Thursday, April 22, 2010

How to Build a Trading Method

The following illustrations were provided by edabreu on Traders Laboratory and serves as a source of great inspiration and logic when designing a trading methodology. I always find myself coming back to it time and time again because it just makes sense. Its a good thing to reference when things aren't going your way in the markets and has made me re-think a lot of my trading rules that have gotten me to where I am, and will force them to change more to advance my skills further.

Right now i'm trying to construct a much more simple method, one that rely's on two things: 1. The statistical probability of reaching a predefined profit target on 80%+ of signals. 2. The ability to allow for large runners with a second contract on the same signals.

What i'm really drawing off of for inspiration is the two contract part of all of this... if you follow Ed's blog ( at all he constantly posts up blotters that look like this:

Ed's trades always are taking quick profits out of the market, and still letting half of his position "ride" for big wins. But what it equates to is that most of the time hes taking something out of the market each time, protecting capital and locking in gains, while still letting the possibility of large runners occurring.

One of Ed's best quotes is this: "Once you accept the fact that intraday trading is about statistical probability of the immediate future, and accept the fact that the immediate is often just the next price bar, then all trading becomes a focus on making money. If you can concentrate on just making money each time you enter a trade, and make your decisions focused on capitol preservation, then all decisions become easy." -Ed Abreu

So here are the actual "How to Build a Trading Method" slides Ed posted late last year.



Sweet Pip said...

Hey Daedalus :)...I just noticed you changed by age 24 to there must be a Happy Birthday in there somewhere ;).

Sweet Pip :)

Gump said...

"The statistical probability of reaching a predefined profit target on 80%+ of signals"

Haven't looked at Ed's stuff yet but I don't see where that particular statistic could come from and I would then fear a reliance on such. My basic philosophy would be that the traders job is to control what he can control. The only thing he can control is his risk. The here and now present. The future is unknown

Matt said...

Thanks Sweet Pip... its actually not until May but it didn't look like I was gonna get to my goal set this year so I might as well prep for next year while I had some free time.

Gump - That stat came from me, not Ed, and i'm with you on the control of risk because as you say the future is an unknown. What i'm really basing that idea off of is Ed's idea that predicting future price movements may only be limited to the next bar on the chart, and trying to exploit that in some way, because as you say, the future (and the further in front of your signal) is a progressively more unclear signal. Thus, if you can get a X move from Y signal that moves Z ticks in favor each time, that is something statistically significant that a method could be built around.