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SYX Journal


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SYX Journal

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  #1 (permalink)
British Columbia
 
Experience: Advanced
Platform: NINJA
Broker: ZEN
Trading: Crude
 
Posts: 1,091 since May 2010

Starting a journal on the psychology of trading, starting with a one lot futures account with 3K in capital and no choice but to succeed, somehow, it can and will be done...

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  #3 (permalink)
Site Administrator
Manta, Ecuador
 
Experience: Advanced
Platform: My own custom solution
Trading: Emini Futures
 
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Posts: 49,050 since Jun 2009
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Glad to see another journal. When you start posting, I assume you'll be on sim? Can you share some general thoughts on your method, and your trading ritual/plan? A chart or two?

Mike

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  #4 (permalink)
British Columbia
 
Experience: Advanced
Platform: NINJA
Broker: ZEN
Trading: Crude
 
Posts: 1,091 since May 2010

Thanks Big Mike, for having this great website for traders.

Trading from home and for oneself compared to trading for a firm brings a great deal of additional responsibility to the trader. The day trader must take on the role of trade manager, risk manager, strategist, analyst, bookkeeper, all in addition to trading duties.

One summer while getting an MBA I worked on the risk control desk in equity derivatives at Merrill Lynch Asia Pacific. Our desk was responsible for analyzing the portfolios of the equity derivative prop traders and taking their requests for trading limit increases. In the day trading game you call yourself. This is not something that is ever done in trading firms, not since Barings went bust. I believe this journal will help me to establish a way to deal with this additional operational risk and to work on the psychology necessary to master it. In other words it is to keep me honest and focused with the help of you fellow traders and your inputs. There will be no five 8’s account at this firm!

Big Mike has pointed out on many posts that your way of seeing the market and the setup you choose to deploy is a result of your own path of learning and understanding and it’s unique to you. So I’m not going to go into great detail analyzing my charts and setup. I’m more concerned with record keeping, accountability, psychology, and organizing the master plan to run a consistently profitable day trading business.

So let’s start with defining the game. I have been studying the profession for almost two years now. Over the course of close to ten thousand hours of screen time I've become familiar with and confident in placing trades on the Euro/Dollar fx cross. 6E futures on Chicago Mercantile is my sole trading instrument and focus. I will however be executing in the M6E, the micro version of the big 6E.


The Edge

My trading method or ‘Edge’ is based on the concepts of trading in the direction of a trend, trading on cycles, and analysis of order flow/market profile information. I look at three frames of reference, the 100Tick, 1000Volume, and 10,000Volume. Why? I find this framework works well with my desired trade sizing and risk controls. I’m not sure which came first though. As Cunparis notes in his journal, you can always find a trend eventually if you try every frame of reference. The key is to decide what frame of reference you are most in tune with. There is no right or wrong here. It is personal.

I look to enter the market when all three frames of reference I like to look at are showing a trend in the same direction. I define trend using Bollinger bands and I use a 10 period stochastic cross on price as the final trigger. I’m currently studying the volume /order flow/market profile paradigm and this is the direction I see my strategic analysis developing. I’m doing my research during non trading hours as I learn to use this deeper level of market information. The Gomi Ladder and the COT studies are currently supportive and filtering by acting as confirmation of supply and demand and showing patterns of active and passive trade flow. This type of order flow and market profile analysis may become the prime indication for entries as my research and development continues and new strategies are considered.

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  #5 (permalink)
British Columbia
 
Experience: Advanced
Platform: NINJA
Broker: ZEN
Trading: Crude
 
Posts: 1,091 since May 2010

Capital Risk Controls and Trade Sizing

The market may eat you for lunch but it will not give you a free one. Unless you are Goldman Sachs the best deal you are going to get is a 1:1 risk reward ratio. Hence your bets should also be 1:1, the way I see it from my view point as a 65-85% range win/loss ratio trader. Your edge should be positive, ie better than a coin toss. If all of that is true, and trades are sized appropriately to allow a large enough sample of trades to play out and hence allow the edge to be realized, then failure is only possible via trader errors in executing the trading plan.

