First, a couple of you have asked where I've been lately. Still here. I'm working hard on putting together an adequate training regimen for my wife (who has expressed an interest in trading). I never realized until now how much I simply take for granted after trading for several years.
Secondly, as I've been trying to review my own learning process I am going back to internet resources that have helped me progress as a trader. That said, I wanted to give a shout out to JJRVAT and his thread on EliteTrader called Day-Trading 2.0.
This thread had definately influenced the way I approach trading and is probably one of the very best threads out there for the short-term (i.e. scalping) trader. The first ten pages or so are simply brilliant.
Wednesday, December 10, 2008
First, a couple of you have asked where I've been lately. Still here. I'm working hard on putting together an adequate training regimen for my wife (who has expressed an interest in trading). I never realized until now how much I simply take for granted after trading for several years.
Posted by Lord Tedders at 8:59 AM
Wednesday, November 5, 2008
Knowing that I risk alienating a fair amount of my readership with this statement I will go ahead and say it anyway. Yes We Can! Yes We Did! GOBAMA!
Also, although I rarely give my opinion on macro economics I will indulge myself here and talk a little bit about what I see as some potential impacts of the new presidency on the U.S. dollar and stock markets.
Right now, we are in a bear market (for stocks and bull for U.S. $ and Yen) as Jesse Livermore would say. The new presidency won't change that. However, what we will likely see in the near term for the dollar is a second test of the highs and either a bounce or continuation. My guess is that at least for the short-term we haven't seen the final high yet for the U.S. (or for the Yen for that matter). Why you ask? There are a number of reasons, but most importantly I think there has been a long-term overvaluation of the Euro that is now being questioned world-wide as we see banks struggle in Europe as well as the U.S. So why is the U.S $ benefiting from this? Although people have not held much esteem in recent years for the $ they do for U.S. treasuries. The recent strength of the Yen has been much discussed and again there are many reasons for this most notably the unwinding of the carry trade.
So what about U.S. and worldwide stocks? As I said earlier, we are in a bear market. Even Mr. Change Obama can't fix that. Although he and Bernake will try their darnest. What I see for stocks right now is that we are bouncing off the lows (looking at the DJIA) in a retracement. Why a retracement and not a recovery? Why son, this is a Bear market like I told you. It ain't over yet. Also, if you look at the two times that we tested the lows of around 8000 it was on relatively light volume. I want to see that there are truly no more sellers in the market before I'm convinced we've come anywhere near the bottom.
We've talked a lot about the short-term implications of our new President on the markets and now its time for some real speculation :) Our new president, despite some concerns, appears to be a rational man willing to listen to both sides of the parties. His economic policies are largely centered around helping the middle class to get back on their feet (something we haven't seen in awhile). At the same time he's shown that he supports protecting big business as well by supporting the bailout. What is more important than his policies is how he makes people feel. The middle class and poor have felt left out of the loop for the last 8 years (at least that's how the polls speak in my mind). This is also the largest and most important group of consumers. Regaining their confidence and ensuring their sense of security is something Obama has shown a great capacity for. Since consumer confidence is the key consumer spending and hence the health of the markets, it is my belief that the new president will help setup the next bull market in stocks. That being said - this is a bear market, son. And its going to take at least 3 to 4 years before we see any sort of real change for the marketplace.
Posted by Lord Tedders at 8:16 AM
Sunday, November 2, 2008
This morning I received a copy of the typical "Doom and Gloom" article that has been floating around recently from a fellow friend and trader. The article was filled with the typical economist bleating regarding how we are going to enter a prolonged economic contraction (i.e. another Great Depression) etc., etc. and that the world has never experienced the level of greed that we have seen in recent years on Wall Street and that the world as we know it will end.
Good grief people! Read your history. Just this morning I was re-reading "Reminiscences of a Stock Operator" by Edwin Lefevre for about the 100th time. Why? Because there is nothing new under the sun when it comes to the markets. It doesn't matter if the year is 2008 or 1908 or 1858.
A great example of this is when Livingston (a fictional character based on the true stock operator Livermore) is discussing his involvement with the manipulation of the Consolidated Stove stock. In this scenario, a number of uninteresting and not particularly profitable stove companies are consolidated into one stock to be marketed and hyped on the general market and sold for more than their current value. Gee, I say to myself, this sounds a lot like a CDO! And this type of activity was rampant in the 1920's bull market. Livermore also goes on about the weak moral fiber of his associates (not to mention his own sordid manipulation of the stock). Sounds just like Wall Street today, doesn't it!
So for all of you out there, including my good friend, please take heart. The more that the economists and general public are saying that this is the end of the world the more convinced I am this bear market (for stocks) is reaching the end of the line. We aren't there yet, in my humble opinion. I am still waiting to hear from the general masses that a) they will never buy stocks again, b) the U.S. will declare bankruptcy any minute. When I start hearing this type of talk "from the shoeshine boy" as Livingston would put it, then I will know that it is time to be a bull again. Until then, I continue to listen to the market, not the hype. I strongly suggest you do the same.
Posted by Lord Tedders at 10:37 AM
Wednesday, October 22, 2008
After talking with many beginning traders, I've seen a common theme that often limits them from their full potential. Unrealistic or undefined goals.
Now one of the reasons for this is that most beginning traders want to make money the same way they do at their day job. Make $X per day, every day. Or they have a $500 account and want to turn it into $10k.
Well I'm here to tell you that the above situations aren't very realistic. Are they achievable? I won't argue that. But what I will say is that they aren't probable. And in trading that is the name of the game. Probability.
When I meet with traders beginning their trading path I tell them, look wouldn't you like to start with a challenging but achievable goal? Like beating the top CTA's in the world? And they say that sounds pretty tough. And I say yes, tough, but achievable. All you need to do is make 30% per year with a maximum intraday drawdown of no more than 25%. And these new traders look at me like I'm crazy. "30% is that all?" they say. No way they tell me. I want to make $500 a day or turn this $500 account into $10k. So I ask them, what type of drawdown do you intend to have while doing that? They look at me like a space alien, "drawdown, no I don't want any of that". So basically, they are telling me that they want to make like 2000% per year with a 0% intraday drawdown. Put in those terms it sounds pretty looney, right? But, seriously, this is what they tell me.
