Looks Can Kill You: RAMOUTAR REPORT VOLUME 11

[harrytrader]

I said that my remark was not targeting you (or me) personnaly as it was a generic you. I wasn't discussing if you (or me) are capable or not to estimate the target or exit, but it is largely admitted both by traders, gurus and academics that knowing the entry is much more easy that knowing the target and the reason is just statistical: entry is generated by detecting a statistical outlier, which doesn't necessitate a sophisticated model, whereas estimating a target means prediction of future and that requires a true model... which officially cannot exist because if it existed that would demonstrate that market wouldn't be efficient.


When you say "I'm not able to figure out probability", you would rather mean you cannot quantify precisely but I'm sure you have a rough idea founded on your experience that it is giving an edge or you wouldn't make the trade (I'm speaking here about a professional trader, not about a novice gambler who has no experience and who would think he has an edge whereas he's just greedy or take the trade by impulse). It is difficult, for a discretionary trader like you to quantify precisely, I know all the more so since I am in the same kind of profile, nevertheless as I am getting more and more knowledgeable I now want to get out from the discretionary style and put everything under quantitative control because I'm now sure of the edge, I'm not sure like you about the precise edge (this is my next step that requires all the long work of automating the decision process. Unlike others who are very lose on methodology notably about backtest, I am very strict as I will require that everything should be predicted mechanically because only prediction in advance can prove scientifically that the edge is real and not due to persistency of trend).

Quote from RAMOUTAR:

Harrytrader, I find your posts very intriguing (after I'm able to understand them )

I'd like to address the first paragraph of your post...

This imply to be able to determine the target or exit, that is to say to make a prediction (even if it is a prob curve it stays a prediction and the prob curve can be completely false as it is not obvious - if it was obvious ...). Also this implies that there is an implicit probability attached to it (even if you can't determine it, its existence is unescapable as its origin is your complete or partial ignorance of the outcome). If you use a stop - which is practically obligatory in futures trading or you would get killed almost surely - then this probability is not even obliged to be equal to 50% it can be much lower so that the edge can turn negative (prob * gain or loss).

Target and exit are very obvious to me. If I had a good handle on the probability of the trade's outcome, I wouldn't need a stop. I gave up on trying to predict probability years ago, but too some degree analyze the price action adn momentum indicators while I'm in the trade. The use of a stop IMHO, is obligatory in any trade. Since I'm not able to figure out probability, the price action I concern myself with rests ini the range of entry, stop and target.

I look forward to trying to get my arms around the rest of your replies on this thread. Phew!!!

Thanks for the insight Harry!

 

[RAMOUTAR]

Quote from harrytrader:

I said that my remark was not targeting you (or me) personnaly as it was a generic you. I wasn't discussing if you (or me) are capable or not to estimate the target or exit, but it is largely admitted both by traders, gurus and academics that knowing the entry is much more easy that knowing the target and the reason is just statistical: entry is generated by detecting a statistical outlier, which doesn't necessitate a sophisticated model, whereas estimating a target means prediction of future and that requires a true model... which officially cannot exist because if it existed that would demonstrate that market wouldn't be efficient.


When you say "I'm not able to figure out probability", you would rather mean you cannot quantify precisely but I'm sure you have a rough idea founded on your experience that it is giving an edge or you wouldn't make the trade (I'm speaking here about a professional trader, not about a novice gambler who has no experience and who would think he has an edge whereas he's just greedy or take the trade by impulse). It is difficult, for a discretionary trader like you to quantify precisely, I know all the more so since I am in the same kind of profile, nevertheless as I am getting more and more knowledgeable I now want to get out from the discretionary style and put everything under quantitative control because I'm now sure of the edge, I'm not sure like you about the precise edge (this is my next step that requires all the long work of automating the decision process. Unlike others who are very lose on methodology notably about backtest, I am very strict as I will require that everything should be predicted mechanically because only prediction in advance can prove scientifically that the edge is real and not due to persistency of trend).

Gotchya, Harry, In understand what you're saying. I didn't think we were targeting one another. I suppose to some degree we have a feeling on the probability. I've never, nor do I wish to explore my sense of probability (if it exists) I have a short attention span for those studies

Thanks again Harry. Your posts are always intriguing. :eek:

 

[RAMOUTAR]

Quote from mmm:

Thanks for your reply Jai, especially since my question was geared toward trading one futures contract, rather than multiple lots of shares.

I'm going to print out your reply and give it some more thought.

Have a good day and week!

-- MMM

Your quite welcome mmm. I have moved away from "all in" trades and went the scaling/average method. Again, futures are not my game, but I think the charts and annotations will help you.

 

[mmm]

Quote from RAMOUTAR:


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[/b]


2) Predetermine Entry, Stop, Target, and risk:reward ratio before every trade. If you don't, you're just gambling and you will become the sole victim of the pattern you started.

