Why working on yourself is so important

We know we cannot change the past - what's done is done.

We also know that we don't know what will happen in the future - it doesn't exist, and anything (or anyone) can do something which may influence what will occur in the future.

So, what are we left with? We can only react and respond to the moment of now.

Sticking with the process

My historical win rate is about 30%, so with the majority of my trades generating losses, I have learnt to accept losing money along the way.

To me, what is far more important than the monetary outcome of any one trade is whether I am sticking to my process and my execution:

More on knowns, unknowns and risk

The recent passing of Donald Rumsfeld caused me to reflect again on his (in)famous "known knowns, known unknowns and unknown unknowns" speech (see here), but the truth is that we always have such instances possible in the markets, at any time.

Using volatility contraction to increase your profits (part 2)

Following on from my previous post about the use of volatility-based position sizing, here is a little wrinkle you may want to consider:

Typically this type of position sizing method is calculated using a multiple of Average True Range over a specified 'look back' period, and is normally expressed as a pure monetary number. So, in the second example in the previous post, Stock B priced at $20 had a 2ATR reading of $1.

Using volatility contraction to increase your profits

Often you see people talking about a winning trade, and how far in percentage terms price moved in their favour after entry.

But on its own, this doesn't tell you anything - to me, it is a worthless metric when evaluating performance.

As a trader, I'm far more interested in the size of the profit (or loss) generated when expressed in terms of R.

Recency bias, and labelling markets as easy or hard

I've seen it said that one of the goals you should have as a trader is to try and make money when things are easy, and that you should be more defensive and protect what you have when things are hard.

That is all very laudable, but from a trend follower's perspective there is a problem with that.

Another example of a nasty price gap

If you subscribe to the Mark Douglas theory that in the markets anything can happen, at any time, then you will know and accept the potential effect that sudden or unexpected announcements can have on price of a stock or instrument.

Seemingly you can be comfortably sitting in profit on a trade, even with your trailing stop above your entry price, only for a price gap to occur against you, resulting from the reaction to such an announcement.

It is for this reason why I never take into account open profits for position sizing purposes. A profit or loss on a position is not known until the trade is closed. Open profits can disappear - seemingly overnight with little or no warning, and your trailing stop may be rendered worthless.

New testimonial

A couple of weekends back, while on the train to London, I posted this up on Twitter:

The traders I was going to meet were Craig and Aaron, and our catch up marked the end of working closely together for three years.

Following that, Craig has now kindly forwarded the following note:

Volatility issues

Below I have shown a chart of the Dow which highlights the split personality of the markets in recent times.

Up until the end of January, we can see the market clearly in a trending, stable (i.e. low volatility) state. From there, the chart is a mess, and the Volatility Factor and 2ATR measurements clearly show the explosion in volatility.

Some thoughts on varying your position size

In my own trading, I use fixed fractional position sizing - that is, while the monetary value of risk per trade varies as my equity goes up or down, I risk the same amount in percentage terms.

A while back, a good trader friend of mine experimented with varying the percentage risk per trade based on a look back period of performance. 

Both methods have been used by successful traders and Market Wizards. Both have strengths and weaknesses.

Regrets and trading

If your trading is not 100% systematic then there is always the danger or possibility of making an irrational, emotion-driven decision which can cause damage to your trading account, as well as issues with your own mindset.

It is very easy for one such decision to eliminate several months of disciplined trading in one go.

If you are looking at your trading as a long-term endeavour (and NOT as a 'get rich quick' scheme) then you don't want to suffer having any trading 'regrets'.

Some thoughts on position sizing

In my own trading, I use fixed fractional position sizing - that is, while the monetary value of risk per trade will vary as my equity goes up or down, I risk the same amount in percentage terms.

A trader friend of mine has implemented varying the percentage risk per trade based on a look back period of performance. 

Both methods have been used by successful traders and Market Wizards. Both have strengths and weaknesses.

Trading my own beliefs

I have a set of beliefs particular to myself, and my preferred style of trading. 

My beliefs about how to make money in the markets may be different to yours, or I may operate on a different timeframe to you, with different entry and exit parameters, and that is fine. That's what helps create a market of buyers and sellers.

For example, when I am trading, what is it I am buying and selling? My beliefs are that:

Controlling your losses, good trades and bad trades

Good traders continually worry about trying to minimise any potential downside. By the same token, they try to avoid placing any restrictions on the potential upside.

Take the four possible scenarios on any individual trade: 

• Big win; 
• Small win; 
• Small loss; and 
• Big loss. 

Good traders try to avoid the big losses at all costs. If you have a robust trading approach that has a positive expectancy, then the small losses can easily be recovered from.

Adding some accountability to your trading - helping a day trader to improve

A while back I was approached by a day trader who wanted some help in improving his performance. This took me back a bit - as readers of this blog may know, when I started trading back in 2003 it was as a day trader (and I initially struggled) before I got into trend following.

I've long believed that the essentials of good risk management and being able to avoid mental errors are applicable to ALL types and styles of trading. This would therefore be an interesting exercise - for both of us.

An example of how emotions can affect your risk to reward performance

A couple of years back I had a meeting with a trader who wanted to improve. He had taken a break from the markets, and came to me for help in putting together a clear plan in place with good risk management and having the right mindset at the top of his list of priorities.
I've talked in the past about how closely your attitude to risk can affect your level of emotional control, and ultimately your discipline, as a trader.

With this in mind, we talked at length about his previous trading experiences and in particular his most profitable trade, which was this set up on the a UK stock. Here is the chart:

Looking backwards to go forwards

The last few weeks have been a total washout for me. The volatility in the market (and in individual stocks) meant that I was getting hardly any setups to consider, let alone take - in either direction. As someone who follows price trends, this was a concern. The majority of stocks, as well as the general market averages have been trending downwards, so why was this?

What's there not to like?

It is not often that I post up a potential set up before it decides whether to trigger an entry or not. It is even rarer for me to trade one of the major indices. However, I was struck by the current set up on the chart of the Dow (see below). The S&P and Nasdaq are also showing similar characteristics and price structure.

Discount offer - mentoring programme

LIMITED TIME PERIOD OFFER

Make the next twelve months a year to remember and start achieving the returns you desire.

Learn how to:   

• Cut losses short and let profits run,
• Use strong risk control, and
• Develop the correct trading mindset.  

Using the magic formula of expectancy, opportunity and efficiency.

Be part of our team of like-minded traders, and use the timeless principles of successful trend followers and Market Wizards.

Make sure you sign up and reserve your place TODAY!

What you get: 

• Initial 1-2-1 training
• Access to members only twitter feed
• Access to watchlist of potential setups and other resources
• Entry levels, stop placement levels etc., given on any trades taken in real-time*
• Regular group webinars
• Ongoing email/Skype support 

Working within a small team, you can accelerate your learning and development process, and work to avoid or eliminate the major mistakes that the majority of traders make.

See some of these testimonials from traders who have been part of our group and have benefited accordingly.

For a limited period, annual membership has been reduced to £900 - 25% OFF.

Offer expires 30 November 2015.

Go here to sign up.

* All entries and exits taken are recorded and result in the performance and metrics shown on the blog.

The mathematical side of trading

When most people talk about how they approach the market, they refer solely to their style of trading.

In my own case, I follow price trends - I wait for a potential new trend to be signalled, and I will then 'hop on' for the ride.

However, there is another important factor you should consider, which is all to do with the mathematical side of trading.