I am starting the account with between 3000 and 5000 in risk capital. I have selected the X Trader DOM platform for execution. Analysis is currently being done via Ninja on Zen but I’m switching to DTN IQ after the Zen demo is up. I am considering switching my analysis to Market Delta or even switching both analysis and execution to CQG. It is critical to have the proper tools otherwise you open yourself up to technical errors, slow order routing, slippage, and broker manipulation.

Based on my experience and understanding of my own trading psychology I believe that systematic non-discretionary process of capital risk and trade sizing is best, as well as in the area of entry/exit methodology. When the qb calls a play there is no more time for planning or rethinking what’s got to be done. It’s either done right or it is not done right. Getting it done right, flawlessly, that is the goal.

Sizing the trade on the fly creates operational risk by allowing emotional biases to enter your trading. Risk limits are mission critical and always planned ahead of the live trading session. Trading with discretionary risk controls, in the hands of the trader no less, opens up a whole lot of woulda coulda type conversations, emotional energy loss, distraction and loss of focus on the market while it’s in play. In my hands this spells an inevitable mistake somewhere along the line, and a mistake with risk controls will eventually lead to a ‘BAD TRADE EVENT’. It only takes one of these to blow your entire month, or worse. So after ruminating on this point for some time I am convinced that my personal psychological makeup and trading methodology is best suited to a non-discretionary system for sizing trades and managing the capital at risk.

So what are my risk limits. I think my win loss ratio or edge is probably around 70%. I’ve never taken record keeping seriously before so we will see exactly as the weeks progress. I like 33 pips as a max allowable loss on any one trade. Losses can and should be cut shorter if conditions indicate a reversal, and no one trade is ever allowed to register a loss of more than 33 pips. The target average win is likewise 33 pips, for a 1:1 risk reward ratio, that is 33 pips risked for 33 pips targeted. The 33 average win amount will be achieved by systematically taking half the trade off at 22 pips and running the remainder to the nearest key support and resistance target or until the shortest term trend reverses. There is a little room for discretion here in terms of where to take T2, however the goal of 33 and maintenance of a 1:1 RR must be kept close in the mind.

Based on 33 for 33 risk/reward and a 3% max loss of capital per trade, the sizing of each trade is shown the spreadsheet below, in the column M.Lots. The M.Lots column shows the number of M6E lots that will be entered based on the capital in the account shown in the middle column. The chart starts at 5,000 and shows how the number of lots traded increases as capital increases

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  #6 (permalink)
British Columbia
 
Experience: Advanced
Platform: NINJA
Broker: ZEN
Trading: Crude
 
Posts: 1,091 since May 2010

Based on 33 for 33 risk/reward and a 3% max loss of capital per trade, the sizing of each trade is shown the spreadsheet below, in the column M.Lots. The M.Lots column shows the number of M6E lots that will be entered based on the capital in the account shown in the middle column. The chart starts at 5,000 and shows how the number of lots traded increases as capital increases.



I expect to do an average of five trades per day. That’s about 80 per month. I expect to win 70% of my trades and I allow for some screwups on less than one in every ten trades, thus putting my win ratio estimate at the conservative and realistic 60% level over one month of trading. Going to the 60%WL and 80Trades cell in the matrix below we get a net of 16 wins over the month. Going to row 16 in the previous chart you will see this puts the account at 3000 of profit and the Capital at 8000. That’s before expenses for data feeds, software licensing, commissions, inet, and phone, which I’ve calculated to be 1400 and hence a net net profit of $1600, or a 32% ROC.

Attached Files
Register to download File Type: xls RR Targets.xls (18.5 KB, 36 views)
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  #7 (permalink)
British Columbia
 
Experience: Advanced
Platform: NINJA
Broker: ZEN
Trading: Crude
 
Posts: 1,091 since May 2010

Execution


With a well understood method of entering and exiting trades and a matching risk control system, the challenge to becoming profitable lies in the execution of the battle plan. The major challenge, the key to success, all comes down to execution perfection by error elimination.

