Az,

Good job on the revenge post. We've all been there. How you handle it or what you take away from it and truly learn from it is what separates the men from the boys in trading Or at least what separates the rest of your money from your wallet.

Speaking from personal experience, when I was in my revenge trading cycle I can specifically remember having a hard time sticking with a plan for a while after. I also started being extravagant in life. I mean if I had just like 5k in one day, then surely I could afford to buy that new Plasma, or xyz, etc. I noticed that for a while after such bad days I would not be satisfied with (what now seemed) "small" winners, even though they were my average normal winners up until the revenge cycle started.

Anyway, looking back, I can give you another axiom -- small, consistent winners and days are the way to make money, while minimizing large inconsistent losing days. Sure, you have to capitalize on big days when they are there, but if you are consistent you will find a way to do this. It's hard sometimes to "settle" for 10 or 20 ticks or whatever your plan calls for, you start moving your targets trying to make up for what you lost, etc. This is the sure-fire way of going the other way. I think you saw that.

Good job, and I know that you can recover, you have to just re-double your efforts and know that it will take a lot longer to make that money back than it took to lose it, if you are going to do it in the smart, slow and consistent way.

Mike

TheWizard,

Please, convince her NOT to day trade. Do not encourage her to open an account. Do not help her with this. If she needs the money, she is already on the losing side of trading for a living.

Mike

Using a baseball analogy, after a slump, the coach often tells the players to play small ball. What is that, try for base hits instead of home runs, try to get a freebie with a base on balls, get hit by a pitch, anything to get on base, steal a base. In other words, grinding it out with a steady diet of small winners. Its much harder, but it wins games.

Today, I played small ball. First thing out of the gate, I got to the computer early for a half hour of simming. Practice makes perfect. I got the ugly trades out of my system, got in snyc with the market and about 6:50 decided it was time.

Today's game plan:

Trade one contract.
Go for small wins on the early trades. Build some confidence.
Don't freak out on the first loss.
Keep the losers small.
Go for a larger target after in sync with market.
No more than 10 trades.
Stop trading if I have three losses in a row. (none today)
Take only the best set ups.
Be patient.
Don't look at the P&L
Execute my rules as perfect as possible.

Results:

8 trades.
5 winners. Largest winner: three trades of 20 ticks each
3 losers. Largest loser: 10 ticks, one 9 tick and one 7 tick.

Net profit for the day: $431 which offsets my loss of $1887 yesterday and keeps me profitable for the week and month.

12 trading days into the month, I am up $1800, winners are bigger than losers and win rate is over 50%. I am pleased. So far, that is $150 per day net profit. Not spectacular I know, but thats $18.75 an hour if you work 8 hours a day. $3000 a month if I keep it up.

Game plan for next week:

Start half an hour early, sim for 20-25 minutes....start at 7:00AM, quit at 9:00AM
Monday, play small ball.
Tuesday, play small ball and look for larger opportunities.
Wednesday, assuming Monday and Tuesday are profitable, increase position size by one car.
Thursday, same as Wednesday
Friday, same as Thursday.

Twice this week I have noticed something. CL has made large moves early both up and down. Toward the end of the run, I have begun to really notice how it behaves as it tries to reverse direction. Yesterday was a blood bath in that transition zone. Today, not so much. I made money in it by recognizing things were changing and taking advantage of the trend reversal attempts.

Next week, will pay special attention to reversal patterns as they develop. I may even try to avoid trading in them altogether as it can be dangerous for a MA trader like me. I do have a tool I use to help identify possible turning points but as with every thing else, its subjective and open to interpretation.

One more thing I have noticed is how the premise of the trade can change mid stream. This seems to happen mostly around transition zones. I will be faster on the bail out trigger if I sense the premise has changed instead of letting a full stop out hit me. I did that today when I knew it was over but in the spirit of honoring a stop and letting a trade play out, I took the full hit. That is not necessary. I'd rather have a small hit, and then re-enter if I was wrong to get out, than take a full one if I think its over and be right. This will be interesting to see how I manage this part of the trade. I'll talk more about it in future posts as it comes up.

Have a great weekend. Thanks for reading.

So, this is just an aside. But have you ever thought about calculating your risk of ruin for you trading style? Sine with a small account it is harder to absorb drawdowns.

traderwerks 

So, this is just an aside. But have you ever thought about calculating your risk of ruin for you trading style? Sine with a small account it is harder to absorb drawdowns.

I'd say my risk of ruin is pretty high if I continue trading like I am now. But that is the premise of this thread. Trading on a small account.

With a large account, you can trade a small percentage of the account, say 1-3% of your balance and still make good money. With a small account, and considering the margin requirements of most brokers, trading a large percentage of the account is par for the course.

What I am trying to prove here is that with good money management, trading an edge with discipline, us small account holders can be among the 5% that make it.

I do not disagree with anyone that says I am being to aggressive and that the odds are against me. I know I am, but trading 1% of a small account is not feasible.

My plan, which I neglected to mention earlier, is to trade as best I can, build the account up aggressively to the point I am risking only 2-3% of the account on any one trade using 5 contracts. That's $25,000 and a 15 tick average stop.

True, this is a problem with small accounts.

I meant looking at your standard deviation of returns. An smoother equity curve ( it my not be a great equity curve ) but you can avoid the blowups. The change in risk of ruin is quick when your account size grows.

So trading a little bit less aggressive until you get to 2K or 3K and then getting increasingly aggressive as your account grows. I just see people trading with what I estimate to be really high risks of ruin.