[/B]

Jai,

If one's methodology is to exit on trailing stops, how can one calculate the risk:reward ratio, since the reward is unknown?

Thanks.

-- mmm

 

[RAMOUTAR]

Quote from mmm:

Jai,

If one's methodology is to exit on trailing stops, how can one calculate the risk:reward ratio, since the reward is unknown?

Thanks.

-- mmm

Hi mmm,

If I enter into a trade with a tight range or a very narrow r/r ratio (1:1.5 or lower) then I use a fixed stop. If the position continues to trend in my favor, I will use trailing stops and or add to the position (scaling).

I have not yet figured out how to upload powerpoints (i dont believe its possible). But I documented the trade in this thread...

http://www.elitetrader.com/vb/showthread.php?s=&postid=287289&highlight=qcom#post287289

When you review it you'll see that I re-adjust the r/r/r as price action takes out (penetrates) s/r zones and or if and when I increase or lower my position, which also changes the average price (the entry).

As the price action continues to trend in favor of the position, the "risk" portion of the ratio begins to fade, instead of risk/reward it becomes reward2/ reward1 with no risk. Certainly risk exists in every trade, but now the risk is "a smaller reward" (reward 2).

Look the chart again, and you'll see what I mean.

 

[Mecro]

Quote from RAMOUTAR:

Case Two:

A friend. He has been paper trading for several weeks now, hoping to go live soon. Like case one, I am very proud of him. He is very disciplined and able to separate his emotions from his trading, to a strong degree. Within the same age as case one, we all have many things in common.

Several times it seemed like he was a contrarian on several of the trades that case one and I were in. I challenged him on many of the trades, and in a few cases his calls were correct. However, he didn’t have a substantial reason for entering some of them. I called him on a contrarian trade he made today, asking him why. Initially the response was, “I just want to see what happens.” I became very aggressive with him, and later the trade worked in his favor. I had case one go on the other side of the trade to take a 4-cent loss of 200 shares.

Case two became very angry at the end of the day, slamming the desk and walking off of the trading floor, a promising indication that he’s taking paper trading seriously. Based on his performance so far, I believe he wil be an outstanding trader.

Please explain why you find Case Two to become an outstanding trader. If he gets mad over papertrades, thats a sure sign of failure. And after all, it PAPER TRADING. Trading becomes quite different when you rely on it for income, let alone trade with REAL money. Oh and there is also the reality of actually getting filled and dealing with MM/specialist abuses. It's a different world.
One of the main reasons why 4 year experienced mediocre traders today outperform newer talented traders is the money in the bank. It's quite easy to be less emotional if you pocketed a few million during the monkey trading years. It's very very hard to trade and take hits in a bad streak when you rely on your trading profits for income in this crappy market environment. It's hard to take off 2 weeks to recoup from a bad streak when you would normally use to that time to produce money.

 

[mmm]

Quote from RAMOUTAR:



If I enter into a trade with a tight range or a very narrow r/r ratio (1:1.5 or lower) then I use a fixed stop. If the position continues to trend in my favor, I will use trailing stops and or add to the position (scaling).

Hi Jai,

Thanks for your reply.

I'm still now sure how one would calculate the risk : reward ratio prior to taking entry on a trade if one plans to exit via trailing stops, rather than a pre-determined exit point.

The reason why I ask this is that if you are trading an individisible unit (such as 1 contract of the e-mini S&P), you have either the choice of exiting early at predetermined profit level, or late via trailing stops. Scaling out isnt' an option.

If one chooses to exit via trailing stops, rather than at a pre-determined exit point, I'm not sure how one can calculate the potential reward of this trade prior to taking entry.

After reading your reply, I suspect that you always have some sort pre-determined profit exit point, even if you end up deciding to exit via trailing stops instead of at the exit point.

Any clarification you can provide would be appreciated.

Thanks.

-- M

 

[causeiambetta]

mecro wrote

Please explain why you find Case Two to become an outstanding trader. If he gets mad over papertrades, thats a sure sign of failure. And after all, it PAPER TRADING. Trading becomes quite different when you rely on it for income, let alone trade with REAL money. Oh and there is also the reality of actually getting filled and dealing with MM/specialist abuses. It's a different world.
One of the main reasons why 4 year experienced mediocre traders today outperform newer talented traders is the money in the bank. It's quite easy to be less emotional if you pocketed a few million during the monkey trading years. It's very very hard to trade and take hits in a bad streak when you rely on your trading profits for income in this crappy market environment. It's hard to take off 2 weeks to recoup from a bad streak when you would normally use to that time to produce money. [\quote]


My interpretation of Jai's comments on case 2 was that he was happy to see that Case 2 took the paper trading seriously, so much so that a lossing day would cause an emotional outburst at the end of the day.

