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Primary source of income: how many have made it?
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Primary source of income: how many have made it?

  #361 (permalink)
Fortitudo et Honor
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monpere View Post
Nothing I can think of, other then his psychological risk profile. To double, triple your income, you have to double, triple your risk, etc. Can he psychologically handle that. Other then that, I think maybe some physical market restrictions like account size, liquidity of his particular market, etc., although these would also depend on his style of trading.

You're speaking in terms of "absolute" risk.

Relative risk I would think would not prohibit most traders in the long run.

This concept can be seen in anything from gambling to business.

When any individual/firm starts out, the numbers they manage seem large, but over time, as the entity grows/expands, those numbers that used to seem outrageous, now seem trivial.

A fledgling homebuilder might think he's swamped building 6 homes/year. His staff may be overwhelmed. Fast forward 3 years later, and now they're building 200 homes/year. Has his risk increased? From an absolute perspective, absolutely. From a relative perspective, hopefully the risk management is at least comparable. (i.e. they're building more homes, but they have a larger employee force, more capital on hand, equipment, offices, cash flow, etc).

The same is true for professional gamblers. A high roller like Phil Ivey may look at the entry fee for a $100k tournament as business as usual, but for a smaller/starting gambler, $100k may seem outrageous. When you're earning $3M+ a year, a $100k entry fee, is the same as a gambler earning $30k/year entering a $1k tournament.

Relative risk should be consistent when growing. It's the firms/traders/individuals that stretch their relative risk beyond their comfort/prudence that end up toppling.

Ideally, a trader could increase his position sizes incrementally, while simultaneously decreasing his relative risk exposure.

I wrote about this in earlier posts. A trader with a $1M account can enjoy a lower relative risk exposure and still make a living when compared to a trader with a $100k account.

"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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  #362 (permalink)
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Lornz View Post
It's always interesting to read your posts regarding the good (?) ol' days. However, I must confess that I am less than impressed with the risk management of some of these guys..

How is your screen trading coming along?

It looks like I started an interesting discussion. The risk management of most of the survivors was just fine, that's why we were survivors. The example people are talking about, where this guy lost a ton of money on one trade, is a result of what I always considered to be the flawed way the trading "descendants" of Ray Cahnman traded.

They traded the yield curve. In my pit, the Five Year Note pit, this meant they traded either the 5/10 spread or the 5/30 spread. They would also trade the 5/10/30 butterfly (more on that later). The 2/5 spread was traded by guys standing in the Two Year Note pit.

Ray almost never took losses, he'd just wait for the market to come back. Sometimes that might take a year. He'd just roll the position into the next contract month, put it in "inventory", maybe "hedge" it with a related spread, maybe stick it in a separate account, and then wait and go on with his trading. At least, that's the way the stories go. I never discussed it with him, though he was a little bit of a mentor to me too. I was at heart a scalper, and his methodologies would not work for me.

Ray's yield curve guys were mean reversion traders, and they would "average" (the rest of us would call that "cannonballing"). So maybe they would sell a "unit" of the 5/10 spread a tick above where it settled or buy a unit a tick below settlements. They might do another unit 1/3 or 1/2 tick above the first unit, and continue "averaging up" for 4 or 5 entries. If they started to get uncomfortable they might buy some 10/30 spreads to hedge their position, establishing a butterfly trade.

Personally I don't know how so many of them survived, but they not only survived, they did very well. One reason was they were terrific at execution. Most of the time the curve didn't trend, and they'd only get 2 or three units on before they got a chance to take a profit on the whole trade. Also they were willing to trade for the smallest possible profit, a fraction of a tick, so they often made their money before the market got away from them. The problem was they were not well trained to handle trend days, so it was easy to blow up several weeks trading if the curve went in one direction and never looked back.

The story I was relating in the previous post involved a guy who had learned to trade the 5/10 and the 5/30 in a period where the yield curve was essentially always dead. If prices changed from the previous nights settlements they always came back, so the strategy was to add on with impunity until the curve reverted to the mean. When something happened that the market perceived would force the Fed to shift its stance, the curve absolutely exploded, and the trader in question kept seeing changes from settlement he had never encountered and was incapable of believing could last the day, and he just kept adding to his position. Remember, this guy had already made $600,000 his first year, so his ego was overdeveloped. (It took me over 5 years to make my first $600,000, and I had suffered plenty of adversity getting there, so I had little ego to get in the way. That came later).


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There is steadfast assumption that markets change their dymanic in such ways that require all methodologies to adapt. This is not the case. Certainly there are strategies that work some of the time but there are others that capture the very essence of what markets are. This means such methodologies must work, if the markets they aim to exploit, exist. This is market character vs 'edges' I'm talking about. 'Edges' are not necessary, and if not careful, you can fall off them as this reckless anecdote illustrates.
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Absolutely great post! I had to think a little bit to understand what might be meant by "the very esence of what markets are" and I eventually came to understand it to mean rationing supply or demand through price, and a methodology that is able to detect imbalances in supply and demand as they are occurring or to detect such rationing taking place would be independent of the character of the market (volatile, mean reverting, trending, etc). Such a methodology would rely on the supply/demand imbalance being rectified to establish where a position was covered, rather than a set profit level. Concerning whether edges are necessary, they used to be helpful but certainly are not necessary. I took at least a little heat on almost everything I did once I was a large trader. And the curve traders usually weren't getting an edge, they were trading a probability, even if it was one they couldn't quantify. "The edge is the ledge" was an aphorism on the floor, even though it was what most of us aspired to get.

