too much emphasis on defense in trading
- Thread starter marketsurfer
- Start date
OK, you asked several good questions and in return, you deserve some honest answers. Really, the answer to your first question is described as clearly as possible on collective2âs website without revealing the model. In a nutshell, I look for stocks that âmisbehaveâ from their long-term âpredictableâ profile. I find about 2 to 3 stocks every week that consist of a certain unique profile. I then input them in my volatility model, the main building block of my system, in order to see a specific behavior that is missed totally by the naked eye when looking at a stock chart or with your traditional indicators. If it passes certain stringent requirements I have set, I will bring their options to further investigate their âtrue costâ relative to my future prediction of the favored outcome taking into account the percentage of error my model has experienced for that particular stock over a period of 5 years.
Indeed, you can see clearly from the graph that the inception period was very tough indeed, however as time went on, the performance started to firm up bit by bit, and I started stringing multiple winners. It meant that there's a solid and well thought out methodology driving the system. But my trading methodology in 2004 was still missing 2 very critical ingredients that I was still attempting to solve and eventually add to the system, hence the drawdown.
Now, move forward to 2005 till now and you'll start to notice that the dips in the equity graph were getting smaller and smaller. I mean the systemâs accuracy is >80%, strong enough that it just gobbled up any losses that came my way. The good news is that the drawdowns are becoming smaller and smaller on a percentage basis and the speed of making new highs in the equity graph is also moving in the right direction.
The size of the trade is dependent on the confidence factor the system generates for that profile misbehavior.
Hi Surf,
Very interesting post, Thanks.
Some time ago I had the opportunity to witness a trader, in person, with a different approach to the markets. Instead of the traditional "static" trade where one had an entry, stop, and profit targets only. His method had all that, plus a management method that made it somehow entirely different.
At first glance, his management method appeared to be a Martingale scheme, just ripe for ruin. But watching him work his positions, adjusting his cost basis, talking scalps, watching price action, and flipping his direction when needed, I realized this was a far more aggressive method than mine, yet at the same time it was quite defensive. The method was not complicated, but definitely not something you read in "Daytrade your way to a fortune". Actually, many trading activities he did, seemed to contradict "the correct" things I've learnt and read about the markets. And his success is far greater than mine.
Since that experience, I have come across a few traders, here on ET that do similar things. Not precisely the same, but similar in that their approach to the market is both "aggressive and non-conventional". I definitely think dying a death of a thousand cuts, isn't all it's cracked up to be. And defensive trading is only the half of it.
In the end, true success is bestowed with the "aggressors".
Good Trading,
Dave
Very interesting post, Thanks.
Some time ago I had the opportunity to witness a trader, in person, with a different approach to the markets. Instead of the traditional "static" trade where one had an entry, stop, and profit targets only. His method had all that, plus a management method that made it somehow entirely different.
At first glance, his management method appeared to be a Martingale scheme, just ripe for ruin. But watching him work his positions, adjusting his cost basis, talking scalps, watching price action, and flipping his direction when needed, I realized this was a far more aggressive method than mine, yet at the same time it was quite defensive. The method was not complicated, but definitely not something you read in "Daytrade your way to a fortune". Actually, many trading activities he did, seemed to contradict "the correct" things I've learnt and read about the markets. And his success is far greater than mine.
Since that experience, I have come across a few traders, here on ET that do similar things. Not precisely the same, but similar in that their approach to the market is both "aggressive and non-conventional". I definitely think dying a death of a thousand cuts, isn't all it's cracked up to be. And defensive trading is only the half of it.
In the end, true success is bestowed with the "aggressors".
Good Trading,
Dave
Well you lived up to your screen name.....
What you say is gospel truth. I find this a totally inane thread. Virtually all trading literature focuses on everything BUT risk management. If one published a book about how methodical one must be in taking small losses, testing the water for direction, getting chopped up, and how one must wait patiently for low risk entries, well you'd bore a lot of readers.
