jasont

Hmm. Something doesn't quite sit right with me with this particular method. On a daily basis, using the average daily gain and standard deviation of those results you get a certain result. Then using a weekly average gain and standard deviation of those results you get a different result. Obviously that represents the difference in volatility between daily results to weekly results but to me it seems rather useless. If one had a system that produced an average gain of 10% per month but the standard deviation was 15% then the ratio would look something like 0.66. Simply if one had small losses and large gains the standard deviation would be bigger thus the ratio would appear worse than a system which produced small losses and small gains yet produced poorer results. Maybe I am way off on this one but I fail to see where the value of using it lies for judging a system.

Thanks FW. I was previously working on it according to average $'s made per week divided by the standard deviation of those $'s. I got some weird results so I suspect using the %'s rather than actual $'s would be the right way to go in the calculation.

I have been going through some extensive testing and noticed some talk around in regards to the Sharpe Ratio. I was hoping a few people could please enlighten me in regards to some info on it. From what I found around the net was that it is calculated by dividing the average gains by the standard deviation. Some places offered different specifications to this as to whether or not to include the starting capital in this calculation or not. I also couldn't find a solid explanation on what is deemed a positive outcome Sharpe Ratio. Getting a touch confused at this point.

Diffused it is really tough for someone to give you sound advice simply according to results posted. Then again, what others think about your results doesn't really matter because everyone is different. We all have different drawdown sizes we can personally tolerate, different average losing streaks we can tolerate, different win %'s we can tolerate. I suggest you look hard at your results and determine whether or not you can handle what your plan entails. I will give you a personal opinion but this is only according to my own risk persona. I couldn't handle trading your plan as it entails a win rate less than 20% on average over a period of 7 months. I personally have tried trading a 30% win rate in the past which was a daily strategy and having to wait weeks before a win sometimes was too tough for me to handle. That is just the way many trend following systems are built though. Just my 2 cents as I noticed no one else has commented for you.