I am here to tell you that you need to start with realistic achievable goals. Imagine as a beginning golfer you tell yourself and others that not only do you want to beat Tiger Woods, but you want to beat him by a ratio of 100:1. And you want to do it every day, day in, and day out. You'd be a laughing stock. No one could possibly take you seriously.
I understand that most beginning traders are undercapitalized. I understand that you "need to make money now", but these are the very weaknesses that will destroy you. It isn't the market or the evil speculators doing it to you. It's you doing it to yourself. If you are undercapitalized the best thing you can do for yourself is to not trade until you are well capitalized. Go get a second job, save your pennies, or start a small business on the side. If you don't have the discipline and drive to make those things happen then you won't have the discipline and drive to stick through a bad trading month, or quarter, or year.
Do yourself a favor and set realistic trading goals and recognize that making money everyday isn't how this business works and that you aren't going to beat Tiger Woods by a ratio of 100:1.
P.S. "Typically 3 months make my entire year. 3 months I lose, 6 months are small winners to breakeven. But those 3 months make it all worthwhile." Loosely paraphrased from Phil McGrew.
Posted by Lord Tedders at 8:52 AM
Saturday, October 11, 2008
After the last couple weeks I'm just waiting for the other shoe to drop. To give you an idea, a typical month for this trading method averages about 15-20% with these risk numbers. So we're a bit above the curve to say the least.
Posted by Lord Tedders at 9:47 PM
Monday, October 6, 2008
Essentially, these folks are telling us that aspiring surgeons should just go operate on someone without dissecting a frog brain first. Or that an aspiring pilot should just hop on a 747 and learn while endangering hundreds of passengers. Or that an engineer shouldn’t prototype a new design of spacecraft. I think you get the point. Doing this sort of thing is madness.
And yet people really think that trading a live account with no defined edge and no experience will yield different results. That somehow these aspiring traders won’t blow up their account? What exactly are these folks thinking? I guess they aren’t.
Also, I would like to differentiate the people who utilize simulated and paper trading as a training tool and those who are playing around. Obviously anyone can cut open a dead frog. However, only in a training environment and with the proper dedication can one learn anything valuable out of cutting open a dead frog. If I just go in there and use a meat cleaver and don’t really identify what I’m cutting open and haven’t read my biology text book then I would learn exactly nothing. Similarly, I could go into a simulated account/paper account and trade at 100:1 leverage, average my losers and essentially “play around” with my paper account. This is significantly different than researching a definable, quantitative edge, challenging all of my assumptions, and testing that edge in a controlled and realistic environment while practicing sound money management and risk principles.
Lastly, I would like to state that yes there are definite differences between paper/simulated trading and live trading. Psychology does play a role. However, I don’t care if you have the psychological prowess of a Zen Master – if you can’t quantify and test what you are doing then you have no chance in trading well - None.
Given the recent economic climate, it should be pretty obvious that there are a lot of so called Masters of Wallstreet that do not know what they are doing. Maybe they should have done some realistic simulations/paper trading before taking their accounts live?
Posted by Lord Tedders at 9:41 AM
Monday, September 29, 2008
This Saturday I had an interesting discussion with a fellow trader who’s been successfully trading the markets for longer than I have. He told me that he’s had guys come to him for help before (having heard that he knows how to trade) and he will ask them to please read a certain trading book. The next time that person talks to him they tell him that they purchased the trading book and are reading it. And so he asks them, “Do you have the book right in front of you?” When they invariably say yes he says, “So on page 114 paragraph 2 what does it say?” 9 times out of 10 they log off IM and he never hears from them again.
To me this is an incredible story. The “average trader” doesn’t have the commitment to go purchase and read a book that is $15 and then has the audacity to lie about it. What does this say about the “average trader”? In my mind they are a total joke. No wonder 95% fail if this is the pool of “average traders” that exists. I mean how is that trader going to actually test a methodology if they can’t commit to something so simple? How will they ever endure the painful and psychologically debilitating process that is a prolonged drawdown? The answer, I believe, is that they cannot. And that is why 95% fail.
But for those of you who are capable of the blood, sweat, and tears that are required to learn about, create, and test trading systems I feel very confident that 95% of you will succeed. Where did I get this statistic from? I just made it up. But seriously, I have never met a trader that has done his homework for 3-5 years who hasn’t been successful. Thus, in my mind the only trader that I ever have to really compete against are the 5% that can actually do their homework.
For myself I have my own litmus test as to the longevity of a potential trader. Can you commit to testing your trading idea (either candle by candle, backtest, or forward test) for at least 60 trades? If you cannot do this simple exercise then quit now, for you will never succeed. If you can then congratulations! Welcome to the 5% club.
Posted by Lord Tedders at 9:09 AM
Wednesday, September 24, 2008
So I’m having her start off learning the important things (many of which I did learn in the early years), without all the fluff and snake oil (which is almost impossible to avoid). I’m having her start with Forex because it was what I started with and because I still think in many ways it’s the easiest to trade (yes I’m sure some of you disagree with that statement). Also it has the advantage of having its best trading hours during the late P.M. early A.M. our time which is most conducive to her schedule (since she is still working during the day). We will split the trading duties into roughly 4 hour blocks and basically trade from about 12:00 a.m. our time to about 8:00 a.m.
We’re going to trade an old favorite of mine – Phil McGrew’s dots. And for the first time in a long time I’ll (actually we’ll) be able to trade on the 15 minute timeframe (which is what Phil himself trades). I’ve not been able to juggle this and trade other markets like the eminis so it had been put aside for the last couple years (which is too bad since it is a great methodology). I think this system will be a good one for her to learn on since it is not entirely mechanical or discretionary but a little bit of both. It’s mechanical enough that someone new to the markets isn’t overwhelmed with information, but discretionary enough to take advantage of intelligent insight.
So for the next 4-6 months I’m having her learn the basics plus get familiar with the dots (Phil has a wonderful 100 page + manual that I deeply admire). Also during that time I’ll have her start testing the system the same way I do (candle by candle) to gain confidence in trading it and understand how drawdowns work. After that we’ll have her start with a demo account for another 3 months to understand mechanical execution, and then we’ll start with a small account trading live and see where things go from there.
