Article By Pabst

[Pa(b)st Prime]

Quote from Cutten:

Here's an idea for a follow-up article:

Based on your experience and time spent in the markets, what things would you do differently if you were starting all over again?

Gee Cutten that wouldn't be an article. It would be a friggin book.

Chapter One: I wish I hadn't bought a 600 lot in Bonds as a horrendously recieved 30yr Treasury auction was hitting the wire......

 

[Pa(b)st Prime]

Quote from GTG:

What would you consider to be a "large account" in this context?

I guess it depends on how much of a persons net worth is tied up in their trading. Some people have 10k in their account and it's all they have. Other guys have a 100k and it's a pittance.

Livermore had a line in Reminiscences that I dis-agree with.

He said something to the effect that if someone has only 10k to their name and they risk it all then they're effectively ballsier than someone who risks a million when they have a few more million "salted away."

BS. One can moonlight at a job or borrow 10k. A million isn't quite as easy to replace. Even if you have a few of them.

 

[MandelbrotSet]

Overall, a very good article but:

Short Term Technical Trading: I'm going to be both emphatic and controversial. There's is no system based on short term indicators generating anything other than real time random performance. It's utterly naive to believe the next few ticks can be handicapped by a stale set of variable equations. Now I know some of you are thinking I'm out of touch. That's because you've just successfully back tested some esoteric system with divergences, crossovers and filters. You're sure this new optimized system is gold. Think again. First the obvious. The Goldman's, Morgan's and big bucks CTA's with their vast computing power and impeccable tick data have already tested every conceivable indicator under the sun. Even if you're onto something remotely consistent you'll be subject to all the problems of high frequency short term trading such as commission costs, unable price orders and slippage. Now here's the good news. There's many signals derived from longer term strategies that will produce quality short term trades. Which signal has a more reliable chance of generating quick follow through? A new 5 minute high or a new monthly high? As a technician doesn't it make better sense to monitor a wider array of markets and spot higher percentage opportunities then to “specialize” in a single market and take a series of weak signals derived from noise?

What appears to be "noise" to you is used to generate very good returns for short-term traders, so don't be so dismissive in your comments about it.

Position Sizing: It only matters how much you bet. We've all made historic market calls only to take a small profit much too soon and then watch the market explode for weeks on end in the direction we anticipated Then the next time we try to milk a winning trade for just a bit more and see our open profit evaporate into loss. It seems that picking the markets direction is seemingly easier than extracting consistent profits. I preach two approaches. For folks who're reasonably well off and seeking stable returns I suggest you vastly under trade. Practice with scaling out of winners along with hard protective stops. Larger accounts should risk no more than 1-2% of their equity on each trade.
For smaller accounts I advocate a more wide open strategy. You're probably not going to double your account 12 consecutive times trading for 1 tick at a time. None of us are that good. What you can do however is hit an occasional home run. I'm not saying just let it rip without an uncle point but you must intelligently look for opportunities that'll give you a quantum leap in return. Unless you're still a teenager, compounding $5000 by 20% a year isn't going to be a life changing experience.

Your position sizing rules don't apply to short-term traders, so why are you talking about them here?

Accept Your Psychological Shortcomings:We're all flawed in one way or another. Discretionary traders in particular are subject to the pitfalls of poor trade selection, over trading, undefined risk and revenge trading. A movie actor can vacillate between bi-polar feelings of arrogance and guilt but what makes his foibles different than a traders is the simple fact that he gets paid no matter what self destructive urges overtake him. Trading is akin to playing 18 at Augusta each day. We will never trade perfectly but must attempt to at least minimize our innately ruinous impulses. Keep a journal of your trades. Don't just mimic the information contained in your brokerage statement. Instead keep a log of how and what you felt emotionally about each trade. Like me you'll find there's commonalities with many of your losses. For instance if I fail to take a signal that would've resulted in a big winner I'll invariably take a sub-optimal trade next. Often I'll over trade it to boot. Doing nothing more than eliminating your “trouble spots” will save you money that can be dedicated to the next good setup you perceive.

Emphatically disagree. Doing work in this area will yield the greatest results for a trader to achieve consistent returns in their trading.

This is the most important area of all, and the reason why most traders fail.
***
As I said, overall a good article, but it would be better if you focused-in on the areas that you are good at, while speaking minimally about the areas which aren't really your forte.

Good trading.

