My Path To Success

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I'm somewhat sad or happy. I don't know. I had to really push myself today to win.

I was short biased most of the day. I used my the information from my "Clone" program to stick with my short even as it moved against me. The stop the optimal clone uses is much larger then I would have thought. The market came very close to my stop. So close I thought I was wrong, so I closed a small portion of my position but then as time developed I felt it was working and added to it.

Overall, I was underwater most of the day but hadn't taken any losses until late in the day, I decided that I might be wrong and started to load the long side. I was looking for a stop run but I just ended up buying the highs. I recognized I was wrong and lost over $1600 on the terrible "hedge" idea. This meant now I needed to make over $1600 to make a profit!! But fortunately, I cut it. I had to cut it because I knew it wouldn't return.

So, I started to add to my short. I added double size by accident. However, I didn't panic and decided I had wanted to add size and my max risk would be kept constant by C2 constraint. Anyway, I was able to take that off pretty quick and was up. But I seen things develop and kept adding but the market wouldn't go easy. I'm not a big fan of shorting because I like to win. Sometimes, though if the market goes down then that's how to win. I just call the market. Its just a game to me.

Anyway, I didn't take my short off at the lows. I had many targets lined up. I could have got even more as it hit my #3 target. At end of day though the sequence was reasonably profitable in % terms. Now I see I could have got quite a bit more. Sometimes, it seems everyone is fighting to get just 1 tick and then the market gives 3 more points. I guess that's how it goes. I wish I had got more value but I really pushed my limits for staying in a trade.

At several targets, I took it off at the exact lows and then reloaded on the bounces. I kept thinking maybe that was it. Maybe that was it but then my bias said stay short, keep with it and so I kept with it.

I mean today was hard because I get into a trade then I want for it go in my favor immediately. I don't like to take any heat but sometimes the right thing is just to stick with the trade and take some risk. When i ran my clone analysis, it showed me that just cutting a trade arbitrarily isn't the best idea. In some ways, it helps though because I really know if I make a trade then I need to be willing to take the risk.

I'll review this sequence and try to learn.. keep practicing.. getting better....

there are a lot of mistakes on ones way to success. some chance, sure.
 
Quote from Lucias:

I'm somewhat sad or happy. I don't know. I had to really push myself today to win.

I was short biased most of the day. I used my the information from my "Clone" program to stick with my short even as it moved against me. The stop the optimal clone uses is much larger then I would have thought. The market came very close to my stop. So close I thought I was wrong, so I closed a small portion of my position but then as time developed I felt it was working and added to it.

Overall, I was underwater most of the day but hadn't taken any losses until late in the day, I decided that I might be wrong and started to load the long side. I was looking for a stop run but I just ended up buying the highs. I recognized I was wrong and lost over $1600 on the terrible "hedge" idea. This meant now I needed to make over $1600 to make a profit!! But fortunately, I cut it. I had to cut it because I knew it wouldn't return.

So, I started to add to my short. I added double size by accident. However, I didn't panic and decided I had wanted to add size and my max risk would be kept constant by C2 constraint. Anyway, I was able to take that off pretty quick and was up. But I seen things develop and kept adding but the market wouldn't go easy. I'm not a big fan of shorting because I like to win. Sometimes, though if the market goes down then that's how to win. I just call the market. Its just a game to me.

Anyway, I didn't take my short off at the lows. I had many targets lined up. I could have got even more as it hit my #3 target. At end of day though the sequence was reasonably profitable in % terms. Now I see I could have got quite a bit more. Sometimes, it seems everyone is fighting to get just 1 tick and then the market gives 3 more points. I guess that's how it goes. I wish I had got more value but I really pushed my limits for staying in a trade.

At several targets, I took it off at the exact lows and then reloaded on the bounces. I kept thinking maybe that was it. Maybe that was it but then my bias said stay short, keep with it and so I kept with it.

I mean today was hard because I get into a trade then I want for it go in my favor immediately. I don't like to take any heat but sometimes the right thing is just to stick with the trade and take some risk. When i ran my clone analysis, it showed me that just cutting a trade arbitrarily isn't the best idea. In some ways, it helps though because I really know if I make a trade then I need to be willing to take the risk.

I'll review this sequence and try to learn.. keep practicing.. getting better....

there are a lot of mistakes on ones way to success. some chance, sure.
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You would never trade like this if real money were on the line - Never! Trading a hypothetical account only instills poor trading habits.
 
