Wanting to start a systematic trading approach

[c.chugani]

Quote from JMowery1987:

Work hard, have dedication, it's kinda funny, i had about 3 newbies ask me something similar, which is fairly common, and this is when I was just starting, and none of them are still here, and I don't have contact with any of them, but one of them admitted they blew it, the other two, I'm sure of the same fate.

They always asked me questions and stuff, not willing to put in the work.

So I have learned from others mistakes. Be sure to learn from what I have just said and do your own research and try out things, because asking a bunch of random people on a forum, even though people here intend on helping you, they will not be able to tell you how to trade because you should trade the way you feel you should and the way you are comfortable with, and if you haven't even determined if you should day-trade or swing-trade, I already know your setting yourself up for failure if your not willing to try it out for yourself.

Just some brain food, hopefully it helps.

This might or might not have anything to do with this, but I was asked very similar questions and knew the people, and I believe the reason they failed was they were looking for a system already built and all that, so again, just some advice to give you a better chance of being successful than they were.

Ok.

I am willing to put in the hard work and learn before jumping in and doing something stupid.

I don't want to do anything impulsive, just to find out that I made a big mistake, start regretting my actions, and feeling that I should quit this field.

Where can I learn the BASICS of market behaviour and the fundamentals of price action?

Could you recommend only one starter book, which could explain me the very basics on how the stock market works?

Like how is the "bid price" and "ask price" of a particular underlying determined?

I need answers to basic questions, I am willing to put in the effort and learn, cos I really don't want to approach the market as though its a casino- for that I rather go to Vegas and i'll have a better time.

So please, could someone enlighten me from where should I START?

 

[Hook N. Sinker]

Hello C. Chugani,

I think this is a good way to start. I remember doing similar studies about year 2003.

1) Download about 40 years daily price data for General Electric stock symbol GE from yahoo.com.

2) Copy and paste the GE price data into a Microsoft Excel or Works spreadsheet.

3) Calculate the average price for 300 trading days using the data adjusted for splits and dividends. I mean, calculate a 300 day moving average.

4) In another spreadsheet column calculate 3 percent of the moving average value.

5) In another column add the 3 percent value to the 300 day moving average value.

6) Now we want to see if it works. When the stock price first moves above the value of the moving average plus 3 percent then the system buys.

7) When the price declines below the value of the moving average this is a sell signal.

8) Test long positions only. (Just to keep things simple)

9) Assume you start with US $ 10,000 and risk 1 percent on each trade. One percent of $ 10,000 is $ 100. Pick a number, say 10 percent. Calculate the position size so that $ 100 = 10 percent of the closing stock price. Now you know how many shares to buy.

10) Write down the results of the trades. Total the profits and losses of each trade and see if the system makes any money.

11) Later you might want to subtract commission costs and slippage but it is not necessary for a first test of a system.

12) Change the numbers and keep track of the total profit. Maybe a 400 day moving average works better than a 300 day moving average. Maybe 4 percent added to the moving average works better than 3 percent.

You might want to keep track of the results in another spreadsheet so you can copy, paste and perform calculations on the values.

You can perform lots of variations to this simple trend following system and discover things that work and things that do not work.

You can use the system to back test other price histories also such as currency exchange rates, crude oil prices or Coca Cola stock price.

You can make the system as short term or long term as you wish. Test weekly and monthly data also.

I believe this is a variation of a system developed by Chester Keltner about year 1950. You might want to google Keltner and learn more about the system and the man.

I wrote a computer program to perform the calculations described above and report the results. Following is an edited copy of the results. The results are long, there are many trades so I will only paste the last few trades.

If anyone is interested I could start a new thread and we can, all together, try to develop an improved version of this system.

====

7-Jun-04 OHLC:[ 29.87 29.87 29.87 29.87 ] buy 29.87 size 33
Dollar Position Cost is 985.71
5-Oct-05 OHLC:[ 31.97 31.97 31.97 31.97 ] sell 31.97
Position Net Gain Or Loss is 69
Subtotal profit $ 11494

7-Oct-05 OHLC:[ 33.47 33.47 33.47 33.47 ] buy 33.47 size 29
Dollar Position Cost is 970.63
24-Jan-06 OHLC:[ 32.47 32.47 32.47 32.47 ] sell 32.47
Position Net Gain Or Loss is -29
Subtotal profit $ 11465