I'm not trading at all right now, I'm rehabbing my summer home. When I was last trading I was focusing on just a couple of setups, and I was a little below break-even in sim. It remains to be seen whether I still have the fire in my belly to do what it takes to make it on the screen, or whether I have the aptitude for this type of trading. I get so bored. I really need a methodology that lets me trade frequently.

"You don't need a weatherman to know which way the wind blows..."
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  #363 (permalink)
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jonc View Post
Guys do you thinking earning $100k a year in trading consistently is considered a successful trader?

I'm thinking if someone can earn $100k what would stop him from earning a million?

Exactly!

If you're trading a liquid market, you either have an approach with positive expectancy or you've got nothing. If you do, you can just as easily make a million as you can $100K....

Unfortunately this doesn't change the fact that developing a valid approach is infinitely harder than most beginning traders assume...

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  #364 (permalink)
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Yes @Lornz, I've often heard experienced traders say that getting to consistently break even is quite a long way down the road to consistent profitability... And I would agree with that statement.

Seek freedom and become captive of your desires. Seek discipline and find your liberty. - Frank Herbert
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  #365 (permalink)
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Lornz View Post
Exactly!

If you're trading a liquid market, you either have an approach with positive expectancy or you've got nothing. If you do, you can just as easily make a million as you can $100K....

Unfortunately this doesn't change the fact that developing a valid approach is infinitely harder than most beginning traders assume...

I hear the phrase 'positive expectancy' thrown around very very often. The challenge with a 'system' that creates positive expectancy is in a context of time. Over time, I have not seen an instrument trade the same way.

So when you create a system with positive expectancy, then how do you decided when the time is to adjust? Most traders figure that out when they go broke (hindsight).

Even if you have been trading for 10 years, the same system, it could all give up tomorrow for the next 10 years and then what?

I guess my point is, I think that is why discretionary trading without rigid rules is the best way to maintain true profitability over time. If PE systems were all you needed, there would be a lot more billionaires floating around....


Last edited by bluemele; August 22nd, 2011 at 04:21 PM.
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  #366 (permalink)
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There are some concepts so fundamental to markets that they really do not change. Of course, I will be called for BS on that statement, as I am not willing to share details. However, there are. Such things are so elemental they are existential to the markets you trade them on. There are other challenges to deal with of course: costs, liquidity, skilled execution, etc. All of which makes success a bit less than simple. I will insist, however, that the idea itself is very basic, and it does not change. It really cannot change for markets to be, well, markets.


bluemele View Post
I hear the phrase 'positive expectancy' thrown around very very often. The challenge with a 'system' that creates positive expectancy is in a context of time. Over time, I have not seen an instrument trade the same way.

So when you create a system with positive expectancy, then how do you decided when the time is to adjust? Most traders figure that out when they go broke (hindsight).

Even if you have been trading for 10 years, the same system, it could all give up tomorrow for the next 10 years and then what?

I guess my point is, I think that is why discretionary trading without rigid rules is the best way to maintain true profitability over time. If PE systems where all you needed, there would be a lot more billionaires floating around....


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  #367 (permalink)
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zer0 View Post
There are some concepts so fundamental to markets that they really do not change. Of course, I will be called for BS on that statement, as I am not willing to share details. However, there are. Such things are so elemental they are existential to the markets you trade them on. There are other challenges to deal with of course: costs, liquidity, skilled execution, etc. All of which makes success a bit less than simple. I will insist, however, that the idea itself is very basic, and it does not change. It really cannot change for markets to be, well, markets.

I agree that certain fundamentals do exist, but 'certain' is an interesting word in an evolving marketplace. I do believe in the core foundations of existence and how those reverberate to trading.

But I see a LOT of people think that they have built the ultimate 'PE' system and then kaboooooooooooooooooom............

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  #368 (permalink)
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Although I agree with zero, I know some people will debate his point (about timeless approaches).

The more important factor about rules based vs. adjusting with market conditions is sticking to your plan (or even having a plan).

by having "rules" it protects you against catastrophic blowouts.

Simple money management and strategy performance metrics will ensure that you're able to stop and reassess before it's curtains.

If you've done enough to determine your expectancy and you know what your strategy "SHOULD" be doing, then you've probably done enough to determine what is in tolerance drawdown is for your system.

Thus if you're obeying your money management rules and only risking finite, pre-determined risk amounts, when the system draws down more than your tolerance limit, you stop and figure out what's going on.

Obviously, the implied step is correctly determining what the acceptible drawdown will be. There's tons of information and discussion on futures.io (formerly BMT) about tools like Monte Carlo and randomizing your results, so that you can get a tolerance interval of what your drawdown should look like.

Acceptible drawdown (like any scientific measurement) should come with a confidence interval.

