Discretionary Trading- A Different Set Of Rules.

We often hear that we should "trade the system", "take every trade"...that the last trade has no bearing on the prior trade etc etc.

But that isn't the case with Discretionary Trading.

"Discretionary-Available at one's discretion; able to be used as one chooses; left to or regulated by one's own discretion or judgement."

"Judgement" is the keyword. I'm pretty sure most would agree that our judgement is easily influenced by how we feel. Binge eating/drinking, driving under the influence, incidence of higher suicide rates around holidays...these are all examples of where people may feel they are making rational decisions but are, in fact, making judgements based on emotion rather than fact. 

So, it then follows that trading in a discretionary manner, even around a pretty objective framework, will always be subject to your feelings/emotions. If there is any room to maneuver within the approach, it will always be in the least favorable direction unless a close eye is kept on how you feel.

Here are some of the things I keep in mind when trading with regards to the discretion involved in the method:

1) The length of time spent thinking about an idea doesn't increase the value of an idea.
2) Increasing trade frequency doesn't translate to a proportional increase in profits- the edge inherent in each trade changes dependent on your state of mind. Even if the set-ups are "the same".
3) What are your emotional triggers? Do you get irritable before you're about to throw the baby out with the bath water?? Do you fight the market when you're tired?? etc. Know your triggers and act on them.
4) Are you seeking the truth or trying to avoid being wrong?

I wish I could explain how important number 4) has been to me!

There are many more ideas, but the goal is the same; to flat-line the waves of Personal Variance which always cancel any positive edge your analysis might have (and you don't need much of the latter in the absence of the former...).

Consistent Profitability.

Years In The Making!

  
Wasn't sure when I'd be writing this post as a form of documentation for future reference but, here it is!

After my fall from grace in late 2007, and my subsequent short-lived period of success at the beginning of 2009 (captured in this blog's first posts..), it was a huge 3-year struggle to try and fit the pieces of the trading puzzle together.

Many helped along the way- both passively and actively- but a special mention must go to L & W . Aside from keeping me company and being a source of "optimistic practicality" , he helped me to realise the true importance of record keeping and reinforced the concept of "nudging probabilities" in your favour.

Now I, too, have a "security blanket" in the form of data! ;)

Finally, there's good reason to return to the live account, with personal expectations truly in check.

And a pretty solid plan.

Let's see how it goes in the coming months.                                                                                                                                                             

1000 + 1 Voices- White Noise & ADHD.

So an interesting thing happened to me the week before last. The heat sink on my computers' motherboard fan had dried, inefficient paste on it (used to carry heat from the board to the fan...or something like that. Complete computer novice here!)...this meant that the fan was going full blast and was quite a nuisance.

Add to that the fact that it's 38C here in Italy and, therefore, I also have another fan running to cool me down and you can imagine what I had to put up with.

That was also my second best week of trading... ever.

Perplexed by this outcome, I started digging around for reasons why the noise of a fan may actually have helped me in my trading endeavors. The result was shocking.

http://www.howstuffworks.com/question47.htm

The above link is the simplest definition of White Noise that I could find. Coupled with the section entitled "applications" in this link, it's not too difficult to see that the potential benefits of using this type of therapy, perhaps by using a site like simplynoise- or just by leaving a fan on- could be far reaching and extremely beneficial.

Incidentally, ADHD, or Attention Deficit Hyperactivity Disorder, is reportedly able to be controlled/reduced by the use of white noise.

The fact that white noise eliminates distraction by making the intruding noise (or voice-in-your-head) part of an indiscernible whole, makes this a brilliant tool for a trader fighting to get out of his/her own way and trade without that negative self-talk that often plagues us.

Police As Traders?

Hardware: 
These traders are mobile- so they need a car. This gets them to their trade location (more on that in a bit). Speed Radar, Pallets and a Police Radio to check out licenses/insurance etc.

Passive aggression: They don't do it to us, WE do it to ourselves.

Risk: 
Time and the officer's hourly pay.

Reward:
Speed fines and fines in general.

Methodology:
(for speed, we'll assume long trades only..)

They find their edge by waiting at that spot on a road where a drastic change in speed limit occurs. They'll hide just before the "resistance"- point of change- in anticipation of a breakout. Odds increase if they do this during rush hour as they know drivers will anticipate the change and try and get ahead due to sheer haste/impatience.

Another method they commonly use is sitting themselves at the bottom of a hill- people tend to forgo controlling their speed and let gravity get the better of them! This could be viewed as Momentum trading- a body in motion, "stays in motion until an equal and opposite force acts on it" (your will to be the captain of your situation).

Win Rate:
They can increase this simply by compounding the above methodologies- for example, waiting at the bottom of the hill, during rush hour where a speed change occurs from fast to slow. Do this all on a pre-holiday workday and....

Cost Reduction

Taking my own advice...

Working out a lot better in this kind of environment. The Trigger Chart has gone from Trending and Quiet to Trending and Volatile. This means getting chopped out of moves (via trailing stop..) which would have otherwise returned good R:R without taking out the original stop.

