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Expanding the scope of what you are trading
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Expanding the scope of what you are trading

  #1 (permalink)
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Expanding the scope of what you are trading

For folks who are trading profitably and consistently in 2-3 instruments for a good period of time, do you see the need to look into trading other instruments and markets?

I'm looking at discretionary traders who spend huge amount of screen time daily

Different instruments have different behaviors, the method which is successful on one instrument generally cannot be applied wholesale to another (especially in different markets - eg forex vs indices vs commodities vs options) without changing at lest the parameters.

Looking and learning the behavior of a new market/instrument and modifying your method takes time and can disruptive to your actual trading which is bringing in the real income. Even the current instrument which you are trading could change in its behavior over time and you need to constantly update your trading approach to keep your trading results consistent. So you need still watch those you are familiar with constantly

The main reasons for looking at new instruments are increasing revenue streams and diversification.

I have a feeling most profitable traders are actually one trick ponies - they focus on one thing and do it particularly well, is there a need to learn another trick?

Last edited by jonc; January 27th, 2015 at 01:15 AM.
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  #2 (permalink)
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  #3 (permalink)
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jonc View Post
I have a feeling most profitable traders are actually one trick ponies - they focus on one thing and do it particularly well, is there a need to learn another trick?

Hmmmm....well I have been doing basically the same type of trading since I started over 20 years ago, long term investment and long term swing trading in stocks.

I have at one time or another thought that options might be interesting to try, but rejected the idea when all the confusing jargon and procedures (to me anyway at the time) made no sense at the time. I thought of daytrading several times but frankly don't want or need the stress of sitting before a monitor waiting for an event to happen, recognizing it... getting in and then out... so, though I have some of the tools to execute and complete a trade , I lack the tools to find good opportunities to use these tools on.

Commodities and futures contracts are not my cup of tea either.

I make a pretty decent living at long term trading/swing equity trading. I find it constantly challenging, interesting and I get more and more ideas within this approach... I am never bored.

There is nothing wrong with becoming very good doing something rather being mediocre doing many things. I saw a signature line another poster had that was attributed to Bruce Lee "I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times."

This is very wise in my opinion. Trading is not something that can be learned in a few months and you know everything there is to know. The more you practice that one "kick" the better you understand the craft and if you are wise you will expand your knowledge within that kick. To float around like a butterfly touching on many styles of trading does not allow you a chance to develop any expertise in one in particular.

Trading in one area should not be a static thing... becoming good at it requires a lot of work... to split your attention among several trading areas is not the best way to trade IMHO. Yep, Bruce Lee has it right, as I see it....

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Imagine the scope of information needed to know just one market really well. That answers the questions itself unless your tactics is analyzing global trends, which are most often represented by correlated moves across different instruments.

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  #5 (permalink)
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I wanted to pin here these two posts by tpredictor which I find very insightful. They put a different spin on expanding the scope of what one is trading, but possibly they are very fitting.

I will mull this over in the next few days. Thanks for the contribution.

tpredictor View Post
Not following what you are doing closely but my best insights below

Trade Frequency, Expectancy, Profit Factor, Net Profit, and Trade Quality Considerations
Profit factor and R (as in reward multiples) is associated with trade quality. Increasing trade selectivity will tend to produce higher quality trades at cost of net profit because of selectivity. In order to generate the same degree of profit with fewer trades compared to more trades, you need to risk more per trade. There is an important trade off here that needs to be understood. As you increase your trade selectivity to get better trades, you are decreasing your total number of trades and thus concentrating risk. As you decrease your trade selectivity to risk less per trade, you are decreasing the quality of the trade and the certainty that you are trading with an edge. The factors of trading cost, capital, and uncertainty are the relevant variables.

Taking fewer trades over some interval, at least for an algorithm, is more likely to be correlated with trading higher quality trade as there is greater ability to implement selectivity based on function of trade of quality. Discretionary traders tend to benefit from seeing more opportunities because it helps with the feedback process.

You may find that being more selective, i.e. risk averse, in your trading opportunities but then allowing those opportunities adequate space works best. Even, if you are trading selectively, if you have higher market cognition and creativity then you should be able to find more opportunities. "Not liking heat", same here at times, but it is also typically a product of lack of confidence in methods or lack of knowledge of how much heat a trade should take.

Generalization vs Specialization
Experience often translates to generalized ability which translates to robustness and ability to find opportunity within certain considerations at medium leverage. I am not sure it translates to being able to scale up in the way you want. Cost/benefit to specialization, the benefit is ability to obtain higher returns but the cost is fragility when market changes. I am taking to the view of trading plans as "projects" vs. "generalization".

Regarding your focus
I am unsure of the benefit of trying to extrapolate from small sets of data. I think what may help is to focus on the variants and invariants in your trading method. There is reproducible input and reproducible output. Reproducible input means being able to trade in a consistent way but doesn't guarantee reproducible output. The other way is to focus on reproducible output. Reproducible output, always unknown, but might be expressed by seeking the best opportunity set.

tpredictor View Post
Yes, very possibly but this wasn't the primary point. But, it is likely there is a trade off between consistency and robustness. There are a couple ways to think about it. The markets are very efficient and so they tend to "punish" optimization. One way to think about it is that if you achieve the ability to trade with say a tight X tick stop loss then your precision is must be Z or better. Another way to think about it, let us imagine your edge is such that you risk 1 tick and have a 4 tick profit. The other way to think is how it becomes easier to game, i.e. you are taking from the best traders and you can only take provided you stay ahead of them. This is a more fundamental problem in that it is not the lack of an edge that gets most traders: it is not knowing their precision. If you have a larger account and reduce your leverage, you can achieve better returns without risking an error in precision and you can do so with less risk of changes in your precision.

Here is another way to think about it, if you are trading in a more general way with less leverage then when the market changes the degree to which you adapt is less. So your performance over the entire year might be less variable even if your "consistency" is worse. On the other hand, if you achieve high levels of consistency then when the market changes, you are more likely to have to make big changes which means higher variability which means requirement to go back simulator or have to wait or take steeper drawdowns-- so over the year you will have bigger periods of out performance.

My only suggestion is that if you are trying to scale up and this was maybe already obvious to you then a specific edge will be more important (then a generalized trading ability). If you do not have a very specific edge then at a minimum, you need to be able to perform under invariant conditions. That is, you need certain controls so that you can have confidence you can execute when you go live. The biggest factor is probably going to be the volatility.

It is true that getting 1:1 targets or worse is typically more common in day trading mean reverting markets. The only downside is that if your win rate drops, then your return will drop quite low. If you can find 2:1 target then your win rate is less critical.

There many ways to trade. I would like to see you make this work. Good luck!

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  #6 (permalink)
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thanks, lately there's been quite a few golden posts on the threads. Great post @tpredictor !

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