That's to say, you know your drawdown is 3% at the 95th percentile. and it's 2% at the 70th percentile and 4% at the 99th percentile, etc.

You set a RULE that says if you break your tolerance limit with respect to drawdown, then you STOP and figure out what's ongoing.

Your rules might also include a number of consecutive losers. In your Monte Carlo analysis, you might determine that there's a 5% chance of enduring 10 consecutive losers. If you're truly obeying your rules, then you know that if you reach 10 in a row, the system is definitely drawing down OUTSIDE YOUR PREDETERMINED tolerance level.

This ensures that if you have a profitable mechanical/rules based system, you don't give back everything you've made.

The other implied concept is actually following the rules you set and sticking to your plan.

Tharp emphasizes that the key part of the plan is not how you'll enter the market, but what will you actually do once you're there. Similarly, developing a strategy/approach is important, but actually implementing it according to the rules you created is crucial. If you're not going to stick to rules, then any sort of performance metric or expectancy is either useless or greatly diminished.

I posted in another thread about expectancy and a trader's need to be "correct." Tharp talks about traders who spend way too much time in losing trades (hoping it will come back their way) so they can feel "correct" or validate their theory. The same applies to a system that may have turned negative. Once it goes beyond a planned downward move, it's time to stop and cut your losses and figure out if A) You simply did not accurately predetermine what that drawdown level was or B) something has fundamentally changed that now adversely affects your system to the point that it's no longer acceptible.

"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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  #369 (permalink)
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Oh yes, definitely. I think mostly when people use the term, they had found a pocket of time they thought proved their system to have PE (selection bias). We know what happens to them. In some cases the person did, in fact, have PE, but then, after some stretch of time, didn't any longer (a market dynamic shifted). This is what I personally call an 'edge'. It defies the common usage of the term, I know. I use and look for methodologies that employ what I call 'market character'. Specifically, that means that I aim to construct strategies from tactics/methods derived from existential market requirements. When one trades 'market character', a damaging fundamental shift cannot happen abruptly, or at all. A change large enough to render such a plan useless, requires the market to become something other than itself. Now, for the sake of being thorough, 'market character'-based methodologies, of course, have Kryptonite of their own. Luckily, its weaknesses can be spotted miles away using rudimentary statistics.


bluemele View Post
I agree that certain fundamentals do exist, but 'certain' is an interesting word in an evolving marketplace. I do believe in the core foundations of existence and how those reverberate to trading.

But I see a LOT of people think that they have built the ultimate 'PE' system and then kaboooooooooooooooooom............


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  #370 (permalink)
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bluemele View Post
I hear the phrase 'positive expectancy' thrown around very very often. The challenge with a 'system' that creates positive expectancy is in a context of time. Over time, I have not seen an instrument trade the same way.

So when you create a system with positive expectancy, then how do you decided when the time is to adjust? Most traders figure that out when they go broke (hindsight).

Even if you have been trading for 10 years, the same system, it could all give up tomorrow for the next 10 years and then what?

I guess my point is, I think that is why discretionary trading without rigid rules is the best way to maintain true profitability over time. If PE systems were all you needed, there would be a lot more billionaires floating around....

A rigid system is no different then a discretionary system, if the markets should change over time. The same way you would adjust your discretionary approach, is the same way you would adjust your 'rigid' system. Trading software providers do not spend thousands of hours programming backtesters and optimizers for nothing. Those tools are there for a reason. That reason is to allow you to 'optimize', in other words 'adjust' your rigid system as the markets change. I don't know one mechanical system trader who is not obsessed with optimizing, so much so that they over do it and start curve fitting. You really think a guy who spent 5000 hours coming up with a decent expectancy, is gonna spend 3 months without ever peeking at those numbers again? When the markets start to systematically change, a systems trader will probably notice before a discretionary trader does, and he will have the concrete numbers to prove it, without even scratching his head.

Furthermore, if you designed a rigid system that blows up your account while your not looking, then you had no business trading that approach in the first place. If your system is worth the paper it is written on, it should include rules that determine the favorable market conditions it was designed for. Case in point, my method generates on average 40-50 signals per day on the CL. The week before last with all the volatility, the method was brilliant, I chose the CL because of the volatility. But, the movement in the last week or so has been just horrible for it, so last week it was averaging around 10-15 signals per day rather then 50. That is the nature of a good rule set, it keeps you out of market conditions you have no business trading. So, if the markets change, then guess what, you don't blow up your account, you keep your money in your pocket, because you just won't get any trading signals.

I don't know where these ideas about the markets changing stem from. Ever since I can remember, double tops, double bottoms, divergence, pullbacks, breakouts, support/resistance etc. have not changed in the markets, have they?. Market fundamentals don't change, because the markets are people, human beings, emotions, greed and fear. When different life forms start trading the markets, then be ready for big market changes. Or, until the markets become primarily HFT vs HFT, or until the SEC decides they will move from decimalization back to fractional system, market fundamentals are not gonna change all that much. To me, the only effective aspect of the markets that changes is volatility. But, if your method is based on moon cycles, then I guess none of the above applies


Last edited by monpere; August 22nd, 2011 at 06:27 PM.
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