The best part about all of this? I can talk about trading with her now and not receive the glassy eyed look. Priceless :)
Posted by Lord Tedders at 9:07 AM
Thursday, September 18, 2008
Several frugal blogs have described some ideas to conserve money for the upcoming Great Depression Part II. I have several ideas on how we as traders can reduce (but never eliminate) our personal portfolio risk.
1) Set aside at least 2 years (better if you can do 5) of your total free capital. Put this capital in government backed savings accounts. In at least 3 banks worldwide. I recommend 1 U.S. bank, 1 European bank (Swiss Bank is good), and 1 Asian bank (Singapore or Hong Kong). Want to be even more secure? Put at least half of it in gold – jewelry, coins, etc.
2) If you are Forex trader, split your account between Spot FX and Currency Futures. Remember that the 6E and the EUR/USD trade in a very similar fashion and Futures are regulated and often insured (check with your broker).
3) Have at least 3 or 4 brokerages (as reputable as you can find) as possible. Make sure they don’t all clear from the same clearing firm.
4) Get your family on a budget. Tell me you already have one. Monitor that budget at least monthly.
5) Reduce all debts to zero – that includes your house. Can’t afford to pay all cash for your house? Get a condo.
6) De-leverage your trading as much as possible. Are you currently risking 3% per trade? Get it down to 1% - or less if possible.
7) No lattes! Reduce your latte and eating out habits. Eat at home. You will lose weight, save money, and help the environment. See if you can cut your total food costs in half. It isn’t that hard.
8) Grow your own food. There are several urban homesteaders who feed their family entirely from 1/10 of an acre. You might have to become vegetarian to make it happen (yep I hate veggies too – get over it). Get into gardening. Re-invent the Victory Garden for your home. WWII rationing may seem quite pleasant compared to the upcoming storm.
9) Kill your T.V. If you subscribe to cable cancel your subscription. T.V. rots your brain anyway.
10) Kill your cell phone. Do you remember when you were a kid? There were no cell phones. It’s a waste of money; nobody really cares about your 100 texts per day anyway. It will relieve stress and help you disconnect from unnecessary distractions. Still can’t live without it? Any disconnected cell phone is still able to dial 911 (the only number you really need in an emergency).
Some of this might seem a little over the top. Didn't we all get into trading so that we could live the Lifestyles of the Rich and Famous? That may be true for some, but for me it's about personal and financial freedom. How can we be free when an iceberg could put us underwater at any time? Remember, just because you're paranoid doesn't mean the market isn't out to get you.
Posted by Lord Tedders at 11:02 AM
Friday, September 12, 2008
I'm glad to hear that you'll be starting off slowly and on the right foot. All of us make lots of mistakes in the beginning and one of the most dangerous is wanting to do too much too fast (I want to grow my $5k account to $500k in 2 years lol). Imagine if a medical intern wanted to perform complex brain surgery in their first week. Obviously complex brain surgery (ala trading a large % risk) is possible, but not safe for beginning interns.
Remember that trading is a great career/business (not fad or get rich scheme) and that you want to be enjoying it for many years to come. Just like a great surgeon it will take you many years to become proficient and even more years to become a master. Try not to think of this as a bad thing - but rather as job security. Remember, the rewards are exponential. It may seem like a long time but imagine the trader you will be when you are 30 or 40. Ten or twenty years may seem like a very long time to you right now but it is not. And because you are young you have the time to enjoy the rest of your life doing something you love (hopefully you love trading or will grow to love it) it is important to build your skills and set your goals with the long term in mind.
To give you an idea of what goals you should be thinking about, consider this. 9 out of 10 of the top CTA funds listed at Attain Capital have not made more than 15% this year with a max DD of 25%. Each of these funds manages well over $50 million. If you could put together a live account track record for 5 years that beat these numbers (or even met them) then you could manage $10 million or more and make in excess of $500K per year (assuming a profitable year). Obviously this is not the only way to make money as a trader but it is a very viable one for those who do not have many thousands of dollars to trade but DO have a reliable low risk track record.
Alternatively, consider this scenario. Start with $10k. Making only 75% per year (with a max DD of 25%) in 10 years you could be making in excess of $250k per year (assuming you can mentally survive 25% drawdowns on a million dollar account). Welcome to the top 1% income earners in the U.S. This would include paying your taxes (can't avoid that silly). I chose 75% because most of the successful traders I personally know and many of those interviewed in market wizards can average at least 50-75% per year. The advantage of this method is that you only have to deal with the psychological pressure of risking your own money (which is easier for some people), however, the downside is that you cannot start withdrawing funds in year 1. It will take at least 5 years before you can start withdrawing anything. So don't quit your day job.
Remember that although these returns are very possible, they are not linear. Consider the fact that it is entirely possible to make no money (or even lose money) for a year or more (this is mentioned in the track records of several successful market wizards) and hence having emergency savings (that is not traded) is a very wise choice. I am personally working up to having about 2 years of saved income and adding to it during the good years.
So why is it at every beginners forum (such as ForexFactory, EliteTrader, etc.) they are talking about making 300-700% per year? I don't know. Of course making that much is possible, but sustaining that year after year is highly unlikely. Also most traders attempting to make that much put too much financial and pyschological pressure on themselves to do so. There is a LOT of obfuscation of this fact in the beginners forums.
In conclusion, if I knew then what I know now I would have spent more time building confidence with either a demo account or preferably a very lightly leveraged real account (say 1% risk). 6 months to a year is the minimium to tell you anything in my humble opinion. Don't change ANYTHING during that period (of course you better test your ideas thoroughly beforehand and challenge your assumptions). Experience counts for so much in this business (same as brain surgery).
Hopefully this isn't too preachy or too long. Just some straight talk I wished I had listened to a few years ago (yeah I was told).
