Climbing the learning curve

E

ermca

I have worked at a well-known investment bank as a senior research analyst for approximately ten years, and, with the substantial structural changes likely to take place on Wall Street over the next few years, I'd like to take advantage of my current downtime to explore a potential longer-term career in trading.

My current intent is to build upon my existing experience analyzing fundamentals by learning to develop a basket of automated or semi-automated trading systems and then gradually transition from paper-trading these systems (using both historical and streaming data) to trading with real money, gradually scaling up as I gain confidence and experience.

Although I have advanced degrees in accounting and finance and have invested casually in my personal account for more than 15 years, I'm just smart enough to know that I am near the bottom of a very steep learning curve. And, rather than blowing through a bunch of money jumping in with both feet, I'd prefer to invest in educating myself as efficiently as is reasonably possible. I recognize that, at a minimum, I'll likely need to spend six months or so educating myself and then another 18 months or so learning-by-doing before I can reasonably expect to be consistently profitable, assuming I don't find out sometime in the interim that I'm unlikely to ever reach that point.

Consequently, I'm soliciting advice from some of the experienced, consistently profitable traders on this website as to what books and tools they found most useful as they climbed the learning curve themselves.

Three specific questions:

(1) What educational materials (e.g. books, magazines, videos, online training) do you recommend for relatively inexperienced traders?

(2) What software do you recommend as a learning tool (not necessarily as an actual trading tool)? I have some, but not extensive, programming experience.

(3) What data sources do you recommend to go along with (2)?

I think this information would prove useful not just to me, but to a wide audience of individuals new to trading and interested in educating themselves. I have found bits and pieces of this sort of information in other posts, but nothing that is reasonably comprehensive.

Thank you in advance for your responses.
 
Well, it sounds like you've given this some thought and planning. Assuming you have the proper amount of starting capital you need to focus on developing the 2 critical areas of competency:

1. Emotional competency

2. Technical competency

The emotional (psychological) aspect will likely be the most difficult so I'll start there. Accept the fact the everyday as a trader is a day where you will feel a degree of anxiety and "pain". You will lose money a good portion of the time and while it always sucks to lose, it is part of the process. Get used to the "pain" associated with losing money as it is the most important part of the process. That said, start by testing some ideas with small size ($1k per position) and limit your maximum exposure for any given day/month/year to something you're comfortable with. If you have $100k in starting capital then always limit your exposure to $25k. Increase this as you get better at handling the losses, but, make a plan that outlines when this will be the case. Under any circumstances, do not go over these limits until your plan allows such. For example, if you hit a P/L goal or a discipline goal (a good goal is to follow all trade signals with no deviations for 6 months or so and then add size or change the plan). The idea here is you are training your psyche to handle the ups and downs and stay balanced and in emotional control during the process.

If you have any hang ups, they will emerge so be honest with yourself. What are your hangups? Are you a drama-queen? Do you have a bad temper? Are you a control freak? Do you have a problem with discipline? Can you admit it when you're wrong? Try to assess these issues beforehand so you know how to deal with them during a trade.

The technical aspects are much simpler. I believe that a good "all-in-one" package is TradeStation. You can develop, backtest and trade all in the same platform for relatively little cost. Start there and start testing out ideas ASAP. In terms of books - well, not much sticks out in my mind and I've read a ton... Taleb has some good books more for entertainment then anything else. So much of successful trading is self analysis and self development that I would hesitate in saying that a book will provide you with any answers. Forums such as this one and the TradeStation forums are good resources. Best thing to do is to watch the market and start refining your own ideas.

Mike
 
Couldn't disagree more with Mike. The better your technicals are the less it will play with your emotions.

But how good you are at working that out will determine whether Mike is closer to what you find out to be true or what I say. The technicals are the hard bit - look at the Jack Hershey threads to see many thousands of pages of traders trying to figure out something that's supposedly taught.

For the majority Mike is correct, and especially so early on, but the more you work it out the more I will be correct.

In any event learning to trade is a very demanding experience. Before I'd make any recommendations I'd need to know a lot more about what you know and what timeframe and style of trading you'd like to learn.

Good luck - you'll need it :)
 
Thanks for the responses thus far.

At least for the time being, I think I have the psychological part taken care of, as part of being a research analyst is being publicly wrong on a not infrequent basis. You learn to take your lumps, recognize the error(s) in your original analysis, revise things accordingly and move on. What most people don't realize is that analysts aren't really paid to be "right" with their ratings, although it's certainly nice when it works out that way -- rather, they're paid to know more about a specific industry and specific stocks within that industry than anyone else.

