GEMS: Vulture

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I agree that trade management is a HUGE aspect of trading and the one that you only really appreciate when you get past all of the gobblygook of trying to tweak indicators, patterns, etc, etc...The ability to minimize the losses and maximize the winners is far more of an art than a science...I do not even understand how someone could actually "program" the amount of exposure one would have to a series of different path excursions...This is like trying to take "black box" mentality and applying it to the most discretionary aspect of trading, and in truth, the aspect of trading that separates the mediocre from the giants in the business...

One of the more interesting interviews in Market Wizards(I hate to bring this book up cause it seems really hackneyed), but was the interview with McKay where he said he varied the position size on a scale of 50x...That is where the actual leverage comes into play...No system can tell a great trader how much size to trade in any given scenario...Having huge exposure to a very trending move that never puts any pressure on the first entry is the definition of maximizing the winners...How many traders trade minimal size take their small profits, then miss the rest of the move...Or even worse, put on small size at the best possible entry, take it off, re-enter with twice the size and stop out for a net loss on the two positions...This happens all the time...Yet they should have been in the trade only once and pairing in, pairing out for the duration of the move...

These are the aspects of trading very few talk about...This is the stuff that makes all the difference in the world...
 
Yes, this is a very "meaty" discussion...This is the stuff that we have to deal with everyday...For instance, what happens when the security or future you are trading breaks out higher or lower and you cannot get into the position right away...You have a signal to go long or short, but you are pretty certain that your entry at point A may be a bit early or late...you want the exposure to the move, should it resume its original trend, but you are also concerned about the retrace backwards...

That is where the scale has to be explored...I deal with this stuff all the time myself...The key is to have enough "bullets" to be able to ensure some exposure for the move should it resume and you are able to "pair out" without reducing your exposure to 0 again and dealing with the same dillema...

At the same time, if your first entry is a bit early and it retraces another x points against you, how do you increase your exposure ie(price improvement) and, at what point are you wrong...As I have gained more experience in this area of trading I find that alot of the trades that I enter(if I am late and miss the perfect entry) require that I actually add to an initially losing position so as to give me a bit better price, with the objective of establishing a position in a "range" and then pairing out when the trend resumes...

btw, I exclusively trade the es futures, so this might not be as applicable to equities...
 
Actually, I had just written a response to a similar thread...Recently, I took the time to test some of my trading ideas and ideas that I had read about for years...I tested a number of variations of "N day or N period" breakout systems...I did not use any filters or "conditions" because I did not want to skew or curve fit the results...It was a very interesting study because I found that if the period was correct(i.e. a specific threshold number of periods) that the system had a high positive expectancy almost irrelavant of how I "tweaked" the money/trade management parameters...The higher I went with the periodicity, the higher the drawdowns and the lower the winning percentage(exactly as one would anticipate)...

Although I do not want to get too specific about the exact combinations I used, I did have enough data(3 years) with enough combinations of money management combinations to conclude that several specific time frames will produce very solid returns...

That being said, when I tested any number of very short term trading systems, none of them had positive expectancy...But, again that is to be expected...For a very short time frame, your profits come from being able to discern the environment...Obviously applying a trend following system to a choppy sideways markets and/or a support/resistance system to a trending market would just blow out the account...So, it would appear that anyone trading on a very short time frame with a system would need to adjust the system to the environment and the volatility...

Either way, I am not a mechanical trader...But I use support/resistance, pivots and time of day type of analysis to get into the trades...Mainly, it is the management of the losers, winners and scratch trades that really determines the day to day profitability...The environment is so quick, that I feel that traders who have good trading instincts thrive on the shorter time frames...Traders who are too mechanical tend to "lag" the actual price action and always off balance...

I believe that systems have a place in the markets, but typically not with the really underfunded traders...They require a definite mental and emotional detachment from trading results over a small sample period...Few traders with smaller accounts can accept these standards...The reality is that most traders are stuck between the two, which is not altogether bad...Many will use some features of a system and some discretion...The key, I believe, is to just understand and exploit the relative advantages of each...

just one opinion...
 