14-Mar-06 OHLC:[ 33.53 33.53 33.53 33.53 ] buy 33.53 size 29
Dollar Position Cost is 972.37
13-Jul-06 OHLC:[ 32.67 32.67 32.67 32.67 ] sell 32.67
Position Net Gain Or Loss is -25
Subtotal profit $ 11440

Number of trades 43
Total profit $ 11440
Profit after subtracting $ 100 commission & slippage per trade: $ 7140
Heat is $ 100 per trade
Drawdown is 0.0677
Initial capital is $ 10000

 

[c.chugani]

Quote from Hook N. Sinker:



9) Assume you start with US $ 10,000 and risk 1 percent on each trade. One percent of $ 10,000 is $ 100. Pick a number, say 10 percent. Calculate the position size so that $ 100 = 10 percent of the closing stock price. Now you know how many shares to buy.

Excuse my ignorance. Could you please elaborate on how I calculate how many shares one should buy?

I understand where you are going with the 1% risk per trade (hence $100). That is your determination of the risk you want to take per operation.

Now what I don't understand is where you get / or on what basis you determine the 10% figure.

BTW, thanx for helping me out by this sample model layout.

I guess yahoo provides historical price data for a monthly fee?

 

[MTE]

Quote from c.chugani:

Excuse my ignorance. Could you please elaborate on how I calculate how many shares one should buy?

I understand where you are going with the 1% risk per trade (hence $100). That is your determination of the risk you want to take per operation.

Now what I don't understand is where you get / or on what basis you determine the 10% figure.

BTW, thanx for helping me out by this sample model layout.

I guess yahoo provides historical price data for a monthly fee?

My guess that 10% is arbitrary, just used as an example. Basically, it implies a 10% stop loss. E.g. stock is trading at $50, so 10% is $5. So if you are risking $100 per trade then you can buy or sell 100/5=20 shares.

Historical price data on Yahoo is free.

 

[c.chugani]

Quote from MTE:

My guess that 10% is arbitrary, just used as an example. Basically, it implies a 10% stop loss. E.g. stock is trading at $50, so 10% is $5. So if you are risking $100 per trade then you can buy or sell 100/5=20 shares.

Historical price data on Yahoo is free.

In your example, if the stock trades at $50, then I can only buy 2 shares per trade ($100 risk per trade).. am I right?

From where do you get 20 then?

 

[c.chugani]

Quote from c.chugani:

In your example, if the stock trades at $50, then I can only buy 2 shares per trade ($100 risk per trade).. am I right?

From where do you get 20 then?

Sorry!!!

My BAD!!

you mean I can risk $100 in LOSSES per trade..

Excuse me.

 

[Hook N. Sinker]

Yes I just picked 10 % of the closing price as a number to use for calculation purposes. Some traders call the 10 % value the "heat" parameter. In this case if the stock price falls 10 % it represents a $ 100 loss. We could "turn up the heat" by selecting 5 % instead of 10 %. In the case of 5 %, if the stock price falls 5 % then the position lost $ 100.

Heat is another parameter that a system developer can experiment with.

 

[Grob109]

Quote from c.chugani:

You see people,

being a newb in this world is pretty aggravating. There's too much info, sometimes it makes things more complicated than what they should be.

There is a chance that you can be influenced to take a critical path through the plethora of information that you are processing. So far you aren't doing very well. This is a judgement I am making about you and your performance.

The path to follow is one where you get on the table what is important to consider by making up a path to follow by reach a goal.

You have the goal and have stated it.

What subtends the goal are VERY FEW considerations.

Right now you are ignorant and that is to be expected.

Because you know little, you cannot decide what information is valuable because so far you are not setting up a game plan to get started properly. see your next comments in your next paragraph.

I really don't know how to proceed. Should I get to reading more abt trading? How do I actually START trading? With what tools, what systems, which risk management principles, how much intitial capital, through which brokerage firm, etc. etc.

How to proceed is to ask questions. you have ask many so far. I have numbered them to keep track of how you are going through an average to poor process to get to your defined goal.

7. Should I get to reading more abt trading?

No. As an alternative you could get out a paper and pencil and put a bunch of boxes in a row and fill the poxes with things you need to do based upon reasoning to get to your goal. you could read the book i suggested as a sideline just so you have the facts on the subject of the book : traders and markets (Exchanges)

How do I actually START trading?

You do very little. see the steps below:

a. Get an account with a broker who will, on your behalf trade at exchanges where the items you want to trade are located. HE will make arrangements for communicating with you and you will inform him in a timely manner what you want done.

b. Get an information source for monitoring what you are trading to make money.

