Monthly Archives:June 2014

Three Nuggets

littl121 post on June 30th, 2014
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Today marks the 3rd anniversary when I left a full time job and started trading.  I have penned this article as a mini celebration.

Someone theorized if we reverse a terrible trading system (eg.  one with a 20% winning probability) and buy when it signals to sell, we should have a very solid trading edge with an 80% win rate …… sorry to burst your bubble  ….. no bacon here.

- Because the market is varied, an edge may work in one market condition but fail in others.  The terrible system in question may actually run an impressive win rate under the appropriate market conditions.

- Generally I categorize market conditions into 2 groups -  1) whether the price is in trend,  range or indeterminate,   and 2) how price behaves inside the trend /range eg.  wild price swings, normal tempered price movements with nice swing highs and swing lows, or fast paced momentum.

- So the first pre-requisite to good trading – the trader must match the correct edge to the correct market condition.  (The internet has trading strategies galore – many are good strategies and can be profitable when relevantly applied to the right market environment.)

- Second – money management is critical – Ralph Vince and others proved clearly that without good money management, one can still lose money even with a strong edge.  (Refer to previous blog post No money management = Gambling.)

- Third , trade management is equally important.  The market often swings a trader out before running to the trader’s original intent.  How can a trader avoid or minimize the damage from such whimsical moves?  That is a crucial part of trade management.  When to add to a position, when to reduce a position (eg .take profit , take a loss), how to enter a trade (graduated multiple entries/exits,  when to use a single lumped entry/exit), how far or near to put a stop, when to use a dynamic stop, when to use a hard stop, how to take profits at what levels.  How much can one bear?  What is the reward risk ratio?  Is it advantageous to scalp a pair given a certain spread and trading costs?  Trade management is really multiple scenario management after a trade is executed.  It is closely tied to the edge and tells the trader how good it is if various scenarios arise – and must be done before entering the trade.

These are 3 pivotal points of how I trade.  Of course, there are other factors (eg. psychology), and the internet is full of similar advice.  But look again, if you have clear, defined rules in these 3 areas, your trading would be much calmer, more rewarding, and hopefully enjoyable.

 

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The Pig Headed Approach

littl121 post on June 23rd, 2014
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Should a forex trader specialize in a limited number of strategies and apply them across a multitude of forex pairs?  Or limit the forex pairs but beef up  the number of strategies he can wield to trade any market condition?  The former means one can find the highest probability trades from a plethora of forex pairs, whilst the latter means one can always trade optimally regardless the market state related to the pair.

To maximize returns and reduce risks – one should master both approaches.  If one is working with a team of traders, splitting up the workload, this combination is ideal.  Working solo however, one will require massive computing resources and highly capable computing skills, as well as a tolerance for much discretionary analysis based on filtered computer results.  You put this across 4 to 6 sessions in a 24 hour time frame, and wow!  Run this on a day trading mode 4 days every week – and you get a very charred trader.   (Sigh –  it is so much easier to do swing trades with key events and major sentiment changes - I sometimes wonder why I continue to be so pig headed)

Ever willing to be the guinea pig, the sacrificial lamb, the greater fool,  I of course endeavored to test my limits with both approaches.  So being a bit pig headed helped.

For the last 8 months, it was mental anguish alternating with delighted epiphany.  The darkness that shadowed the beginning trader troubled me again - I certainly did not expect the overcast to be so heavy.  However, to reach for other skies often  mean letting go of many sacrosanct devices and thought processes which had represented over a year’s sacrifices.  For traders who have struggled as I did in the initial learning process, giving up hard taught principles that have anchored subsequent trading success was painful.   Stop loss principles were overturned in some strategies, the notion of currency strengths was trodden on, multi timeframe analysis was completely warped, price action had various twisted indicator companions, trend analysis was deflated, exit strategies reduced to probability numbers,  and there was this long exhaustive debate over odds …. – and many awkward ideas and observations were sketched on my “whiteboard” walls , doors and long table ( — my wife finally understood why I insisted on a long white table that was completely out of place in the living room).  And not for a few occasions I would wake in the middle of the night and run over to a wall to write down my dreamt solutions.

However, three  important developments gave some direction to this mayhem.  I learnt earlier this year, I was not able to computerize many of the discretionary thought processes – simply too many permutations - so there is no way I could reduce my legacy to a computer program.   Secondly, not everyone would be motivated to learn trading like this even if it will benefit them.  Thirdly I needed to find a way to make all these useful.

So with my usual common sense (or lack of it) , an unexpected eureka moment over Yong Tau Foo, and God given courage, I endeavored to develop a robust trading system that requires no trading skills or knowledge – the real pig head approach.  Naturally, such a system can only be built through a profused understanding of forex trading in the first place.

Ha ha, the trick to making all these useful, —  is to build something not meant for me.   To define success the system must meet criteria which included the following – Respectable profitability with risk management caveats ( based on a system of money management numbers), clear identification of market characteristics , leading to right strategies, clear rules governing entry and exit strategies, clear responses for possible market changes,  and enough recurring frequency in such a way to give at least 1.5 times reward risk ratio, as well as a system that does not intrude unnecessarily into ordinary living.  So simple I could laugh at myself.  For those who have also succeeded, congrats.

 

 

 

 

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