I have mentioned this before, but I have seen so many newbie traders make very naive statements such as "I only want to get 5 pts per day trading this" or some other arbitrary number, not based on any market reality, but on some monetary figure they seem to like the sound of...The reality is the distribution of gains and losses is not so easy to predict, even if you are 100% discretionary...

Take, for instance, this past Friday...For some they might have caught one small move off the open and made their 5 pts and quit for the day...Others may have traded all day and lost their 5 pts for the day...There is a serious randomness to returns over the short term...And another thing that you have to watch for is the tendency to say, "once I am up 2-3 points I will quit for the day", which is equivalent to saying once I capture a minimal amount of noise I will quit and then start again with that exact amount of risk tomorrow...

Many of these questions arise because people have not considered the alternatives...What happens when you are battling back from being down 10, when all you wanted to make was 5..What happens when you are up 3, want to make 5 and then lose the 3 and go back to 0...These are just a few of the myriad possible occurrences during any given trading day, which goes to prove that it is very random...The best thing to do is to simply max out the days when you are winning, so that when you are in flow with the market one day, you do not quit, but you push it and try to hit a much higher threshold...That way, when you have the losing trades they will not knock you right back to 0...

If you do a good enough job, eventually you will average your intended goal, but you cannot predict the outcome of the event and cannot "micro manage" too finely or you will find yourself developing a certain anxiety over each and every trade...This will certainly destroy any "flow" you want to create in pursuing your goals...
 
This actually is an interesting argument for a few different reasons...While one might assume that a larger account is safer from liquidation or overleverage AND that it might generate higher commissions, I would not say this is a certainty...

From my experience and my exposure to other traders, the less liquid(i.e. smaller accounts) will tend to do alot of trading with a 10k account because they believe that more is better and that they need to catch every 2 pt blip or wave or retracement in the market...Sometimes they use leverage, but most of the time they are just going up or down around the 10k level...

The more dangerous accounts are the ones who have maybe 50-100k, little futures trading experience and $1500(ES/NQ margins)...I routinely hear of traders, with little feel or mechanical efficiency in the index futures, leveraging 30 lots with a 50k account...These are the guys who are the biggest risk, IMO...They are hugely leveraged and they really do not have any idea about what happens when a price shock hits the markets...

It appears to me that the entire retail futures broker business model is coming closer and closer to annihilation...The big "elephants" that they want to land are not out there, they are going directly thru the clearing firms...Anyone who has experience and will be around for more than a few months already has the inside scoop and is very cost conscious...THe only thing that is out there are the smaller accounts because 9/10 the guy who is going to pay 10-20 per r/t on a futures account is a guy who just got started in this side of the industry...
 
I sit in a few chat rooms and the majority of futures traders I know, myself included, have a major short bias...

As for futures traders who have a long bias, I also find that hard to believe...Personally, I think that most stock traders come into the futures markets mainly because they have a short side bias, but the mechanics of shorting equities seems to troublesome and they see the ease with which they can just sell futures and cover lower...

This long side bias stuff would probably have alot to do with the first few profitable trades a trader had, assuming that he/she did not get blown out turning trades into "buy and hold"...But even Dennis says that the majority of traders he had come across displayed a bias towards one side of the market based almost exclusively on their first few big winners...

While I would agree that ideally the proper state of mind is to think buy/sell with equal detachment, there are different mechanics to each side of the trade...Unless you have a short covering market, the long side typically requires a different sort of patience...The short side is the "instant gratification" side of the market...
 
I think that the tendency for futures to spike up or down quickly has alot to do with what "stage" the market is in...By the time the market gets near major support, there is definitely alot quicker spike action to the upside near the support levels and vice versa...

I think both can display the same velocity, but it really depends on where the market is when it happens...Also, it is worth noting that in the past few years there have been a number of upside "crashes"...
 
