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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

  #51 (permalink)
Elite Member
Williamsburg, VA
 
Futures Experience: Intermediate
Platform: ThinkorSwim
Favorite Futures: Stocks
 
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Posts: 523 since Mar 2010
Thanks: 259 given, 788 received

Here are some charts illustrating the differences between high and low volatility I mentioned in the prior post. Clearly the same tactics don't work in both environments.

If volatility stays low next week, my main plan of action is to stay with the trend, trade larger size, and keep stops tight. Reversals are acceptable plays only if they line up with a key support/resistance level from a longer term chart. These levels will also serve as profit targets.

Attached Thumbnails
The Rule of 70-high-vol.jpg   The Rule of 70-low-vol.jpg  
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  #52 (permalink)
Elite Member
Williamsburg, VA
 
Futures Experience: Intermediate
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Thanks: 259 given, 788 received

Breakeven day today. I made some good mental adjustments over the weekend and was in the right frame of mind for the kind of action we saw today. Still getting my "sea legs," however, and didn't trade terribly well. I've had to make a mental shift from countertrend to with-trend trading, which feels unnatural to me somehow.

What I Did Right:

1. Took a couple of good with-trend entries, looking to basic price action to confirm a trend and then waiting for a small pullback. This kind of trade is not in my normal repertoire so I was pleased with my ability to execute this today.

2. Managed my exits well for the most part, bailing for a loss at the earliest point I could see that the thesis of the trade was violated.

What I Did Wrong:

1. Took one bad late entry, in the direction of the trend but neither at a breakout level or at a good pullback level. Shouldn't be a surprise that this one resulted in a full stop.

2. Missed the large drop in the late afternoon; saw it happening but couldn't decide on an entry point. Those kinds of breakout moves are dependable in these low-volatility conditions so that was a missed opportunity.

Overall, I am pleased with my preparation coming into this week. The tactics I was using previously do not mesh with the current market and it appears to have been a good idea to switch mental gears when I did. Still need some more practice with my low-volatility tactics, but I'm content with how the day played out.

Daily Total: +2 ticks
Monthly Total: +145 ticks

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The Rule of 70-march-28.jpg  
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  #53 (permalink)
Elite Member
Williamsburg, VA
 
Futures Experience: Intermediate
Platform: ThinkorSwim
Favorite Futures: Stocks
 
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Posts: 523 since Mar 2010
Thanks: 259 given, 788 received


Had a great CL trade today, and a lousy YM trade where I shorted at what literally turned out to be the low tick of the day. Bad idea to trade right into the scheduled news announcement; was aware of it but took the trade anyway, thinking a bad number (which is what we got) would trigger a further breakdown. Oops! Guess I was wrong on that one. Anyway, the CL trade more than made up for the YM stopout so I decided to call it quits.

The month is drawing to an end and I think I'll take the last couple of days to post some of my lessons learned. It has been an eye-opening month for me and I feel that I've made some important realizations so far. A short list:

1. I don't have the right mentality to be a successful mechanical/automated trader. I'd been struggling with my identity as a trader and this month really cemented the fact that I more naturally belong to the discretionary camp than the mechanical camp.

2. My greatest strength as a trader is my ability to control losses and manage risk.

3. My greatest weakness as a trader is my inability to hold winners long enough.

4. I can't make money over the long term trading the way I traded this month. I'm averaging around 6-8 ticks a day. When considering that I'm taking multiple trades per day in most cases, the average ticks of profit per trade is abysmally small. In a nutshell, I'm not trading efficiently enough.

That's it for now. Will follow up the next couple of days with more specific ideas of how to improve.

Daily Total: +39 ticks
Monthly Total: +184 ticks

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The Rule of 70-2011-03-29-tos_charts.jpg  
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  #54 (permalink)
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Thanks: 259 given, 788 received

I focused on CL today as the pace of action in YM was yawningly slow. Finished with a reasonable profit on three trades although I'm not happy about my exit strategy overall; I got shaken out early on two trades and used a very tight profit target on the other.

A few more "lessons learned" this month:

1. The best outcome of the month was that i got some additional confirmation of a theory I have been developing, which is that intraday price action looks fundamentally different during periods of high volatility than it looks during periods of low volatility. Using the VIX as a general proxy for volatility, this should help me adapt my trading strategies to suit the probable state of the market on any given day. This little bit of knowledge would have saved me countless hours of heartache if I'd figured this out earlier in my career.

2. I seem to be better at trading CL than I am at trading YM. Each of these instruments has its distinct "personality" and I like being adept at both so I can switch back and forth in case one of them isn't acting right. This month at least I executed my CL trades much better. I'll keep an eye on this going forward, as I may eventually drop YM. One big disadvantage of YM is that the dollar value is only $5 per tick as opposed to $10 for CL, so you need to trade twice as many contracts (and incur double commissions) to get the same result.

3. I need to find a way to reduce commissions. They're eating up way too big a chunk of my trading profits at this stage.

That's it for now. Last day of the monthly epic is tomorrow.

Daily Total: +17 ticks
Monthly Total: +201 ticks

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The Rule of 70-2011-03-30-tos_charts.jpg  
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  #55 (permalink)
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Des Moines, IA
 
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Great Journal

Hey Worldwary, just want to say thanks for keeping this journal and providing so much detail. I'm glad I've been following it.

I find this journal really interesting to read, because when you began you had a system and a set of rules which were working successfully. You were taking what the market was giving, hitting a few solid singles per day. Then let's just say the "market mood" changed, meaning that your system no longer gave you what you had been taking earlier.