My belief is that I could expand on this my expertise evaluating fundamentals and use it as a foundation for trading. That said, I have not yet determined what broad trading strategy would be most suitable. I am an experienced equity investor, but I have little to no experience with options or short-term trading. I don't think I would have any edge trading futures or indexes or anything similarly broad, at least at this point in time. Ideally, I think a short-term strategy focused on a basket of perhaps 8-12 stocks with reasonable liquidity would be what I am looking for, but I haven't yet found a good synopsis of the various potential strategies and the pros/cons of each.

I am not looking for a "swing for the fences" type of strategy -- I'm looking for a broad strategy with a reasonably predictable equity curve and relatively low maximum drawdown on a monthly basis (e.g. something that grinds out 0.5-1% winners versus 0.25-0.5% losers a couple of times a week, perhaps more frequently, with a relatively favorable win-loss ratio). In the long term, I have a decent pool of investment capital to put to work, but I do not want to put this capital at risk until I'm confident I know what I am doing (i.e. likely not any time within the next 12-18 months). If anyone could nudge me in the direction of a strategy that meets these criteria -- or suggest more suitable criteria, I'd appreciate it. I'm not looking for specifics -- just a broad framework within which I could start building and backtesting my own systems.

In addition, I'm interested in hearing more specifics on educational and reference materials, if anyone has any books they found particularly useful.

Based on what I found in other posts here on EliteTrader, I have been studying books by Elder (Trading for a Living) and Van Tharp (which are mostly focused on the psychological framework), among others, and I recently downloaded evaluation copies of both NinjaTrader and TradeStation. I have read that ThinkorSwim has a good interface for options trading, but I haven't yet taken a look at their platform. I was also intrigued by the threads on TradersStudio, but the interface looked anything but intuitive for a relative novice like myself. Frankly, I found even NinjaTrader's interface to be a bit intimidating.

Speaking of which, where can one download historical data sets for backtesting in NinjaTrader and TradeStation? Is it necessary to subscribe to a live data stream vendor to get access to historical tick-by-tick or 1-minute data? I don't know enough yet to really know what I'll need in the intermediate-term, but I'd like to have some historical data to experiment with as I start building and testing trading systems.

Thanks in advance for any additional responses!
 
Your last post was well informed. You understand what is and is not realistic which puts you at an advantage already.

It sounds like you would do well with a swing pairs trading strategy. Look it up on google and *do not pay* for anything. All the information needed to implement a successful pairs trading strat. is available free if you're willing to put in a bit of effort.

About the books/educational resources - I posted these in another thread:

http://press.princeton.edu/titles/8055.html

http://www.amazon.com/Design-Testin...s/dp/0471554464

These are meant to get your quantitative skills up to par. This may or may not be the route you want to take but I believe it is the most legitimate. I am from a quant. background so I am biased in this area: edges must be proven via good quantitative practices before any money is traded.

TradeStation gives you access to a ton of historical data for free. Also, the forums there are quite good.

Mike
 
Just be prepared to lose your first 100K account as tution to the market. Once you have cleared this pre-requisite, you can begin turning the corner to consistency.
 
Quote from ermca:

Thanks for the responses thus far.

At least for the time being, I think I have the psychological part taken care of, as part of being a research analyst is being publicly wrong on a not infrequent basis. You learn to take your lumps, recognize the error(s) in your original analysis, revise things accordingly and move on. What most people don't realize is that analysts aren't really paid to be "right" with their ratings, although it's certainly nice when it works out that way -- rather, they're paid to know more about a specific industry and specific stocks within that industry than anyone else.

My belief is that I could expand on this my expertise evaluating fundamentals and use it as a foundation for trading. That said, I have not yet determined what broad trading strategy would be most suitable. I am an experienced equity investor, but I have little to no experience with options or short-term trading. I don't think I would have any edge trading futures or indexes or anything similarly broad, at least at this point in time. Ideally, I think a short-term strategy focused on a basket of perhaps 8-12 stocks with reasonable liquidity would be what I am looking for, but I haven't yet found a good synopsis of the various potential strategies and the pros/cons of each.

I am not looking for a "swing for the fences" type of strategy -- I'm looking for a broad strategy with a reasonably predictable equity curve and relatively low maximum drawdown on a monthly basis (e.g. something that grinds out 0.5-1% winners versus 0.25-0.5% losers a couple of times a week, perhaps more frequently, with a relatively favorable win-loss ratio). In the long term, I have a decent pool of investment capital to put to work, but I do not want to put this capital at risk until I'm confident I know what I am doing (i.e. likely not any time within the next 12-18 months). If anyone could nudge me in the direction of a strategy that meets these criteria -- or suggest more suitable criteria, I'd appreciate it. I'm not looking for specifics -- just a broad framework within which I could start building and backtesting my own systems.

In addition, I'm interested in hearing more specifics on educational and reference materials, if anyone has any books they found particularly useful.

