On the Path to Profitability

[wrbtrader]

It really depends what/when you trade. I trade some wild swings in lower capacity markets, and would have my head handed to me trying to get cute with mental stops.

Exactly although I recommend using stops at all times.

I knew some guys years back trading the Nikkei, Yen, DAX and Hang Seng markets via mental stops. They went bust in less than 2 years. Simply, they pick the wrong markets to play the "no stop" game along with putting too much trust in their discipline to adhere to their mental stop.

In addition, the volatility spikes out of nowhere in combo with extremely fast moving price action (algorithm handprint) is what eventually did them in. All it takes is just 1 - 2 bad trades to understand the importance of stops in certain types of trading instruments and/or on certain types of high volatility trading days.

 

[i am nobody]

One commonality for all retail traders is their risk of ruin is high. If you don't use stops your risk of ruin increases, even decades of subjective experience will not negate this law of trading.

Decades of subjective experience is to me objective experience. If you see every experience that has risk to end bad as subjective, it would mean that every experience is subjective. Even those experiences that according to you are objective. Nothing is life is for 100% sure.

I always use stops (3 points ES), but never put them in the market. 3 points loss means go flat without hesitation. Even if the trade would go back in profit and I would miss that, it has no impact on my return in the long run. At the same time it is my life insurance.
I have no risk of ruin because of the way I use my capital. My profits from trading have grown to more than 1000 times my initial investment from in the 1990's. I put away most of these profits and use just a part of my total value to trade. As my leverage is very high I can make big profits with a small capital. This has as advantage that I can lose this small invested amount of money 100 times in a row without being hurt as I will still keep 900 times my invested capital in profits. Only disadvantage is that I will never become a billionaire as I do not continue to reinvest all my profits. But it is not a real disavantage because I prefer to be a millionaire above trying to become a billionaire and lose everything. Not to mention all the stress and loss of quality of life.

 

[jl1575]

My profits from trading have grown to more than 1000 times my initial investment from in the 1990's. .

So if your initial capital was 50K, you made around 50 millions in profit over the years?

 

[Handle123]

Decades of subjective experience is to me objective experience. If you see every experience that has risk to end bad as subjective, it would mean that every experience is subjective. Even those experiences that according to you are objective. Nothing is life is for 100% sure.

I always use stops (3 points ES), but never put them in the market. 3 points loss means go flat without hesitation. Even if the trade would go back in profit and I would miss that, it has no impact on my return in the long run. At the same time it is my life insurance.
I have no risk of ruin because of the way I use my capital. My profits from trading have grown to more than 1000 times my initial investment from in the 1990's. I put away most of these profits and use just a part of my total value to trade. As my leverage is very high I can make big profits with a small capital. This has as advantage that I can lose this small invested amount of money 100 times in a row without being hurt as I will still keep 900 times my invested capital in profits. Only disadvantage is that I will never become a billionaire as I do not continue to reinvest all my profits. But it is not a real disavantage because I prefer to be a millionaire above trying to become a billionaire and lose everything. Not to mention all the stress and loss of quality of life.

It truly amazing you and I have very like how we manage risk and winnings for day trading, I risk 3 points in ES but then in almost anything I day trade I risk $150, it is like the normal trader would never risk this amount and why it works so well, I never use hard stops but I never recommend to anyone to do so. I am always transferring monies from day trading accounts, perhaps to better use the funds than staying stagnant. I don't know what is the most amount of contracts can be traded in ES at a clip for the hour I trade, but what I do know the size I trade now at times can't always be filled at prices I want to exit, and this of course is troublesome. I have my doubts that even in a perfect world one can become a billionaire day trading the ES or even a host of markets. I think in Forex wherever you have an account, someone would clip you on trades. I have never heard of a billionaire day trader either, anyone know?

I trade when I have signals only, the only times I have an opinion is in ET and often opinions are wrong. I have blown out twice, once took me several months to go from 5k to 105k then lost it all and then some in 3-4 days, lock limit in soybeans, time after that I made a stand in the T-Bonds not going higher in the 1990s, learned great deal when you lose horrible how dumb you can be. For those who do well with your opinions and can profit by them, I stand up and applaud you for I can't, as bright as I am making systems, my opinions are almost always wrong. I make systems the 99% of those who get to see them will say they never work, they even curse at me when they try to trade them and I told them they have to practice a great deal beforehand. They always think I am leaving out huge pieces of information, but I don't. Trading is hard cause you have to become someone you are not cause your childhood made you who you are.

