Wednesday, October 22, 2008

Setting Trading Goals

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.


Saturday, October 11, 2008

Waiting for the other shoe to drop...

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.


Monday, October 6, 2008

Paper Trading = Waste of Time?

Jules has recently posted an excellent thread regarding the controversy of paper trading vs. real trading. Too many times I have heard other traders state that simulated or paper trading is worthless.

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?