July Trading Journals

Making a direct comparison between Hitman's and TraderX's styles is not appreciating the role of probability in Hitman's scalping strategy versus TraderX's momentum trading.

I have respect for both of these traders. Mathematically, both traders can be as successful as eachother.

I am about to make some assumptions to clarify my last point...

HITMAN'S CONSERVATIVE STRATEGY:
Let us suppose Hitman's conservative NYSE scalping strategy scores 70% of the time, and when he scores he makes $300, and when he loses he loses $100... then, on average Hitman can expect to make the following amount per trade:
(70%x300)-(30%x100) = $180 before commissions
Let us assume that Hitman can find 3 such opportunities per day within his wide NYSE universe.
So let us hypothesise that Hitman can ON AVERAGE score about $500 a day (approx. = 3x180)

TRADERX'S HOME RUN STRATEGY:
Now onto TraderX's macho Nasdaq strategy which is very likely to score a much lower % of the time but, when it does score, it will score VERY big.
Let us assume that TraderX scores only 30% of the time, but he manages to make $1000 when he scores and lose $100 when he loses. On average, then, let us assume that TraderX makes the following amount per trade:
(30%x1000)-(70%x100)= $230 before commissions
Let us assume that TraderX's holding period in his momentum trading is considerably longer than Hitman's and that the availability of stocks fitting TraderX's criteria is rather limited. So let us assume that TraderX can find only 2 good set-ups a day. So TraderX can on average ALSO SCORE about $500 a day (approx. 2x230).

Hitman and TraderX, please understand that my above numerical assumptions are hypothetical (and are purely based on the well-understood risk/reward/probability paradigm). Therefore, please don't correct me on my assumptions, since I am only using your strategies to make a generic trading-style conclusion, not a conclusion specific to your own trading accounts.

The above analysis mathematically indicates the potential profitability equivalence of Hitman's and TraderX's strategies... this, hopefully, should serve to stop the bickering on Hitman's excellent July thread.

At the end of the day, a trader should understand his personality and use that understanding to gravitate towards the most appealing trading style. People who like to be correct frequently, should go for Hitman's conservative approach. The per trade gain will be small, but they will be more probable. For people who want to go for home runs, and who are not bothered about being correct frequently, they should go for TraderX's approach.

I suggest that Hitman's approach would be more suited to the more perfectionist (and perhaps less macho-type) personalities. I suggest that TraderX's approach would be more suited to the more aggressive personalities, who have the psychological capacity to withstand long drawdown periods.
 
candletrader,

I respectfully disagree with you but will change my mind in the face of a persuasive argument.

First of all, you assume w/o supporting evidence that Hitman's NYSE scalping strategy will produce a higher percentage of wins. Why should it? What inherent in those stocks would allow more price predicability? If you can support this assertion, I would like to hear it.

Secondly, I don't think the risk reward ratio favors Hitman's scalping strategy, does it? Yes, it seems he places tight 10-20 cent stops reducing risk, BUT he's looking to score only 20 cents. Risking 20 cents to gain a potential 20 cents??? Why is this a good risk/reward ratio?

Now, isn't my risk/reward far better playing these NAS mo-mo stocks with, for the sake of argument, placing a ONE point stop BUT looking to score THREE or FOUR or more points on each trade? That risk/reward profile seems better to me, unless there's something I'm not seeing. I'd like to see some opinions on this.

Also, keep in mid Hitman's trade size is much much larger than mine. When he takes a 20 cent stop, it has to hurt. I, on the other hand, trade 100-500 at a time, so not only is my risk/reward profile better but I risk less capital.

Am I looking at this right? If not, I would like to see compelling arguments to the contrary.

tradeRX


"It isn't what we don't know that gives us trouble, it's what we know that ain't so."
 
TraderX,

Thank you for your comments. I will try and address each of your points, after each point in your message(my response is enveloped by a ">>>>>>")

"candletrader,

I respectfully disagree with you but will change my mind in the face of a persuasive argument.

