It is so important to automate as much of the mundane tasks in trading to keep the fire burning. This is particularly true for a part-time trader like me. I use some programming to help me look out for setups and I use spreadsheets heavily to help me compute my entries, exits and margin requirements. Can you imagine I wake up at 5 am in the morning to do these mentally-taxing computations and laboriously go through the charts one by one and squint my eyes to look for setups?
Jun 20, 2012
May 31, 2012
Michael Douglas's Mind over Market
Thinking in probability
This is about not expecting to win every time. He mentioned that when we are trading with an edge, we swap positions to be the casino. We will win in the long run like how casinos work. Trend following strategies are known to have long periods of drawdowns. The key is to stay in the game, believe in yourself and your system.
In the zone
Someone says humans always look for comfort. Our behaviours change base on the outcome. We tend to take the easier path. That's how our brains are programmed to work, especially in times of duress. This concept of "in the zone" basically tells us to practise so hard that we subconsciously do what we have to do when we are in a trade, when we are experiencing the pressures from the market, to not let our conscious brain determine out next course of actions but instead leave the decision making to the subconscious part of our brain.
May 16, 2012
Scott Andrews shows that gaps can be traded!
I got to know about Scott Andrews (aka The Gap Guy) from Corey's blog.
In a presentation I gave to a group of over 140+, I talked about how I sieved out better quality trading resource. Traders who demonstrate success of their trading strategy/system with statistics always catch my attention. Scott Andrew is one such trader. Furthermore, he specializes in something close to my heart - GAPS. Yeap, I traded gaps for over a year before giving it up altogether.
During that time, I also did a fair amount of research on gaps. But I never thought of doing it Scott's way. Well, in the first place, I was taught to trade gaps in a unorthodox way. Scott fades gaps primarily. He has with him tons of statistical research on which gap patterns are risky and which gap patterns have a high probability of winning. His statistics are significant because of the large sample size. I am blown away.
Now, Scott shares some of his research at his blog - this is free :-) He also runs a paid service at MasterTheGap.com. But allow me to point you to the free Gap Trading Video section where videos related to gaps are posted up daily. A free great learning resource! You may also want to check out his presentation at the Traders' Expo 2009 that talked about 10 patterns that every trader should know. Also check out his trading results.
I am truly inspired.
In a presentation I gave to a group of over 140+, I talked about how I sieved out better quality trading resource. Traders who demonstrate success of their trading strategy/system with statistics always catch my attention. Scott Andrew is one such trader. Furthermore, he specializes in something close to my heart - GAPS. Yeap, I traded gaps for over a year before giving it up altogether.
During that time, I also did a fair amount of research on gaps. But I never thought of doing it Scott's way. Well, in the first place, I was taught to trade gaps in a unorthodox way. Scott fades gaps primarily. He has with him tons of statistical research on which gap patterns are risky and which gap patterns have a high probability of winning. His statistics are significant because of the large sample size. I am blown away.
Now, Scott shares some of his research at his blog - this is free :-) He also runs a paid service at MasterTheGap.com. But allow me to point you to the free Gap Trading Video section where videos related to gaps are posted up daily. A free great learning resource! You may also want to check out his presentation at the Traders' Expo 2009 that talked about 10 patterns that every trader should know. Also check out his trading results.
I am truly inspired.
May 15, 2012
Unconventional Trading Strategies
In our search for THE trading strategy, I guess many of us have come across dozens of more conventional trading strategies that made use of:
As I got more acquainted with expert advisors (EA), I was exposed to some trading strategies, which I termed as "unconventional" trading strategies. Basically, in unconventional trading strategies, they don't use any of the things listed above! So allow me to share some of the unconventional trading strategies that I have come across.
Correlation Trading
In correlation trading, people trade base on the relationship between the same or different trading instruments. I ever heard a course out there teaching people to buy a currency and sell another highly-correlated currency. Supposedly, this will cancel the effect of the currency price fluctuations and the profits will come from the swap. Not a bad idea...one don't have to care about which direction is the currency moving (aka non-directional trading) - provided the 2 currency pairs are REALLY moving in correlation, that is... But my this friend got a hell lot of problem...
Trading mean reversion
My encounter with the PID EA taught me the concept of mean reversion. The main idea is that there is a high chance that price will move back to the average price (more details at investopedia). Interestingly, Dr Brett has the statistics to show that "a disciplined trader can make a living simply trading this pattern".