P.S. Although I ignored this until fairly recently, consider the fact that most of the people who become wealthy (not inherit it) are very frugal. Learn to live frugally. You will appreciate the wealth you make that much more and you will aquire it at an amazing pace. This is an often discounted tidbit of wisdom in the trading world, but take it to heart. When we are young we live happily on little money (I wish I could live as carefree as I did when I was 20). As we get older we buy toys, cars, houses, etc. We become more trapped in our job. We have less freedom, less happiness. This is a trap. Learn to escape it. Money will not make you happy. Only you can do that. Check out Get Rich Slowly for more frugal ideas.
Posted by Lord Tedders at 10:21 AM
Thursday, September 4, 2008
Although there are many ways to trade the market, I've never heard of any successful trader who risks more than 5% of their account at a time no matter the market, timeframe or anything else. In fact of the pros I know the vast majority risk 1-2% of their account. I'm guessing there is a reason for that.
In my view here is the problem with risking anything close optimal f or kelly criterion. If you test your system for 30 trades that gives you about a 90% confidence level, 100 trades about a 95% confidence level, 1000 trades about a 97.5% confidence level. It would take well over 10000 trades tested to reach a 99% confidence level. That means that even if you could be 99% sure that your expectancy was accurate (within a margin of error) you still would bust your account at least 1 out of every 100 trades with an optimal f risk. Now that might sound like a good gamble to you until you consider this - it is virtually impossible to reach a 99% confidence level because once you test over about 150-300 trades the market makes earlier trades irrelevant.
In other words - the market always is changing. I've known folks to test systems of thousands of trades over decades only to find that the system will break (after being robust for over a decade) and the expectancy will shift (even if the system bounces back eventually). In reality I've found it impractical to achieve much more than a 95% confidence level. That means if we push "the optimal solution" we will go bust 5% of the time. Now I don't know about you but to me that is not the optimal solution. That is the gamblers folly.
So let me define for you what I believe is the optimal risk solution. To trade with as low a risk as possible (thus smoothing my equity curve to as close to a straight line as possible) and still achieve gains that exceed the industry standard (about 25% per yer with no more than a 25% drawdown). And for those of you who aren't impressed with those sort of gains consider the fact that if you can achieve those numbers you could manage other people's millions. Hence we are back to risking less than 5%. I actually prefer about 2-3% for my systems. Of course if I had a million dollar account I might risk 1% or even 0.5%.
Obviously we can certainly do better than the "industry standard" as small traders. However, most of the beginning traders I know are trading too small and want to make 1000% per year. They end up over optimizing everything about their system, taking too many trades, taking trades not in the plan etc. Their own boredom and fears and greed overwhelm them.
The best words that any trader (Phil McGrew) has ever said to me, "Good trading is boring". So be bored. Make 50%-100% per year (instead of dreaming of making 500-1000%). Take so little a risk on each trade that you absolutely don't care about the result of that single trade. Think in terms of at least 30-50 trades at a time. Evaluate your results quarterly or annually instead of weekly or monthly. In 5 years you will be the millionaire you wish to be.
Posted by Lord Tedders at 10:00 AM
Monday, September 1, 2008
Optimal f is the optimal % risk that can be applied to a fixed fractional money management scheme that will yield the greatest net profit. Of course for the net profit of optimal f to be positive the expectancy of the strategy must be positive. This method is also known as the Kelly criterion.
The primary disadvantage of optimizing our risk parameters in this fashion is the high degree of volatility that this will incur in your account. As such, this method utilizes no limiting factors to account for things such as margin calls. Also, it fails to keep risk within human psychological boundaries as when a trader experiences an 95% draw down (which could occur in 5% of all trade sequences) it is unlikely they will be able to keep trading in this fashion. Lastly, and if the above reasons were not sufficient, this methodology assumes a constant statistically verifiable expectancy. In other words - in the real world where trading expectancy is not constant, optimal f is not constant either. Which in layman's terms means that you are constantly trying to catch a falling dagger - drunk, blindfolded, and missing 3 fingers. Hence, it is an interesting theory but of little practical relevance.
Posted by Lord Tedders at 7:13 PM
Tuesday, August 26, 2008
A few years ago a fellow trader asked me what I was doing. He saw me using overbought/oversold indicators and other reversion to mean oscillators. And I was trading Forex. He told me "you gotta fit the right tool to the right market". If those were the tools I preferred then I was trading the wrong thing.
Needless to say that conversation prompted me to investigate the emini Futures (S&P 500, Dow, and Russell 2000). These markets respond well to reversion-to-mean indicators. Another lesson I learned is that what timeframe you trade also determines the right tools for the job. When you're scalping the Russell on a 52 tick chart (about 35 s - 1 m depending on the speed of the market) you need to have the 610 tick (about 5 m) chart up to keep you on the right side of the trend. Just cause you are reverting to the mean doesn't mean you want to ignore the big picture.
Today, whether I'm trading futures, forex or something else I know that I need to fit the right tool to the right market.
Posted by Lord Tedders at 12:46 PM
Friday, August 22, 2008
Type rest of the post here
Posted by Lord Tedders at 8:45 AM
Thursday, August 21, 2008
Type rest of the post here
Posted by Lord Tedders at 10:50 AM
Monday, July 7, 2008
To me these reactions to the market mark a state of denial. As many of us know from personal experience (or anecdote) living in denial in the markets is a dangerous state of mind. We all have this amazing capacity in our minds to deny what is right in front of us - what any 4 year old can see. We are in a "long bullish" trade (at least that's how Lehman's and UBS's money is talking) and we are telling ourselves that yes we are currently in a tough spot (ok we're down like 50% in this trade) and that things HAVE to get better. We'll that's not true - it CAN and if it can it WILL get worse - taking all your money with it. The mistake is not getting into the original trade, the mistake is compounding the error by denying that we were wrong and the market is right. The market is always right.
You've probably heard all of this before, you may have even made the same mistake before and vowed never to do it again. But again any of us may slip into this mistake - even the most experienced of traders. So what can we do about it? In my opinion carefully tracking the statistics of your trades and having a drop dead point (i.e. intelligent stop loss and daily/weekly/monthly/yearly stop limits) is the only way. Of course the only way to have confidence in your drop dead point is to test it. And we are doing that - right Lehman?
