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The Rule of 70
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Created: by worldwary Attachments:32

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The Rule of 70

  #21 (permalink)
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monpere View Post
Your rules have to be more complex then what you mention, I see multiple touches of the envelopes that do not have arrows. Also, what are your stops and targets? That will affect number of winners and losers.

The arrows were added manually but should line up pretty well with the system's signals. Keep in mind that this is a stop-and-reverse system; therefore, for instance, if price touches the upper envelope, you'll enter short and stay short until a touch of the lower envelope. So if price dips down a bit but not enough to trigger an exit, then goes back up to touch the upper envelope again, that second touch won't represent another trade since you haven't exited the first yet.

The target is the opposite envelope. As to stops, the system was designed to use no stop. During high volatility periods, this works okay; during low volatility, it doesn't. When the trade signals dry up you're exposed to the risk that a single outsized loss will ruin your day.

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  #22 (permalink)
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Inspired by the journal contest, I'm going to dust off this journal next month. My goals for March:

1. Take at least one live trade every day the markets are open.

2. No self deception. Accurately and honestly describe all trades and the thinking behind them.

3. Don't let the results of previous trades affect my confidence regarding future trade signals. If there's one personal demon I need to slay in order to become a consistently profitable trader, this is it.

I look forward to reading everyone else's journals as well. Should be a good learning experience for everyone involved.

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  #23 (permalink)
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Day 1 of my March journal contest. Let's hope all the trading days can be this quick and successful.

Took one CL trade this morning. Hit my 30 tick target about a minute later and I'm done for the day.


What I Did Right:

1. Took a live trade!

2. Managed the trade according to my rules.

3. Kept my target in place when it looked like price action was stalling; the target was hit a few bars later.


What I Did Wrong:

1. Nothing (yet...the day is young!).


Issues to Think About:

1. I have not settled on a consistent approach with respect to daily targets or maximum losses. I generally prefer to stop trading if I hit my full target on the first trade. The difficulty comes when I start with a loss. It's always tempting to keep trading until I'm ahead on the day, but I know this isn't a healthy attitude. I need to give this some more thought and develop some working ground rules.

2. I need to revisit the YM strategy I started this thread with. For now I'm taking discretionary CL trades but I don't consider the YM strategy to be dead and buried just yet.

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The Rule of 70-march_1_cl_trade.bmp  
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  #24 (permalink)
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A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate the number of years for a variable to double, take the number 70 and divide it by the growth rate of the variable. This rule is commonly used with an annual compound interest rate to quickly determine how long it would take to double your money.

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  #25 (permalink)
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imnewtrader View Post
A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate the number of years for a variable to double, take the number 70 and divide it by the growth rate of the variable. This rule is commonly used with an annual compound interest rate to quickly determine how long it would take to double your money.

Oops, didn't realize someone had already used the phrase. My "rule of 70" is completely different.

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  #26 (permalink)
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I wanted to go back and revisit the strategy I described at the beginning of the thread. As noted earlier in the journal, I stopped trading this system because it had become unreliable. I theorized that the strategy was correlated with volatility and that it is profitable only in a high-volatility environment.

I've kept this strategy in my back pocket for the past couple of months as I focused on other things and as the market continued its slow grind upward. Now that volatility is spiking again I took a look at the charts from the past few days and sure enough, it looks like this strategy might have come back from the dead. For now, at least.

Since Feb. 22 (the first day volatility spiked), I tally about 16 trade signals per day and about 270 net ticks of profit this system could have generated assuming you caught all the signals. This is a huge improvement over anything the strategy's produced since November at least. Looks like further confirmation that the system is tied to volatility and produces decent profits, but only when the markets are jumpy because fear is in the air.

Now, what to do with this knowledge? Trade the system live and try to milk the opportunity while volatility is high? Or chicken out? We'll see what tomorrow brings I guess.

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  #27 (permalink)
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Well, I did it. I mulled things over last night and decided that if conditions are favorable for the YM strategy, I should trade it while the window of opportunity is here. So today I took several live trades using this strategy (or as things turned out, maybe it's more accurate to say using this strategy as a rough guide).