Quote from SkepticTrader:

You would never trade like this if real money were on the line - Never! Trading a hypothetical account only instills poor trading habits.
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Sorry not sure what you're referring too in "trade like this". There was real money on the line, quite a bit, just not mine. I have developed a trading style over the years that I feel is rather low risk and high return. I'm on track to do over 55% (net of fees and commissions) return this year and my greatest drawdown is under 14% (which came, I think, during flash crash). So, yes I would trade the same way if I were trading my real money if I intended to do my best. Might I trade poorly, sure that's possible too.

I'm going to give away one holy grail, of many, that I posses. The holy grail is that I bet bigger on my best trades. I bet bigger when I'm more confident and less when I'm not. That's the secret. I push my best trades so that I'm always winning. Now, what is true is that I'm also pushing and testing the extent of my abilities.

I want to talk about risk in the futures market. My trading style, as supported by the evidence of my clone system, incurs a high potential risk of loss. However, I possess great skill in managing that risk and thus my average realized risk is very low most of the time.

Now, I'm sure you read in the books that you can manage the risk by using tight stops. I haven't found that to be true. In fact, a very tight stop would reduce my return to about zero. What about using moderate stops? Sure, that works but only if you're aggressive. If you take 2 5 point losses then now you've got a 10 point loss. What about this trading at 1:1 risk/reward, I've seen only a few successful futures trader who can do that, they tend to use a moderate stop, and their win ratio tends to be in the 45% to 52% (at best) range. The predictability of returns drops greatly if win % drops below around 60%!

Okay, I'm sure you've heard the vendors that say if your stop is too big then you need to time entry better, you know wait for a pullback or whatever. That's wrong too. My best trades NEVER retrace more then 1 or 2 points! My average MAE is only about 2 points. Okay, okay then... what about using the 3 point stop? Nope doesn't work because I make some profit on trades that go against me 3 points. The stop would turn all those into loser.

You see what's missing from risk/reward is probability. You need 3 factors risk/reward and probability of stop hit!!

Now remember, I'm using C2 constraint feature to keep my % loss the same on every trade. I've set that to the 3% to 5% range. I need to risk that much to hit my optimal return. But, as I put on more contracts then my stop gets smaller and my PROBABILITY of loss goes up.

Likewise, when the market moves more then expected then my PROBABILITY of a large loss gets much larger if I'm using larger stops. In general, if the market is range bound then using a wide stop works better but if the market trends against one then taking a quicker smaller loss works better.

Yes, this market has shook me up a bit because while my RISK AMOUNT is CONSTANT. The extreme volatility changes the PROBABILITY side. This is whyI've said I'd prefer to trade spreads or binaries then futures if all things were equal or a synthetic with constant volatility.

So, at end of the day, the futures market is risky. Stops, time based exits, indicators.. nothing changes that and nothing will change that. The market is risky. And, its good to be reminded of that. You can lose lot on a small position. You lose a lot on a big position. You can lose a lot when long. You can lose a lot when short. From what I've observed among successful traders and traders in general is they do take some small probability of significant risk but tend to realize and manage that significant risk well.
 
Quote from sfbayarea:

ok, so much are you charging for your system?
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Just a little update, based on actual fill data provided, I estimate that my signals have generated over $7,200 in real net profits over the last appx 30 days. I probably swung 8k to the downside too: so it was not without risk. I'm currently not charging enough. I'm not going to raise the rate though until I get more subscribers. The fair price on my discretionary system is probably at least 2.5x (based on typical rate) to even 10x (based on .20% of expected profit) my offering rate.

I've spent a lot more money then I've made. But, I've built a great track record and learned a lot in the process. You'll have to do own leg work to find my systems. I don't want to get in trouble here, as I'm not a sponsor.

I want to discuss something about mistakes though. Remember when I put on more contracts then I intended I was able to remain calm and cool. Whereas today, I made an order entry mistake and immediately exited for a small loss. Why did I approach these mistakes differently?

In the first scenario, I was trying to add size because I was more confident. I try to keep my max lots to no more then a NET of +6 contracts. This is approximately 4x leverage. Due to my mistake, I had on 8 or so contracts. The C2 automatically adjusts my stop to keep my risk at a constant rate. I think I set it to about 3% (anywhere from 2.5% to 5% could make sense for me). I checked the stop and didn't feel the probability was high that it would be hit. My risk was constant and I was in the position that I wanted to be.

Today, I made a different type of mistake. I bought when I intended to sell. I immediately closed the position taking a $50 loss and re-opened short. True, I could have held it a few moments and exited with a few dollars profit. But, this was an entirely different type of mistake. This was a mistake that I had to correct immediately. After closing out, I immediately opened up my short trade and later added to it as I grew more confident. I could have added even more. But, I felt the market was higher risk and decided not too.