Money Management Discoveries... This is a topic I have spent a lot of time investigating of late. I threw it in the "I'll think about it more when I am making money" category. Never did I understand the importance behind it and the more I investigate it the more it becomes apparent how much of a difference it can make. In my following explanation I don't want to use the actual figures from my testing because it isn't a toot my horn exercise. I am relaying this because I find it an interesting topic and it will help me to keep it here for future reference. Instead I will substitute numbers that produce the same % results so people can get the idea. So throughout my testing I have fulfilled my goals of what I wanted to achieve profit wise. The original results produced an end return of $1994 however reached a high of $2108. The biggest drawdown was 13.8% from it's equity high and 20.8% of the entire starting capital. So this appears to be pretty normal results in my opinion, the % drawdown seems in good shape according to both equity highs and starting capital. This is all trading one contract so per contract results could be recorded for the money management tests. Now the first approach I looked at was the traditional approach taken when trading and probably still the most popular to date. It is the fixed fractional approach. This approach keeps the exact same % risk per trade and increases as capital increases but never risks more than the defined % risk per trade. Now I didn't bother getting into Optimal F methods which in a nutshell work on trying to fund the ideal % to risk per trade to get the best returns. The reason being I didn't look at this is because it constantly changes according to ones win% and risk - reward factor. So using the fixed fractional approach, starting with one contract, to begin trading two contracts I would need to double my capital in the first place. The reason being is that I keep the same stop point for each trade so for me to maintain the same risk % per trade I would be required to double the account to trade two contracts. I won't go in much depth but just talk about the results. At the end of the testing my equity had settled at $3049 and reached an equity high of $3572. This represented a 152% increase on the original results. My contracts increased as were allowed according to my risk allocation per trade and the maximum contracts I got to trade was 4 but at the end of my testing I was trading 3. The biggest drawdown was 29.46% of the equity high's. I am not including the drawdown in comparison to starting capital with the rest of the results as the larger drawdowns will only be incurred when size has been increased. So the end result was improved but at a cost of increased drawdown size. The next approach I took was the Fixed Ratio approach. This method increases size according to making X amount of $ per contract. I set the $ to be made per contract in direct relationship to the maximum per contract drawdown. So I set each contract to be needing to make $350 before adding another contract. So as soon as $350 is made trading one contract, I then begin trading two contracts until I make a further $350 per contract which is $700 combined. This would have the total profits at 1050 before moving to 3 contracts etc. I also dropped size immediately after the total profit dropped beneath the increase level. So if the total profit went to $400 I would begin trading two contracts. If the total profit then dropped to $320 I would then go back to trading one contract. So at the end of the testing my equity has settled at $6263 and reached an equity high of $6965. This represented an increase of 314% on the original results. The maximum contracts I got to trade was 6 and at the end of the testing I remained at that level. The biggest drawdown was 25.09% of the equity highs. So switching to the Fixed Ratio Method of increasing size doubled the returns of the fixed fractional method and decreased the drawdown %. Now it is important to know that the actual drawdown in dollars was greater with the fixed ratio method however would one rather lose 25% of $6965 in a drawdown or 29% of $3572? Building upon the above method as it appeared to be much more beneficial, I wanted to find a way to reduce drawdown size but also optimize returns. The problem with the above approach and the fixed fractional approach was that they became victim of asymmetrical leverage too quickly. For those unfamiliar with asymmetrical leverage, it generally is the result of reducing size when in a drawdown. If you are trading 2 contracts and lose 10% of your account you now have to make up 11% of your account. If losing that 10% meant you had to from 2 contracts to 1, you now need to make 11% of your account back trading with one contract. Now failing to drop size at all during a drawdown can lead to an early demise as each time your account drops and you don't reduce size, you are risking more per trade. That being said, dropping size to quickly can hurt results as I found. So in the next test I opted to increase size in the same fixed ratio method however instead of reducing size at the same levels, I adjusted them. So before where I would increase size at $350 and reduce size should I drop beneath $350, I halved the reduction point. If I reached $350, I would drop from 2 contracts to one only if my profits dropped beneath $175. Why would someone do this? Well you need to understand your own drawdowns, average drawdown size, maximum tested drawdown size, average winning streak and average losing streak before you would do this. So knowing my above criteria I could see that I shouldn't really be afraid of my drawdowns. Also going back and forth between 1 and 2 contracts due to asymmetrical leverage could hinder ones growth in time value. Knowing my drawdown information I could give myself a buffer. If I increased size at $350 to 2 contracts and kept trading 2 contracts until I reached the 3 contract level or my profits reduced to $175, I would only begin reducing size when an knowledgeable drawdown was in place. So using the above method at the end of my testing my equity settled at $6638 and reached an equity high of $7328. This represented an increase of 332% on the original results. The maximum contracts I got to trade was 6 and I did not experience one drawdown that necessitated reducing my contract size. Here is the kicker, my biggest drawdown was 23.84% from the equity highs. So the adjusted method increased gains by an additional 18% end result and reduced the maximum drawdown by 2%. These are all different results and playing with the way size is increased and decreased can make more difference than entry and exit setups. I don't think I could find an entry and exit methodology that would create a 332% difference on results. Although drawdowns as a % increased from 13.8% of the equity highs in the original method to 23.84% in the fixed ratio adjusted method, I would rather take a 23.84% drawdown on highs of $7328 than a 13.8% drawdown on highs of $2108. Now the above is a result of testing and each person needs to do their own testing to understand drawdown effects on their own strategy. I thought the above results were interesting enough to post here and they did surprise me. I was in fact happy with the results I got without using any money management in my plan so was blown away when I assessed the improved results. I am still doing some more investigation into the area but am almost satisfied with my results and approach. There are a few ends to be tied up and once that is done I should be back in action.