I think HFT is an excuse, adapt to it, work so no matter what happens you have the answer of what to do when something happens, back in the 1980s same amount of opinions about Program selling, there were dozen companies back them that traded money when program selling happened, so like companies that came out when T-bills were King and people held their breaths when M1 and M2 numbers came out in late 70-early 80s came out, Nixon took over huge deficits from Johnson spending on welfare and costs of Vietnam war and end of 70s interest rates near 20% and inflation nearly 14%, knowing many of you were not born yet you be going nuts to try to trade that, can you imagine what USA will be like when interest rates will make this country bankrupt? When or if HFT ever goes away, there will be a replacement and people in charge of exchanges will have their hands in it some way, elevated salaries good way to hide it.

My thesis is that past price data, support and resistance areas, are not reliable on any timeframe due to stop-hunting by institutional algorithm trading. Retail order flow is sold to HFT instutitons who have all the edges over daytraders that make gambling at the casino seem like it has even odds. If you see a place that looks like a safe place to put your stop off an index futures daily chart, or any timeframe, based on fractal nature of the market, and enough other traders do that as well then your stops are more likely to get run by institutions...believing in the predictive value of what's to the left of your chart can work against you as much as for you, past price data isn't safe on higher time frames, as you can see on daily charts on the ES where support and resistance is much more pliable now due to HFT orderbook clearing, daily charts of ES from 1998-2005 were much more with-trend where risk management was easier for retail traders and risk of ruin was far less than in current HFT markets and gurus have failed to address this as they know it will scare off the few retail traders who still try trading these markets.

Once thing to write about your opinion and another to be a trader of it for decades, shoot I could say all Beef is the same and that is not true at all, if it came off a feed lot compared to range feed, beef that compared to beef that raised in Sicily or Japan not only tastes different but Japans is more tender.

Let's face it 95% of day traders lose money, another 4.5% are breakeven to like $500k, and other .5% make the blunt of the profits. Let's take individual traders, 95% are less likely to have a staff or hire even one person to help with mountains of back testing that needs to be done as this time that away form studying the markets, to get real real good, most have to go beyond patterns whether they are chart patterns or indicator patterns or mixture of both, and if you don't know what that is, most will be treading water a long time. 4.5% might have one person helping them on part or full time basis, the half percent most likely has a staff or couple of programmers.

Cost of doing business, people just don't understand this is huge costs between expensive commissions and data, computers, internet, oh something no one ever seems to talk about is loss of hourly pay. Do 10 trades a day and say 220 trading days a year based on $4 bucks comm is $8,800 a year on a $5,000 account. laptop costs $500, data how about $180, internet $480 year, loss of wages at min $7.25 times 40 hours haha times 52 weeks=$15,080, let's not forget rent, food, ultilities, gas, health insurance.

You write "safe place to put your stop" is like thinking in stone age to me, my areas of where I will get out is not based on this at all, there is no safe place, you are thinking in terms of your childhood of emotional trading of what is safe. Do you know large firms have had one time hired Psychiatrists? Gave them ideas of what our emotions will produce when price gets to areas on charts, even have firms that consult for the biggest. https://www.marketpsych.com/about/

I use great deal of support/resistance in my trading, I can easily say it saves me 1.5 losses on the hour I trade. But I also know when it shows S/R, it is less reliable in often times when others see it as areas that will hold. S/R is like the yellow light of a traffic light.

"Risk of ruin" has no place in this business, and that is where topic comes up so much. 99% of those who trade forget they are running a business, really you are the middle man of suppliers and producers or Import/Export Business cause if you bought 5,000 bushels of corn and kept it, exchange WILL tell you where to pick it up.

"Sure Chap" am sorry this went different direction than your wants. Constant work, most of my trades whether day trading, spreads, options, long term are automated, regardless one of three things reoccur, profitable right away, going against me right away and price stagnant, last two after so many bars have new targets of plus enough to cover fees and lunch, first one goes to plus one tick after so many bars as well. This is true of trades off weekly bars, don't get married to them. Congrats on getting this far, I applaud you.

Good weekend all.

 

[i am nobody]

So if your initial capital was 50K, you made around 50 millions in profit over the years?