Posted by Lord Tedders at 7:34 AM
Friday, June 13, 2008
What I can tell them (and you) is a little bit about my trading journey. Perhaps this may be useful to your own trading journey...
So to sum things up here is how it went:
1) Started talking to a friend who happened to be a Futures Trader. He had some interest in learning Forex.
2) Went to a Forex Trading Seminar in Los Angeles with said trader - cost $1k.
3) Got 2 useful things from the seminar. 1) Learned how to "test" a trading concept
"candle-by-candle", 2) Met Phil McGrew (who helped mentor me) .
4) Spent 6 months (20-30 hours per week) testing different systems from the seminar including some of Phil's old systems. Got TradeStation - cost $200 per month.
5) Wasn't happy with results of testing (my expectations were too high - wanted to make 1000% per year with like no drawdown lol) .
6) Spent another 1 year(20-30 hours per week) testing many different indicators and setups. Basically on the Holy Grail Hunt. Bought probably $500 worth of books, read every forum, website I could etc. etc. Setup account with TradeStation ($5k). Made $20k in 3 months and gave it all back in 3 days. Learned about the toilet stoploss.
7) Decided that automated trading was the way to go and began learning TradeStation Easy Language. Spent 6 months doing that. Bought an automated trading system (grey box) for $3k.
8) Discovered curve fit strategies don't really make money ;) Spent another 6 months learning about The Grail (a genetic algorithm and walk forward testing package) and spending another $1.5K. Finally got some decent results with that.
9) Discovered two important things that forever changed my trading life 1) Money management could make a decent strategy great, 2) I was a crummy programmer and that the main problem I had was that my automated strategies were never as good as my candle-by-candle tested strategies. Spent another 6 months discovering this fact.
10) After 2 1/2 years finally came up with 2 simple non-curve fit swing trading strategies that made money and which I continue to trade today with strict money management.
11) However, I still was not satisifed as I wanted to learn the day trading strategies that allow some traders to make money every day (more like every month). Spent another 1 year(40-50 hours per week) with NeoTicker ($1.5k) and NinjaTrader ($60/mo and $200/mo for eSignal data) discretionarily testing in tick by tick simulation several simple methodologies that I continue to use today. Spent another $5k in market hazing fees to determine what works and what doesn't.
12) Finally came up with a couple of simple methodologies that I continue to use. Finally after 3 1/2 years I had come up with several methods that work, are robust (only require occasional tweaks) and make money.
13) Today (about 5 years after I started) I am still making money and am working on converting my discretionary day trading concepts into automated strategy (no easy feat but one I am confident I will eventually complete. My swing trading strategies average about 80% ROI per annum with no more than a 10% max intraday drawdown. My day trading strategies average about 10% ROI per month with no more than a 10% max intraday drawdown.
Total Time to
Break-even: 2400 hours
Profitability: 3000 hours
Profitable Day Trading: 5160 hours
Total Dollar cost to
Profitable Day Trading: $26,000
So there you have it. Adding it all up seems pretty extraordinary. I guess they aren't joking that trading is a lot of hard work and that a good way to end up with a small fortune trading is to start with a large one ;0
Of course those of you just beginning will probably ask was it all worth it? To me it was. I enjoy trading so the hours spent do not seem wasted. Additionally, although the initial cost seems somewhat steep, when you compare this cost to opening a Subway shop (about $300,000) it seems pretty cheap. And my returns have already exceeded my initial investment with a satisfactory ROI beyond that.
The key that a lot of beginning traders forget is that Trading is a business. You don't become proficient at your profession without time and money invested. Hopefully this will help some of you who are still beginning your journey.
Posted by Lord Tedders at 9:49 AM
Saturday, May 31, 2008
Yep I've been slacking on my blog recently and it shows. Well the answer is I'm moving again from Portland to Sacramento. The wifey got a nice job so it's goodbye rain hello sunshine. So I've been packing boxes like a madman. Pretty soon I get to unpack them (joy).
Also I've been busy getting my short term emini's systems converted from the ER2 (Russell 2000 index) to the EMD (S&P 400 Midcap) and the YM (Dow). It's just really hard to say what effect moving exchanges this summer from the CME to the ICE will have on our good friend the ER2. So I'm taking no chances and switching things over. I sure will miss the craziness of the ER2 that scares the beejeezes out of most folks...I love it. The YM and EMD just ain't the same - similar action but less zesty craziness.
Additionally, there really hasn't been anything that has gotten me excited in the Forex market recently. Remember I like the 1 hour and 4 hour time frame best. And really we've been in this choptastic action all month. Sure you could have gotten down on the 30 min and grabbed some pips. But why bother? Remember the cheetah - I want the best and easiest trades. And I'm a lazy Forex trader at the best of times. Forex - show me the pips. I wanna see a trend. Then I'll get excited and trade somethings.
Have a good one till I see ya on the road.
Posted by Lord Tedders at 8:39 AM
Friday, April 18, 2008
Well you can't always have your head duct taped to your monitoring screen and this beautiful trade setup is a proof of that pudding. Triggering at about 3:00 a.m. PST I was sound asleep. Too bad. What a beauty. Classic Hidden Divergence.
Initial entry 102.72
Projected min R:R 3:1
Open Position profit: 2.7R
Posted by Lord Tedders at 8:00 AM
Thursday, April 10, 2008
How many times have you read a book or a post telling you to keep a trading log. But you don't. Or it isn't consistent or some other excuse.
The reason I believe that most traders don't keep a log (remember most traders don't make money either) is because it requires discipline. And it requires that you confront your trading - warts and all.
I've posted a copy of today's trading log for the ER2 and YM. You'll notice that there are 2 trades that shouldn't have been taken at all! Also you'll note I calculate my average winner, average loser, and my winning %. That tells me my expectancy. Also all my profits and losses are denominated in R values (that's risk values) not ticks or dollars. This keeps me honest. If I risk 20 ticks to make a 2 tick trade then I don't get "rewarded" for that. However if I make a 20 tick trade with a risk of only 2 ticks then I do.