Thanks for the great post LP. The change to focusing on a well detailed plan that leaves very little room for compromise has made a big difference. I think EMA's help me enter according to sentiment without hesitating over price action like I use to. You are right about the 4 points being pretty ambitious and I believe it will be difficult to achieve when we eventually see days with less than a 10 point range return. I have noticed something interesting that is this volatility may hang around for some time if we go by past performance. According to the VIX, during the long upward run we had very low VIX readings between roughly 2003-2007. Prior to that we had the tech bubble burst creating a period from 1998-2003 show high VIX readings. According to the pattern there we have periods of sustained volatility followed by periods of reduced volatility. My testing of periods where the VIX remained above the 20 level has brought in more than my average 4 points per day which I am pleased with. I tested May this year which was the only month this year showing readings on the VIX beneath a level of 20 and produced 3.9 points average per day. The average daily range during the period was 17ish points. A bit higher than what we may have seen during the upward run from 03-07 though I wasn't following the S&P during that time. What the important part of this is that during the May period I discovered that halving my stop actually improved results on my testing. The bonus on that is that halving my stop means I doubled my contract size, keep the same risk exposure and get double the points on average per day. Meeting my objective, not directly but in a round about way. It's not the 4 points per contract per day that I was looking for but I am happy to adjust my goal to 4 points per unit per day. Per unit being regular contract size during high volatility and double contract size during low volatility yet risking the same amount per trade during each period. I don't consider scaling out and trailing stops on the broader ideology as useless however for my plan it has been proven to be so. What my plan focuses on taking advantage of in the market really doesn't benefit from trailing stops or scaling out. In fact it doesn't benefit from profit targets at all unfortunately. I say unfortunately because I like the idea of profit targets however my testing shows it produces bigger draw downs and reduced returns. I am going to put in another post right after this outlining some of my findings in regards to money management that may be interesting to some. It definitely was interesting to myself that is certain.

Thanks for the great compliment Blowfish. FW the Money Management has been made top priority for me of late. I thought it entailed simply increasing size as capital grew. Granted that is the very basic idea, I have been investigating the area quite a bit and found that there are numerous ways one can do so. I would say it is something I took into consideration previously but no where near as much as I should have. The reason my results came up as 300% is because the increasing size is more aggressive earlier on than it is in the later stages with Fixed Ratio money management. Instead of increasing size according to overall capital size, like what happens in Fixed Fractional money management, it increases size according to profits gained. As an example for someone trading a one lot system with $10,000 to increase to two contracts using Fixed Fractional money management, they would be required to make a 100% return on their account before they could add the second contract. (Mind you this is if the trader holds the exact same points risk on each trade). This means they cannot increase to two contracts until they reach $20,000 entire capital. Then to move from 2 contracts to 3 they would be required to make 50% return on their new account size. This means they cannot increase to three contracts until they reach $30,000 total capital. It goes on like this with the amount needed to increase size decreasing as the capital grew. My main concern for this is that size increases quicker with more contracts. The first contract needed to make $10,000 to go to the next level. Then once the next level was reached, the two contracts needed to make $5,000 each to get to the next level. Then trading 3 contracts they each need to make $3,333 to get to the next level. The problem I see with this approach is that it is inconsistent with the gains of the plan, it will get bigger capital going later on but early on it takes a long time. The Fixed Ratio approach uses a per contract level to increase size. One might set it at $5,000 to be conservative. So with a $10,000 account trading one lot the trader would be required to make $5,000 in profits to move to two contracts which is 50% of the account size. Then to move to 3 contracts the trader would be required to make another $5,000 per contract (total $10,000) before moving up. So at $25,000 the trader can increase to 3 contracts. This effectively uses more aggressive increasing to grow size but then fades off with the more size that is achieved. Many might argue against aggressive increasing of size in the beginning stages and it appears so at first. However that is where aggressive decreasing of size comes into the picture and is where the risk management is important. I am not entirely finished with my money management and risk management however I see no problem with increasing size early on whilst making profits and decreasing size aggressively to protect those gains. Having the tested data, though it can differ from my results quite easily, allows me to gauge an appropriate rate of increase and decrease according to my statistics. I guess that is where the importance of continually recording statistics on ones trading comes into play to assess the plan's effectiveness. Money and Risk management only work with a positive expectancy system and can make a massive difference to ones results. If a trader has a negative expectancy on their account then chances are that it won't make an iota of a difference.