8.With what tools?

Tools are human aids which extent the capability of a human to perform work. You need tools to communicate to your broker. Get a phone and get the trading platform the broker provides to a PC and get a PC and a printer and 2 to 4 screens for display. Learn how to operate the PC and the phone so they have utility.

You already have an information source(See 7.) so use that on your PC as well. There is no commercially available complete information source and the software coding to make it possible to "See" any market at this point. So you will have to do two more tooling efforts to get a full compliment. At this point you would not be able to understand what I am talking about. I suggested to you previously in questions 1 through 6 how to deal with this adroitly, quickly and completely. Your poor performance precludes, at this time, your getting with the program so to speak. You choose to delay and wait so far.

9. What systems?

Systemsd for making money are easy to come by and so you can choose. I am making a choice for you at this point since I need an example. I choose for you a system that is symple, elegant and makes money as fast as the market can deliver it to you.

It is a position trading system that trades very very high quality stocks only and the stocks are high Bets and they feature reliabiltiy and repeatability of performance. They complete about 35 cycles a year, each being 6 to 8 days or less and half their potential is what you should expect per cycle and financially it is nominally 10%. The compound interest formula multiplier annually on your initial capital is 28.1 as calculated on an HP 10B calculator that sells for about 25 bucks. Get one so you can determine that I am giving you the facts properly.


10 which risk management principles?

These are simple. you will be entering profit cycles late and leaving them early. Of the profit available you will be taking the middle 50% and forging the first and last 25%'s respectively. The other half of money management comes under the routine that you will be adopting to make money. This is also new to you since you haven't considered it. there are four parts: monitoring, analysis, decision making, and taking timely action. these money management activiies feed each other in sequence and they are repated continually with out interruption as the money making proceeds.

you will take your sheet of paper and pencil and make up all the questions necessary to figure out how to do this stuff. you can postpone it for as long as you wish.

11 how much intitial capital?

Your intial capital is listed in this thread somewhere look it up. 5,000 I think I saw. Divide it into two equal parts. You will be keeping logs of how you trade it. Get some logs completed and print about 500 copies (one ream of paper).

12. through which brokerage firm?

There is only one answer for this. Use your mentor's broker. I answered in questions 1 through 6 what your mentor is going to be doing with and for you. He is waiting for you now and you have not shown up yet because of delays on your part. He is a local rich person who will approve your character and your preparation and you will follow his direction and he will instruct you.

You will have difficulty finding a mentor. Everyone has difficulty and they usually give up for a few years.

12 etc. etc.

As you can see you poop out easily at this point. you will have some more soon enough.

the doubts in my mind are neverending.

A lot of stuff can be left out of getting started. your physiological and psychological system will kick in all the time to give your status reports. Right now you are getting a lot of long half life peptides, etc. telling you that youare at risk and these are part of your heritage, survival wise. You are telling yourself that you are not doing a very good job and I can confirm that as well.

It seems as though I need some coaching on this field.

This is a rational judgement on your part. People who do this stuff are called mentors. You cannot get mentored on ET. there are some things that can be done on ET, though.


I follow the Spanish markets (I live in Spain btw) religiously and keep track of the stocks that compose the major spanish indices. I do my research, look for edges through technical indicators with historic data, etc. etc. But I still cannot see clear patterns or indications of where the trend is heading.

you are continuing to comment on the theme of your first post. the stuff you are doing is a way to spend time but it is not a methodical way to get from A to B. so you need to take out the paper and pencil and formulate a set of questions where each one will take you further down the path. Right now your path is a bunch of overlapping circles that are not growing in diameter.

I really love this world, but at the same time I find the amount of info, options, competition and overall pace of this field really mindboggling.

It is not mind boggling; it is quite the opposite.

I yet don't know how to ACTUALLY START TRADING!!

Again this is a survival reaction of your mind and bod. It is protecting you from yourself.

Any advice to give a distressed beginner?

See above.

 

[Grob109]

Quote from c.chugani:

For a guy that is starting out, do you people recommend to swing, position or day trade?

There is no choice for any beginner or person who is a prebeginner. People must begin to trade only in no risk settings. This is a location that is a small part of position trading.

In your past efforts you did not find out anything about the risk that exists for a person who is ignorant of most trading and market knowledge.

You may only begin to trade a specific small universe of stocks. They must be the only ones you trade. And you will be told by the markets if you are able, even in this place, to begin to trade.

