40yo's new career or bust

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40yotrader

This is yet another journal of a novice trader. Why should anyone be interested? My motivation is simply to be able to communicate with others that have either been down this path and succeeded or early stage traders looking to learn from my experience.

Background: I'm a 40 year old unemployed marketing strategist. I was laid off in the beginning of 2001. I have a wonderful, supportive wife and two typical teenage daughters. During my search for employment, and while still living on severance, my wife bought a copy of Market Wizards for me because of it's inspiring stories. I read it and loved it. As my quest for another job stretched past 5 months, I gradually realized I wasn't going to get employed in my profession. Sensing that I'd probably have to create my next job, my wife and I (both of us have MBA's), decided to look into franchise opportunities. Eventually we decided that we could buy a couple of Subway franchises and manage them. I was interested in alternatives and since I was fascinated by Market Wizards, I decided to learn about this business. My severance would continue until the end of 2001, so I had plenty of time before buying a franchise. I bought books and lurked on forums while keeping a notebook of everything I found interesting. I decided to try trading and setup a account at http://www.auditrack.com. I used a datafeed from quote.com to look at charts. I had read about patterns like double tops, triangles, flags, etc. and tried to find and trade off of them. I did terribly! No matter what I tried I couldn't seem to make consistent profits.
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Originally posted by 40yotrader
This is yet another journal of a novice trader. Why should anyone be interested? My motivation is simply to be able to communicate with others that have either been down this path and succeeded or early stage traders looking to learn from my experience.

Background: I'm a 40 year old unemployed marketing strategist. I was laid off in the beginning of 2001. I have a wonderful, supportive wife and two typical teenage daughters. During my search for employment, and while still living on severance, my wife bought a copy of Market Wizards for me because of it's inspiring stories. I read it and loved it. As my quest for another job stretched past 5 months, I gradually realized I wasn't going to get employed in my profession. Sensing that I'd probably have to create my next job, my wife and I (both of us have MBA's), decided to look into franchise opportunities. Eventually we decided that we could buy a couple of Subway franchises and manage them. I was interested in alternatives and since I was fascinated by Market Wizards, I decided to learn about this business. My severance would continue until the end of 2001, so I had plenty of time before buying a franchise. I bought books and lurked on forums while keeping a notebook of everything I found interesting. I decided to try trading and setup a account at http://www.auditrack.com. I used a datafeed from quote.com to look at charts. I had read about patterns like double tops, triangles, flags, etc. and tried to find and trade off of them. I did terribly! No matter what I tried I couldn't seem to make consistent profits.
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May I ask, in analyzing your trades, what is your win/loss ratio, what is your profit/loss ratio, and what is your average position size (How much capital risked per trade). Trading is a numbers game, more than it is a game of skill. Your edge might get you 60/40 win to loss ratio. Where you have absolute control is on proift/loss and position sizing. It is important to not risk too much per trade, something like 10 to 20% per trade, and to set your profit loss around 1.5:1, 2:1. These are loose numbers, but they are a start. I've blown out an account (Only about 2000), and in doing so, I found that my risk amounts per trade where way too high, and my profit loss ratio was all out of wack. I hope that helps
 
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At that point I figured there was no way I could trade off of charts. In my profession we lived by probabilities. ex. (it's far more probable the buying habits of a 18 year old aren't set in stone than a 45 year old). I decided I needed a method to trade using probabilities. Mechanical trading caught my attention and I found http://www.traderclub.com on the web. The discussions about products were interesting, and someone mentioned systems for sale at http://www.futurestruth.com. I bought a copy of their rankings and I looked into buying a couple of the systems that looked good (Rbreaker and Rlevels). When I got them, I realized I couldn't do anything with them because they needed Tradestation to run. I found Tradestation Securities on the web. They said I could try out the site if I opened an account, so I opened a small account with them. This allowed me to watch the software trade online. It was interesting, but since I couldn't see a long past period I had no faith in trading the systems. I found a copy of 2000i foresale on Ebay and I bought it. I also learned of a site called http://www.traders2traders.com where multiple years of continuous contracts could be found. I downloaded some data and applied the systems I had to see a historical record. In short, I found the results were never going to be good enough for us to make a living. My journey then switched to scalping to see if I could make a consistent living.
I bought a system from http://groups.msn.com/DAYTRADINGatHOME. I tried to papertrade the Emini market using the signals. After two weeks, I decided the system was ok, but I hated scalping for two points.