It doesn't look like your indicators or charts really changed, but recently you began taking different entries (and having success trading in this new way). It appears from what I can see that this was the right call, since the trades you were taking were successful but also the trades you would have been taking previously would not have been successful had you not made an adjustment.

So anyway, thanks for documenting this. I know it's a whole other discussion (probably many discussions) about whether you should stick to your system, expect certain "market moods" to generate drawdown, trade through it, trust the system, etc. Or whether you should be more nimble as you were and adjust your strategy. Glad I got to see how it played out here, and I hope I can take something from this experience into my own trading.

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  #56 (permalink)
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Curbfeeler View Post
Hey Worldwary, just want to say thanks for keeping this journal and providing so much detail. I'm glad I've been following it.

I find this journal really interesting to read, because when you began you had a system and a set of rules which were working successfully. You were taking what the market was giving, hitting a few solid singles per day. Then let's just say the "market mood" changed, meaning that your system no longer gave you what you had been taking earlier.

It doesn't look like your indicators or charts really changed, but recently you began taking different entries (and having success trading in this new way). It appears from what I can see that this was the right call, since the trades you were taking were successful but also the trades you would have been taking previously would not have been successful had you not made an adjustment.

So anyway, thanks for documenting this. I know it's a whole other discussion (probably many discussions) about whether you should stick to your system, expect certain "market moods" to generate drawdown, trade through it, trust the system, etc. Or whether you should be more nimble as you were and adjust your strategy. Glad I got to see how it played out here, and I hope I can take something from this experience into my own trading.

Thanks for your comments. I think adaptation is crucial. I have found over and over through the years that trading systems that work really well for a while can stop working without much notice. The reasons why a good system would suddenly turn sour were never clear to me and as a consequence I learned not to place very much trust in the system itself.

Now I'm at least starting to develop a method that might help decide which kind of system is likely to work on which days. Still have a lot of work to do but I've got a good start anyway.

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  #57 (permalink)
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Futures Experience: Intermediate
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Posts: 523 since Mar 2010
Thanks: 259 given, 788 received

Can't believe we're here already. March 31, the end of the month-long saga. I was pleased to finish the month off on a high note, with a 33 tick net profit on a couple of CL trades.

Posting to the journal every day as I've done this month has been a positive experience for me. It's kept me focused and disciplined. I somehow feel as if I'm accountable to someone to keep improving, even if it's an anonymous someone. The process of recording my thoughts in real time has also helped highlight some recurring issues that I need to work on going forward.

In the last couple of posts, I listed a few of the lessons I've learned over the course of the month. Today I'll discuss some of the specific steps I plan to take to improve my trading in the future:

1. Avoid Overtrading. If there's a single culprit that I could blame for my losing days over the course of the month, it would be overtrading. I have trouble identifying a single day in which I took a large number of trades (like 6+) and ended up better off for it. On a number of days, I was up a decent amount and then decided to take "just one more" trade, which would turn into a loser, which would inspire me to take another trade to make up for the loss, which would end up eating into my profits even further. Commissions are killing me and I need to recognize that it's quality of trades, not quantity of trades, that will result in profits over the long run.

2. Larger Profit Targets / Trailing Stops. I have traditionally been a scalper. My standard trading chart is a 233-tick chart for both CL and YM, which does a good job of identifying short-term trends and swing highs/lows but tends to mask the larger picture. I frequently find myself exiting out of a trade for a 10-15 tick profit and feeling satisfied with the trade, only to have it run another 30 ticks in my direction with only minor pullbacks along the way. In many cases the trend will run all the way to a key S/R level that might be obvious if I'd zoomed back and looked at the trend in the larger context of the day. I need to work on holding trades longer and exiting either at an intelligently chosen target or on a trailing stop if and only if the move peters out and reverses before hitting the target.

3. Larger Time Frames. I've been working on trading off a 5 minute chart, which has a much different feel than the tick charts I'm used to. Larger time frames show profit targets more clearly and reveal much more of the context underlying any particular intraday move. I need to make these charts a regular part of my trading routine.

4. Risk Aversion Can Hurt. Most of my trades this month were micromanaged much more than they should have been. The basic reason for this is that I didn't want any trade to turn into a loss. I kept stops incredibly tight and then trailed them up too early, resulting in a lot of stopouts for breakeven or for a tiny gain when the original thesis of the trade was still intact. Basically I'm allowing myself to get taken out of too many good trades due to random market noise. Keep the stop close enough to the current action, and it will get hit. This in turn leads to overtrading, as once I'm stopped out of the first trade for basically no gain I'm eager to jump in the next one, thus doubling up on my commissions. My better trades have generally come when I allowed myself to take more heat. Need to give trades more room to breathe and develop and avoid the irrational desire to "take the risk out of the trade" by moving stops too quickly.

Someone pointed out recently that my profile identified me as an "advanced" trader. Not really sure why I selected that option in the first place, but this month has convinced me that I still have a long way to go. So I've officially demoted myself. I have no illusions that I've "made it" as a trader but think that this month has pushed me in the right direction. Maybe "advanced" is attainable someday, but not just yet.

Thanks for reading. If you enjoyed this journal, please give me a mention on Big Mike's "win an ipad" thread.

Daily Total: +33 ticks (one 10-tick loser isn't shown on the pic)
Monthly Total: +234 ticks

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