You may only trade the shortest price cycle this very limited universe allows youto trade. you have to enter late and leave early as well, leaving some profits on the table.

yuor universe may only contain stocks that are "repeatable and reliable and that come form the top 150 stocks of 15,000 stocks as further determined by their earnings and price performance.

You are hanging in the wind and have no knowledge, skills or experience. Here you see in ET a moving parade of people who 90 to 95 % of which are focussed and concentrating on one thing only: REPEATED FAILURE.

Some of these people are so far gone that they will tell you that you can trade almost none of your money on a trade simply because of the EXTREMELY HIGH risk that exists in the place where they are learniong repeated failure. Read their posts.

I plan on risking part of my own savings. Currently 5000 euro.

Good. your one and only one job is to do only no risk trades until you have 10,000 euros whic in the natural cycle will take 8 trades of 6 to 8 days. 48 to 64 buiness days. Then take the 5000 Euros out of your account and only, for the rest of your life trade on profits.

Instead of buying the stocks I'm going to concentrate on the options of the blue chip spanish stocks as well as on the whole index. (Atleast like that I shall have some leverage, since my starting capital is a pittance).

you are focussed on two elements of making money: low risk blue chips and leveraging options.

Blue chips are not quality repeatable and reliable stocks. There is no way they will ever meet the quality and risk requirements a beginner has to get his intial capital back out of the market at any speed, fast or slow, whatsoever.

Options leverage and do what to make money?? Find out when and how often.

The standard being offered to you is 10% every 6 to 8 days at no risk by entering late and leaving early.

 

[Grob109]

Quote from c.chugani:

Ok.

I am willing to put in the hard work and learn before jumping in and doing something stupid.

I don't want to do anything impulsive, just to find out that I made a big mistake, start regretting my actions, and feeling that I should quit this field.

13.Where can I learn the BASICS of market behaviour and the fundamentals of price action?

You can best learn this by sorting high quality stocks, annotaing them, completing analysis sheets on them and ranking them for their potential to make money for you.

After you have this done, you can monitor them on lists in real time where you get to see their daily action as they move up and down (according to aleading indicator of price) the lists as their cycles are completed. You parallel this with charts that you annotate and update.

You will have about two inches a month of records in a three ring binder. The stocks in the binders as the months go by are allowing you to do 35 cycles per year @ 10% a cycle. Multiply your initial capital by 28.1 to see the annual results of your binders.

14. Could you recommend only one starter book, which could explain me the very basics on how the stock market works?

Use your binders to get the explanation you want. After you have been working at it for a while you will be bebriefing yourself. These debriefings will contain a lot os really excellent and comprehensive info on how the markets work.

This will be a template for trading other markets. those markets that are leveragedand that move about 50 times faster than the stock markets.

15. Like how is the "bid price" and "ask price" of a particular underlying determined?

In the book I recommended to you previously start with the info in CH 4 and then go to CH 7 from there go to Ch's 10 etc.

I need answers to basic questions

That is what the paper and pencil are for. To write down and answer the questions. You are beginning to get started. 15 questions so far and you have just left out the part of going to get the answers.

First of all it is hard to plan a path of boxes that have the key questions. you and most people are poor to average in doing that. actually not many people do figure out how to even ask questions or to have the questions lead them down a path.

One older organization has determined that the questions that deal with their organization are always in the same sequence that their members ask. Thousands of years yielded this result.

The way to get answers to basic questions is to make up the basic questions first. You may want to begin to do that.

Basic questions are the most important questions.

I personally have a set. I also have a set of answers that are commonly givien the these, among them the right answer. I made up squibs of dicussions on the wrong answers to guide a psreson who believes the wrong common answer back to the right answer. There are about 1440 of these.

I am willing to put in the effort and learn, cos I really don't want to approach the market as though its a casino- for that I rather go to Vegas and i'll have a better time.

It will be great to see you begin.

So please, could someone enlighten me from where should I START?

Start with basic questions. Then when you have a few, you can go get the answers to each of them as you add more questions. It is a staggering of things where you always have a few more questions on hand than answers.

Going to get the answers in trading and markets is different than going to University. at University you get grades, etc.... for getting the right answers in markets and trading you get very rich very fast. But if you get thewrong answers, then you get to lose capital and also go through the process of deeply learning failure. At some point in learning failure there is a point of no return. Try to avoid this pitfall.

The way to learn is to build on continuing success. doing no risk trades right out of the box is a better way to build on success.