Friday, April 23, 2010

Simplicity Defined

Today I stopped trading live and started a period of demo trading. While I find this frustrating I believe its necessary. Over the past few weeks we have eked out a profit here and there but a few things have become VERY apparent.

1. I'm carrying huge amounts of risk (9 Ticks Initial) considering my account size.
2. My winners are not larger than my losers.
3. I have a large percentage of par trades that are inefficient.
4. My entries are not precise enough (if they were I could use smaller stops).

New or old setups make no difference, the point being that there have been cracks in the armor and that sooner or later Mr. Market was going to crack. That's why starting today i'm going to start forward testing an idea based on the "How to Build a Trading Method" post from last night. I'm going to be looking to exploit areas on the charts where the novice money is reversing and having their stops blown out, or where stops are being trailed tightly and a reversal occurs to blow through them.

I'm also going to be trading under the assumption of a two contract setup with a fixed tick target for one contract, and a variable trailing stop contract for runners. I've discussed the issue with my broker and it should be no problem to go live trading the smaller markets (YM/NQ/6B) initially with 2 contracts as this is still less risk than 1 contract on the larger markets. But for the purposes of this forward testing i'll be trading all 8 markets for the experience and to test the validity of the setups.

This should allow me to do a couple things. On about half of the trades that don't exhibit large explosive moves I can lock in a take profits on half the position. Then on the other trades that do show the potential for runners I can get in and out with a profit quickly and use that profit to offset the potential losing outcome of the second runner contract in while still allowing me to catch the runners when they occur. The setups also requires a significantly smaller stop (6 ticks) which makes things MUCH more comfortable for me emotionally.

The hypothetical benefits of all of this are:

1. Less Risk (6 Ticks)
2. Statistically consistent initial profit (4 ticks)
3. The ability to catch big winners > 6 ticks

Here are a few of the signals from today.

Unfortunately the best signal didn't give me a fill but there was still money to be had. There were 6 trades today, all of which were either pars (2), partial winners (2), and runner winners (2). And all of this was achieved with less risk, more precision, more reward. And to be honest the signals are MUCH MORE SIMPLE. Not a complex rule sheet that's 8 pages long, just some good common sense rules that exploit the areas on the charts when the newbies are losing money.

Have a Great Weekend!


Anonymous said...

Personally, I just think your sample size is too small to draw any conclusions from on your trading systems. It's clear your strategy works, but only within the right regime.

I go through the same issues all the time, but I tend to stick with my main model and make iterative refinements and do out of sample tests to see if the results make any sense. Writing code to do the testing helps, because it makes the sample size large enough to draw conclusions from.

Gump said...

I'm negative on peeling contracts off.
First, in effect, it's as if you're trading two different methods. Now you've doubled your trouble.
Second, it's against good trading principles when you're smaller when you're right and larger when you are wrong.
Third, it takes the focus off reading the markets turns which I believe should be the primary goal and puts it on some mathematical profit scheme. It's not a game of chance, you have an edge.

E-Mini Player said...

I've said it before, trading 1-lots is the toughest way to trade. Trading 2 or more allows you to really manage the trade. Scaling out is a great way to manage risk, and allows you to "buy" the trade. We do it all the time at the firm. But just because you've scaled out doesn't mean you have to let the other contract hit it's initial stop. Figure out the optimal time/conditions of moving that stop to break-even, and locking up the trade. Once you've locked up the 1-lot at break-even, move on and figure out how you can trade around that 1-lot with your other contract; perhaps you add it back on a pullback, and then scalp it out for a few ticks again while leaving your original contract in place?

E-Mini Player said...

Btw, I wouldn't scale out at a fixed # of ticks. Watch how it's trading and let the market tell you when to scale out. It might be 6 ticks, or depending on market conditions, it might be 16 ticks. The markets are not static so why incorporate a static scale-out? Just trade it!