It's an eye-opening experience trying to trade a mechanical system. I was amazed at how difficult it was to follow the rules. I found myself second-guessing virtually every signal; inserting breakeven stops to preserve a gain when that's not part of the system; bypassing some valid signals and taking others late; and all manner of other craziness. A few of my discretionary decisions saved me from losses but others kept me from larger profits. The chart below shows the morning session; had a couple of trades in the afternoon, basically breakeven.

It was a profitable day (net gain of 57 ticks) but I don't know if I can count it as a success. Either (a) my discretionary instincts are solid and I shouldn't be afraid to "improvise" around the rough rules of the system, or (b) I got lucky today and need to step up my efforts to stick with the system. This is I guess an identity issue as much as anything else. Who am I as a trader? Should I aspire to trade mechanically, or would that aspiration wind up hurting me in the end?

What I Did Right:

1. Put my money on the line and took multiple live trades.

2. Didn't take unnecessary risks with my capital.


What I Did Wrong:

1. Treated the day maybe 75% as a discretionary trading day and only 25% as a system day, when I had intended it to be a system day.

2. Major specific issue to work on is the breakeven stop. Once a trade went 8-10 ticks in my favor, I kept feeling a strong urge to insert a stop in order to prevent the trade from turning into a loss. This isn't necessarily a bad thing but it is not part of the system that I developed and back- and forward-tested for months. I don't really know the impact that this will have on my expected results and for the moment the practice serves as a psychological crutch more than anything else. I'm not prepared to say for certain that I shouldn't use breakeven stops in the future, but I do need to study the issue further.

3. Traded without a specific enough plan. It's hard to judge yourself when the rules you're using are vague.


Issues to Think About:

Who am I as a trader? What role should discretion play in my trading? Is a purely mechanical system for me?


Daily Total: +57 ticks
Monthly Total: +87 ticks

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The Rule of 70-march_2_ym.bmp  
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  #28 (permalink)
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Decent trading morning on YM, +34 ticks, and I may call it a day at this point.

The major issue that needed to be addressed coming into today was my lack of a clear trading plan, which has prevented me from grading myself based on how well I'd stuck with the plan. I did some soul searching last night and decided that I do not have the risk tolerance at this point to trade a mechanical system that has the potential to produce large drawdowns (as this one does), even if it's got a positive expectancy overall. I don't have enough trust, faith, whatever you want to call it that the system will work as it's supposed to. I've had decent results with my discretionary trades based loosely on the system, and so have decided to give myself permission to go forward as a discretionary trader.

As a discretionary trader I still need rules to follow, however. Here's what I've come up with for now:

1. Only trade setups that I've studied in detail. Absolutely no "whim" trades.

2. Establish my maximum acceptable risk before the trade is entered, and set a hard stop at that point. Do not widen the stop under any circumstances.

3. Do not "average in" or add to losers.

4. Quit once ahead by 30+ ticks on the day.

5. Quit once behind by -30 ticks on the day.

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  #29 (permalink)
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Took three trades today, 2 winners, 1 breakeven. traded fairly well according to my new plan.

What I Did Right:

1. Took only setups that I have studied.

2. Managed risk well and didn't move max stops.

3. Took live trades. It is becoming less difficult to pull the trigger with each trade.


What I Did Wrong:

1. Avoided what would have been several decent short trades. This is an example of my discretion being perhaps too conservative. I'd pegged this as a "trend up" day after my first short and decided to avoid shorts the rest of the day. Could have doubled my profits today if I'd traded both directions.

2. Took another breakeven stop, and again not sure if I should regard this as a mistake. Perhaps the bigger mistake was not cashing out sooner as I got a nice move in my direction right after placing the trade. A retracement was quite likely and the breakeven stop could have been expected to be hit under the circumstances.


Daily Total: +34 ticks
Monthly Total: +121 ticks

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  #30 (permalink)
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Good job. One suggestion: upload attachments as PNG or JPG instead of BMP, they will retain quality but be much smaller, and load faster for people with slower connections.

Mike

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