I'm sharing this to show how I handle different types of mistakes. Now, I want to talk also about the risk the computer says I should take. The computer says I need to risk a certain amount to hit my optimal profit. Trust me, I'd rather risk only 1:1 to or even less. But, it doesn't work that way. Remember, my best trades never retrace and I can usually get out of the trades that go against me with a profit or small loss. I will take a quicker loss if I think the market is going to trend against me. So, I "agree" that I don't like taking the risk. But, I've found and the computer verifies that there is very little way around it. I mean the only solution is to take only winning trades but that's impossible!! I've found that if the futures game is played with "even risk", i.e no probability of loss, then it becomes extremely difficult to produce a profit. My understanding of this is that the futures market is simply too efficient for that type of trading. I've seen, also, traders who have did well with the 1:1 risk/reward and have seen in many cases their equity curves break down and become unstable and their drawdowns become higher, as well.

I mean let's think about it. You want to get long/short for whatever reason. Let's say you're trying to buy pullback in uptrend based on your XYZ indicator (I do not use any normal indicators in my trading..) You pick a spot and you get stopped out. Let's say it goes a bit further and looks like it will turn up, do you take the trade? What if it works out.. Now you've made a loss when you were right but just not precisely right!

My understanding is based on 3 concepts:

1. You can't trade risk free
2. You can't win every time
3. Too tight of stops increase the drawdown and decrease the net profit.

What's the solution? The only solution is you have to make more when you're right then when you're wrong. This is also why I start to look at my trades as sequences. When I'm playing "market making" game then I do not look at the individual trade profits always.

I explain in this sequence.

SELL 17 @ESZ1 Normal $2,088
BUY 6 @NQZ1 Low ($1,600)

Do not pay any attention to the contracts. I never had more then 8 open at any time and on average I had only about 3 to 5 open. You see in this sequence, I open my short up. I set my stop based on what the computer has told me would be optimal based on my historical performance which is also near my max risk per trade. The market comes within a just a couple points of my stop. At that point, I start trying to unwind on any selling pressure as I think I'm wrong. However, shortly after that I decide that I'm right and re-size to normal.

Later during the day, I think I must have been wrong and anticipate a stop run. I buy the NQ to hedge against the anticipated stop run and start to load heavier to long side. But after I start to load long, I recognize my initial basis was right and also furthermore anticipate I won't be able to unload the hedge. So, I dumped it for a largish loss. But, I'm very certain now of my short and add more. I'm pushing my good trade.

Now it was ugly. It wasn't a pleasant trade. It wasn't me at my best but the sequence as a whole was profitable. Again this was a fairly ugly sequence, the ugliest I can remember in a long time..

But, the point is when I'm really sure I'm going to win on a trade then I'm betting more. I think the futures market is too efficient to win big without betting strategy! But, I do it within limits, I have a lot of risk controls:

1. I have C2 constraint feature that limits my max risk per trade no matter how many contracts.
2. I have in my mind agreed up front max # contracts I can put on. It is set to 6 currently or 4x leverage.
3. I'm quick to recognize when I'm wrong.
4. I've requested that we have a max contracts per instrument constraint feature added.
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My hedge style, experimental, spread style, also known as my "hammer trade"

More on hedge style, the key to my hammer trades or "market making" is that I don't take the loss on both sides and usually can exit for a profit on both sides. So typically, I make a small profit or small loss on one and a big profit on the other. The key to this "game" is that I size larger on the trade that is working and take it off at a low/high. Let's look at this game closer

I'm long biased A and market is moving against. I anticipate a stop run. So, I short B with the intention of hedging out this momentum. Hopefully I'm long the stronger and short the weaker. I'll stay short B until the momentum ceases and then I'll drop B, also what I call "dropping the hammer". This reverses me and puts me in the next winning trade. Likewise, I could decide that B was the dominant trade and drop A. It is often possible to drop A/B both for a profit but requires expert timing. There isn't an edge in this style itself -I don't think or I wouldn't sharing -- the edge is that I'm timing multiple instruments at once. If the market is very jittery then I can usually profit on both sides but if market strong trends then even if I scalp then I may not make enough. It is hard to explain. I'm typically scalping one side and holding the other.