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Next up, I decided to build my own system. One that I could use to make consistent profits based on some overall tendency in the markets. I used excel to look at the data and create probability distributions. One thing that caught my attention was standard deviation of the SP data had increased dramatically over time. I thought if it's getting bigger, maybe I could trade off the increased volatility. When I looked at the charts for 1998 and 1999, it sure looked like there were big intraday moves. I used some ideas from the previous systems I bought and did hundreds of hours of trial and error using the data I had from 1994 - 1998. I saved the data from 1999 - June of 2001 to test any ideas without changes. I guess this is called a walkforward test. What I found was, I could consistently make money, but not enough to pay our bills. I started another couple hundred hours learning about money management ideas like fixed fractional and fixed ratio. I knew my goal was to make a consistent amount of money, so I also looked at gambling money management methods. I learned the difference between martingales and anti-martingale money management ideas. I tested ideas from both of the categories. What I found was the martingale category helped me accomplish two goals (consistent returns, and low drawdown periods). The risk was I might go broke if a streak of losses hit me bigger than I was prepared for. My initial volatility breakout method was only profitable 38% of the time, so I had to improve it or the probability of a crash and burn scenario might hit. I found that if I only took trades when the previous days range was less than the day before's range, then the volatility breakouts were stronger and had a higher probability. It boosted the probabilty of successful trades to over 50%. Each year I tested had more than 50% winners. After another couple of hundred hours, I found a dynamic method of money management using a modified martingale approach that would meet my two goals. A income of at least $150,000 and a maximum drawdown not to exceed $40,000. In forward testing it worked as well or better as in the past (which I guess I knew it would since I already knew the volatility was increasing). The originally tested data had +31,000 in 1994, +12,000 in 1995, +65,000 in 1996, +150,000 in 1997, and +193,000 in 1998. The blind data tests showed profits of +176,000 in 1999, +212,000 in 2000, and +105,000 in the first half of 2001.

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By the time all this work was done, it was 2002. I had setup my system with a realtime datafeed so I could watch it in action and was happy with the way it performed using the 5 min. bars. My wife and I decided that we had enough time and money to test this idea for six months and then run it in realtime for another 4 months, before having to make a decision about trading or franchise for our future. If we were going to do either one, we had to downsize our life, so we sold our house and moved to a 3 bedroom apartment. We lowered our costs so that we could live on $50,000/yr. I used one of the bedrooms as a office for our trading "business" and my teenage girls shared a bedroom (not a pretty picture). We had to rent storage for lots of stuff and so we became ready to trade.
My wife and I started a 6 month test without making any changes to the system beginning May 1 of this year. We expected the system to make approximately $75,000 net of all commissions unless the market volaility dropped off a cliff. Well, we're now near the end of the six month test and we're planning on going live on Nov. 1. Up through today the profits during the test period were $97,830, so we're encouraged about the future prospects.
The months results were:

May +7,960
June +10,780
July +10,290
Aug +15,880
Sep +40,540
Oct +12,380 (to date)

At no time did we get close to our max. drawdown cutoff point. During the test I learned of Monte Carlo testing to test for worst case drawdowns. A product called Prosizer was available to do the test, so I bought it and used it with the past trades in a Excel spreadsheet. I found I needed to withstand over 20 losses to have a virtual probability of zero of blowing up. I figured we could do it with $40,000.
We've now funded the trading account with 200k (160k in Tbills) and 40k in the cash portion of the account. We're going to start small on Nov. 1 and verify actual slippage and results versus our model. Beginning Dec. 1, we're planning on going to full size trading. Our test will run from Dec. 1 - Mar. 31. We need to see actual results of +30k minimum to continue going down this path. If not, we'll give up on trading (for now) and buy the franchises and move on. I figured the odds of us blowing the 40k were less than 1 in 2,000, while the odds of meeting our success goal were 2:1 in our favor. If the markets revert to the volatility of the early 90's, then this won't work. If the volatility stays up, we'll move on to adding new systems and building our new career.

I've received great encouragement from this site and I hope to document our journey for others to follow (if successful), or learn from whatever mistakes we've overlooked.

I've been writing a formal Trading Plan and plan to finish it this weekend. I can convert it to a pdf file and post it for all to see and critique. The only question I have is "does anybody know where I can have the file hosted?". I'm sure it'll be too big for the attachment size restriction of this site. I don't think I should need to buy a web address and pay whatever it is per-month to get a few files hosted. Anybody have any ideas?
 
i am impressed with the amount of work and commitment you have put into this.this one statement you made makes me think it may be hard for you.
"In short, I found the results were never going to be good enough for us to make a living. My journey then switched to scalping to see if I could make a consistent living."

if you have to make a living off of this anytime in the first year it means you will be trading with scared money.with your family commitments and limited capital it will be hard to give it enough time to work.backtested results are mostly useless in the real world.if it were that easy the big boys would be doing it already.even if you got lucky and developed a system that could work it will take months to work out the bugs.

" I figured the odds of us blowing the 40k were less than 1 in 2,000, while the odds of meeting our success goal were 2:1 in our favor."

i think your way off here.your odds are no better than 50-50.

