Successful Trading and Compounding
- Thread starter gmst
- Start date
- Status
WOW,...I must comment here. I will give you a set of rules you MUST follow. These are rules that you are OBVIOUSLY NOT following. You will blow up your acct again probably before the end of the year if not before Halloween if you do not follow these rules.
1) Never risk more than 0.5% of your capital on any one trade UNTIL you have proven through statistics that your "strategy" will in fact make you money. Realize that your backtesting has inherent errors in it. It assumes you will trade your system 100% perfectly which obviously you are not doing. Because of human errors, emotional errors as well as market dynamic your system will NEVER perform as well in real life trading.
2) Keep detailed records of your trades. I recommend using a good spreadsheet designed for this. I have no affiliation with this site but I use their product and it is GREAT for keeping track of trades. BUY this... http://tradingspreadsheets.com/default.aspx
3) Read Dr. Van Tharp's book "Supertrader". I was like you in many ways because of a "good strategy based on backtesting". I started out thinking I knew how to trade and kept blowing up my acct and blaming it on the market or not following rules and ended up with highly volatile swings but net loss. This book changed all that for me. This was the basis for understanding risk management and position sizing. You SAY you understand it but it is obvious you do not. This book will help you realize your weaknesses and improve on them. Once you read that I also recommend reading his book "The Definitive Guide to Position Sizing". In that book you will learn to evaluate your system in depth and determine more appropriate position sizing. Then you can optimize your % of capital to risk on each trade. The difference is you are doing it based on stats. IF your system truly shows a positive expectancy in real world trading NOT backtesting then you should be able to risk more than 0.5% of capital per trade. You will need at least 100 real world trades to do this. This is where your spreadsheet data will help you fine tune.
If you do not follow these rules I guarantee you will blow up your acct again. I can not explain in detail why on here as it would take too long. Suffice it to say the reasons are in the sources I have given above. Basically your position sizing is WAAAY to high and you are going to suffer huge drawdowns.
A big part of your problem appears to also be psychological. If you TRULY had enough confidence in your system you would not be taking these other types of trades that do not follow your rules. You are doing them because you still are not sure and you have not proven it to yourself that is does work. Statistics on your data will show you what works and what doesn't....again the spreadsheet is vital here. You will also notice that keeping stats and examining them periodically will force you to do more of that which works and less of that which doesnt. Also, you do not seem to have appropriate stop losses. There should be NO way you could lose 40% on a couple of trades if you have 2% supposedly at risk. I suspect you do not enter stops or you average down on losing trades. Both are bad!!
I also suspect you are quite young (< 30 years old) and do not have enough capital to trade well. You really need at least $25K in my opinion to trade effectively. Someone with frequent trades has high round trip commisions that you must overcome in order to be profitable. Add up all the round trip commissions over the course of 1 month of trading and figure what it would be after 1 year. I suspect with your acct size it is AT LEAST 35% in commisions alone and possibly more like 100% depending on how many trades you do in a month!!. An acct size of >25K will at least give you a fighting chance. In the mean time you need to raise capital, READ, and preferably paper trade and keep stats on that. If you must use your own money follow my rule of 0.5% until you have stats. You quite possibly will still blow up your acct with 0.5% because your commisions will eat away at your acct but this trading time will only be for collecting data. You should analyze the data WITHOUT commisions to get an idea of what could happen with an acct big enough to make them less of an issue.
IF you have read this far into my post then at least thats a step in the right direction. I encourage you to print this out and keep it. You may or may not listen to me now. If you dont listen to me now then SOME DAY after blowing up another 10 accounts you will possibly be at a point in your trading life where you CAN accept some of what I am saying. What I am suggesting is looking at yourself and treating this more like a business than a slot machine that you think you can rig in your favor.
Good luck.
1) Never risk more than 0.5% of your capital on any one trade UNTIL you have proven through statistics that your "strategy" will in fact make you money. Realize that your backtesting has inherent errors in it. It assumes you will trade your system 100% perfectly which obviously you are not doing. Because of human errors, emotional errors as well as market dynamic your system will NEVER perform as well in real life trading.