This is an issue that I feel is a big achilles heal for the industry and probably, on more than one occassion, has caused some uninformed traders to really blow out, plus owe a big debt to the clearing firm...My feeling is that the short term scalpers who are leveraging a 10-20k account with 1k intra-day margins are really putting the pedal to the medal...Typically, anyone who has traded long enough is either just fronting a small amount in their futures account with a good amount of backup or is not going to even touch those absurdly low intra-day margin rates...When I hear of traders doing 20-30 lots, I assume that they have six figure accounts, but it seems that many of these traders are maxing out their margin...That is a real risky game in this day and age when the increasing number of surprise Fed announcements, news sensitive price shocks and technical glitches basically make a 20 pt spike a liquidation sale...

The real security is in knowing that even if the worst case scenario occurs and the market spikes 20-30 handles in a heartbeat that u will still survive...WIthout that security trading takes on an unreal level of stress and emotion...
 
I agree with the general tone of the responses on this board...But I also believe the original question is something that a 22 or 23 year old would ask because he is under the assumption that a college degree means something when it comes to trading...As many have pointed out, the Ivy League education thing does get one in the door of the big investment banks and, in certain cases, does give some guarantee of a big six figure payout somewhere down the line...But the truth of the matter is, the majority of the time spent on this site, is dedicated to trading, proprietary, nuts and bolts, do it yourself trading, not the sort of market making, brokering stuff that alot of the Wall Street crowd does...I think there are several people on this site who have discussed the merits of one vs the other...Obviously, the guaranteed salary is the upside, but the downside is the office politics, the bureaucracy and all of the other bs that goes along with ANY job...

To answer the question about colleges, intelligence, SAT scores...I do not want to get into SAT scores or anything like that...I went to the "toothpaste" school in upstate New York...The education itself was about the same as the high school I went to, which was 10x more competitive, and a truly intellectual environment...In all honesty, the thing that prepared me the most for trading was playing competitive golf for about 10 years in college and as an amateur...To me, competitive golf and trading are so similar in the mental aspects that it is sometimes startling...The same nervousness, the same ability to "pull the trigger", to visualize the target, to try and correct a "bad run" and stop the bleeding...In fact, I believe all traders can learn alot about how the game should be played by simply watching Tiger Woods play a tournament start to finish...The way he positions himself on Thursday's and Friday's...How he tries to make his move on Saturday's and how he plays with a lead...The difference between a guy like Tiger Woods and a Phil Mickelson is management, plain and simple...Knowing how to take calculated risks and make them pay off...
 
Matt is right...Until you actually feel the pain of a position go massively against you, the idea of leverage is romantic...The beginning trader is always thinking of upside; the pro is thinking of how best to manage downside...

I have no idea how you can think of trading 40 lots with 40k...Almost any given day in the markets, you have event risk...Your losses are not limited to either your physical stop or your mental stop...If you try and get out 40 at a price, maybe at a certain time of day and in a certain type of market, you are not going to get filled...

I agree that some of the best traders to ever live actually have a certain "gambler's mentality"...This may sound controversial, but I would say that the ability to leverage and max out winning positions is definitely an instinct, it goes beyond the nuts and bolts of system trading and the average trader's capacity to understand this "art of trading"....I also think the professional trader can always manage to get out of a bad trade with less damage that if he just put a physical stop in the market and let the market run him over...

But I also think that the best traders de-leverage relative to what they have...Sure, there are the stories of the guys back in their day who parlayed 1000 into 250k or into millions...Fine, they did it, but alot of them have since that time gone broke several times over...The biggest problem some of these trading legends face is that they bet big, win big and lose big...I guess it all comes down to what one wants to get out of trading...If one wants steady consistent returns with less stress, de-leveraging is the answer...If someone wants to become the next Marty Schwartz or Mark Cook, then perhaps leveraging to the hilt when the opportunity presents itself is the answer...

Either way, it is the trader's decision and the trader's fate that is on the line...
 
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