I'd agree that no amount of defense will save you if you have no offense.
I think the emphasis in trading literature and public forums like these on defense is simply due to the fact that a good offense is kept hidden and not discussed as long as it continues to work. But the defensive theories we're offered are necessarily generic by nature (ie, only risk X% per trade, per day etc).
Another way to look at it is that there really is no difference between offense and defense. Capital is allocated in a manner tailored to the specific edge applied, and is removed when the edge no longer holds or has been played out. The technique simply boils down to pushing your strengths and downplaying your weaknesses. One really shouldn't need to "think" about defense at all; ideally, it should be indistinguishable from one's offense by the fact that either the opportunity is there/potential profit still remains -- or not.
I think the emphasis in trading literature and public forums like these on defense is simply due to the fact that a good offense is kept hidden and not discussed as long as it continues to work. But the defensive theories we're offered are necessarily generic by nature (ie, only risk X% per trade, per day etc).
Another way to look at it is that there really is no difference between offense and defense. Capital is allocated in a manner tailored to the specific edge applied, and is removed when the edge no longer holds or has been played out. The technique simply boils down to pushing your strengths and downplaying your weaknesses. One really shouldn't need to "think" about defense at all; ideally, it should be indistinguishable from one's offense by the fact that either the opportunity is there/potential profit still remains -- or not.
Pabst - you may have some insight into this.
I once had a similar discussion here with traders about scaling out. Which I supported.
I remember some guys familiar with the floor stating you had to go for it and go big.
They spoke of Richard Dennis in his hey day piling in his trades on the floor and just making tons cause he was big and aggressive.
I mentioned that back when I was making money trading. I took some of my profits and put them in the managed futures funds. One of the being the Dennis fund. I saw that his returns were all over the place. I started off with a very quick 30% drawdown and then 6 months later I was up about 100% from my initial capital. So I took half off the table and used the money to buy a house in Carlsbad. A few months after that scale out, The Dennis fund had a huge draw down and closed. In in all I got out at a profit but had I not scaled out I would have been net loser.
This is still an incomplete story. As a trader I was all about defense. To the point of not making nearly as much as guys in my office whom I had trained. Later when I was no longer able to make much trading. I got into real estate.
I sold my house in Carlsbad. (9 mos early) Took large profits and bought real estate here in florida. Which has turned out to be the poster area for the anti-bubble fed propaganda. The wall steet journal said we were the hottest area in the country last year with a 41% gain. I have been leveraged to the hilt and I have been a much bigger pig than I ever should have been. If I can get out soon. I will have plenty of cash to start trading again. But I could be slaughtered.
We will see in the next few months.
I once had a similar discussion here with traders about scaling out. Which I supported.
I remember some guys familiar with the floor stating you had to go for it and go big.
They spoke of Richard Dennis in his hey day piling in his trades on the floor and just making tons cause he was big and aggressive.
I mentioned that back when I was making money trading. I took some of my profits and put them in the managed futures funds. One of the being the Dennis fund. I saw that his returns were all over the place. I started off with a very quick 30% drawdown and then 6 months later I was up about 100% from my initial capital. So I took half off the table and used the money to buy a house in Carlsbad. A few months after that scale out, The Dennis fund had a huge draw down and closed. In in all I got out at a profit but had I not scaled out I would have been net loser.
This is still an incomplete story. As a trader I was all about defense. To the point of not making nearly as much as guys in my office whom I had trained. Later when I was no longer able to make much trading. I got into real estate.
I sold my house in Carlsbad. (9 mos early) Took large profits and bought real estate here in florida. Which has turned out to be the poster area for the anti-bubble fed propaganda. The wall steet journal said we were the hottest area in the country last year with a 41% gain. I have been leveraged to the hilt and I have been a much bigger pig than I ever should have been. If I can get out soon. I will have plenty of cash to start trading again. But I could be slaughtered.
We will see in the next few months.