This is a very difficult style to master though. It is one way for me to boost my profits to the +1k per day range because it keeps me in the market and making trades. But it is very difficult. Some dangers:

Position Ballooning: Let's say I'm biased on A but decide that B needs the bias. I add to B. Later I change my mind that A needs sized heavier. I add to A. The more I'm adding then the more leverage I'm using in terms of account slippage.

Spread widening: In essence, if spread widens or changes orientation then now I'm losing on both positions.

Failed hammer drop: If I can't drop the wrong side then I may have to take a loss on it.

Mistimed drop: Also can lead to loss

Pinning: If I don't profit that first momentum surge, failed hedge drop, then I may get "pinned". Basically the market just stops where both A and B have a loss and I have to sit with the loss until the market unpins itself.

The pros to this method though is I find out quickly what is working. I can make myself do trades that I wouldn't normally do, like buying every high or selling every low because I'm "hedged" and provided the market doesn't run too far. I book all my scalp profits then wait for my losing side to recover when I re-time it.
But its a difficult method which is why I don't use it all the time. It hasn't made it into my "standard" plays yet. It requires a strong stomach. Often, I get scared of one side even though I'm "hedged" but typically the instruments are so correlated that the spread is unlikely to widen more then a certain amount. So, its a learning process for this style.. This is a method I developed to push myself way beyond what I'm normally capable of...
 
In a recent post, a trader ask "how much should I risk?"

You see, as I was saying, you have to consider probability when considering the stop size to use. Right, the notion of risk/reward is meaningless without probability. I have a system that could risk up to 15% of the account on a single trade but the probability of taking that loss is very, very low.

You need to think about a range of scenarios. What's the probability of the max loss, the size of the max loss, and the size of the average or typical loss. The common knowledge and ways of thinking about trading is absolute garbage. Absolute garbage.

Think about a stop loss itself, what's a stop loss do? A stop loss transfers an unrealized loss to a realized loss. This is not what insurance does. True insurance limits the loss but pays out if you're right. Okay, true insurance would be something more like a vertical spread or binary option.

Drawdown. Drawdown isn't relevant for active trading. We take losses. Drawdown implies something that can come back which may be relevant for a diversified investor who is not leveraged. What does the stop loss do? It transfers an open loss to a booked loss. That's all.

People want numbers. They want to say okay, if I take 2% loss or a I take my stop hit then okay I'm right. My question is then what? Okay you've taken your 2% loss or whatever it might be. Now what? Now what? You see it doesn't provide the why.

Why so many rules and indicators? The reason is uncertainty. The reason is people can't handle uncertainty. They need to make rituals to protect them. Once you realize that then you realize the rituals are just rituals. They don't actually have a basis to reality.

But, by the same token, one does need balance. The market is unstructured. Chaotic. Risky. You see your thinking about loss. Thinking about rules. You need a reason for it. You need to understand the why. If you understand why then the reason could make sense. Without the why, you're dealing in nonsense ritual!

Think about a trading system that could produce, if it were to work, a million dollars in 5 years. Why not think about risking the entire account.. Start it with a 10k account and run it until you make your million dollars or lose your 10k. Why not? Why use a stop loss unless it improves performance? If the trading system never needed a stop loss then why would you put a stop loss on a trading system?

What are you going to do when you're down 15%? What are you going to do? What if you get stopped out 5x in a row then what? What you're going to do? What about if you lose 50%?

We're thinking.. thinking together here. I'm not telling you what to do. We're thinking about this together.

Narrative. Narrative. There are infinite narratives to explain any given phenomena. The phenomena described is the same but the narrative changes. When people say rationalize, they are saying "create a narrative". The mind tries to make sense of things. The mind doesn't see incongruities. It will create a narrative naturally to explain any anomaly.

Balance. How do you create balance from chaos? How do achieve balance? Clarity.
You need to be clear on what you're trying to do in any given endeavor.
 
So, we've explored the concept that much of what traders do is nonsense ritual that is designed to provide one a sense of safety, a sense of structure, in an unstructured and risky environment. These mechanisms often are psychologically beneficial but are often suboptimal to making profit. The textbook idea of tight stops lead almost inevitably to certain loss, in my experience.

Again when we think about stops losses, a stop loss basically transfers an unrealized loss to a realized form. What it doesn't do, is that it doesn't pay out if you were right. That's the real problem with it. So, you can lose even if you were right. Good traders don't lose when we're right. We lose when we're wrong. Of course, a stop loss takes one out of the market. It eliminates future risk and future reward. Being out of the market, gives one time to consider whether our analysis is sound or not. But, the extra time that one gains comes at the cost of losing any price improvement. A a stop loss doesn't work like insurance. A stop loss is really more akin to a forced exit. It works more like a margin call.