Just one unplanned for error per every ten trades, done consistently, can ruin an edge. The difference in profitability over time is astounding when you play with the numbers in the spreadsheet. The list of things that can go wrong and cause a trade to screwup is a long one and I am sure we will se many here over the coming posts, but not more than one per week, more than that and it’s a break even proposition. Perfect trade plan execution is profitability.

My operation requires military precision to attain this goal. There is a need to know exactly what will be done in every situation and to do it in every situation before you find yourself in a situation. The goal is not to outsmart the market. It’s already a lot smarter than I am. The goal isn’t even to win pips on every trade. Wins and losses are all good. The goal and the challenge is to follow the letter of the plan to the T on every single trade of every single session, and at the end of the month enjoy the profits this will bring.

Every individual trade’s success should be judged by the effectiveness by which the plan is carried out, not by the resulting net win or loss in pips, that is to be expected.

The Key Rules of Execution are thusly;

Rule 1: Always trade only one strategy at one time

Rule 2: Never trade someone else's strategy

Rule 3: Never change your strategy during trading hours.

Rule 4: Never plan a trading strategy during trading hours. Eliminate distraction maximize focus.


And the Goal,

The Goal is to become a master of trade execution. The forces of greed and fear shall be conquered and eliminated from my personal trading zone. Nor shall they interfere with the goal of ‘perfect execution’, trade in and trade out, 100% of the time.

That’s post number one. Check back next week as we follow the capital controls and see if we can execute a plan!

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  #8 (permalink)
Site Administrator
Manta, Ecuador
 
Experience: Advanced
Platform: My own custom solution
Trading: Emini Futures
 
Big Mike's Avatar
 
Posts: 49,050 since Jun 2009
Thanks: 31,658 given, 94,915 received

Great job on the plan!

You covered a lot, so I have few questions. Just one right now actually. Are you at all concerned with slippage on the M6E compared to the normal 6E?

Mike

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  #9 (permalink)
Asia
 
Experience: Beginner
Platform: NinjaTrader, TOS
 
Posts: 798 since Jun 2009
Thanks: 109 given, 798 received


syxforex View Post
Capital Risk Controls and Trade Sizing

...
I am starting the account with between 3000 and 5000 in risk capital. I have selected the X Trader DOM platform for execution. Analysis is currently being done via Ninja on Zen but Iím switching to DTN IQ after the Zen demo is up. I am considering switching my analysis to Market Delta or even switching both analysis and execution to CQG. It is critical to have the proper tools otherwise you open yourself up to technical errors, slow order routing, slippage, and broker manipulation.

Based on my experience and understanding of my own trading psychology I believe that systematic non-discretionary process of capital risk and trade sizing is best...

If you are using X_Trader on a per execution basis , the low end IQfeed subscription, and the low end CQG web client, you might burn through 3K annually without even trading. You wrote some great stuff, so don't let the pressures of undercapitalization become a factor in your trading.

If its a $100K account and you never risk >3-5K ignore my words. If its a 3-5K account...

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  #10 (permalink)
British Columbia
 
Experience: Advanced
Platform: NINJA
Broker: ZEN
Trading: Crude
 
Posts: 1,091 since May 2010


Thanks Mike, that was a bit of long post alright. Slippage on the Micros. When I was playing with them about a year ago I noticed some, like M6C, had slightly wider prices at times but the Euro was significantly tighter and did not vary much from the Big contract. In critical and fast moving markets I think the fills are not going to be as good, I don't know exactly how it will affect the pips but the CME does seem to emphasize that it's the same liquidity, and with their technology and I can't see why a market maker can't offer the same price in both markets.

I may lose a few pips over the trades but that's probably better than the alternative of trading a full lot and risking 30% of the account on a single trade. It should be a good opportunity to document CME Micro Futures and find out the truth about the liquidity connection claim they make and hence whether or not it is the true open and fair market for retail fx traders they claim it to be.

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