Update on the plan... For anyone interested in where I have been heading with my plan I wanted to get some things written down, a) explaining things often gives us a better understanding and b) I want to keep it as reference. If people get something out of it then that is great. I have completed my testing of my strategy, with 300+ trades tested over different time frames with different types of exits and entries I have come to a conclusion. If we do the same thing consistently, it can be pretty difficult to lose money. That right there actually blew me away. I have in fact tested with the exact same entry, exiting at different time frames, exiting at profit targets using stops and not using stops. 99% of the time I came up with a plan that made money over time. Some of the plans made very little whilst others made what I consider to be amazing results based upon per contract basis. What is strange is that just using a time stop didn't limit my losses and let my profits run, it let both run. Yet somehow every time no matter what time frame I used, the tests would be profitable. Of course bringing in a stop loss to wind in the massive losses helped immensely. Now it wasn't due to my entry either as I changed up some of my entry rules to wait for confirmation before entering instead of just fading the EMA and it made Sweet FA of a difference at the end result. It did however reduce draw downs during the high volatility period which was all I can ask considering it is my worst performing period. Being my worst performing period it still netted me an average 4.65 points per day. Above my desired goal prior to testing. So really what this has taught me in a convincing way is that how you cut it doesn't matter as much as making sure you cut it the same each and every way. I used to be a big believer in picking trades according to market action, it stressed me out, made me anxious and deep down I knew I wasn't consistent. There is nothing wrong with picking trades according to market action however doing it the same way over and over is what seems to be the difference between the guy who does make money and the guy who doesn't. I wasn't doing the same thing over and over, I was choosing when it suited me and my results showed. Anyhow, I was working on the money management side of my plan before I got stuck in an area where I needed an indication of what to expect in the way of draw downs. I needed to know a rough estimate of an expected draw down so I could calculate my position sizing accordingly. The method of money management I am looking to use is the Fixed Ratio method. There are a few reasons I am opting for this method of management over Fixed Fractional. First of all, to trade the ES according to the fixed fractional method would require a large account size utilizing my plan. My plan has fixed stop losses that are not placed according to market action. Therefore position sizing would need a lot of gains in the early stages and less in the latter stages. That doesn't make much sense to me considering the early stages would be where one needs to accrue size and then lightening the load as capital increases would allow for better risk management. The most important element will be how I protect my size during draw downs and a Fixed Ratio approach will be used for that also. It will enable me to reduce size quicker than it increased but still maintain strong growth as it is used on a per contract basis rather than full capital basis. I am almost completed with my plan specifications. It needs some further work but at this stage any further strategy testing is just clarifying what I already know. I am diving deeper into the money management and risk management side of things. At this stage my early testing of the money management has my account increasing 300% of the regular results when implemented. It is making a big difference. There is a bit more work needed but it is getting to completion.

Jon I think you may have misunderstood what I meant by assessing the heat you take. Instead of looking only at the heat on your winning trades which were limited by a 4 point stop, assess the heat on all of your trades. You may find maybe 6 out of 20 took 5 points heat before becoming 18 point winners. Using the above as an example you would have taken 6 losers of 4 points when you could have risked 1 point extra per trade to make 108 points. See what I am saying? In regards to trying to catch the bottom, it is the path to "trying to be right" rather than trying to make money. Would you rather take 0.25 heat per trade to make 20 points a month or would you rather take 5 points heat per trade to make 80 points per month. See where making money is different to being right. I have been there myself wanting to do the same thing, funny part is I realized it was making me less profitable.

