I trade the CL with a pretty rigid manual mechanical system rule set. On typical days, I get between 40 and 50 signals between 8:00am-3:00pm EST. Today I got about 15. I trade a very small time frame, I don't know about the higher time frames, my time was just a mess. So, the beauty of a mechanical rule set, is that since it was not designed for this type of market, it kept me out of the market much of the time today with 15 signals instead of 50. As a trader, I don't need to constantly have to analyze the market, and during the heat of battle, come to the realization the market conditions just aren't right, only after I'm already half way to my daily loss limit. Many people say mechanical rules don't work when the market changes, well that is exactly what they are supposed to do, keep you out of market environments you have no business trading.
If you had followed your rules to the letter, how would the results of your trading differ the last couple of days? This is why I think it is important for traders to compare their actual trading performance, to the theoretical performance of their method. I still do this everyday. Everyday, after market, I go through my charts and mark them up exactly as my trading plan says they should have been traded, and compare to my actual performance. If you do that enough times, you will subconsciously build confidence in the plan, and your brain will gradually convince itself to start adhering to it, and let go of all the bad trading impulses.
Last edited by monpere; August 16th, 2011 at 07:04 PM.
The following 10 users say Thank You to monpere for this post:
This is good stuff. The method should keep you out or reduce your exposure to the market if conditions are not right. I like this.
Also, the actual vs theoretical each day is something I've gotten away from. I will start doing this again.
I don't get as many signals as you do as I think I am trading a larger range bar than you but in the course of an entire trading day, I can 15-20, most of which are in the first three hours after the opening. At least this is the normal time of day for the best follow through. Catching 2-5 of those with a decent profit target is enough.
Using ADR as an input to determine target size these last two days, I am really beginning to realize this could be a legit way of determining approximately how many ticks I should be targeting for the day.
Simplicity is the ultimate sophistication, Leonardo da Vinci
Most people chose unhappiness over uncertainty, Tim Ferris
The following user says Thank You to PandaWarrior for this post:
There are unfortunately some days that can give you lots of picture-perfect trading signals that all turn into losers. Those days are killers. Tuesday of this week was like that for me.
A dip-buying system, for instance, is vulnerable to trend moves that fizzle before they go very far. This is very difficult to avoid as the beginning of a trend that's about to fizzle looks just like the beginning of a trend that's about to take off for a huge move.
There are a few ways to try to deal with this kind of "wolf in sheep's clothing" environment, none of which is perfect:
1. Develop additional filters that will keep you from trading when there's a chance that the day could be full of false signals. The downside is that the number of trades will decrease, and also that your filters might not work as well as you expect. Curve fitting can be a problem here as well as you can find yourself developing filters that would have avoided the last few bad days but might not work in the future.
2. Stop trading after a preset stop loss or a number of consecutive losses. The downside is that you'll prevent yourself from trading out of a slump and are vulnerable to days that start off poorly but would end profitable if you kept trading.
3. Take all signals, regardless. The downside is that you're vulnerable to huge drawdowns if market conditions change in a way that renders your system worthless.
It is a difficult quandary and I still haven't worked out the best solution for me.
Well, I think you have to understand your method. In a dip buying system, you would not be trying to catch the beginning of trends, you would want to wait for an established trend, and then start buying dips. But you would have to expect to generally lose on the last dip of the trend, and possibly miss the first dip of the trend, and you have to make sure that there generally are enough dips left over to make up possibly for the higher risk first and last dips of that trend move.
In general, due to the nature and frequency of trends and the performance profile of trending methods, the trader faces various issues they have to be able to deal with:
- Trends are few and far in between, so winners are few and far in between
- Losing signals signals that look like beginning of trends are more common then actual trend moves
- Winners must be big enough to make up for the multiple small losing signals that fizzle out
- Winners must be big enough to provide profit after making up for the previous multiple losses
- Trader must have patience to ride the trend as long as possible
- Trader must have the fortitude to sit through several trend pullbacks
- Trader must have the stop management skill to avoid getting stopped out early in the pullbacks and fake trend termination signs
- Trader must have emotional fortitude not to regret money left on the table when trend continues after they are stopped out
- Many small losses, few large winners, add risk to the overall method
- Losses are evenly spread across a large number of trades, profits are spread across a very small number of trades
- Winners carry a lot more weight then losers in the method's performance profile
- Missed or botched winners have significantly increased impact to the overall profitability of the method
- One missed winner, can make or break your profitability for the day, the week
- One missed trend day is even more significant, and can make or break your month
Last edited by monpere; August 19th, 2011 at 12:46 PM.
