Saturday, April 16, 2005

Follow-Up

You raise a few points in your reply (posted here), which I want to address seperatly:

Simtrading
Simtrading is fine and the cheapest way to pay your tuition fees. As long as you have to learn to execute your plan that's correct, but don't try to be too good in Sim or you will never go live. Sim trade for as long as it takes to reach about 70% to 75% winners. This will be good enough for gov work. The rest is just plain Trade Management. It's quite some time, that I posted my real trading results (last time was with my Trade Journal at the e-minitraders site), but maybe it can help you see, that you don't need to be perfect to have an edge in the market.
Daily Statistics
My statistics aren't near perfect: 58% Winners, 30% Breakeven and 11% Losers, but the Loss$ still outweigh the winners with 1.67 : 1 (Loss$ on average is 145$ vs 86$ Win)
Still it works, because I happen to manage most of the losing trades to become Breakeven + 1 tick trades. I have my disasters like the one on March 14. You could say, this was just the exception and that's correct on the one hand, but on second thought, these events were always rare, they were the trades causing me to seasaw my account.
But the trades thereafter are the ones which really count. Are you able to shrug it off, are you able to leave the 3 bad trades behind you, and continue trading your plan. Or are you shaken emotionally, do you question everything on your charts, do you redefine your plan after a disaster struck?
March 14 was the first time, when I was able to shrug it off, to leave it behind me and continue trading my plan. It was the first time, where undoing a disaster did not take 2-4 weeks but just 3 days. You need to analyze, what caused the disaster. If it's the plan, then it's really back to the drawing board. But that's the exception.
Usually the plan is sound, it's the execution and the Trade Management which lacks. So work on yourself. Learn to be able to follow a losing trade unemotional, watch the little clues, the details in the trade as if you had no open position.
On Friday I was in a Dax trade early morning (around 7am EST I think). Dax had sold off twice 10 points and recovered 8 immediatly thereafter. Nice, I thought. Dax trading at 4344 and starting to sell-off, I put a Limit Long at 4334 and was taken in. But instead of reversing, Dax sold off another 10 points to a Low of 4324 before it bounced to 4328 (Dax is 16.25$/tick and trades in 0.5 points a tick). It took 10 minutes to trade up to 4331, still 6 ticks or 97.5$ down. As it was a momentum low, common sense told me, we would see a second lower divergence low. And sure enough Dax started to sell-off again. 4330, 4328.50, 4327.50 down 211.75$. Draw the line at 4326, try to get at least 4328 or wait was the question. I noticed ES upticking a quarter, YM holding, but that was early premarket, so not a real clue. But then I saw a 700c trade on my market volume display in Futures-Trader at 4328. Someone buying 700c Dax at the Ask, that means someone was willing to pay 11,375$ just to be in the trade instead of patiently waiting at 4327.50 to be filled in a market which looked as if it would make a diverent new low.
This convinced me to remain in the trade. Sure enough Dax ticked up, and ticked up and ticked up. 10min later I closed the trade at 4334.50 Breakeven + 1 tick. Follow-up was, that Dax traded to 4335, sold-off to 4332 and then spiked to around 4343. This Fund manager buying 700c made a killing in the trade, but for me it was the difference between a loser and another Breakeven + 1 trade. These are the trades where the market demands payment for your trading errors, but where it is content to ask for emotional payment only, where you have learned enough to avoid the payment with your hard earned cash. And if anyone tells you otherwise, don't try to argue. You know better, you know how hard a job trading can be at times.
Most of you would either have taken the Short trade in the first instance or taken a Stop at 5 ticks and reversed. I know, I know. But that's not the way I traded it. I made an error and had to manage it. I paid emotionally as these trades cost you a lot of energy. They focus you, they let me miss a sure 30 tick trade in the Euro, one I was watching all morning, which I posted about in the Chatroom, which others took and I missed. But I managed the trade, I was able to watch the market objectively and still see the little clues, which you need to know to read the market direction.

Trade Plan
You tell me you have no trade plan and then you describe a neat setup you like to trade in the Euro. That is a Trade Plan! Take this weekend, take a Euro trend chart and a Euro trading chart (I would use a 5000 Volume for trend and a 500 Volume for trading, you might use a 30min for trend and a 5 min for trading or whatever you like) and search for your setup. See it on the trend chart, see it on the trading chart, what where the little clues, which gave away the new trend springing from the consolidation. Where there Fake-out’s, what was the priceaction prior to the new trend move, what did your indicators tell you. Define your entry rules. That is a trading plan. You intuitivly like a market, a setup and then you try to grasp it, try to define in words, what it is you see, what it is you “like” about this setup, which gives you the feeling you have an edge. Such a feeling comes from watching markets day-in and out, from screentime, from repetition. You train your subcontious mind to see the setups and it answers you by giving you a feeling. It’s your task to listen and to try to define the reasons for this feeling.

When i have such a feeling, I have 2 choices: Listen and follow or Watch it develop. I have learned, never to ignore the feeling.