No, I was not accurate enough in the details I suppose.
I started with 50K, did compound at maximum (leverage 200 and reinvesting all the profits), like a real newbie who knows everything. Then in a short time I wiped out that account completely, think less than $3000 was left. That's when I realized I should put away systematically part of the profits.

AFTER that experience I decided to change the way I traded. From then on I worked the way as I described above. Every week/month (depends on the returns made) I move part of my trading account elsewhere.
It was an expensive lesson.
So I started again with another amount (little bit smaller). But the profits indeed ran in the millions (8 digits). Exact amount is not important. What is important is the way I use "capital management" and that I realized that I made enough money to have a very good life. You don't need billions to life without sorrows.

 

[eganon69]

No, I was not accurate enough in the details I suppose.
I started with 50K, did compound at maximum (leverage 200 and reinvesting all the profits), like a real newbie who knows everything. Then in a short time I wiped out that account completely, think less than $3000 was left. That's when I realized I should put away systematically part of the profits.

AFTER that experience I decided to change the way I traded. From then on I worked the way as I described above. Every week/month (depends on the returns made) I move part of my trading account elsewhere.
It was an expensive lesson.
So I started again with another amount (little bit smaller). But the profits indeed ran in the millions (8 digits). Exact amount is not important. What is important is the way I use "capital management" and that I realized that I made enough money to have a very good life. You don't need billions to life without sorrows.

I find this very interesting. Thanks for sharing.

Could you elaborate on what you feel is your strong suit on capital management?

 

[i am nobody]

I find this very interesting. Thanks for sharing.

Could you elaborate on what you feel is your strong suit on capital management?

The first thing we should understand is that all depends on the abilities of the trader.
All the time I hear people say: “”That is impossible…… 90% lose all…… HFT will ruin you……””
If you believe that, it means that for you it might be true. But for others it might be false. If it is true for you: quit trading immediately!

Example: I know nothing about basketball. Can I make 5 points in a game? No, that would be impossible for me. Can James Lebron make 5 points in a game? Piece of cake.
So what is impossible for A can be a piece of cake for B. That same discussion goes on all the time on ET and will never stop. The reason is that all opinions are based on own experience. And for a trader only his own experience is important. Whether somebody else wins or loses will never affect your situation. So their opinion is irrelevant for you.

Before speaking about capital management you should first know all the specifics of your trading system, your (real or backtested) trackrecord. Capital management should be build specifically for your system.

We should take a hypothetical system as we need it to show how the calculations work:
Let’s trade the ES. Starting capital $326,500, margin per contract $1,306, commissions $5 per RT, net profit before commissions 3 points a day.

The result would be: weekly profit $181,250.
The weekly profit will stay constant as you put away the profits and always trade the starting capital.
Each week the profits add $181,250 to your total capital. Total/initial shows how many times you can wipe out your invested capital COMPLETELY BEFORE LOSING YOUR INITIAL INVESTMENT.

After 13 weeks (=3 months) you can wipe out your account completely 7 times in a row without even losing your initial investment, all you lose is profits. I never hear about somebody who wiped out his account 7 times in a row. If that risk would exist, you should see indictions of it in your trading specifics. So can trading ruin you? NO, if you follow your system and if your system was tested correctly.

How will the situation look once started:

The specific of your system will alter the calculations, but not the logic behind it.
In this sample you make $4.7 millions profits a year. What would you prefer to do in that situation:

1. follow this system and be happy with $4.7 millions profits a year?
2. go for billionaire by risking all you have and maybe end up with nothing?

I took the first choice, so I will never be a billionaire... but I will never lose all I have, which is more important for me. Because of this choice the statement "you should be the richest man on earth" is total nonsense. I already noticed that the statement comes mostly from relatively poor people; they have no idea what you can do with 1-5 million income a year as they have already problems to survive.

People who are starving from hunger have only one wish: find food and eat as much as possible. But when they finally have food they will change their opinion. They will, in a first stage eat as much as they can, but in a later stage when they realize that they will have enough food in future, will eat less and focus on other important things, like quality of life.
Compare it with "become the richest man on earth".

 

[i960]

Let’s trade the ES. Starting capital $326,500, margin per contract $1,306, commissions $5 per RT, net profit before commissions 3 points a day.

You're not going to be able to put on 250 contracts after the first loss - c'mon this is a totally unreasonable example. People with 300k are not trading 100-200+ lots using DT margins unless they have balls of steel or are complete nutters (a 2 pt stop is 7.5% of the account). The example is totally unrealistic and extremely optimistic for even the best traders. Take the size in your examples and divide it by 10 so we can even discuss reality.

