Money management, is this all you need?

[LondonUSTrader]

Quote from Indrionas:

I have opinion about this so called edge.

Finding an edge is not hard.
The problem is that you find this edge from the past data and you don't know how long it will last. This is what happened to me (I know, I am still newbie in trading). I found what looked like a very good edge: it was intraday trade of opening range breakout. I tested it back for about two years of data, that is about 500 trading days, which meant about 700 trades. Now this would be statistically significant sample, right?
So I started trading with real money, at the start it looked good, but I still didn't increase my position size (the profit cushion wasn't that great). Six months of trading resulted in breakeven, one month you're in profit, then you're in loss, etc. Then bam slam and I lost 45% of my equity (lucky me it was not a big account - just for learning purposes). What happened? I was prepared to sustain twice as big drawdown as the backtest of two years showed. But what happened is that even bigger drawdown kicked in and you wake up to realize that your "edge" is just a dream

There can be considerable differences between historical results and actual trading results. This is usually a function of either trader effects, random effects, optimisation or curve fitting.

I am not surprised the historical results were different to actual results for an open range break out method. I have seen quite a bit of publicity of this method recently.

I imagine the differences you encountered could be due to trader effects. That is to say, if traders notice a method is working well it means they might start using similar methods, which in turn increases the probability that it won't work as well in the future.

Trader effects is one reason I believe you should develop your own edges based on market observation, rather than try and trade well known methods.

 

[jack hershey]

Here are two lists of attributes of good and poor traders. The items are ranked.

Most people begin to assess trading from the "otuside". At some point they actually commit to becoming involved.

There are many forks in the roads they follow. A major one deals with what the effort being made focusses upon: making money or learning is a defining choice.

A better way to put it may be from a business point of view: learning a business or making money in a business.

I do not think the people start right off with the reinventing the wheel. Most people do take that trip for a while though. The streets smarts or brainpower of most people has an inordinant effect on how they approach the opportunity. Everyone is a least well above average so they are unable to follow a rational path.

It may be like trying to get in college. People try for the best one they can get into so they can be at the bottom of their college class and not learn along with their non peers.

Some people view trading as a competitive matter. Since everyone is a little smarter than everyone else, they plan accordingly. There is no competition and that takes a while to figure out. It may be that somepeople will never figure it out or they will determine once and for all that there is competition and just be mistaken about it. Either way they get it wrong.

If there ever is money management it has to do with the capacity of the market. It s not possible to trade more contracts than the market can handle. There are three limiting cases: single fills, a series of partial fills intraday (the separation is in seconds), and having to position trade over days using partial fills (the separation is in blocks where total blocks never exceed bocks sixe on T&S and 10% cummulative daily volume is not exceeded).

The most critical (meaning screwing the potential trader's future up) forks are:

1. Never seeing the market.

2. choosing to make money rather than learn markets first.

3. Choosing to do entries and exits.

4. having emotions of fear, anxiaty and anger set in as the modus as a consequence of repeated failure.

5. Not knowing that there is a limit to the number of repeated failures before your system does not et you trade anymore. This is postponing th opportunity to learn too long. It is simply deadly.

 

[luckyluciano]

none less than Jesse Livermore himself said that "the difficulty is in the sitting and waiting".



Jimmy Jam [/B][/QUOTE]

Sorry to rain on your parade Jimmy... but Jesse Livermore himself said his quote about " the difficulty is in the sitting and waiting"is so misunderstood and what he was actually saying was one should sit and wait in cash for the right trade set up & he would never recommend sitting and waiting thru a trade.

AS PER HO TO TRADE IN STOCKS.

I am reading it for the 3rd time & can give look uop the page # if required!

Lucky

 

[sporky]

Quote from luckyluciano:

Sorry to rain on your parade Jimmy... but Jesse Livermore himself said his quote about " the difficulty is in the sitting and waiting"is so misunderstood and what he was actually saying was one should sit and wait in cash for the right trade set up ...

you beat me to it. He said this when starting over again after losing a fortune. He waited for months for the right trade before getting back in the market.

never the less, there is the necessary sitting and waiting for your trade to work itself out, win or lose, once your in. I think that's just as difficult as waiting for the setup.

 

[Vienna]

Quote from jack hershey:

Here are two lists of attributes of good and poor traders. The items are ranked............

That is one beautiful post!

I would say I spent 4.5 years of my "trading life" and some money following the direction of people like Tharp. I even went to his money management seminar. In my opinion, trading is so hard because it can take you years to understand the field and sort your way through.... it is littered with people who give you incorrect approaches or information. Some of them do it because they want to sell you stuff, and some of them because they truly think that their view is all there is... kind of like a guy looking at the stars through a straw.
The guy who taught the Monte Carlo Simulation at the seminar called me several months later (when I had sent him some data a trading method and asked for Money management analysis advice) and asked me about my trading system because he was " not doing too well". He was an absolvent of Tharp's "Supertrader" program, which at that time retailed for 50 k $.