Gambling and information theory applied to trading
A online buddy introduced this concept to me recently. I have not really dwell into this yet. Basically, some genius managed to represent gambling concepts mathematically such that the parameters can be manipulated and optimization can be done. Another genius applied this to trading. One such application is in Kelly Betting, that applies to money management.
Trading based on probability or other mathematical models
The Hedgecow EA trades base on a such a probability model. The high level concept is that it is highly unlikely to consistent lose for too many trades. So when there is a lose trade, we will increase lot size for the next trade. More details can be found here.
Disclaimer: I am not recommending any EA here. I am just illustrating some novel trading concepts that I have learnt from some of the EAs that I come across. In fact, PID caused many to get margin calls last year.
- technical indicators (ADX, MACD, Stochastics etc)
- price action
- support and resistance lines
- candlestick patterns (doji, harami, evening star etc)
- chart patterns (double top, flags, pendants, cup and handle etc)
As I got more acquainted with expert advisors (EA), I was exposed to some trading strategies, which I termed as "unconventional" trading strategies. Basically, in unconventional trading strategies, they don't use any of the things listed above! So allow me to share some of the unconventional trading strategies that I have come across.
Correlation Trading
In correlation trading, people trade base on the relationship between the same or different trading instruments. I ever heard a course out there teaching people to buy a currency and sell another highly-correlated currency. Supposedly, this will cancel the effect of the currency price fluctuations and the profits will come from the swap. Not a bad idea...one don't have to care about which direction is the currency moving (aka non-directional trading) - provided the 2 currency pairs are REALLY moving in correlation, that is... But my this friend got a hell lot of problem...
Trading mean reversion
My encounter with the PID EA taught me the concept of mean reversion. The main idea is that there is a high chance that price will move back to the average price (more details at investopedia). Interestingly, Dr Brett has the statistics to show that "a disciplined trader can make a living simply trading this pattern".
Gambling and information theory applied to trading
A online buddy introduced this concept to me recently. I have not really dwell into this yet. Basically, some genius managed to represent gambling concepts mathematically such that the parameters can be manipulated and optimization can be done. Another genius applied this to trading. One such application is in Kelly Betting, that applies to money management.
Trading based on probability or other mathematical models
The Hedgecow EA trades base on a such a probability model. The high level concept is that it is highly unlikely to consistent lose for too many trades. So when there is a lose trade, we will increase lot size for the next trade. More details can be found here.
Disclaimer: I am not recommending any EA here. I am just illustrating some novel trading concepts that I have learnt from some of the EAs that I come across. In fact, PID caused many to get margin calls last year.
What Makes Learning Trading Truly Difficult
Rogue information
Some of our time are also sucked up by articles or teachers that teach rubbish.
Too many parameters to tune
I truly believe what's underlying that makes trading difficult is simply because there are too many parameters to tune. By parameters I am talking about:
If you were to mix and match the above, we have unlimited possibilities! Not to mention there are over hundred types of indicators and candlestick/chart patterns! Now, how much time do we really need?
Difficult to discuss
When aspiring traders come together, we usually talk about what work and what don't. However, because of the short acquaintance, traders usually don't spell out the entire context. For instance, a aspiring trader sharing with his friend may say: "The MACD indicator works for forex.". But... in what timeframe, what parameters, which currency pairs etc. I think you know what I mean. And those who are listening to him may take his "recommendation" and go back to do their own testing and wasting time as a result.
When something doesn't work it is normal
In my personal opinion, this is the most challenging issue to tackle. Let me illustrate with the following scenario:
I backtested a system, and it worked for historical data. And when I traded it live, things don't turn out as well. Explanation: Well, past performance don't gaurantee future result, market condition changes, anyway, best traders only have success rate of 60% at best, etc
If I come to think of it, we can't have a clue to what's working what not!?!?
Do you have any personal experience to share?
Some of our time are also sucked up by articles or teachers that teach rubbish.
Too many parameters to tune
I truly believe what's underlying that makes trading difficult is simply because there are too many parameters to tune. By parameters I am talking about:
- type of instrument - options, stocks (local or overseas) , futures, forex, CFD, warrants etc
- timeframe to trade - 5 min, 15 min, 30 min, hourly, 4 h, daily etc
- lot size - a couple of position sizing techniques are mentioned in Dr Van Tharpe's book
- entry strategy - which timeframe to enter, what and how many indicators to use, which candlestick/chart pattern to look out for?
- exit strategy - we have the same amount of choices as for entry strategy
If you were to mix and match the above, we have unlimited possibilities! Not to mention there are over hundred types of indicators and candlestick/chart patterns! Now, how much time do we really need?