First of all, you assume w/o supporting evidence that Hitman's NYSE scalping strategy will produce a higher percentage of wins. Why should it? What inherent in those stocks would allow more price predicability? If you can support this assertion, I would like to hear it."

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
Any scalping strategy will produce a higher % of wins than a momentum trading strategy. The issue is not about NYSE vs Nasdaq. The higher win rate is simply a result of the target price being the same as the risk taken. If you seek the same return as your risk, you will lock in profits with more certainty than swinging for a higher risk:reward and thereby risking the stock reversing on you.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

"Secondly, I don't think the risk reward ratio favors Hitman's scalping strategy, does it? Yes, it seems he places tight 10-20 cent stops reducing risk, BUT he's looking to score only 20 cents. Risking 20 cents to gain a potential 20 cents??? Why is this a good risk/reward ratio?
Now, isn't my risk/reward far better playing these NAS mo-mo stocks with, for the sake of argument, placing a ONE point stop BUT looking to score THREE or FOUR or more points on each trade? That risk/reward profile seems better to me, unless there's something I'm not seeing. I'd like to see some opinions on this."

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
Hitman has an adequate risk-reward ratio, given that the moment he has achieved his target he books it and simply moves on. In scalping for small gains (even a 1:1 risk:reward), you will be in a position to lock in gains with more certainty and control. Moreover, each trade is relatively quick, so you have more time to lock in a series of small gains, which add up nicely.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

"Also, keep in mid Hitman's trade size is much much larger than mine. When he takes a 20 cent stop, it has to hurt. I, on the other hand, trade 100-500 at a time, so not only is my risk/reward profile better but I risk less capital.

Am I looking at this right? If not, I would like to see compelling arguments to the contrary.

tradeRX"


>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
A 20cent stop can have as much of an effect on your trading account as a 1 point stop, if you have intelligently sized your position to ensure this. Intelligent sizing of trades makes any talk of 'risking less capital' pretty meaningless i.e. a 1 point stop can have an identical effect on your trading account as a 20cent stop, if you size effectively.

To conclude, your momentum strategy will invariably have a lower % win rate than a scalping strategy, for the simple reason that you are endeavoring to achieve a higher multiple of your risk per trade. Conversely, the gain per trade will be lower on a scalping strategy.

The trading formulation can be broken down as follows:
Average daily profit =
[(%win rate x profit) - (%loss rate x stoploss) - commissions] x Number of trades per day

A scalping strategy will have a higher win rate, because the profits can be locked in with more certainty. A momentum strategy, on the other hand, will have a higher profit when the higher expected target is hit. A scalping strategy, nevertheless, will have more trades per day, because each trade is relatively quick.

In the final scheme of things, the interplay of %win rate, profit target, and number of trades per day will determine overall profitability.

Trade-offs amongst these variables may mean that net profitability for Hitman's scalping strategy and your momentum trading strategy can indeed be very similar.

So, as I alluded to before, the style that you go with is simply a function of the trade-off of a trader's psychological "need" to win frequently versus his "need" to hit home runs. These two psychological "needs" are mathematically incompatible. Any trader who attempts to fulfill both of these psychological "needs" is likely to fail over the long-run.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
 
>"HITMAN'S CONSERVATIVE STRATEGY:
Let us suppose Hitman's conservative NYSE scalping strategy scores 70% of the time, and when he scores he makes $300, and when he loses he loses $100... then, on average Hitman can expect to make the following amount per trade:
(70%x300)-(30%x100) = $180 before commissions
Let us assume that Hitman can find 3 such opportunities per day within his wide NYSE universe.
So let us hypothesise that Hitman can ON AVERAGE score about $500 a day (approx. = 3x180"

>"Let us assume that TraderX scores only 30% of the time, but he manages to make $1000 when he scores and lose $100 when he loses. On average, then, let us assume that TraderX makes the following amount per trade:
(30%x1000)-(70%x100)= $230 before commissions
Let us assume that TraderX's holding period in his momentum trading is considerably longer than Hitman's and that the availability of stocks fitting TraderX's criteria is rather limited. So let us assume that TraderX can find only 2 good set-ups a day. So TraderX can on average ALSO SCORE about $500 a day (approx. 2x230)."

