is this frustrating! After the most recent loss this morning, I've decided to go back to my previous trading size.

Here's my question: in order to succeed as a trader in the long run, I know I will have to increase my trading size, but with this frustrating setback, I don't want to be so discouraged so as not to ever increase it again.

How do other traders, systematic or otherwise, decide when to increase their trading size? In some ways, I worry that I will be gun shy in the future, and afraid to increase my size when I should.

I thought systematic trading would remove the emotions from my trading effort, but it seems like I need to systematize this aspect of my trading as well!

Does anyone have any thoughts on this?

It's best to have a plan ahead of time. You should examine your system over the desired sample data and then conduct a monte carlo analysis to determine your tolerable drawdown.

Each trader has their own opinions as to how conservative to calculate possible drawdown, but I recommend nothing MORE than 5% chance (i.e. when you do a Monte Carlo analysis it will calculate how likely it is to drawdown....there's a 50% chance of a $30k drawdown, there's a 10% chance of a $15k drawdown, there's a 5% chance of a $10k drawdown and a 1% chance of an $8k drawdown, etc).

Once you've calculated the odds (5% means that you have a 1/20 chance of actually seeing that drawdown...projected of course) (1% means 1/100).

Then you hold that additional drawdown reserve (in addition to your initial and maintenance margin). So if you're trading CL and the initial margin is $6750 and the maintenance drawdown is $5k, then you know that you have to have enough to enter the trade, and survive any drawdown in that particular trade, until loss.

THEN you have to have enough to enter the next trade. Once you've calculated the trade close/drawdown, and added the margins...now you know you've set aside enough capital to survive a project 1/20 or 1/100 drawdown, etc.

So if that total is $30k, then you should increase your position size another lot, contract once you've reached a positive $30k.....and maintain your trades until you either lose it all back or increase to another $30k (based on a single contract).

Bear in mind, if you EXCEED your drawdown, then you stop and re-evaluate as obviously your system did NOT perform on unseen/out of sample data the way you had hoped.....and you've experienced a very RARE event (more rare than chalking it up to just bad luck or bad trade order...your system is actually failing beyond luck with a fair amount of certainty).

The key is having a plan so that when you DO drawdown, you'll hold tough, knowing that you've accounted for this. The worst mistake you can do is drawdown within your tolerance and step out, cause usually that's when your system recovers and then you're left mad at yourself for running at the first sign of trouble.

A wise trader also once said..."when in doubt, take half and do whatever you were planning." That way, you're at least half right. If you're down and you remove half your position, and you get stopped out, then you can feel good about preserving half the trade. If you're up and you take half profits, and you target out, you can feel good that you left half of your capital in. Etc...etc.

"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."

Last edited by RM99; July 26th, 2012 at 09:42 AM.
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  #5 (permalink)
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Quoting 
A wise trader also once said..."when in doubt, take half and do whatever you were planning." That way, you're at least half right. If you're down and you remove half your position, and you get stopped out, then you can feel good about preserving half the trade. If you're up and you take half profits, and you target out, you can feel good that you left half of your capital in. Etc...etc.

This is a very good quote - I had thought about this very idea this morning when I saw that the ECB head was on the tape, but I became bull-headed, and thought that I would be a sissy if I let this dissuade me from my new, larger size. Lesson learned.

Trafford, thank you for your helpful comments as well.

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  #6 (permalink)
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It sounds like you dont have a money management plan that includes when to increase/decrease size. Part of your trading plan must include money management. If you increased your size and then were able to lose half your trading profits from the year within 4 days, that's a money management issue.

Presumably your system has a defined amount of risk that you're allowed to take on each trade. If so, then that can be scaled up to define a daily loss limit (and possibly a weekly loss limit). If your capital reaches the point where you are allowed to increase size (not just because you feel like it), then your daily/weekly loss limits still apply but are increased accordingly to your new trading size.

Then, just like you had a point where you were 'allowed' to increase size, you also have a drawdown point which will require you to reduce size.

So if you're busy trading on increased size and reach your defined drawdown point, you reduce size until your capital once again reaches the point where you are allowed to increase size. By doing this there is no way you would risk losing so much of your profit in such a small time frame.

Increase and decrease size according to money mangagement rules.

Not sure if that will make sense for you, but it's the way I handle this aspect of my trading. You are however absolutely correct around the psychological issues. Systematic or not, increasing size does play with your head.

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Thanks for those insights, DarkPool. You're definitely right - you need to define a sizing strategy at a time when you can be objective about it, not when you're on a winning streak or a losing streak.

In all honesty, I was so surprised and elated by the strong performance of my systems earlier this month, so much so that I let that excitement cloud my better judgment. Having worked at a moderately-sized hedge fund in a previous life, where the chief trader would put on 100-500 contract trades every day, I have always had a concern that I don't trade big enough (that is, I'm not trading big enough to be considered a "real trader") and so in my anxiousness to get out from under that label, I let go of my objectivity and paid for it.

Thanks again for your insights.

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  #8 (permalink)
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This becomes particularly important when basket trading more than one strategy out of the same capital account. Unless you totally silo accounts, then you'd better have a plan with how they'll calculate and enter positions based off the available capital.

Totally silo'd accounting negates the advantage of basket drawdown complement.....ideally, you calculate the drawdown for anyone one strategy and hopefully, when traded together, you get some reduction in overall drawdown when trading the entire basket.....hopefully while one strategy is suffering, another is winning.

This is a whole other level of money management when calculating the portfolio drawdown...but my point is that it's always good to go into trading live with a plan....and that includes what criteria will cause you to turn it off.

The other thing that I'll add is out of tolerance events allow you to try to diagnose what was different that caused such a change in the performance. Did the volatility spike or tank? Did the volume change significantly? Was there some fundamental change.....

"Flat is a position." It's better to sit on the sidelines than to lose money so even if you can't figure out how to adjust the strategy to take advantage, maybe it's enough to simply recognize those events and sit flat until the market returns to conditions more favorable to your strategy.

"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."
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The Education of a Speculator has a terrific chapter on this issue, including switch-itis and the law of changing cycles. Highly recommended.

You'll understand your behavior in a new light and will be ready to change it.

"...the degree to which you think you know, assume you know, or in any way need to know what is going to happen next, is equal to the degree to which you will fail as a trader." - Mark Douglas
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Read and understand the "Risk of Ruin" sticky thread....as a follow up, read and understand sticky "Why 7% is the difference between failure and success in trading". Both are in the Psychology and Money Management section.

My timing was also impeccable on a system size increase. I was trading 1 contract while vetting the system for 3 months live. I then adjusted to my money management size...bam worst case scenario trade. Disappointing, yes, freak me out, no...I kept my new proper size and kept going even though that one trade wiped out all of the prior gains. There was nothing wrong with the system, recovered my loss quickly, and the following month was my best yet. I continue to walk my size up as my equity increases, always according to plan.

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