Autumn trading seems to allow for more volatility-based trading when using my strategy although I'd dare say that that's probably the case for most strategies. Now I'm turning to more of a destination-oriented approach.

So leaving the stop alone and gunning for a moving, but decent, target relative to risk is what I'll be doing until the market says otherwise...the space in the middle is of no importance to me.

The End Of Week Affect??

I've just (12/02/12) finished updating my Spread Sheet to include a DOW ("Day Of Week") function. It's been on my list of things to do for a while but the last couple of weeks' results encouraged me to do it sooner rather than later.


The hypothesis is that I'm giving back money/under-performing at the end of the week. This has been especially evident these past couple of weeks, but I wanted to find out if the data added any weight to this idea...


What did I find?


The above charts are all derived from my trades year-to-date. The first chart represents all trades taken between- and including- Monday (Sunday evening..) and Wednesday. The second shows what the equity curve looks like if we use trades taken on a Thursday and Friday. Finally, we have the actual equity curve.

I've marked off two arbitrary dollar values, +$X and -$X, to give context as the scaling of the charts isn't the same and, without those reference points, it'd be impossible to make any comparisons (as dollar values have been removed).

A few facts:

* 17.2% of Nov profits came from Thur and Fri, under-performing the random 40%.
*30% of Dec losses came from Thur and Fri, out-performing the random 40% (ie losing less).
* 66% of YTD's Mon-Wed profits have been lost between Thu and Fri.

So, it would appear that when doing very well I make less at the end of the week. When doing well, I lose and, when losing, I actually do better at the end of the week.

There are a load of potential psychological reasons for these tendencies, but what's most important is how I circumvent this to further sharpen the edge. As far as solutions go, an obvious one is simple to trade more at the beginning of the week than at the end. But I'm tackling one issue at a time so it'll have to get in line for now!

Will collect more data and make any adjustments in the not-too-distant future should it continue to show me this pattern.

The Week That Was: UPDATE.

180 Trades, 12 weeks and a good dose of discipline later, my fear of this happening has yet to be realized!



Instead, I'm left wondering...




Guess I'll find out soon enough. In the meantime, here are the current headline stats...

E=0.1041
WR=0.3833
RR=1.8803

Art + Science= Genius.

There is a wealth of information hidden in this short snippet of an interview with the legendary, and highly intelligent, Bruce Lee.

The part which talks about systems and crystallization is, potentially, of particular use to a trader.

I've also noticed he has the three key attributes to success through management of self as taught in the book "EGOnomics" (see the education list on this blog).

Veracity- he mentions "honesty" several times in the interview.

Humility.

Curiosity.

The Week That Was.

I have been very quietly plugging away at my trading over the last couple of years. After taking an infinite number of notes on trading (even more on myself..), recording data from various approaches to trading the markets and keeping them in separate spreadsheets, one thing has become crystal clear...

....it isn't the method. It's me holding,umm, me back. I sorely underestimated the influence that mindset has on the outcome when using anything even remotely discretionary to navigate the markets. I am fixing that now.

I have three decent datasets whereby I did/tried to adhere to one way of doing things for a large number of trades. All three have very similar equity curves that ultimately finishes with losing in the "end" (we'd have to go to infinity to find the real end, but that's another post!). Adding more weight to the above assumption.

So here I am at dataset four. I got off to a stellar start and have got to the point where, historically,I usually stop working (because we KNOW that several differing systems producing the same results in any given trader's hands is almost certainly connected to the trader's behaviour and not the systems themselves).

I'm currently in what could be 1) a draw-down in a rising equity curve or 2) The beginning of the end!

But, in the past, I've often found myself literally discontinuing data-keeping after a period of bad trading as the extent of the losses made the idea of going on with the idea seem...well...pointless.

But herein lies the difference. I've just had a terrible week, nothing worked the way it was supposed to. The week was negative but the percentage of gains lost was tiny in relation to how bad the week felt. This type of week would have usually resulted in a new spreadsheet!

So I didn't need to make this week, along with it's trades, just disappear...it's just the week that was.

...Maybe this is what "1)" feels like...

The Flintstones

They were fortunate enough to have a car that was a) easily accessible for the whole family and b) able to run without an engine!(although they got really fit doing so!!)

...we have a three-door which just cost us a small fortune in repairs as, unlike the Flintstones' car, ours needs to have all the parts in full working order.

And so too does a trading strategy.

If we have numerous "nuts and bolts" to tighten (criteria of a trading strategy) we also have many potential points of weakness. Taking that idea one step further, the more parts in the car (strategies in the trading approach) the more things we have to learn to do effectively in order to harvest a profit.

It only takes a quarter-turn of each nut in the car to end up with a trading approach that's as uneffective as this....!

http://www.youtube.com/watch?v=LmeNy768qCo

So why not simplify, reduce- take away all those extra parts to the car - and just make sure the nuts and bolts are as tight as possible??

Cut & Paste.

"I skip trades. But, somehow, I skip more winners than losers".

A statement made regularly by struggling traders.