>>Secondly, I don't think the risk reward ratio favors Hitman's scalping strategy, does it? Yes, it seems he places tight 10-20 cent stops reducing risk, BUT he's looking to score only 20 cents. Risking 20 cents to gain a potential 20 cents??? Why is this a good risk/reward ratio?
Now, isn't my risk/reward far better playing these NAS mo-mo stocks with, for the sake of argument, placing a ONE point stop BUT looking to score THREE or FOUR or more points on each trade? That risk/reward profile seems better to me, unless there's something I'm not seeing. I'd like to see some opinions on this."

>>"Hitman has an adequate risk-reward ratio, given that the moment he has achieved his target he books it and simply moves on. In scalping for small gains (even a 1:1 risk:reward), you will be in a position to lock in gains with more certainty and control. Moreover, each trade is relatively quick, so you have more time to lock in a series of small gains, which add up nicely."

Ah, but you assume Hitman's scalping successes are 70% when you state a 1:1 risk/reward ratio is acceptable and profitable. What if his win percentage is 50%? Or perhaps less...say 40%? Then, he will break even or lose money, will he not? His scalping stategy must be better than even to make money. He HAS to be right 51% of the time to make any money.

On the other hand, if play the NAS mo-mo's for 2 point gain for every 1 point stop-loss, I can be WRONG 65 times out of 100 and still make money.

Of course, these conclusions assume we either win our targets or lose our stops with completeness.

Now, this means that for Hitman to make his first 20 cent profit, he would have to make FORTY SIX PERCENT MORE RIGHT CALLS THAN I!!

Seems to me that if you trade a 1:1 risk/reward ratio YOU BETTER BE RIGHT...and OFTEN.

If I have miscalculated, please tell me where I err.

tradeRX
 
TraderX,

The section demarcated by ">>>>>>" is a response to your comments in speech marks:

"Ah, but you assume Hitman's scalping successes are 70% when you state a 1:1 risk/reward ratio is acceptable and profitable. What if his win percentage is 50%? Or perhaps less...say 40%? Then, he will break even or lose money, will he not? His scalping stategy must be better than even to make money. He HAS to be right 51% of the time to make any money. On the other hand, if play the NAS mo-mo's for 2 point gain for every 1 point stop-loss, I can be WRONG 65 times out of 100 and still make money. Of course, these conclusions assume we either win our targets or lose our stops with completeness. Now, this means that for Hitman to make his first 20 cent profit, he would have to make FORTY SIX PERCENT MORE RIGHT CALLS THAN I!! Seems to me that if you trade a 1:1 risk/reward ratio YOU BETTER BE RIGHT...and OFTEN.

If I have miscalculated, please tell me where I err.

tradeRX "


>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
TraderX, your comments are merely a recapitulation of what I have already said. You would have realised this if you had read my posts carefully.

There is little in your last post that I disagree with, since I have already made the same points i.e. a scalping strategy has an inherently higher % win rate, since the objective is merely to capture the risk, thereby achieving a 1:1 risk:reward ratio.

TraderX, I would appreciate it if you carefully studied my posts, rather than paraphrasing what I have already said. Criticising what I have already said by repeating what I have already said in your own words doesn't make much logical sense to me and it is somewhat irritating. I would prefer not to engage in any further debate with you on this issue.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

 
candletrader,

I'm not simply paraphrasing you. I question whether anyone can make the right scalp call somewhere in the neighborhood of 70 times out of 100 calls. This means that you make the call, and the price has to go up 20 cents before it goes down 20 cents... 70 times out of 100 trades. To that I say...WOW. That's predicting the future with astounding accuracy.

tradeRX
 
TradeRX,

It's very easy to say, "go for a $3 profit, risk only $1, be right only 50% of the time and you've got it made."