Jon I think you may have misunderstood what I meant by assessing the heat you take. Instead of looking only at the heat on your winning trades which were limited by a 4 point stop, assess the heat on all of your trades. You may find maybe 6 out of 20 took 5 points heat before becoming 18 point winners. Using the above as an example you would have taken 6 losers of 4 points when you could have risked 1 point extra per trade to make 108 points. See what I am saying? In regards to trying to catch the bottom, it is the path to "trying to be right" rather than trying to make money. Would you rather take 0.25 heat per trade to make 20 points a month or would you rather take 5 points heat per trade to make 80 points per month. See where making money is different to being right. I have been there myself wanting to do the same thing, funny part is I realized it was making me less profitable.

On a slightly different approach, have you looked at how much heat you take during the day before your profit target gets hit? I.e you put your trade on at say 10am, you take 6 points heat before your profit target of 15 points is hit at 11:30am. It might help with your review of your trades to go back and see how much heat you end up taking prior to your target being hit if it gets hit at all. That is how I personally find my best working exits according to the volatility in the market. All the best with your testing mate, from your journal I can see you have the dedication and devotion needed to stay the distance. Keep up the great work.

Interesting Understanding... Many reading this may actually have found my change of approach to the markets a little abstract to the norm. It is a big change to the way I previously tackled the markets via trying to figure out price action. I was trading sentiment with price action looking for discrepancies and trying to capitalize on emotional extremes. For me that became a challenge to be right rather than a challenge to make a profitable business. My direction now has taken the form of finding something that happens on a regular basis and exploiting it. Those are the words from someone who has been generously giving their time to help me out. What started as an exercise to find out a better way to exit my previous methodology became a whole new area for me to exploit. That area has become momentum and time. That isn't what the point of this post is about but thought it helped explain what I am going to say next. Throughout my testing I have kept the exact same entry and looked at different exit methodologies. Ranging from time based exits, trailing stops, profit targets and stop losses. As much as I wanted profit targets to work for me, they just didn't provide the results I was after. This does not mean they don't work, they just don't work as well as other methods with my momentum based system. Trailing stops also didn't provide the results I was looking for as many times the regular back and forth just knocked me out of profitable positions. Time based exits performed much better than profit targets and trailing stops for my system. The initial problem I came across however was that I would get some wild swings in my capital. Implementing a stop loss seemed to cut that down dramatically. However this is where the meat of this post is going. My system takes advantage of momentum generally going in my desired direction over time. Having a stop loss too close dramatically reduced my performance and the same thing occurred when it was placed too far away. I used to think the smaller the stop loss the better. Though if someone had suggested at the time that I use a 0.25 point stop I would have said they were on drugs as I would get shaken out of just about every trade. However at the time I never considered it to be the case for a 1,2 or 3 point stop. Those seemed ok to me because they gave a little bit of room to move. So during my testing I became aware of how big a difference moving my stop point around made to my results. My win ratio would change and so would my risk:reward ratio to the point that simply placing a hard stop in one place would sometimes render the my trading barely profitable. This brought about adjusting my stop according to implied volatility in the market. I began testing my exits with the September market using X points as my stop. (Again I don't want to give exact details as I think this type of exercise is best for people to do with their own trading strategy as different entries will give different results.) It took me a while to find the ideal stop point and I noted the VIX indicator during that time mainly as between 20 and 40. I then tested the lowest VIX value for the year in May which was below 20. I found that halving the stop provided the best results for my plan, which means I will double the contracts I use when we reach that period again. Now I originally labeled a VIX reading below 20 as low volatility and a reading above 20 as high volatility. I tested out the market using my stop point from September only to find my results dramatically decreased. I went back to implementing different profit targets but it only made the results worse. I couldn't figure out what the problem was though I'm guessing most already know right now, I was treating previous volatility the same as much higher volatility. It took me a while to have the lightbulb go off so I labeled anything above a VIX reading of 40 as extreme volatility. I tested out the results again with different sized stop losses and found that adding 2 points to my X point stop in fact increased my results by 90 points. It also decreased my maximum draw down of $4,100 per contract to $1,800 per contract. That totally threw me, adding 2 points extra size to my stops up front in fact decreased my longer term risk. My win ratio increased and my total losses in points decreased. The whole point of this is that it turned a corner for me. I had been spending so much time in the past working on entries, trying to time the market best, knowing what traders were doing etc however I never realized how much of a difference my own risk and money management meant to my trading. Adjusting size according to volatility on its own turned 104 point gain over 25 days to a 194 point gain whilst decreasing draw down size.