There are 2 ways down this path that I discovered:
The first one is the "Money management is everything, entries don't matter, Psychology is hugely important" view. It seems to be disseminated by people who either can't read market movement or want to sell psychology seminars. This might sound polemic but I believe it is true. They prey on the retail trader and his bewilderment and fears. Disclaimer: not that I did not learn anything from Tharp, I did. He helps you stay alive until you discover trading.
But run like hell from anybody that talks about this random entry BS (try it yourself, and use any money management you like...).

The Second way is what Jack is hinting towards. I say hinting because that is the way he expresses himself... but this is the really valuable stuff... it has nothing to do with the "find a statistical edge through backtesting, and then improve your psychology and money managment approach".....study ithe hints, try to see what he is saying and save yourself the 4.5 years that I wasted... try to spend time to learn if there is a logic behind the way the market moves

 

[JimmyJam]

Quote from luckyluciano:

none less than Jesse Livermore himself said that "the difficulty is in the sitting and waiting".



Jimmy Jam

Sorry to rain on your parade Jimmy... but Jesse Livermore himself said his quote about " the difficulty is in the sitting and waiting"is so misunderstood and what he was actually saying was one should sit and wait in cash for the right trade set up & he would never recommend sitting and waiting thru a trade.

AS PER HO TO TRADE IN STOCKS.

I am reading it for the 3rd time & can give look uop the page # if required!

Lucky [/B][/QUOTE]
***
Thanks for the correction guys.

I know that he spent weeks/months building his position, so that's why I mis-interpreted the quote.

But your interpretation sounds a whole lot sweeter, and is perfectly in alignment with the rest of the thread.

Good trading,

JJ

 

[maxpi]

Quote from sporky:

you beat me to it. He said this when starting over again after losing a fortune. He waited for months for the right trade before getting back in the market.

never the less, there is the necessary sitting and waiting for your trade to work itself out, win or lose, once your in. I think that's just as difficult as waiting for the setup.

Sitting and waiting while in a trade is harder than sitting and waiting for a trade. The risk is different, waiting for a trade the risk is that you miss something, in a trade your money is on the line. That is the human element. In reality your money is on the line no matter what due to opportunity cost of missing a trade but it's not perceived the same...

 

[maxpi]

Quote from Vienna:

That is one beautiful post!

I would say I spent 4.5 years of my "trading life" and some money following the direction of people like Tharp. I even went to his money management seminar. In my opinion, trading is so hard because it can take you years to understand the field and sort your way through.... it is littered with people who give you incorrect approaches or information. Some of them do it because they want to sell you stuff, and some of them because they truly think that their view is all there is... kind of like a guy looking at the stars through a straw.
The guy who taught the Monte Carlo Simulation at the seminar called me several months later (when I had sent him some data a trading method and asked for Money management analysis advice) and asked me about my trading system because he was " not doing too well". He was an absolvent of Tharp's "Supertrader" program, which at that time retailed for 50 k $.

There are 2 ways down this path that I discovered:
The first one is the "Money management is everything, entries don't matter, Psychology is hugely important" view. It seems to be disseminated by people who either can't read market movement or want to sell psychology seminars. This might sound polemic but I believe it is true. They prey on the retail trader and his bewilderment and fears. Disclaimer: not that I did not learn anything from Tharp, I did. He helps you stay alive until you discover trading.
But run like hell from anybody that talks about this random entry BS (try it yourself, and use any money management you like...).

The Second way is what Jack is hinting towards. I say hinting because that is the way he expresses himself... but this is the really valuable stuff... it has nothing to do with the "find a statistical edge through backtesting, and then improve your psychology and money managment approach".....study ithe hints, try to see what he is saying and save yourself the 4.5 years that I wasted... try to spend time to learn if there is a logic behind the way the market moves

There is plenty to what Jack says. We could all rate ourselves with that document he provided for download. Currently I don't do the "in all the time" thing because every exit I have is pretty much a prelude to an entry and I am willing to pay some money in the form of lost revenue to lock in profits at a turning point. That is just me, I messed up all my life by not locking in some gains, went to JC, didn't lock in the grades by getting the AA, worked for people that I liked and was appreciated, never locked in those gains by working for promotions, etc. I'm learning about locking in gains as well as trading. Jack's view on a market is superb. He says something like "it is trying to give you money all day". That is the correct view, the things about "zero sum, me against the market, me against all the other traders, I predict that....." are really forms of insanity.

 

[Vienna]

Quote from maxpi:

There is plenty to what Jack says. We could all rate ourselves with that document he provided for download. Currently I don't do the "in all the time" thing because every exit I have is pretty much a prelude to an entry and I am willing to pay some money in the form of lost revenue to lock in profits at a turning point.

Right. What I do is swingtrade in a similar way as his PVT method.. so not permanently in the market either. No time for that- am not full time. Perhaps one day.

 

[sporky]

Quote from maxpi:

In reality your money is on the line no matter what due to opportunity cost of missing a trade but it's not perceived the same...

I don't disagree with that