2) Keep detailed records of your trades. I recommend using a good spreadsheet designed for this. I have no affiliation with this site but I use their product and it is GREAT for keeping track of trades. BUY this... http://tradingspreadsheets.com/default.aspx
3) Read Dr. Van Tharp's book "Supertrader". I was like you in many ways because of a "good strategy based on backtesting". I started out thinking I knew how to trade and kept blowing up my acct and blaming it on the market or not following rules and ended up with highly volatile swings but net loss. This book changed all that for me. This was the basis for understanding risk management and position sizing. You SAY you understand it but it is obvious you do not. This book will help you realize your weaknesses and improve on them. Once you read that I also recommend reading his book "The Definitive Guide to Position Sizing". In that book you will learn to evaluate your system in depth and determine more appropriate position sizing. Then you can optimize your % of capital to risk on each trade. The difference is you are doing it based on stats. IF your system truly shows a positive expectancy in real world trading NOT backtesting then you should be able to risk more than 0.5% of capital per trade. You will need at least 100 real world trades to do this. This is where your spreadsheet data will help you fine tune.
If you do not follow these rules I guarantee you will blow up your acct again. I can not explain in detail why on here as it would take too long. Suffice it to say the reasons are in the sources I have given above. Basically your position sizing is WAAAY to high and you are going to suffer huge drawdowns.
A big part of your problem appears to also be psychological. If you TRULY had enough confidence in your system you would not be taking these other types of trades that do not follow your rules. You are doing them because you still are not sure and you have not proven it to yourself that is does work. Statistics on your data will show you what works and what doesn't....again the spreadsheet is vital here. You will also notice that keeping stats and examining them periodically will force you to do more of that which works and less of that which doesnt. Also, you do not seem to have appropriate stop losses. There should be NO way you could lose 40% on a couple of trades if you have 2% supposedly at risk. I suspect you do not enter stops or you average down on losing trades. Both are bad!!
I also suspect you are quite young (< 30 years old) and do not have enough capital to trade well. You really need at least $25K in my opinion to trade effectively. Someone with frequent trades has high round trip commisions that you must overcome in order to be profitable. Add up all the round trip commissions over the course of 1 month of trading and figure what it would be after 1 year. I suspect with your acct size it is AT LEAST 35% in commisions alone and possibly more like 100% depending on how many trades you do in a month!!. An acct size of >25K will at least give you a fighting chance. In the mean time you need to raise capital, READ, and preferably paper trade and keep stats on that. If you must use your own money follow my rule of 0.5% until you have stats. You quite possibly will still blow up your acct with 0.5% because your commisions will eat away at your acct but this trading time will only be for collecting data. You should analyze the data WITHOUT commisions to get an idea of what could happen with an acct big enough to make them less of an issue.
IF you have read this far into my post then at least thats a step in the right direction. I encourage you to print this out and keep it. You may or may not listen to me now. If you dont listen to me now then SOME DAY after blowing up another 10 accounts you will possibly be at a point in your trading life where you CAN accept some of what I am saying. What I am suggesting is looking at yourself and treating this more like a business than a slot machine that you think you can rig in your favor.
Good luck.
Update for week 9 ending Oct 1, 2011 :
+1100$ for the week. 4th profitable week out of 9 weeks. Largest dollar positive week till now!!
Weekly Stats:
1. Week PL: +1100$
2. Start Equity: 2.4k
3. End Equity: 3.5k
4. Maximum equity run-up: 3.7k
5. Max Win day as % of that day's start equity: 38%
6. Max Loss day as % of that day's start equity: -6%
Below stats are from Journal start day:
1. Total PL: -4k
2. PF: 0.70
3. RoI: -52%
4. Max. DD: 82%
5. Current DD: 57%
6. # of winning days 51%, # of losing days 49%
7. Av. win day: 13%
8. Av. Loss day: -14%
+1100$ for the week. 4th profitable week out of 9 weeks. Largest dollar positive week till now!!
Weekly Stats:
1. Week PL: +1100$
2. Start Equity: 2.4k
3. End Equity: 3.5k
4. Maximum equity run-up: 3.7k
5. Max Win day as % of that day's start equity: 38%
6. Max Loss day as % of that day's start equity: -6%
Below stats are from Journal start day:
1. Total PL: -4k
2. PF: 0.70
3. RoI: -52%
4. Max. DD: 82%
5. Current DD: 57%
6. # of winning days 51%, # of losing days 49%
7. Av. win day: 13%
8. Av. Loss day: -14%
Some salient points about my trading this week:
1. I was much more selective in my trades this week, just took the well defined setups with 'right' size, without over-leveraging myself and without over-trading. Deserves a Good!
2. I expanded the number of potential trading set-ups to 19. Imo, identifying different set-ups and keeping records for them is one of the most critical steps for establishing a successful trading process. I am surprised at myself that I have been trading for 3 years now, but never did it before. It just shows how lax and unorganized I was regarding my trading before. Improving!