Difficult to discuss
When aspiring traders come together, we usually talk about what work and what don't. However, because of the short acquaintance, traders usually don't spell out the entire context. For instance, a aspiring trader sharing with his friend may say: "The MACD indicator works for forex.". But... in what timeframe, what parameters, which currency pairs etc. I think you know what I mean. And those who are listening to him may take his "recommendation" and go back to do their own testing and wasting time as a result.
When something doesn't work it is normal
In my personal opinion, this is the most challenging issue to tackle. Let me illustrate with the following scenario:
I backtested a system, and it worked for historical data. And when I traded it live, things don't turn out as well. Explanation: Well, past performance don't gaurantee future result, market condition changes, anyway, best traders only have success rate of 60% at best, etc
If I come to think of it, we can't have a clue to what's working what not!?!?
Do you have any personal experience to share?
May 14, 2012
How much capital is needed to begin trade full time?
Well, I am a salaried-worker currently. As in, I receive a salary every month. I guess in trading, there has to be a paradigm shift. Trading profits may or may not come in every month on time! I did a quick search of the equity curves that I had come across (and still remember!):
So what does this mean?
To live off trading, we need a good sum of starting capital
Let's use OptionPundit's equity curve as case study. Let's use his May 08 to Apr 09's results for discussion sake. That will be average of 5.5% gain monthly (which is quite good!).
Let's say I need US$5000 to maintain my family's and mine current lifestyle. I would require US$90909 in trading capital.
We also need to cater additional funds for our livelihood
We have seen from the above equity curves that no trading strategy can guarantee profits weekly, monthly nor yearly. So, in reality, we will have to set aside funds to tide over those months when the trading account suffers from losses. Even if we look at OptionPundit's equity curve, there was a month with 1.7% profit (not to mentioned -13% for Aug 08!) which will not give us the US$5000 to pay for our bills, mortgages, food etc.
So what is the GOOD SUM of capital to start with?
So our objective now as a part time trader should be accumulating that six figure amount so that we can trade full time. And...forget about starting with US$3000 capital and go full-time after demo trading for 6 months...
- InfinityYield Forex - equity curve tells us that we may not make profits every week
- BK Forex Advisors - equity curve tells us that we may not make profits every month
- Ray Barros - equity curve tells us that we may not make profits every year
So what does this mean?
To live off trading, we need a good sum of starting capital
Let's use OptionPundit's equity curve as case study. Let's use his May 08 to Apr 09's results for discussion sake. That will be average of 5.5% gain monthly (which is quite good!).
Let's say I need US$5000 to maintain my family's and mine current lifestyle. I would require US$90909 in trading capital.
We also need to cater additional funds for our livelihood
We have seen from the above equity curves that no trading strategy can guarantee profits weekly, monthly nor yearly. So, in reality, we will have to set aside funds to tide over those months when the trading account suffers from losses. Even if we look at OptionPundit's equity curve, there was a month with 1.7% profit (not to mentioned -13% for Aug 08!) which will not give us the US$5000 to pay for our bills, mortgages, food etc.
So what is the GOOD SUM of capital to start with?
- Jorge from Investing Adventures feels that he will be comfortable to start with $200,000
- USD$131,000 is the good amount
- Chris Perruna also suggests a six figure sum to start with
So our objective now as a part time trader should be accumulating that six figure amount so that we can trade full time. And...forget about starting with US$3000 capital and go full-time after demo trading for 6 months...
May 13, 2012
Trading Concepts That SHOCKED Me Recently
Seriously. I mean. Well, I have heard people mentioned some of the following concepts before. But you know, in another moment, we would hear others saying the opposite. This is how trading is like. Now, allow me to spark some new controversy:
Most, if not, all trading strategies don't work
Now we have strategies based on fundamentals, technical indicators, mere price action, or even magazine covers... Have you ever come across a trading strategy that has a success rate of 80% or more? Now, I have to qualify this. If it is a trading strategy based on daily charts, then it has got to have that success rate for more than 3 years. If it is a trading strategy based on 5-minute charts, then it has got to have that success rate for more than 3 months. Ok, the above values are fictitious, but you get what I mean. The period for judging the success rate of that strategy has to be significant enough. One hit wonders don't count.
If you subscribe to tradersinterview.com, you would hear that most of the successful traders trade with strategies that wins at most 60% of the time, and that is considered very good already!