By the way thanks to "Ontariodave" for the inspiration for the grading system you see on this trading log. The idea is that for each of my trading components: 1) signal, 2) mechanics, 3) Position Sizing, 4) Trade Management, 5) and Exit mechanics I get a grade - just like school. Depending on how I handle each of those components. So at the end of the day I can quickly evaluate where my weak points were. Today I had trouble identifying valid signals. It was tough - we were in a trending market most of the morning (and this is a methodology that looks to fade breakouts).
Another thing I'd like people to note (just as Brett Steinberger says in his book "Enhancing Trading Performance" is that good traders will take that 5th attempt at something even though they've had several losers in a row. Inevitably, that is when I have my biggest winner (note the 5R winner at trade 8 after being -4R on the morning).
Good luck with your trading and I hope this inspires you to keep a trading log or improve your existing trading log.
Posted by Lord Tedders at 2:06 PM
Monday, April 7, 2008
From the previous post I had placed a short USDJPY trade before NFP. Well the NFP didn't matter too much in the grand scheme of things. Sunday night I was very quietly taken out at my ATR trailing stop.
R: 19 pips
Result: -.2 R
Posted by Lord Tedders at 7:06 AM
Friday, April 4, 2008
Last night I put on a short USD/JPY trade. Most traders wouldn't put on a trade hours before Non-Farm Payroll. However, the market is going to go where it's going to go. Obviously right now I am still holding onto that trade and ANYTHING could happen. However, I know that my methods put the expectancy in my favor. So why wouldn't I trade before NFP?
R: 19 pips
Risk to Reward: 5R
Posted by Lord Tedders at 5:54 AM
Wednesday, April 2, 2008
After talking with some traders last week and this week, I thought I would talk a little about understanding yourself and how this can help your trading.
I recently spoke with a trader who asked me why I switched using from using a particular trading method. His assumption was that it was not profitable.
Actually, it was quite profitable - however, it did not meet my personal requirements. These requirements dictate that I look for methodologies that are low risk, tend to win less than half the time, and have high R multiple gains.
So why do I have these requirements in the first place? Because of my strengths and weaknesses as a trader. Any method I trade must maximize my strengths and minimize my weaknesses.
It may seem that I am being rather "fussy" not trading an approach that "works". However, it is my firm belief that you cannot successfully trade an approach that does not psychologically and financially meet all of your requirements.
When one is first testing systems either discretionary or mechanical it is very difficult to see that there are multiple ways to be "right" in the markets. Of course for every 1 correct way there are 100 incorrect ways to do things.
My original trading journey took me down the path of backtesting ideas (first by hand and later by computer). Eventually, I realized that my strength in the real world is not programming computers. Rather it is the macro understanding of how systems work. I am not a detail oriented person in the real world - but I am very good at sensing the general pattern of things.
Summing this all up I came up with a list of my trading strengths and weaknesses:
1) Good at seeing the overall pattern (technically and fundamentally).
2) Good at reacting quickly (played lots of video games as a kid).
3) Good at risk management (know a lot about risking a little to gain a lot).
4) Good at understanding market psychology (I know that most traders have a strong desire to be "right" but don't understand magnitudes of risk)
1) Poor at predicting market direction (I'm usually wrong most of the time)
2) Poor at programming computers (not detail oriented enough)
3) Poor at understanding complex derivatives (not going to be trading options any time soon).
Based on these strengths and weaknesses I have built a methodology that plays to my strengths while minimizing my weaknesses. Furthermore, any methodology that I consider must play to those strengths while minimizing the weaknesses.
If I had done this first (instead of just pursuing the holy grail systems that every beginning trader does) I would have been profitable long before I was.
Type rest of the post here
Posted by Lord Tedders at 12:54 PM
Tuesday, April 1, 2008
Because of the quantity of trades I take on a monthly basis I'm going to focus just on my Forex trades in this monthly analysis.
Date Pair Setup Timeframe R Target Result
3/5/08 USDCHF Hidden Divergence H1 26 84 +6R
3/10/08 USDJPY Divergence M5 9 42 +3.5
3/11/08 EURUSD ABC Reversal M5 14 39 -1R
3/12/08 USDCHF Hidden Divergence H4 60 132 +2.07
3/19/08 USDJPY Hidden Divergence M5 22 63 -1R
3/27/08 EURUSD Hidden Divergence H1 42 127 -1R
Monthly Net Results: +8.57 R
Now I want to point out a couple of things. First most people aren't that excited about this type of trading since it is longer term than most day traders like (typical holding time was 1-5 days). Secondly, with a winning percentage of only 50% it is hardly "glamorous" trading. However, it is quite profitable. This particular setup tends to average about 5-10R (i.e. percent per month) with no more than a 10-12% max drawdown and about a 40% win ratio. If only hedgefund managers could match results of 50-120% per year ROI with a 10-12% max drawdown.
Some of you might be thinking that this is based on some "awesome" entry perhaps a really complicated Neural Network or something of that nature. Actually, it has almost nothing to do with the setup (divergences of course) but all about the fact that I risk a very small amount to attempt to capture very large R multiples.
After all do you want to be "right" or be "profitable"? Good trading is boring.
Posted by Lord Tedders at 9:29 AM
Wednesday, March 26, 2008
Our QM trade setup this morning combined divergence of our oscillator with price. This setup was confirmed with a doji candle. Now a lot of people tell me that trading the QM is "risky" because it is a volatile and high priced futures contract. However, risk is all in the eye of the beholder. For a mere $.12 stop I was able to let our profits ride to $1.08. Remember, risk is all what you make it.
R = 12 ticks
Initial target 104.70 (100% retracement)
R to R ratio: 2.65
Actual exit was at 105.46 for +59 points or +9 R
My exit was an opposing divergence signal in the opposite direction confirmed with a bearish hammer. This is a more aggressive exit than a trailing stop, however, it works well in certain markets. If one wanted to play things more conservatively, they would exit half their position at the 161% retracement level and then wait for an opposing signal to exit (you don't always get one of course).
Posted by Lord Tedders at 9:44 AM
Thursday, March 20, 2008
Our YM trade setup this morning combined divergence of our oscillator with price, a touch of the retracement area and a confirmed bullish harami candle that wasn't too big.
