Best of Trades, Worst of Trades, Some of the Others too

[KymarFye]

Scott,

I appreciate many of your points, and will have more specific responses later, but, at this point, I'd say that, though I prefer looking for patterns and "situations" among many stocks, if I were going to focus on just one trading vehicle, I'd probably choose the NQs, and maybe the ESs.

Though there are a few peculiar disadvantages or at least problem areas related to futures trading, the index instruments offer greater leverage, would give me directly relevant breadth and other market-internal indications to follow, aren't subject to the kinds of price shocks that even a big battleship stock like MSFT can undergo, and offer superior or at least comparable average daily tradable ranges. I would also consider the QQQs (though not via AMEX at this point).

Have you considered trading the MSFT SSF if and when it's broadly available?

 

[catman]

Hi KF,

I would certainly consider many instruments as being suitable for trading. My real point is that the issue with many traders
(myself included) is not what we trade, but how we trade it.
I found many parallels in your initial posts to my experiences.
Because I love trading as a way of life, I had to make it profitable
enough to be viable. In order to turns things around I began a process of elimination to get to the root of the problem. I came to the realization that I was the problem, not the stocks I traded.
The market will do what it wants to do. By narrowing the field of stocks I traded it allowed me to get a better handle on what the real issues were.
I would print out the charts of MSFT every day and study them, trying to figure out why I either lost money, or did not make very much that day. I would notice that almost every single day MSFT presented plenty of opportunities to capture a good run of anywhere from 50 cents to 1 dollar. Many other opportunities for scalps too.....so the issue was not the instrument I was trading. It was always the same thing. Every so often I would let the loss get out of hand, and I would almost always cut the winners short. Sound familiar? To me, that's the real issue.
We know the rules, yet we fail to adhere to them time and again. Those are the issues I work on and analyze every single day. A set up is a set up. We can never be sure of the outcome. We have no control over the direction the market takes. What we
can control (yet fail to do most of the time) is get out where we should when the trade goes against us, and stay in long enough (when the trade is in our favor) to make a substantial profit.

If you can look at those three rules in my previous post and tell me that adhering strictly to those rules would have no material difference to your bottom line, then the issue for you I guess would be your set ups, etc., however from reading your posts,
I don't believe that's where the problems lie.
Again, this is just my opinion.

Scott

 

[catman]

KF,

Here's another little exercise you might want to try. In one of your previous posts you stated you win/loss ratio. Try looking at it from another perspective, instead of just winners to losers.

Take your last thirty trades. Take all your losers and break it down into two categories.
1. Trades where your exit was right on the money
2. Trades that exceeded your predetermined stop loss

Take your winners and do the same
1. Trades where your exit was right on the money
2. Trades where your exit was premature and you cut you profits short

Analyze the results and see what they tell you.

Scott

 

[KymarFye]

Originally posted by catman

1. Trade with the trend (there's nothing wrong with counter trend trading as long as you understand that and are not trading against the trend because your gut feeling is telling you the market is going to turn)

Sure... I'm friends with all the different trends... though if my trend jumped off the roof of a high building, that doesn't mean that I would, too...
The trend is your friend, but it's not your wife...

2. Know you stops the second you enter a trade and stick to them no matter what. Do not think, react.

Sure - though one potentially fuzzy area has to do with trades that aren't going anywhere, neither hitting your stop nor reaching your profit target. There is also nothing in my rules that prevents me from exiting early if a set-up is negated without hitting my original or max-loss stop.

3. Know your profit goal as well. No exit unless profit stop is hit.

See answer to the above. Additionally, there are certain set-ups, and a subset of types of developments from certain set-ups, that cannot, in my opinion, be effectively or safely traded with hard profit stops. On most of the trades I take, and especially the gap fades and related trades (none of which came up in WK#1 of this journal), I will exit in significant part (typically half of the position where profits are adequate) upon cessation of any substantial direct move. In the instances of fades against gaps and against other powerful impulse moves, this policy may include scratches or small overall losses.

 

[KymarFye]

Originally posted by catman
If you can look at those three rules in my previous post and tell me that adhering strictly to those rules would have no material difference to your bottom line, then the issue for you I guess would be your set ups, etc., however from reading your posts,
I don't believe that's where the problems lie.