And, I'm thinking about what I need to do to get to my next level of performance. I'm thinking about how I can get to that next level. What works then? What works is winning. If you're making profit then you're not losing and this is where taking a loss is beneficial. If your stuck in a losing position then you're not making profit and that can hurt performance but that assumes we're limited to holding one position at a time.

This is why the hedge trading style or my hammer style can produce enormous profits because one can always be winning. If one is losing money in instrument A but is able to time out or scalp out some profits from instrument B then it's like you're averaging into A at a better cost. So, you're getting cost reduction your losing position. It's like averaging down but you're not increasing your net risk. So, you more easily recover. I think that's really why my hedge may be the way for me to get to the next level of performance.

Balance. I'm always testing and retesting my ideas. I'm putting everything to the test. Now, I've said that I may could double or triple my profits by instant reversing because I usually time a low/high properly. This would increase the size of my drawdown and my net profit and probably reduce my risk/adjusted return per trade leg. But, I might improve enough on my net profit to make some variation of this could get me to that next level of performance.

Remember, I said that the notion "taking every opportunity" was very powerful in improving my profits. The reason is that size*volume= profit or loss. In other words, the bigger size you trade and the trades one makes then the faster one will make or lose money. The risk increases and the reward increases. This is why that great trading is very close to pure gambling because the gambler is driven to take every opportunity. It is a very slight difference and the difference is the trader will only take those opportunities that are slightly profitable after costs. There is a greater difference between good trading and gambling then great trading and gambling.

In thinking about getting to that next level of performance.. let us review my current themes and ideas

* The safest way to protect an account is to be making money and growing it.
* Traders take losses: not drawdown. As such, a large trading account doesn't mean that one can ever be secure because the losses are realized and not invested.
* Stop losses in general hurt performance because one will always lose sometimes when they would have won without the stop. Tight stops hurt performance more then larger stops.
* Taking losses or stop hits will improve performance at the point where staying in the loss for a longer period of time would prevent one from taking new profitable trade ideas and under the assumption that is one limited to trading a single instrument.
* My hedge style or multiple instrument trading shows great promise because it allows me to increase my rate of profit without having to decrease my stop size to a point of taking unnecessary losses. One can view it as a method of "averaging" into a loser without increasing the net total at risk on one side of the trade. Basically, the goal is to take only the losses when one is truly wrong.
* Stops can be eliminated if one is willing to risk the entire account. This notion is rather unappealing to my senses. Yet, if we imagine that a trading system has a return value over a period of time that is many times greater then the starting account and we believe the trading system has a reasonable probability of generating those returns then risking the entire account could be rational. More over, stopping a trading system at an arbitrary loss level would only make sense if we had a rational basis for doing that, i.e the system was "out of normal". There is one key idea here that is critical but that I'm not sharing because it is my original idea but another traders. The "missing idea" is very critical for this concept.
 
you must be a fast typist. I don't think I would have the patience to type as much as you do in your missives. Then again, I appreciate it is good to keep a Journal and collect/express your thoughts; in fact its probably invaluable.
 
thanks iceman1.

A little something different...

Well, I've just been practicing this week. I'm making profit but no really big gain days this month, yet. I've had a few opportunities. Very slim game between winning and losing. Not really hit my groove this month but fortunately not losing either. Belief is everything in trading. Sometimes I've had a long system signal but because I was strong and confidence, I went in and made money on short side. I tend to be a "blitz" trader.. When not confident, I've lost even when I was right to within 2 points of a huge winner. I need to recognize that and foster it when appropriate.

What I'm Doing Well:

Pushing my best trades. Adding size to my best trades. Recognizing my best ideas. Recognizing when wrong. Keeping good tab on my mental/physical state before trading: I do a self-check before trading. I guess like a pilot might check the plane.

What Needs Working On:

Giving trades enough room. I've had trouble giving my trades enough room. I think partly it is because I don't want to take any downswing. I may need to work on using the computers projections to better use and also formalizing some of my practice methods with more formal projects to gain the confidence to win on them. Also, I need to watch my experimental methods and not give back too much on them.

What Need To Watch:
Working short side pretty heavy, need to think about long side too. So far short side has been easier but that may be changing. Need to recognize the opportunity and risk for both sides.

I've been waiting sometimes to see if a trade "fails to follow through" before taking it off. Yet, there isn't time to respond. I need to start acting at first opportunity using my predictions. By time I see something, it too late.
 
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