 

[Thunderdog]

Quote from asap:

pabst...

i have to disagree with how you have articulated the message of using options vs futures in the example cited above. you say that you have decided to enter a put spread with payoff of 8 to 1 which paid 80k profit, as an alternative to shorting the equivalent future. that's ok. but for the sake of transparency, you should have provided more info about that spread, especially the probability of success. for instance, a option spread that pays 8 to 1 only has approximately 12.5% probability of success. this can not be compared with shorting the equivalent future, which has a statistical probability of success of 50%. if one compares those two alternatives without mentioning the different probabilities they carry...

I know less than nothing about options trading. But how do you arrive at a 50% probability for the futures trade? Simply because the market can go either up or down does not mean that it necessarily has an equal likelihood of going in either direction at a given point in time. Am I missing something here?

 

[Yours truly]

Quote from Thunderdog:

I know less than nothing about options trading. But how do you arrive at a 50% probability for the futures trade? Simply because the market can go either up or down does not mean that it necessarily has an equal likelihood of going in either direction at a given point in time. Am I missing something here?

I had the same notion when I read asap's post . Also, an 8-1 expected profit/loss on the option trade does not necessarily equate to 12.5% prob of success. Al least not imo.

 

[asap]

Quote from Thunderdog:

I know less than nothing about options trading. But how do you arrive at a 50% probability for the futures trade? Simply because the market can go either up or down does not mean that it necessarily has an equal likelihood of going in either direction at a given point in time. Am I missing something here?

sure.

but, if you'd analyze a statistical relevant sample, you'd come up with 50/50 chances on average or to be more precise, roughly 51/49 when accommodating survivorship bias, positive drift and inflation. this is revealed by empirical analysis as well.

 

[JamesVU2000]

Couldnt agree more about having a mental market map of many different asset classes even if you only trade one. Everything is correlated and connected.

 

[Pa(b)st Prime]

Quote from MandelbrotSet:

Overall, a very good article but:


What appears to be "noise" to you is used to generate very good returns for short-term traders, so don't be so dismissive in your comments about it.

Your position sizing rules don't apply to short-term traders, so why are you talking about them here?

Emphatically disagree. Doing work in this area will yield the greatest results for a trader to achieve consistent returns in their trading.

This is the most important area of all, and the reason why most traders fail.
***
As I said, overall a good article, but it would be better if you focused-in on the areas that you are good at, while speaking minimally about the areas which aren't really your forte.

Good trading.

Psychology IS the most important and it was a misnomer on my part to title it "Accept...". Really should have been "Recognize....."
I wanted though to emphasize to guys that it's not just THEM who're fucked up. EVERYONE is. Accept it but try to change it as little or much as you can.

I was EXCLUSIVELY a short term trader for years. I was trading for only a tick before many on ET were born. I began testing on TradeStation in 1994.

I'll repeat: There's big money to be made on shorter term time frames. My partner will trade 800 a side today and make a few thou. But that money is NOT being made by guys using canned indicators. Life should be so easy......

 

[asap]

Quote from Yours truly,:

I had the same notion when I read asap's post . Also, an 8-1 expected profit/loss on the option trade does not necessarily equate to 12.5% prob of success. Al least not imo.

from a statistical standpoint it does. i mean, if that would not be the case, then the market maker would have never filled you in the first place.

dont forget options are zero sum game. a bet that pays 8 for 1 has the following payout equation. meaning, in the long run, the net result of this trade will converge to zero (negative after adding trading costs).

7*.125 (winning) - 1*.875 (losing) = zero.

 

[Thunderdog]

Quote from asap:

sure.

but, if you'd analyze a statistical relevant sample, you'd come up with 50/50 chances on average or to be more precise, roughly 51/49 when accommodating survivorship bias, positive drift and inflation. this is revealed by empirical analysis as well.

Okay, but does it not get a bit more complicated than that? For example, up or down for what distance and/or what length of time? And how does the answer to that question compare to the context of the trading strategy in question? What may well be a loss for one trader may be a winning trade for another, depending on exit criteria and so on. Further, if we are to assume that the chances remain 50/50 across the board, then it would make little or no sense to have an entry timing strategy of any kind. In a truly 50/50 environment, I suppose that the trader would want to be either always in or always out, depending on the quality of the back end of his strategy. But then, even that would be 50/50 wouldn't it? That is why "up" or "down" has to be qualified to the point where such studies are rendered meaningless to the individual trader and his specific trading strategy.

Just my opinion, of course.