You are correct in saying that such an outburst is inapporpirate in trading especially when nothing real is at stake but this statment was more to the effect of how serious said studen was.

whether case 2 will indeed make an outstanding trader is up to how closely Jai's teachings are followed and his/her control on emotions when the blood of losses is real.

-m.o.

 

[RAMOUTAR]

Quote from Mecro:

Mecro's post in bold followed by my replies.

Please explain why you find Case Two to become an outstanding trader. If he gets mad over papertrades, thats a sure sign of failure. And after all, it PAPER TRADING. Trading becomes quite different when you rely on it for income, let alone trade with REAL money. Oh and there is also the reality of actually getting filled and dealing with MM/specialist abuses. It's a different world.

In my experience, 90% of papertraders do not take this stage of development seriously. ie:
- using more exposure than their leverage will allow
- disobeying EST and then becoming so discretionary that they start gambling
- walking away from open positions
- putting on a trade just to see "what would happen
- becoming complacent and making too much money trading
- going out of their stable
- there's thousands more....

One of the main reasons why 4 year experienced mediocre traders today outperform newer talented traders is the money in the bank.

The reason why experienced trader outperform newer traders is their experience. Many of the newer traders (last 1-3 years) have caught a Stage One and Two, many of them are pulling their hair out in this wild Stage Three, and spend more time trying to find the answer "why the market is...", instead of trading the market. There is a very fine line between an analyst and an ANAL-YST.

It's quite easy to be less emotional if you pocketed a few million during the monkey trading years.

I know of a trader who turned $5K in 1995 to $1MM plus. He's been very emotional and has had a very tough time trading experiencing major drawdowns. He's human like the rest of us, and he's tweaking his strategy to evolve. He's getting back on track.

It's very very hard to trade and take hits in a bad streak when you rely on your trading profits for income in this crappy market environment. It's hard to take off 2 weeks to recoup from a bad streak when you would normally use to that time to produce money.

Yes. As I said in earlier in this thread..."dealt with psychological pressures of generating trading profits to pay for food, a medical plan, utilities, a tuition, mortgage, car(s), and a Sunday night at the movies." When the trading losses and losing streak consume your confidence then it's time to take a break. See Report #9

I have seen and been with A LOT of papertraders. Here's some advice for papertraders:

1) Remember "Karate Kid"? "Wax on wax off." The protege couldn't figure out the purpose of this, and didn't know he was performing all of the unrelated chores for his mentor. He realized it when he fought, "wax on wax off" was a fighting tactic. You're practicing the mechanics of opening and closing positions...the actions should be instinctive and congnitive.

2) Trade within your intended capital. Otherwise your just fooling yourself

3) It is 'very" essential to draw out as many emotions and personal shortcomings when trading, whether you get upset, slam a desk when you're having a bad day, or doing the "peacock strut" (as I call it) when you have a successful and profitable trade.

4) Cases One and Two (my personal proteges) follow me in many of my trades, and they are permitted to only they understand the EST & R/R/R and it fits in their Personal Trading Plan. One day a couple of weeks ago, Case Two became very nauseous as I scaled into a trade that was moving against me (the play pulled into a prime zone where I could increase my position. I was sure he needed a paper lunch bag to catch the imminent projectile. While he was uncomfortable, I was quite pleased with his response. That is a feeling that most "paper traders" don't get.

Please explain why you find Case Two to become an outstanding trader.

He is displaying many of the counterproductive emotions and making all of the mistakes that most "live" traders have succumbed to. We not only do post-mortems on the trades, but discuss the trading demons he reacted to that day. He keeps a trading diary and is very in tune with his shortcomings as a trader, and is managing them. For that reason I believe he will be an outstanding trader. I would be proud to have him as one of my colleagues and member of my trading clan if stays in this trend.

Again just my opinions.

 

[RAMOUTAR]

Quote from mmm:

Hi Jai,

Thanks for your reply.

I'm still now sure how one would calculate the risk : reward ratio prior to taking entry on a trade if one plans to exit via trailing stops, rather than a pre-determined exit point.

The reason why I ask this is that if you are trading an individisible unit (such as 1 contract of the e-mini S&P), you have either the choice of exiting early at predetermined profit level, or late via trailing stops. Scaling out isnt' an option.

If one chooses to exit via trailing stops, rather than at a pre-determined exit point, I'm not sure how one can calculate the potential reward of this trade prior to taking entry.

After reading your reply, I suspect that you always have some sort pre-determined profit exit point, even if you end up deciding to exit via trailing stops instead of at the exit point.

Any clarification you can provide would be appreciated.

Thanks.

-- M

As a reminder I don't have any real trading experience with the emini's. Your suspicion is correct, I have a predetermined entry, stop and target for every trade. I've sent you a PM with more information.