But how is that possible? If you were randomly skipping trades then you'd end up with the same Win Rate and, therefore, the same result over time right??

After reading a recent post by MBAGearhead, I started thinking about the effect that losing streaks can have on a traders psyche.

This "Streak Calculator" says that you'll almost certainly (99.2% probability) experience 4 losers in-a-row during your trading week if you take an average of 20 trades per day with a 45% WR. As the length of the streak increases, the chances of said streak happening goes down.

So what if you habitually skip trades after x losers in-a-row? Logic would suggest that the chance of you bumping into a winner increases drastically after a string of losers as the likelihood of said streak continuing decreases.

Maybe that's why otherwise uptrending equity curves end up looking like a cut 'n' paste job- all ranges and sell-offs with a few rallies left in for good measure...?

Pane In The Glass- Pace, Patience & Panic.

Was thinking about how important it is to acknowledge that s/r is flexible. It brought me back to this analogy that I referenced some time ago. There is no bigger pain in the ass than taking a trade in the right zone, but failing to account for the pace of price into said s/r zone...(that'd be the Bull/Bear running into the stuck-in-the-mud fence!)

The following quote written to myself in this post also came to mind:

" Plan to wait for the crazy activity that usually indicates the flush at the end of a trend move."

Having the patience to wait for the moment that feels most uncomfortable (the panic flush/stops...), then getting in anyway, is usually the best move.

"Space-Time"

This concept talks about the way time can be thought of as being a "fourth dimension"- time & space are distorted for an object, relative to an observer, as the speed of that object approaches the speed of light.

After thinking about that for a while, it occurred to me that a similar situation is often played out in trading, except that Space & Time are doing the distorting.

Distorting our emotions that is.

Time- If a losing trade occurred "a long time ago" (<- all relative!) then you're less likely to hesitate on that next trade than if it happened "recently". On the flip side, if you've made good gains "recently" you're more likely to "call it a (insert arbitrary time period)" than if it was "a long time ago"....

....AKA Recency Bias.

Space- If you have been stopped going long/short at a given price level/taken profits at said level, it's quite possible you'll modify your actions around that level as it has become an emotional place for you. You may treat it as s/r based on your experience(s) there when, in fact, it could mean nothing (unless it is a point of collective decision making, in which case it's actually s/r! Where we should be looking to trade...)

Even worse is when we have positive/negative experiences within the same place on the X as well as the Y axis.

It can be hard to accept the fact that equity increase/decrease is not correlated to Space OR Time. 6R can be made over a period of time and then lost in a fraction of that time, or vice versa. 20 pips of movement can make you money whilst an 100 pip trend can lose you money (especially if you're me!). It's all random.

Only the edge is constant.

"A Bird In The Hand Is ISN'T Worth Two In The Bush"

....that is, if you have a positive trading expectancy.

Way Of The Turtle is a MUST read for anyone who is struggling (who isn't?!) with the emotional/psychological aspects of trading.

Chapter 2, "Taming The Turtle Mind", has been useful to me...particularly this piece, found on page 16:-

"People who are affected by loss aversion have an absolute preference for avoiding losses rather than acquiring gains. For most people, losing $100 is not the same as not winning $100. However, from a rational point of view the two things are the same: They both represent a net negative change of $100. Research has suggested that losses can have as much as twice the psychological power of gains"

So THAT'S were mum got the title's saying from!

We are so tied up in avoiding losses from money we already have that we are prepared to lose (and it is losing!) money that we essentially do have in a future's present if we follow through with our edge-inclusive plan.

Feeling the losses twice as intensely as the gains (or future gains which have been "lost") creates a negative edge- you'll go out of your way twice as much to avoid losing what you've got and, in doing so, avoid future gains by the same factor.

I suppose the above could be viewed as a negative mental edge with a value of -2.

Which would obviously be detrimental for any positive trading edge.

The Power Of Recognizing Market States.

...this template attempts to capture my thoughts regarding the implications of the four market states on a micro and a macro timeframe.

Knowing which state you're trading in at any given time can help you to adjust your way of managing risk to better fit the present conditions and maximize your edge.

If I'm trading a nice "trending" and "quiet" market on the macro/anchor/larger timeframe, but the micro/trigger/smaller timeframe is "volatile" (but also "trending"...) I know I need to hold through some pullbacks in order to offset any losses. I know my wins need to be sufficiently larger than my losses as opportunity for entry will be limited compared to, say, a "stable" and "volatile" anchor chart. I know if I look to move my stop to break even too soon, I risk being left behind on an otherwise profitable idea.

During the aforementioned "stable" and "volatile" period, you'll find repeated opportunities for profit but less profit potential per trade as the market will be doubling back on itself a number of times during any give period- N goes up R:R goes down.

If the trigger chart is quiet, I can eliminate risk sooner (by moving stops to b/e)without adversely affecting results, If volatile, I can choose to accept a number of b/e trades to get to my goals or, hold through the pullbacks...accepting that some will be deep enough to take out stops.

And so the list goes on and on....the important thing for me is being able to identify the environment as quickly as possible so that I can formulate a sensible plan of attack!