"I've been writing a formal Trading Plan and plan to finish it this weekend. I can convert it to a pdf file and post it for all to see and critique. The only question I have is "does anybody know where I can have the file hosted?". I'm sure it'll be too big for the attachment size restriction of this site."

any plan this big will be impossible to follow in the heat of the moment.
i dont think there is any easy way to learn trading before you actually do it.it cant be learned in books.my advice is start small,keep costs low and try to last long enough to learn how the game works.but this means you wont be able to live off the results in you time frame. i wish you luck and let us know how it goes.
 
Originally posted by hybridmachine


May I ask, in analyzing your trades, what is your win/loss ratio, what is your profit/loss ratio, and what is your average position size (How much capital risked per trade). Trading is a numbers game, more than it is a game of skill. Your edge might get you 60/40 win to loss ratio. Where you have absolute control is on proift/loss and position sizing. It is important to not risk too much per trade, something like 10 to 20% per trade, and to set your profit loss around 1.5:1, 2:1. These are loose numbers, but they are a start. I've blown out an account (Only about 2000), and in doing so, I found that my risk amounts per trade where way too high, and my profit loss ratio was all out of wack. I hope that helps
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It's hard to give the numbers you want so here's what I have.
For the test from 1994 - June 2001, the ave. profit per-winning trade was $1,923.00. The ave. loss per-losing trade was $974.00 and the profit per-average trade was $949.00. The % of winning trades was 52% and the % of losing trades was 48%. One year it dropped to 50.4% winners, but that was as low as it goes.
I said it was hard because the numbers were done with the money mangement. It changes the number of contracts dynamically and so one trade you may have 7 emini's and a few trades later it might be 10 or 4. It all depends on how the trades play out in the market. With only one contract the win/loss percentages are the same but the dollar per-average trade drops to only $112 after commissions and slippage (1/2 point).
 
Originally posted by vhehn

if you have to make a living off of this anytime in the first year it means you will be trading with scared money.with your family commitments and limited capital it will be hard to give it enough time to work.backtested results are mostly useless in the real world.if it were that easy the big boys would be doing it already.even if you got lucky and developed a system that could work it will take months to work out the bugs.
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We've got enough capital saved to live until June of 2004 without any profits. I've heard about scared money, but obviously I've never lived it. During papertrading we had 10 losses in a row and neither my wife or I were concerned. It's just part of the game. We'll see how we really feel in another week. I tried to model an observed behavior in the Emini market. If the market changes to a 5-6 daily point trading range, then we'll be off to our franchise option. If it holds at 10 pts. or better, we'll be fine. We've been trading the system for 6 months with no changes off a realtime feed. That's how we selected the 5 min. bars. It's a pain doing add/cancel trades for a couple of hours, but that's what we expect using a trailing stop loss. The only thing that might need to be changed is our assumption on Emini slippage. We've been using 1/2 pt. R/T and the real world may be more or less.

"i think your way off here.your odds are no better than 50-50."
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I came up with 2:1 as a wild guess based on the number of volatile years versus non-volatile. Nobody knows the future. It's all a risk.

The bust odds were based on probability. The chances of a method with 50% winning trades having 10 losses in a row is less than 1 in 1,000. It can be calculated by taking the losing % and raising it to the power of the number of consecutive trades expected. The average losing trade was $974. I planned for two 10 period losing trades back to back along with 6 other trades in a run so that we'd be down $25k+. Then I added in a std. dev. worth of losses to bring it up to about 37k. I was being very conservative when I said I thought we had a 1:2000 chance of blowing up. Actually it's just about zero. If the market changes dramatically, then of course all bets are off. That's why this is called speculation.

any plan this big will be impossible to follow in the heat of the moment.
i dont think there is any easy way to learn trading before you actually do it.it cant be learned in books.my advice is start small,keep costs low and try to last long enough to learn how the game works.
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It's not that tough, it's just that I'm a verbose writer as you can see. We don't plan on changing a thing for the test, so if all our work is for naught, then we'll be heading to Subway school. lol

We'll be trading small during November so that we get used to the online entry system. Both my wife and I will take turns doing the trading so one of us doesn't get burned out or too bored.

I don't know what the difference between entering trades on auditrack and another system will be. It's hard to imagine the real world will be any different. If you mean nerves, I don't think so. We're too old to let a swing of 20 or 30k get us excited. I've blown 10k taking clients out on the town in NYC. It's no big deal.
Hope you'll stay tuned for the show. One way or the other I'll detail the success or failure.
 
Originally posted by 40yotrader

During papertrading we had 10 losses in a row and neither my wife or I were concerned. .

[/QUOTE

Nobody is really ever concerned with losses in papertrading.

This is such a physological game that you can not really test emotions while papertrading; that's why I believe paper trading is almost useless.

But I think you have a good idea in beginning small. This will be your real test when real dollars are on the line.

You sound serious and you have done your homework. I wish you the best of luck!
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