However, most traders wouldn't have taken this trade or would have tried to change something - why? Because this trade was right before a well anticipated Leading Indicators news release and Philly Fed announcement. So how much affect did this have on our trade? Not much...
R = 24 ticks
Initial target 12175 (100% retracement)
R to R ratio: 2.2
Actual exit was at 12181 for +59 points or +2.45 R
My exit was the low of the bar entering the 100.8% retracement level. This is a good way to trail your stops on moves that are unlikely to be lasting (such as this one). As it turned out this move had some more juice after this retracement, however, I still believe this was a good exit for this particular setup. You can't milk the market for every tick - get the meat in the middle and keep your R:R in line and life is good.
Posted by Lord Tedders at 8:54 AM
Wednesday, March 19, 2008
Not every trade is a winner. This is a fact of trading. Most guys selling you software won't mention that reality. Fortunately I'm not selling anything (expect a viewpoint perhaps). What I find amazing is that most of the best traders I know average about a 40% win ratio - yep you hear that right they lose more than they win. And speaking of losses...
Our USDJPY 5 min bar trade setup this morning combined hidden divergence of our oscillator with price, a touch of the 61.8% retracement area and a confirmed bullish harami candle that wasn't too big.
R = 22 pips
Initial target 99.85 (61% retracement)
R to R ratio: 2.86
Actual exit was at 99.06 for -22 pips or -1R
Remember 1 loss isn't that big a deal (it means absolutely nothing statistically). Heck you can expect 6 or 7 loss strings sometimes - that's trading. But when your targets are at least 2:1 the odds are actually on your side even if you only win less than 50% of the time.
Type rest of the post here
Posted by Lord Tedders at 7:27 AM
Monday, March 17, 2008
Divergence is one of those things in trading that is like an Art. The difference between a "good" divergence play and a "bad" one requires an eye for two things: 1) coincidence with a good fib placement, 2) a reasonable risk to reward ratio.
Our YM trade setup this morning combined divergence of our oscillator with price, a touch of the 61.8% retracement area and a confirmed bullish doji candle that wasn't too big.
R = 22 ticks
Initial target 11867 (61% retracement)
R to R ratio: 2.1
Actual exit was at 11864 for +48 points or +2.04 R
My exit was the low of the bar entering the 61.8% retracement level. This is a good way to trail your stops on moves that are unlikely to be lasting (such as this one). Since this wasn't a major S/R area to bounce from and we had already failed to make a move up this morning this wasn't likely to be a home run. However, this was a solid single and a good use of looking for multiple pieces of market information to confirm a potential entry.
Posted by Lord Tedders at 10:17 AM
Friday, March 14, 2008
According to Wikipedia, the cheetah (Acinonyx jubatus) is a member of the cat family (Felidae) that is unique for making up in speed and stealth what it lacks in climbing abilities.
What does this have to do with trading? Find out by reading more below...
Cheetahs are outranked by all the other large predators in most of their range. The death rate is very high during the early weeks of a cheetah's life, and up to 90% of the cubs are killed during this time by lions, hyenas or even by eagles. The cheetah has a 50% chance of losing its kill to other predators as well. Cheetahs avoid competition by hunting at different times of the day.
Prey is stalked to within 10 metres (33 ft)-30 metres (98 ft), then chased. This is usually over in less than a minute, and if the cheetah fails to make a catch quickly, it will give up. Running at high speeds puts a great deal of strain on the cheetah's body. When sprinting, the cheetah's body temperature becomes so high that it would be deadly to continue - this is why the cheetah is often seen resting after it has caught its prey.
The above is taken directly verbatim from Wikipedia. Does any of this sound familiar to you the TRADER?
Here are some points to consider:
1. The Cheetah is smaller and weaker than it's competition. In fact it is smaller and weaker than the prey it hunts.
You the trader have a very small account. You do not have 90 Ph.D financial analysts working for you, a Cray computer, or direct access to a financial exchange. The other "lions" that hunt in your territory are the large institutions, banks, and even larger traders and hedge funds. Given half a chance they will eat you - and not even notice it.
2. The Cheetah is much faster than it's competition and and employs stealth and retreat tactics when necessary.
As a short-term trader you can enter and exit a trade with minimal to no slippage (since you aren't trading 100's of contracts). You can be in and out of your trade in less than 15 seconds. Speed and stealth are your allies.
3. The Cheetah will either quickly catch it's prey or it will break off the chase. It is hunting for the weakest, smallest, most retarded gazelle of the herd. It will not be distracted by other gazelles that happen to cross it's path during the chase. Finally, if the Cheetah cannot catch it's prey (typically in less than 1 minute) then it will break off the chase. After all the Cheetah will die if it continues...
A cunning trader hunts only for the weakest/strongest trades and ignores market times/conditions that they cannot profit from. Lastly, as a trader you retreat quickly if the tides begin to turn against you. After all you're account will DIE if you do not!
Enough with the hypothetical. How do you actually DO what I've been suggesting here?
First, I would suggest reading this thread that Avery has found and contributed to on Elite Trader - the jjrvat thread.
Second, I would suggest that you attempt to implement this for yourself on whatever timeframe and instrument that you trade. After all pretty much any trading software is going to have a simple Moving Average in the charting package somewhere. You can use whatever trigger you like with this setup.
Lastly, I would encourage you to think of what I call "Time Stops". I would say that the main reason that most short-term traders get into trouble is that they don't apply their trade to 1 timeframe. For example if you are trading on a 5 minute chart - you should be making money in 5 bars (or 25 minutes) or the trade should be considered no good. If you are trading on a 1 minute bar then your time stop is 5 minutes. You get the idea. Obviously there is nothing magical about 5 bars (it could be 6 or 3 or 17). But you should work with this idea a bit.
Alright Cheetahs - let the good hunt begin!
Posted by Lord Tedders at 11:20 AM
Well even though Consumer Sentiment came in stronger than anticipated mixed market action stopped me out of my trailing ATR stop of my short USDCHF. I had already booked 1R in profits (closing half the trade) the other day when prices began to stall.