Over the long term, I have taken significant hits from blown stops, but problems arise more often from taking marginal or worse set-ups - which are more likely to lead to difficult stop-related problems. My worst results have come from bad "experiments" - ill-timed, over-capitalized testing of alternative approaches and new set-ups. Having recently blown a wad on an amazingly ill-considered series of experiments of that sort, I don't intend to engage in any of them again for a while. I'm focusing on what I know, and on doing it better.

There are also certain kinds of blown stops that are always a risk, but that one gets better at avoiding or minimizing: I've lost around 3% of my account in about 20 seconds one day recently just for having glanced away when I "thought" that a gap fade I was trading was consolidating... Or when trading certain small caps, you can have the hardest stop in the world, and still get a horrible fill (the kind of thing I'd think you'd rarely see trading MSFT)...

Take your last thirty trades. Take all your losers and break it down into two categories.
1. Trades where your exit was right on the money
2. Trades that exceeded your predetermined stop loss

Take your winners and do the same
1. Trades where your exit was right on the money
2. Trades where your exit was premature and you cut you profits short

Analyze the results and see what they tell you.

I perform that analysis on ALL of my trades.

 

[catman]

Originally posted by KymarFye

I perform that analysis on ALL of my trades.

Well then, what do you see from that?

As I stated before, this must be a process of elimination.
So far I would say;

1. Eliminate "experiments". If you want to try something new limit your size to 100 shares.

2. Eliminate small caps or any other illiquid trading vehicle. Liquidity is only one reason why I trade MSFT so often.

3. Excuses and obstacles...there cannot be any excuses as to "why" something happens.

Over the long term I have taken significant hits from blown stops, but the problems arise more often from taking marginal or worse set-ups-which are
more likely to lead to difficult stop-related problems

....

No, blown stops are the result of the trader not sticking to the rules....rules regarding liquidity, pre set stop loss, thoughts entering process as opposed to just reacting to the situation.

My average loss has, however, been greater than my average win, mainly as a result of overly hasty exits from winning trades, and, especially during recent periods, a handful of train wrecks more or less along the lines of "Kymars Last Stand".

Those are your words KF.

It's about probabilities. If your winning percentage is 60-67% and you tie that in with the above statement, do you think the answer is to increase your winning percentage, or do you think the answer is to figure out how to let the profits run and how to cut the losses shorter?

Timing is everything. Unfortunately our timing regarding entries and exits are tied to our thought process instead of just being a reaction to what we see. I believe it's the thought process that does us in every time.

The strict adherence to rules without the thought process entering the equation and screwing it all up is the comfort zone
that allows a trader to enter at the moment we are signaled to enter as opposed to a few cents later when our brains try to confirm what we have already been told.
It is the comfort zone that gives us the confidence to put in a stop where it needs to be prior to that number being taken out, and now putting us in an even more uncomfortable position.

Discretionary trading executed in a mechanical fashion....that's how it needs to be done.


As always, just my opinion

Scott

 

[nitro]

Originally posted by catman

...Discretionary trading executed in a mechanical fashion....that's how it needs to be done...

Yes.

nitro

 

[nitro]

Kymar,

Experiments are fine, but:

a) They must come from a place of confidence, that is, you must be profitable in what you are doing NOW.

b) They must be done with enough size to warrant your attention, but not so much where the pain suffered will blow the experiment. Also, they cannot be done in a way where they would detract from your other trading. Therefore, if you derive your living from trading, experiments are REALLY more expensive than they seem.

As to your current trading, I believe I "feel" what your biggest road block is - you do not know how to "forget" well, that is, I feel you are a very sensitive person, and have not come to terms with taking loses in the right way. My guess is that your adopted style of trading does not match your personality - this is a common problem, and it happens not only in trading, but in life in general.