3. I re-read Pit Bull. I had the urge to become very happy couple of times this week, but 'mashed potatoes' lesson was continuously running in my head, and it helped me to calm down and to continue trading in a non-emotional and systematic fashion, even after big wins. Thanks Marty!!
4. Multiple times during the week, I felt like trading ES/QM. However, I stopped because of the Largest Loss analysis that I did 2 weeks ago and the leverage rules I formulated for trading Es/QM. I am updating the leverage rules for QM/ES. New rules are
=> for trading QM, I need 10k and for ES, I need 7k equity.
5. Some of my biggest losses have come due to continuously reversing trades before. Identifying this behavior helped me to change this behavior this week. Deserves a Good!
Here is the account equity weekly curve.
1. I was much more selective in my trades this week, just took the well defined setups with 'right' size, without over-leveraging myself and without over-trading. Deserves a Good!
2. I expanded the number of potential trading set-ups to 19. Imo, identifying different set-ups and keeping records for them is one of the most critical steps for establishing a successful trading process. I am surprised at myself that I have been trading for 3 years now, but never did it before. It just shows how lax and unorganized I was regarding my trading before. Improving!
3. I re-read Pit Bull. I had the urge to become very happy couple of times this week, but 'mashed potatoes' lesson was continuously running in my head, and it helped me to calm down and to continue trading in a non-emotional and systematic fashion, even after big wins. Thanks Marty!!
4. Multiple times during the week, I felt like trading ES/QM. However, I stopped because of the Largest Loss analysis that I did 2 weeks ago and the leverage rules I formulated for trading Es/QM. I am updating the leverage rules for QM/ES. New rules are
=> for trading QM, I need 10k and for ES, I need 7k equity.
5. Some of my biggest losses have come due to continuously reversing trades before. Identifying this behavior helped me to change this behavior this week. Deserves a Good!
Here is the account equity weekly curve.
You are absolutely correct.
You hit the nail on its head. I have been a high achiever through out my life but I cannot believe that I was so lax about my trading for last 3 years that I never kept good stats. Its almost embarassing. Now, I am keeping stats. I have seen that worksheet you mention, but I have made my own worksheet with fewer bells and whistles that just captures the more salient points of trades and I am using it to build my trading history.
All your suspicions are correct
Actually, I read your post around 4 times at different times to see if there is anything I can disagree with you and to see what changes I need to do. Seems like I agree with almost everything you have said.
Thanks for your suggestions.
to the op, as someone who has blown up several small accounts, i can certainly relate to your situation. you've been given a lot of great advice. i'd just re-emphasize the importance of small stops and reviewing past trades to see what works and what doesn't. i used to trade 4 strategies but then one night i had an idea to dump every trade into excel and see how much money i made on each trade and for each strategy. to say it was shocking would be an understatement. i ended up only trading the one strategy that had a positive expectancy and dropping the others.
we've all made mistakes trading. what's important is first: identify the problem and second find a solution and third (most important) ACT on the solution. the first two are useless w/o the third. it's like knowing your problem is you're overweight so your solution is to exercise but you need to work out otherwise they're just words on a page (or worse in your head and not written down).
i'm impressed w/ your persistence and you should be too.
we've all made mistakes trading. what's important is first: identify the problem and second find a solution and third (most important) ACT on the solution. the first two are useless w/o the third. it's like knowing your problem is you're overweight so your solution is to exercise but you need to work out otherwise they're just words on a page (or worse in your head and not written down).
i'm impressed w/ your persistence and you should be too.
Quote from gmst:
You are absolutely correct.
You hit the nail on its head. I have been a high achiever through out my life but I cannot believe that I was so lax about my trading for last 3 years that I never kept good stats. Its almost embarassing. Now, I am keeping stats. I have seen that worksheet you mention, but I have made my own worksheet with fewer bells and whistles that just captures the more salient points of trades and I am using it to build my trading history.
All your suspicions are correct
Actually, I read your post around 4 times at different times to see if there is anything I can disagree with you and to see what changes I need to do. Seems like I agree with almost everything you have said.
Thanks for your suggestions.
Follow my suggestions and you will become profitable. I have nothing to gain by giving you bad advice so understand that these are ALL thing I used to do (and suspect many of us did at one point and some STILL do). These rules changed my trading entirely.