Trade Result: +2.07 R or +124 pips
P.S. A lot of traders would be totally fuming right now that their stop got taken out (nearly to the pip I might add) and be sitting there blaming the market, blaming their broker, blaming the locals etc. That type of attitude will lead to self destruction in my humble opinion. The market moves the way it moves. You either make money or you don't. Don't get so caught up in each particular trade that your ego is invested as well as your dollars.
The bottom line in this game is NOT to be RIGHT but to MAKE MONEY.
Posted by Lord Tedders at 8:14 AM
Thursday, March 13, 2008
Some mornings are just setup for playing the range and this morning was one of those on the Russell. A nice tight range with divergence setups usually equals some good opportunities.
Trade setup this morning was divergence of the oscillator with price and our 61% fib retracement.
Price setup a positive spinning top at the first sign of divergence (see first arrow), however, it failed to follow through on the next bar (hence the 1st setup never triggered). The second setup was a Harami bar (see next arrow) which confirmed one bar later that price was turning around.
R = 0.5 ticks
Initial target 658.70 (61% retracement)
R to R ratio: 7.6
Actual exit was at 660.8 for +5.9 points or 11.8 R
So why didn't I exit at the 61% retrace? Because price moved right through it without hesitation and unfortunately I was a bit slow to hit the 100% retrace at 661.7.
Posted by Lord Tedders at 8:16 AM
Wednesday, March 12, 2008
Tuesday, March 11, 2008
This morning I pointed out an ABC pattern that was forming a few minutes before 10 a.m. This trade triggered several minutes later at the 100% retracement level, triggering a short at 1.5327 with a stop of 1.5341 R=14 pips and was stopped out at 10:00 a.m. Several minutes later a setup at the 161% retracement level triggered a short at 1.5336 stop at 1.5350 R=14 pips with the first target at 1.5295 projected risk to reward ratio of 2.7.
Initial Risk = 14 pips
Initial Projected Target = 39 pips
Risk to Reward = 2.7
Net profit: -14 pips or -1R 1st trade
+5.8 pips or 0.4R 2nd trade
-8.2 pips or -0.6R
Type rest of the post here
Posted by Lord Tedders at 1:39 PM
The ABC pattern is a consolidation pattern that is the practical form of an Elliot Wave analysis. On the EURUSD this morning we are showing several divergences on the longer time frames (like the 4 hour) indicating that the long trend against the USD may be taking a break to retrace.
The 5 min time frame is already showing a minor downtrend (really still somewhat sideways), however, there is an ABC pattern forming and if we get a reversal candle around the 161% retracement fib we will go short and see if we can get a short break in the EURUSD.
Posted by Lord Tedders at 9:00 AM
Monday, March 10, 2008
This morning another divergence play was spotted at about 9:55 and triggered a few minutes later.
Initial Risk = 1 point
Initial Projected Target = 4 points
Risk to Reward = 4
Net profit: +4 points or 4R
At 9:55 our MACD oscillator indicated a divergence with a lower high, however price indicated a higher high. Using Fib's the FE 61% was identified as being the likely turn around area. This was triggered by the doji bar. This setup was confirmed on the same bar as it was a bearish doji candle. Entry was set to 1 tick below this candle at 653.0. Stop was the high of the confirmation candle at 654.0 for 1 point. Initial projected Fib target was at 649.1 for 4 points. This gave the trade a risk to reward ratio of 4.
After approximately 1 hour the initial target was met. Since this move was not part of an overall trend profit was taken at the Fib projected target.
Net profit: +4 points or 4R
Posted by Lord Tedders at 1:43 PM
This morning a classic divergence play was spotted at about 6:20 and triggered at 6:50 a.m. my time (PST).
Initial Risk = 9 pips
Initial Projected Target = 42 pips
Risk to Reward = 4.67
Net profit: +32 pips or 3.5R
At 6:20 our Moving Average oscillator indicated a divergence with a higher high, however price indicated a lower high. Using Fib's the FE 100% was identified as being the likely turn around area. This was triggered by the bar shown in the blue box indicating a potential setup. This setup was confirmed 2 bars later with a bearish engulfment candle. Entry was set to 1 pip below this candle at 102.25. Stop was the high of the confirmation candle at 102.34 for 9 pips. Initial projected Fib target was at 101.83 for 42 pips. This gave the trade a risk to reward ratio of 4.67.
After 8 candles the initial target was met. Since this move was part of the overall macro downtrend on the 30M bar (and above) we set our targets with the ATR 2.5 trailing stop.
Trailing stop is triggered at 101.93.
Net profit: +32 pips or 3.5R
Posted by Lord Tedders at 1:29 PM
I've decided it's time to revive this blog since I need a place to track my trades. Just so everyone knows I will be utilizing a different methodology than what I tracked here before. In case you're curious the old methodology works just fine still, although I've been looking at a more discretionary setup across multiple markets (eminis, Forex etc.) as this seems to be far out performing my more strictly mechanical methodologies. Never fear, however, I haven't take a nose dive completely off into la-la land of astral charting, moon phases and psychic intuition...
Recently I've been inspired by a number of things I've read (in the past of course) such as how Paul Tudor Jones describes his trading in Market Wizards (lots of little stabs at the market looking for the big payoff), Van Tharp (not some of his flaky ideas like entries don't matter but more looking at large R payoffs versus little R risk), and lastly Avery aka the RumpledOne who approaches each trade as a scalp but is willing to ride his scalps if the market is poised to do so.
Of course the big question that every trader eventually asks is "how do we know when we are part of a 'big' move and not just a reaction". That question has been on my mind for quite some time now and the light started to go on for me after reading a thread on Elite Trader (yes Alice there are a couple of real traders at Elite Trader) called Daytrading 2.0
For those of you who want the Reader's Digest version, let me sum it up by saying that you need to have an idea of what the macro (4x-6x larger than your current time frame) trend is and then look for higher highs, higher lows (for bullish conditions) and the opposite for bearish conditions.
The other discretionary setup I've been looking at recently is a divergence setup with a Fibonacci reversal target and a Japanese candlestick confirmation.
In case any of that sounds like Japanese to you, I'll be posting some trades in the next few days with these setups an an explanation of the setup logic.
Posted by Lord Tedders at 12:05 PM