One of the studies that everyone quotes about most retail traders failing had 70% of the participants trading in a way that their risk of ruin was 100%. I will have to see if I can find it.

Risk of ruin is actually a great topic to discuss. But I am math impaired and don't really understand this formula proposed by Kaufman in his book, so maybe someone can help me.

risk_of_ruin = ((1 - Edge)/(1 + Edge)) ^ Capital_Units
* Edge = probability of a win

It seems we need to calculate expectancy first (substituting expectancy for probability), right? Otherwise I get hung up on probability simply meaning win percentage, which can't be right (doesn't take into account actual net result of the trades).

Mike

I never really liked the way Kaufman did it.

There is a good article from last Aug in futures mag
Minimizing your risk of ruin - Undesignated - Futures Magazine

It is a little bit 'mathy', but probably better. Near the end of the article he states

Quoting 

2) As the standard deviation increases, risk of ruin rises sharply. The second equation has the standard deviation squared in the denominator of the exponent. Doubling the standard deviation in that example from 13% to 26% changes risk of ruin from 2.9% to 41.2%. If a market becomes more volatile, a wise trader will reduce position size accordingly.

Which is sort of what I meant. Look at your volatility of returns and try to maintain your style. Since we are all human we make mistakes and a few bad trades/fat finger errors can shatter a small account. With a small account , you reach be point where you have to stop trading quicker. You can go from trading 5 contracts to 2 and still be in the game, but when you are only trading a single car, where do you go if you have to reduce size ?

I read this on a blog recently.....


I have spoken at length in the past about managing your equity curve when entering a period of drawdown. There is no doubt that recent months will have lead the majority of traders into some sort of drawdown. Now things are starting to look a little brighter, it is time to think about how we manage our way back out of a drawdown.
To some traders, myself included, managing your way into and back out of a drawdown can be one of the most powerful tools in the armoury, so this is a subject worthy of significant personal study. In this first article I want to cover the core principles of this technique and then next time I will expand upon this and discuss how we put the theory into practice.
Going into the hole

Let’s start at the beginning, with your capital preservation plan. The purpose of this is to ensure you retain the majority of your capital – however long and however bad a drawdown period you have to endure. Everyone has his or her own version of this, but I am going to use the simple model I gave you in Golden Rule #3. In this we have (a) a maximum allowable loss limit per month and (b) loss levels at which we cut our unit size by 1/3rd each time a drawdown level is reached:

[COLOR=blue][IMG]http://simon-townshend.com/wp-content/uploads/2009/07/CPP.png[/IMG][/COLOR]

The main point here is that even with a somewhat conservative rate of cutting back the unit size, you still have 80% of your capital at the end of an astonishingly bad period. You would also carry on cutting back if it went on further. If you never recovered at all you would still have ¾ of your capital intact by the time you retired! So don’t underestimate the importance of this.
Climbing back out

Once the tide has turned you then start to build your size back up. However if you reinstate size more aggressively you can accelerate the recovery back to equity highs by taking fuller advantage of the upturn.
In the following model I show the effect of the same capital preservation plan which risks a maximum monthly loss of 8% initially and reducing by 1/3rd when going down. When climbing back out this plan doubles the unit size after each successive profitable month, until full size is restored. In this way it takes 6 months of reducing from full size down to a very small unit size, but only 3 months to build back up to full size which is then maintained in the final 3 months. The result is the red line.

[COLOR=blue][IMG]http://simon-townshend.com/wp-content/uploads/2009/07/CPP2.png[/IMG][/COLOR]

In contrast the blue line shows the impact of sticking with a fixed unit size throughout but still using a maximum monthly loss limit – so this line is a simple 8% loss each month on the way down and a fixed 8% monthly gain when going back up.
So after 6 bad months and 6 good months the linear plan gets right back to where it started, after enduring a gut wrenching 48% drawdown and with no certainty that it couldn’t actually continue going down to zero if the second six months also turned out to be losers!
Whereas our planned and managed approach not only recovers fully but even generates a 10% profit on what is a very bad year. But most important of all its drawdown is a much more tolerable 22%, plus the mathematical certainty that it actually cannot fall very much lower than that were the second six months to also be complete losers.
I don’t know about you, but I know exactly which one I prefer! Yes there are several practical difficulties in implementing this, which prevent a simple theory working perfectly in real life. But we can come surprisingly close with the right tactical approach and that is what I will cover next time.

traderwerks 

I never really liked the way Kaufman did it. There is a good article from last Aug in futures mag Minimizing your risk of ruin - Undesignated - Futures Magazine It is a little bit 'mathy', but probably better. Near the end of the article he states Which is sort of what I meant. Look at your volatility of returns and try to maintain your style. Since we are all human we make mistakes and a few bad trades/fat finger errors can shatter a small account. With a small account , you reach be point where you have to stop trading quicker. You can go from trading 5 contracts to 2 and still be in the game, but when you are only trading a single car, where do you go if you have to reduce size ?

The single car question is of vital importance. I think in the beginning, you must take care to take only high probability trades which presupposes you know what those are. This is probably the reason most flame out, they don't know a good trade from a bad one.

But with practice on sim, hence the challenge I am on currently, you can learn a good trade from a bad one. At least when you go live, you will have tested with some degree of certainty your edge and ability to select good trades. Otherwise, just write your broker a check for the amount in your trading account and spare yourself the heartache of losing it yourself.