Good Luck
Update for week 10 ending Oct 8, 2011 :
-600$ for the week. It was a losing week financially but a winning week from the reinforcement of learning. Simply put - I lost money because I broke my rules. It hurts a lot and this hurt is good, since it reinforces the connection in the brain that "breaking rules implies losses". The more powerful this connection becomes in the brain, beneficial it will be for my long term success in trading. Otherwise, its possible that few years down the line after making a few millions in the market, I lose a very large chunk of it not following the rules. So, every loss that arises from breaking my rules at this stage is a kind of positive reinforcement for me for my long term success. Its like a child who gets burned by putting his hand in fire, never goes again close to it!
Specifically, I broke two rules:
1. I traded ES (with my account equity < 7k) and made 300 USD on day one and then lost 1100 USD on day two. I shouldn't have traded ES as per my rules.
2. I traded an untested setup (a EURAUD cross trade) with 5x leverage than I had planned for. Lost 250$ on this instead of 50$.
Weekly Stats:
1. Week PL: -600$
2. Start Equity: 3.5k
3. End Equity: 3.0k
4. Maximum equity run-up: 4.2k
5. Max Win day as % of that day's start equity: 26%
6. Max Loss day as % of that day's start equity: -34%
Below stats are from Journal start day:
1. Total PL: -4.5k
2. PF: 0.70
3. RoI: -60%
4. Max. DD: 82%
5. Current DD: 63%
6. # of winning days 50%, # of losing days 50%
7. Av. win day: 13%
8. Av. Loss day: -14%
-600$ for the week. It was a losing week financially but a winning week from the reinforcement of learning. Simply put - I lost money because I broke my rules. It hurts a lot and this hurt is good, since it reinforces the connection in the brain that "breaking rules implies losses". The more powerful this connection becomes in the brain, beneficial it will be for my long term success in trading. Otherwise, its possible that few years down the line after making a few millions in the market, I lose a very large chunk of it not following the rules. So, every loss that arises from breaking my rules at this stage is a kind of positive reinforcement for me for my long term success. Its like a child who gets burned by putting his hand in fire, never goes again close to it!
Specifically, I broke two rules:
1. I traded ES (with my account equity < 7k) and made 300 USD on day one and then lost 1100 USD on day two. I shouldn't have traded ES as per my rules.
2. I traded an untested setup (a EURAUD cross trade) with 5x leverage than I had planned for. Lost 250$ on this instead of 50$.
Weekly Stats:
1. Week PL: -600$
2. Start Equity: 3.5k
3. End Equity: 3.0k
4. Maximum equity run-up: 4.2k
5. Max Win day as % of that day's start equity: 26%
6. Max Loss day as % of that day's start equity: -34%
Below stats are from Journal start day:
1. Total PL: -4.5k
2. PF: 0.70
3. RoI: -60%
4. Max. DD: 82%
5. Current DD: 63%
6. # of winning days 50%, # of losing days 50%
7. Av. win day: 13%
8. Av. Loss day: -14%
One silver lining is, my market read for capturing large moves this week was spot on. I still couldn't make money since my account size is so small and I had to cut positions when they turned against me, before moving in my initial direction. Specific examples were:
1. I went long ES around 1085 after Bernanke spoke, thinking it will reach around 1140, but was shaken out before ES moved in my direction. Lost money 1100$ while being correct on direction.
2. I went long EURAUD but was shaken out since my size was too large. Had I kept size small, I would have been green on this one.
3. After EURAUD crossed 1.405 aiming for a target around 1.385, I went short but closed the position prematurely, had I kept it open for 2 more days, it would have paid off much more handsomely.
4. I went long Gold around 1610 targeting 1650 but closed position at 10$ loss since my account equity was so small that I wasn't sure how I will react if price moves against me 20-30$ before moving eventually in my direction.
Looking back at 10 weeks, its pretty clear to me that if I strictly stick to my rules to trade in a discretionary fashion along with trading my strategies, I will do pretty well over the long run.
1. I went long ES around 1085 after Bernanke spoke, thinking it will reach around 1140, but was shaken out before ES moved in my direction. Lost money 1100$ while being correct on direction.
2. I went long EURAUD but was shaken out since my size was too large. Had I kept size small, I would have been green on this one.
3. After EURAUD crossed 1.405 aiming for a target around 1.385, I went short but closed the position prematurely, had I kept it open for 2 more days, it would have paid off much more handsomely.
4. I went long Gold around 1610 targeting 1650 but closed position at 10$ loss since my account equity was so small that I wasn't sure how I will react if price moves against me 20-30$ before moving eventually in my direction.
Looking back at 10 weeks, its pretty clear to me that if I strictly stick to my rules to trade in a discretionary fashion along with trading my strategies, I will do pretty well over the long run.
- Status