It’s the way my subcontious mind is communicating with me. It’s its way to tell me, hey Chris, I have seen something, Watch out.
And that’s what I’m doing now, if I don’t take the setup: I watch. If it’s working, if my feeling proves to be correct, I try to define it. I try to look for the little clues, which gave my subcontious mind the setup. Once I have done that, I might have a new setup, I watch for in the future and the next time or the time thereafter, my rational mind won’t override the feeling but instead see it for himself. If it’s not working, it teaches my subcontious mind as well, as then it’s the rational mind, which acts as overseer and filter, which get’s the boost and which is as important to my trading as my feelings. The rational mind takes care of me and my account, it alerts me to known trading setups and decides, which setups to take and which to pass. My feelings are there to continuously provide me with an edge, to let me adapt to changing markets, to give me new trading ideas. Both are necessary, so i can prosper as a trader.

Yesterday in the afternoon, ER2 sold-off into the close. Reading, commenting about the email in my last article, I had to test the bounce theory myself. I had had a real nice day yesterday and had closed trading a few hours earlier. Still I got this feeling, that I wanted to trade a possible bounce 20minutes prior to the close expecting a short covering rally before the weekend.
But my rational mind said, Nope. You had a great day, don’t screw it in the last 20minutes. My feelings said: Take it. 
So I decided to comfort both: Click on Demo in Futures-Trader and place the trade. 13 ticks down in 3 minutes, Add-On and down 25 on 2 2 minutes later. From + 374$ up downto – 136$ in 5 miuntes. I stopped and reversed the trade short with ER trading at 581.40 10 tick target on the trade and was out another 2 minutes later + 194$. This feeling I got, would have cost me a real nice profitable day and made it into a + 68$ day.
But it was not all bad, all wrong about the feeling. I have seen a lot of short squeezes 20 minutes prior to the close in ER2, to ignore the feeling. Just the usual clues were missing, when I placed the trade. And that might have also been the reason, why I switched to Demo instead of trading it real, which is what I usually do.

Still I learned a thing, I had seen Cometguy doing earlier in the Euro. If it’s not going one way, join-em the other way. Stop and Reverse trading is something alien to me. Something I still need to learn, to grasp. It’s not yet intuitively, it’s not part of my trading plan. But it might become so in the future. Eman is doing it regularily, as he is trading an always in the market strategy. And I watch him, I learn, try to see how he is doing it. If it pays off in the future I don’t know. But you need to keep your edge.

What market to trade
Trade the market you feel comfortable with. Concentrate on this market, learn it and ignore the markets you can’t grasp. Markets change, markets evolve. You should learn different markets, just to be able to switch if need be, if one market becomes dull and another market emerges as hot leader. But while learning concentrate on one market, one setup. Don’t make it harder than necessary to you. And don’t trade against yourself. If your feelings tell you, this market is nothing for you, heed the advice.
I don’t trade the British Pound at the moment. Why? Because it just does not move like I expect it to move. I still have it on my screen, I follow it, but I don’t trade it. I have traded it, but right now my setups don’t work as expected. They get faded and and have no follow-through. This happens once or twice. Fine, I can accept that. I don’t expect 100%. But if you notice your setups failing one after the other, if it really takes a lot of effort and trade management to just get a breakeven + 1 tick trade or an acceptable loser, then it’s time to move on. And make sure you have something to move on.
Here is my Trendscreen. It shows me 6 currencies. I usually trade the Euro and the Australian Dollar, sometimes the Canadian Dollar. But I always see the British Pound, the Yen and the Swiss Franc as well. And there will be a time, when the Euro stops working as I’m used to, when it will no loger give me the results I expect. Then it’s time to move on and I will already have trained my mind to trade the Yen or the GBP or the CHF, just by having them on the screen. My subcontious mind will know how they trade, how they trend and countertrend. I will just have to activate this knowledge, define the rules and start trading them.
While learning, watch 1 market, but once you master one market, add another one. As trader you need to be flexible, still you need to invest the screentime and what better, if you can invest the screentime, while actively trading another market. I’m sure you know the old story about a man, who followed one stock in the newspaper day in and out, suddenly on a hunch  bought another stock and made a killing. He had uncontiously followed this other stock, while scanning for the stock he was interested in in the newspaper. He invested the screentime necessary to learn, while actively doing something different.

Relaxed trading

2 comments:

Phil Trader said...

You may want to change how you distribute wins loses and breakevens in your money management spreadsheet. The formula =IF(RAND()<=$G$8,"l",IF(RAND()>$D$14,"w","be")) will give you a higher win rate than you may think you have. I ran 2000 cycles and got 56% to 64% wins when I think you expected about 55%. Breakevens were correspondingly lower. You've made the distribution into a conditional probability. You might consider having RAND() in a separate cell on each line and using =IF(B21>$H$7,IF(B21>$H$7+$H$8,"be","l"),"w") to distribute the trade result. B21 refers to the cell with RAND() in it. H7 is win % and H8 is the lose %.

Globetrader said...

Phil,
thx for your comment. I have made the changes you suggested and posted the new MoneyManagement spreadsheet. Just download usuing the link provided. Current Version is V 4/23/2005