Think about past relationships where you have been in, think about the ones that you really enjoyed being in, and think about the ones that you really hated being in. How fast did you cut your losses? There is no "fixing" something that doesn't work in relationships, because people aren't fixed, they are simply tolerated. This is no different than the relationship we have with the market. The markets aren't damanged, but when we trade them and lose, we think WE need fixing. This is FALSE - we need to find that friend in the markets just as in life that sees things the way we do - and if there are no friends like that there, then we need to move on.

It is true that you should trade what you see and not what you think, but you should only enter that trade in the style that will satisfy you whether you win or lose. There are lots of profitable traders that are getting ulcers on a daily basis. Perhaps they could have done that in the younger days, but now it is taking it's toll on them. We all adapt to the markets or perish, but we adapt to ourselves or perish as well.

You can learn a lot about yourself from trading, but you can learn alot about how to trade from KNOWING who you are and your limitations, and those are changing as you gather wisdom and experience.

It is soooo very difficult to give trading advice to someone. If you are truly comfortable with the way you trade, and you belive that this style of trading is what matches your natural gifts the best possible, then there can only be two conclusions:

1) Your method stinks and has no edge, and that, coupled with a deteriorating psychology, makes for a negative feed back loop waiting for the inevitable to happen.

2) You are ill suited to trading for "unknown" reasons

nitro

 

[KymarFye]

Originally posted by catman


***
Discretionary trading executed in a mechanical fashion....that's how it needs to be done.
***

Well, it's a nice paradox, but it remains one all the same: Either the trade is governed at every point by clearly defined, objective signals, and the signals themselves are derived objectively, or elements of discretion - including thought, instinct, gut, improvisation, etc. - become involved. My own belief is that the distinction falls apart on deeper analysis - the "mechanisms" underlying so-called discretion merely escape our methods of analysis (i.e., occur within the mind or psyche in ways which we cannot explain), while every element of a mechanical system must be selected discretionarily at some point, even apart from the discretionary decision to commence trading on whatever tradable...

You mentioned "gut instinct" in your discussion of trend up above, and I suspect there may very well be other elements of gut instinct or other fuzzy determinations involved in your trading. If, say, you're trailing a stop on some extended long-side move, and the whole market and the whole world are powering to the skies, but your stop is about to be triggered by a penny on some freak downspike that may very well be bad data - are you going to "execute mechanically" or are you going to make a discretionary exception of some kind - at least, say, give it another wiggle or another minute? If you say "nope, a stop's a stop," then that's where we definitely part company, even beyond the other differences in our approaches - even though I'll acknowledge the possibility that, over the long run and within certain systems, 100% mechanical execution may be the better part of valor...

Under what circumstances do you allow yourself to act discretionarily? Under what other circumstances do you, personally, disallow discretionary action - but sometimes go ahead anyway?

 

[KymarFye]

Nitro, Catman...

I'm happy to see you engaged here, I respect you both, and I enjoy discussion and exploration, but I think we've gotten off track:

I'm NOT dissatisfied with my approach to trading.

I seek constant improvement, and I am not "satisfied" in the sense of believing I've nothing more to learn, but I'm not looking for a new way to trade. I'm just focusing on what I consider to be some last, critical obstacles in the way of my success.

I'm NOT seeking some new "answer" to seemingly intractable "problems."

Again, I appreciate and enjoy discussion, but there's a point where well-intended suggestions begin to seem condescending. It doesn't make much sense, for instance, to cite my earlier efforts at self-analysis and put them before me as though they represent unaddressed or unconsidered issues. I'm sorry if some dramatic language on my part, some perhaps excessive confession, or some failures in explaining my approach have given a wrong impression, but I'm NOT seeking answers from the readers of this journal. If I were that desperate, I would not seek answers by keeping a journal here. I'd go elsewhere.

I'm actually feeling pretty good about where I am.

I wouldn't be planning to increase position size if that wasn't so.

As I said, I believe I have identified and isolated a couple of critical problems. I also believe that they must be addressed within the parameters of my methodology, not by direct interpolation from some alternative methodology. Moreover, I feel confident that I am addressing these problems effectively. I know what I'm doing, I have an edge, and I'm getting better and better as a trader. I do not trade the same set-ups, vehicles, or parameters as you guys do, and probably could not do so effectively, just as you two might very well have a lot of difficulty working with what I work with.