The truth is, in this choppy market lately, it's very difficult to actually get those $3 gains. What happens when you're up $2.50? Do you now go for that extra 1/2 point, or lock in your profit? If you go for it, you may lose it all plus have that trade turn into a $1 loss. And that is extremely devastating from an emotional point of view.

Or you might decide to trail a stop loss to lock in profit. Either way, if you take anything less than that $3.00 gain, you've just busted your reward/risk ratio.

Very often, traders face this dilemma. One more important aspect to keep in mind is this:

Being correct 50% of the time does NOT mean 5 out of 10 trades will be winners. In fact, it can only be accurately stated that 1/2 of all trades in a very large pool of trades (1,000 or more) will be winners. Just like you can flip a coin and get 9 heads in a row, with only 1 tail, you can easily get 9 losing trades in your account, before getting that winner.

This will result in what's known as drawdown in your account. Can the average person emotionally and financially stick to their trading plan after being wrong 7-9 times in a row? I don't think so.

This is where playing for a smaller gain makes sense. It's just easier to grab 1/2 to 1 point from the market, than go for that 3 or more point move.

Especially if trading is your only source of income. You may not have the luxury of sitting through a series of small, but extremely painful losses, to get to that final winner or two.

I am by no means suggesting that playing for larger gains is not possible. Just that for the average person, it's a lot harder to be successful in doing.
 
Good game to close the week out as I finished the week +$1200, not a great week but at least it pays for the Boca vacation. A very quick and solid open even if I missed a huge trade in MU off the open. Very very blue collar trade as I put up the bullet and cancelled it before it was confirmed. Could have been a super size day but I have to be happy with what I have here and head for the airport.

3 of 4 shooting on 2400 shares, +745 before commissions, +688 after, no bullet. Who knows, this could be the beginning of another winning streak. I will be back on Tuesday.

Pre-Market: News galore, SFA has 5 downgrades on him, ouch. D beat earnings AND offered optimistic forecast hence I expected UTY strength. A tons of technology news and it looked like the market didn't like it, but I didn't exclude the possibility of a gap fill. BJS/HAL upgrade for OSX strength. It was hilarious how a lot of stocks got downgraded today and they were destroyed yesterday, such as TBL, PVN.

9:30: SOX opened down 18 points and that is a substantial move. MU was down 20 cents and I put up the bullet, I saw the futures squeezing just a little so I cancelled my bullet, could have been a super size trade if I didn't save on cost, no uptick whatsoever and seller showed up to trash the stock 1 point. OSX strength, took WFT and VTS, scored 1 point on VTS unfortunately went too light with only 500 shares. 65 cents profit on WFT. Went for REI and CPN on UTY strength but the index reversed on me and got out out CPN for a nickel profit (unfortunately it went up more), and got out of REI for a 20 cents loss. Don't want to ruin a vacation so stopped.
 
TraderRX:

I am not sure why you assume a scalper must live with 20 cents gains and 20 cents stops. The definition of a momentum scalper is someone who DOESN'T hold through wiggles. I take a position, it moves, move over, I am out, one move, one play, doesn't matter if it is 20 cents or 1 point, specialist shakes (which he will), I am out at least half of my position. My shooting % is around 50% and any time I shoot above that level it is usually a size day assuming I went full size.

Back in March I would hold the other half for more but in summer time I find it much better to take the whole thing on most occassions. Also, my positions are nowhere near their normal size, and by September hopefully I will be able to do get back to multiple K day's . . .

There is a trader sitting next to me who pulls off 1-2 points off a stock on a daily basis, but her strategy is most definitely not "I am looking for that on every trade", she takes what the market gives her, whether it is a scalp, or if tape looks like heavy action, she will hold on for more. If she looked for 1+ point on every trade she would have definitely lost money. You do not jump in there with a 1 point stop when you trade 5000 shares, and if you want to go top tier, you will have to play that size.

Last but not least, you are worried about that 25K rule and you are talking about "people who trade with other people's money don't have money themselve"?
 
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