Questions a new trader should ask
- Thread starter ziyan
- Start date
Dividing MFE by MAE will confirm whether or not your entries have an edge. In other words "taking off" in the intended direction. Stated another way, minimal drawdown.
Exits are where the money is made (or losses stemmed).
Exits are where the money is made (or losses stemmed).
Proper exits is part of an edge, and your formula doesn't factor exits into the equation. Your Mfe could be a million points but if you dont have a method of exiting profitably it doesn't really matter.
BTW, 1a2b3cppp is correct: account size can be an edge. Why do you think so many people here talk about how you need a certain size account to trade? Sure, you *could* trade the ES with a $3,000 account but you'd do much better with a $100,000 account.
If you want to check if you have an edge, look if you're profitable over time. Yes = edge. That doesn't mean your edge will work forever.
No, it is not. You have this the wrong way around. A SMALL account is a hindrance. You can't use proper money management etc. But it does not follow that a large acct is an edge.
As for that nonsense about waiting for years for a market to come back, i went long at the exact high of one of the stock index futures in 2000. I exited and lost 20 ticks (or something). That index has never hit those highs again, 11 years later!!!. But according to your "methodology", i should have averaged down until, well, i don't know, hell freezes over!.
Why go through all that pain when you could make money instead?
You should do what works for you.
You don't have to wait for the markets to hit their highs again. Remember, each time you average down, your break even point becomes lower. It's possible to exit significantly under your intitial entry price and still profit.
There are indeed risks to trading this way, one being that the instrument's range will significantly change and then its ATR will significantly reduce (for example, an instrument trading in the $100's for a while and then suddenly it drops to $5 per share and never exceeds the single digits.
That's why I said choose your instrument carefully. We're all betting on something. Options players are betting on time. Ternd followers are betting that they won't die from 1,000 paper cuts. Market makers are betting on volume. I am betting on range.
And even so, in a worst case scenario, I will not blow out.
Which index did you buy and at what price?
Well, if you can predict direction, then you shouldn't go through all that pain.
What works for someone might not necessarily work for someone else. My timeframe is weeks/months and sometimes years. I don't mind waiting for price to eventually go back up and collecting dividends and small profits from hedges in the opposite direction in the meantime.
I trade this way because it works for me, it suits my psychology, and because I cannot predict direction.
If it works for you, and you are consistent with it, then by all means why should you change ? I have taken on several clients who managed to make a living constantly fighting the markets over an extended time period - it was in their nature to always fade moves. Ultimately, trading along with the market bias order flow proves to be far more economical and efficient. Let the big commercials and trend following HFs do the heavy lifting for you.
There is no one way, or correct way, to trade. You can, however, employ a strategy that is far easier on you emotionally and financially in terms of drawdowns and mental/emotional energy conservation relatively speaking.
It's not a formula, it's a simple rudimentary computation as a CONFIRMATION of an edge (whatever that(s) may be.
I mentioned exits because that's what one does to capitalize upon an edge. "Method" implies consistency. I would prefer consistency toward entry but an exit can be a stop out, pre-empting, or little Susie needs new braces.
Anybody can enter, no more difficult than ordering a pizza. In fact, faster. In contrast, an exit (whether positive or negative) is a taxable event. It's simply WHERE the money is made (or losses stemmed). Between entry and exit, your bias changes.
With an ownership (internal) bias, you exit as the situtation dictates. Ideally to maximize, but it's OK to leave some on the table. There's another bus coming along in 15 minutes.
After MFE has clearly, note clearly, peaked, might be time for looking for the exit. But not necessarily.
I'm not writing anything you don't already know.
Repetition breeds familiarity. Familarity breeds confidence. Quantified confirmation of edges builds confidence ( or........tells you something needs to be altered or tweeked). MFE/MAE, a tool.
I suppose an Iron fist could be a tool. In more than one context. I personally opt for brass knuckles. Less cumbersome. Streamlined. Faster. Portable. Non-metallic ones will pass through a detector.
Like Karl Malden, I never leave home without it/them.
Profitable over time is generic. A platitude. I'd rather have a smooth equity curve over one resembling a carpenter's saw blade even IF they end the same net net.
Position size is akin to two over-lapping spheres. Enough to matter but not enough to take you out of the game. A sweet spot. It too can be quantified. I personally risk no more than 1% and let it slide no more than 3 ATR's (MAE is another perspective). All irrespective of total capital. I treat each account differently.
Lots of edges. Seasonality is just one. Pssst, the Thursday before option expiration week is.......eh..........meaningful.