 

[Q3D]

You're not going to be able to put on 250 contracts after the first loss - c'mon this is a totally unreasonable example. People with 300k are not trading 100-200+ lots using DT margins unless they have balls of steel or are complete nutters (a 2 pt stop is 7.5% of the account). The example is totally unrealistic and extremely optimistic for even the best traders. Take the size in your examples and divide it by 10 so we can even discuss reality.

Agreed. There are a lot of dangers in this strategy, the more often you trade, the more likely HFT-based 3+ point ATR moves will have you hitting that mental stop in a fraction of a second, much more so after the RTH open on the ES than in the Asian or European trading times. Most daytraders I know take over 10 trades a day, not 2-3. Most daytraders I know are often losing/breaking even on just 2-3 trades in a day.

Also no SIPC coverage is going to safely protect that $326.5K account, further increasing risk of ruin. Sadly, not even Elitetrader sponsor-brokerages have reliable insurance for funds in futures trading accounts. If you consider SIPC reliable, a daytrader's funds are not safe at IB since that $326.5K would have to settle before going into the SIPC-insured account.

 

[i am nobody]

You're not going to be able to put on 250 contracts after the first loss

Depends on when the first loss occurs and also how big that loss will be. Should be deductible from the specifics of your backtesting.

After day 1 you have already $36.250 extra capital to absorb a loss. Each following day it grows by $36.250, so depending on timing and size of a loss you can continue or not to trade 250 ctr.

Even if you get a hit of $100,000 after doing 4 days at 3 points net, your margin will be higher than the $1306 you need. So timing of the loss is crucial.

I can put on 250 ctr after the first loss for the simple reason that I maintain a $1306 margin but don’t need it for trading with my broker. He accepts smaller margins. So I lower my margin as even wiping out my account cannot harm me. I also know my trackrecord and know how big, or rather how small, that possibility is. I also don’t need balls of steel as I know my risk before I enter a trade. And again even wiping out my account cannot harm me. Balls of steel are more needed for most of the newbies, but they don’t even realize the risk they take.

My broker tells me all the time: I wish I had more clients like you. You make consistantly money, so stay alive and generate commissions for me. A big part of my clients wipe out, not generating commissions anymore and I should replace them by new clients or I will be soon out of business. He is not afraid if my margin would drop from $1306 to $1000 because he knows I will recover very fast (normally within 48 hours ).Even a 20% drawdown, which I didn’t have anymore the last 15 years leaves me with a margin of over $1000 per contract while trading 250 ctr.

People with 300k are not trading 100-200+ lots using DT margins unless they have balls of steel or are complete nutters (a 2 pt stop is 7.5% of the account).

Every day when you make your 3 points you make 11.1% of the account in plus. You should not only see losses, but also profits. Losing 7.5% is not a problem if you make more in profits and have more profitable trades then losing trades.

I clearly said: We should take a hypothetical system as we need it to show how the calculations work. Purpose was to show how the calculations work. Nothing more.

I clearly said: The specific of your system will alter the calculations, but not the logic behind it. So it is clear that you should adapt the calculation to your system.

Take the size in your examples and divide it by 10 so we can even discuss reality.

To adapt the hypothetical model:

• Dividing by 10 and trading 25 ctr is not realistic too, way yoo pessimistic. Full margins are even much less than what you use as margin then. But even when divided by 10 you have after 18 weeks doubled your initial investment. So from then on you can play by only risking your profits.
• Let’s assume 5 times stopped out in a row with 3 points loss at start of the trading. That is a very bad scenario as I never had 2 consecutive stops of 3 points, and surely not when starting trading. And let’s assume a $5000 margin, so trading 65 ctr. Which is close to normal margins, not daytrading margins. We would lose from start in the first 2 days in the 5 consecutive losses about $47,275. Worse scenario is almost impossible. Leaves us $279,225. Good for trading 57 ctr. From then we do 3 points and trade till 65 ctr based on margin.After 6 weeks we will have doubled the initial investment and can start trading from profits only.
• I use these proportions already for years without any problem. With other size of ctr.
• For some of my children I created an account and I saw it as a challenge (or even game) to myself to only put $3,000 in each account and trade it up to considerable amounts. Each opened account went that way successfully. No problems and never a margin call. The maximum risk of the game was losing $3,000.