The following 6 users say Thank You to monpere for this post:
Yes, generally agreed. The earliest you can get into a trend is the second dip as that's the earliest point that you've had a confirmed trend (a HL/HH or LH/LL pattern). From that point there's no telling if that particular trend will have two, three, four or more legs before it peters out, or how large any of those legs will be. If two, your first entry will be a loss; if three, usually a small gain; if more, a decent profit.
The worst kind of day for this type of system is a day that produces a lot of two- or three-dip trends without any larger ones. Rangebound days in other words.
I think the general wisdom among trend traders is to take every signal as you never really know which trend, or which day, will be the one that gives you the big payoff. That probably is the rational approach but is difficult to implement when the market goes into an extended sideways period.
Just wanted to note that continuing to trade after you hit a preset daily stop loss (in order to avoid missing those instances in which you would have come back to even or better) is logically equivalent to holding a losing trade past your pre-determined stop loss or risk parameter.
Sorry for the non-sequitur, this is just something I've been specifically thinking about lately...
Seek freedom and become captive of your desires. Seek discipline and find your liberty. - Frank Herbert
The following user says Thank You to Surly for this post:
I agree with that to some extent. The important point is that daily loss limit cannot be some arbitrary number you choose because that is the loss amount you are psychologically comfortable with. I think that is how most traders choose their daily loss limit. The daily loss limit has to be based upon the statistical data of your method. Example, if your method generally gives 15 signals every day with a 60% win rate using 2:1 ratio, and you decide that you are only comfortable only with the amount of 3 sequential stop losses, then that makes no sense, the odds are in your favor to continue to trade rather then stop.
Last edited by monpere; August 19th, 2011 at 05:56 PM.
The following user says Thank You to monpere for this post:
I agree with your statements for trading approaches that are very (or completely) mechanical in nature. However, for discretionary traders there are two factors which can affect trading results that have little to do with a statistical analysis of trading results:
1. Discretionary traders must make decisions in real time - emotion is necessary for decision making and emotion can become disruptive if losses exceed a given value. Also, emotions can be disruptive for other reasons (personal life events, etc) as well. A daily loss limit can be used to guard against trading during times of emotional disruption and this amount would not be correlated with the statistics of your method (as measured by backtesting). Thus a daily loss limit should be set at a "loss amount you are psychologically comfortable with" - of course one needs a certain level of self-knowledge to make sure this level is set appropriately and not simply to coddle oneself.
2. Discretionary traders are often better or worse at certain types of markets than others (an over-simplification that is often quoted being the distinction between trending and ranging markets). Thus a daily loss limit can guard against trading one's account when markets are not cooperating with a particular discretionary trader's strengths.
Seek freedom and become captive of your desires. Seek discipline and find your liberty. - Frank Herbert
I have been on a vacation. From obsessing about trading. I decided to try and just walk away most days after I am done. I have threatened to do this several times. Its been hard. I like trading, I like reading about it and I like seeing what other people are doing. But it was becoming obsessive to the point my daughter was complaining about me always working.
So I just stopped. When I'm done trading, I do my spreadsheets, talk to my trading buddies a bit and then walk away. I have to say, its been nice. I've gotten a lot done, read about 6 non trading books and I think 2-3 trading books.
And I've finally come to the place where I am satisfied with a certain amount of daily profit. I've been profitable now about 23 days out of thirty and my loser days have been small. To be fair some of the profitable days have been pretty small. But any day you walk away from the battle with green in your pocket is good.
I've developed along with one of my trading buddies a way to determine when to quit if I am up and when to quit if I am down but not at my daily stop. Basically a trailing stop on profits and a circuit breaker on losses.
Currently I am working on building my account to the point where I can begin to take a small income without jeopardizing my working capital. I think I will be there in the next couple of weeks assuming I do nothing stupid. At this point, I intend to take less than half my monthly profits as income, so in theory anyway, the account will continue to grow and I can increase size as it grows.
I'll continue to post of course but it won't be about set ups or stop loss placement or the normal stuff. As time has progressed, I'm becoming less and less convinced the money is in the set up...while thats important to be sure, its also about the right frame of mind to actually take the set ups and the right frame of mind to exit when you are supposed to. And quitting for the day before you give every thing back and knowing you can actually stop. No gambling.
Here's a chart if anyone is interested. I've removed all the hand drawn trend lines. There were quite a few today.