Then came along a EXPERT expert advisor (EA) developer friend. Since he started EA development 2 years back, he had coded over 30 strategies into EAs (some from well-known forex educators too) and unfortunately, not many could even hit the 50% mark.
Most, if not, all technical indicators don't work
For the same EA developer friend, getting EAs to backtest with technical indicators is a simple task. And when he does backtesting with an EA, he is not merely looking at 6 months or 1 year or historical data. He can get his EA to run over 5 or 10 years worth of historical data in 1 night! From his very mouth: "INDICATORS DON'T WORK".
Trailing stops are not the most effective
This one is difficult to stomach. It seemed so profitable at first. You know, when you are profitable, keep on adjusting your stops as the price continues to move in your direction and capture as much profits as you can. This same EA developer friend (again!) has deduced from his EA that for the long term, trailing stops are not as effective as "soft stops" (This is proprietary, so don't ask me what is it). Mainly because it is tough to determine the right value to trail behind with as the market changes and this limits profits.
It is difficult for humans to trade emotionlessly
This is from Ray Barros. He shared that even traders at his level can also be affected by emotional disturbances. In particular, he shared an instance of how he forgot to put a stop when he had to rush to the airport on hearing that a relative is critically ill. In the end, a winning position turned into a losing position. How true, certain circumstances is really inevitable.
Position sizing is the key
If you had attended our meetup back in Feb 09, you would have already be blown away by a pro EA developer friend's presentation. Here are his presentation slides (Registering for an account at Meetup.com and joining the Automated Forex Meetup group is required to download the slides). In essence, he showed the equity graph of trading a pivot strategy without and with proper position sizing. And the equity graph with proper position sizing applied is a up, up and away 45% equity graph!
Ebb and flow
This concept is up for discussion. Only 2 traders told me about this to date. Ray Barros discussed Ebb and Flow in his blog. Essentially, the concept behind is to take a larger position when things are going your way and vice versa.
Now, any other proven concepts that you would like to share?
Most, if not, all trading strategies don't work
Now we have strategies based on fundamentals, technical indicators, mere price action, or even magazine covers... Have you ever come across a trading strategy that has a success rate of 80% or more? Now, I have to qualify this. If it is a trading strategy based on daily charts, then it has got to have that success rate for more than 3 years. If it is a trading strategy based on 5-minute charts, then it has got to have that success rate for more than 3 months. Ok, the above values are fictitious, but you get what I mean. The period for judging the success rate of that strategy has to be significant enough. One hit wonders don't count.
If you subscribe to tradersinterview.com, you would hear that most of the successful traders trade with strategies that wins at most 60% of the time, and that is considered very good already!
Then came along a EXPERT expert advisor (EA) developer friend. Since he started EA development 2 years back, he had coded over 30 strategies into EAs (some from well-known forex educators too) and unfortunately, not many could even hit the 50% mark.
Most, if not, all technical indicators don't work
For the same EA developer friend, getting EAs to backtest with technical indicators is a simple task. And when he does backtesting with an EA, he is not merely looking at 6 months or 1 year or historical data. He can get his EA to run over 5 or 10 years worth of historical data in 1 night! From his very mouth: "INDICATORS DON'T WORK".
Trailing stops are not the most effective
This one is difficult to stomach. It seemed so profitable at first. You know, when you are profitable, keep on adjusting your stops as the price continues to move in your direction and capture as much profits as you can. This same EA developer friend (again!) has deduced from his EA that for the long term, trailing stops are not as effective as "soft stops" (This is proprietary, so don't ask me what is it). Mainly because it is tough to determine the right value to trail behind with as the market changes and this limits profits.
It is difficult for humans to trade emotionlessly
This is from Ray Barros. He shared that even traders at his level can also be affected by emotional disturbances. In particular, he shared an instance of how he forgot to put a stop when he had to rush to the airport on hearing that a relative is critically ill. In the end, a winning position turned into a losing position. How true, certain circumstances is really inevitable.
Position sizing is the key
If you had attended our meetup back in Feb 09, you would have already be blown away by a pro EA developer friend's presentation. Here are his presentation slides (Registering for an account at Meetup.com and joining the Automated Forex Meetup group is required to download the slides). In essence, he showed the equity graph of trading a pivot strategy without and with proper position sizing. And the equity graph with proper position sizing applied is a up, up and away 45% equity graph!
Ebb and flow
This concept is up for discussion. Only 2 traders told me about this to date. Ray Barros discussed Ebb and Flow in his blog. Essentially, the concept behind is to take a larger position when things are going your way and vice versa.
Now, any other proven concepts that you would like to share?
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