Based on what I found in other posts here on EliteTrader, I have been studying books by Elder (Trading for a Living) and Van Tharp (which are mostly focused on the psychological framework), among others, and I recently downloaded evaluation copies of both NinjaTrader and TradeStation. I have read that ThinkorSwim has a good interface for options trading, but I haven't yet taken a look at their platform. I was also intrigued by the threads on TradersStudio, but the interface looked anything but intuitive for a relative novice like myself. Frankly, I found even NinjaTrader's interface to be a bit intimidating.

Speaking of which, where can one download historical data sets for backtesting in NinjaTrader and TradeStation? Is it necessary to subscribe to a live data stream vendor to get access to historical tick-by-tick or 1-minute data? I don't know enough yet to really know what I'll need in the intermediate-term, but I'd like to have some historical data to experiment with as I start building and testing trading systems.

Thanks in advance for any additional responses!
More...

Preserving your capital is more important than seeking profits.

1) Paper trade until you are REGULARLY profitable.

2) Risk small amounts until you are REGULARLY profitable.

3) Ramp up slowly.

The most important thing is an outperformance edge. That is the same thing that makes a pro gambler earn more money than others. Unfortunately, most of the "successful" traders here do not have one, but love to imagine themselves as more than the paper traders they are.

This is much harder to do that you can imagine. Planning for 6 months followed by 18 months, you are very likely to still not be close.
 
Quote from TraderZones:

Preserving your capital is more important than seeking profits.

1) Paper trade until you are REGULARLY profitable.

2) Risk small amounts until you are REGULARLY profitable.

3) Ramp up slowly.

The most important thing is an outperformance edge. That is the same thing that makes a pro gambler earn more money than others. Unfortunately, most of the "successful" traders here do not have one, but love to imagine themselves as more than the paper traders they are.

This is much harder to do that you can imagine. Planning for 6 months followed by 18 months, you are very likely to still not be close.
More...

Exactly. Expect up to 5-10 years before you can expect to be able to break free from corporate employment and trade full time. This is after a 100K+ payment to the market in losses while developing your edge and riding the learning curve.
 
Although I appreciate the response, I think the point of asking questions, educating oneself and properly managing risk from day one is to avoid such unnecessary losses.

If one is sensible about risk exposure from day one, one should theoretically be able to pick investments at random and end up only losing commissions and slippage at the end of the day -- but I think anyone considering becoming a career trader had better have a "proven" edge (i.e. validated by extensive backtesting and then paper trading on a realistic simulator) and/or fighter pilot reflexes if they think they are going to come out ahead at the end of the day.

I absolute, positively do not intend to lose $100K as "tuition". In fact, I can say definitively that this won't happen. First, I'd never put that amount of money at risk and, second, if I wasn't at least breaking even trading real money over a reasonable time interval, I'd immediately stop and go back to paper trading and refining the strategy and risk exposure until I was.

I think these sorts of account drawdowns occur because people foolishly jump in and begin trading real money without a real strategy and without understanding expectancy and risk -- likely because of some sort of horrific late-night infomercial promising instant wealth. Thus the first $100K (or $10K or $1k) is gambled away foolishly before the potential trader realizes how little they actually know.

This is akin to learning to fight by immediately going out and picking a fight with the biggest, toughest person you can find without ever having set foot in a boxing ring or martial arts dojo. You're almost certain to lose, and you won't learn much in the process of being beat to a pulp.

I think there are a lot of potential career traders out there (myself included) who recognize the potential dangers and are willing to invest the time and resources necessary to avoid at least the most obvious pitfalls. That does not necessarily mean that we are guaranteed to become successful career traders, but hopefully we'll be able to find out whether we could be successful traders relatively inexpensively. I'm here to learn from others' mistakes, as well as from the accumulated experience of some of the experts in the field.

At least to me, one of the attractive things about automated or semi-automated trading is that you're minimizing the impact of your emotions by letting one or more models tell you when to enter and exit trades rather than making educated guesses and letting your emotions run wild. Assuming you're capable of following through with your pre-established plan and rules, which many people aren't, then your potential losses should be contained.
 
Quote from ermca:

then your potential losses should be contained.
More...

The keywords are "should be"!!!!

The markets and the models people use to trade do not always work the way they should. (i.e. Taleb's black swan)

e.g. Look at some tick data for the whites and the red (first 8) Eurodollar futures on Globex 9/19/08 about 8:20-8:40 est.

But none the less I understand the point you are trying to make about taking it seriously and being prepared. It is just things happen sometimes that no one could have imagined happening (the black swan) and those events can cause models and algo's to blow up.

On another note, from what you said, I would say (as another poster mentioned) to look into pairs trading and I would add yield curve spreads.

Happy Trading
 
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