Jon I am actually going to suggest you do some rigorous testing before you decide to lower your stops and targets. Doing so in fact has a much bigger affect on your trading results than where you place your entries. Reducing your stop size will reduce your win ratio. By having less room to move the market is going to hit your stops more often. That is in general but what I have found to be the case in all of my own testing. You reduce your stop and what was previously a 60% win ratio goes down to say 56%. Now if you reduce your win ratio, you now need to increase your risk:reward level from where it was previously just to keep the same results you previously had. Therefore lowering your profit target may in fact possibly give you a lowered risk:reward ratio. I don't know your plan so I can't say what effect lowering your stop and profit target together will have on your results. I will say that you need to know what effect it has by going through your tested results to find out. It is a cause and effect element that not many traders realize. You reduce your stop and you are going to get stopped out on trades that may in fact have been profitable with a larger stop. For example, say you currently have your stop at 4 points but you decide to lower it to 3 points because on the surface it makes sense. However if the market moves against you 3.5 points and then hits your target at 15 points, you could have made a gain. Now this is where many traders don't seem to realize the impact the above has. You have not in fact just missed out on a 15 point gain, you have in fact taken an 18.5 point loss. This is how it works, lets say you are at a net gain of 80 points for the month. You take this 3.5 point loss and it brings your net gain down to 76.5 net points for the month. Had you been trading your 4 point stop you would be sitting on 95 points net gain. The difference there is 18.5 points simply because a stop was too close. If this happens a few times in the month you miss out on a lot of points. This is something I have been vigorously testing recently and come to understand. Before you make the changes I do urge you to go through your previously tested results and see what difference the changes make, you may be surprised at what you find. A lowering of risk up front in many times with my testing has resulted in an increase of longer term risk in the format of larger drawdowns.

A New Beginning... As stated earlier in here I am revamping my entire trading plan due to things not working for me. I previously traded sentiment as well as support and resistance areas which was good to stroke the ego when right but it wasn't consistently putting money in my pocket. I am now developing my plan based upon running a business and early stages have provided good results. So I first began with my goals for what I wanted to achieve out of my trading. In the past I was doing things backwards thinking that the strategy would magically form goals for me. It is not the case. I won't put personal goals down here as well... they are personal. I will state some trading related goals however. If I am making this a business that will fund my living I needed to take into consideration all current expenses and find what is necessary to pull from the market in order to survive. Sticking with the ES (and I am possibly looking into trading the NQ as well, but not just yet) I want to achieve an average of 4 points per day, per contract. Going over the daily ranges there are times when this represents 40%+ in the ES however we are currently in periods where this represents less than 10% of the daily range on occasion. Looking at this I realized that adjustments may be needed to be made for low volatility periods to achieve this. That will need to be addressed in the plan which is being discussed later in this post however just something I picked up early on. I want to keep my trades to roughly 5 per day otherwise too much is going towards my broker so working with my 4 points I came up with the following statistics: To make 4 points over 5 trades: This averages to 0.8 points per trade gain. If I have a 25% win ratio I would need to profit 3.8 times as much as I lost per trade. If I have a 50% win ratio I would need to profit 1.4 times as much as I lost per trade. If I have a 60% win ratio I would need to profit an equal amount as I lost per trade. If I have a 75% win ratio I would have to win 0.60 times as must as I lost per trade. So doing the math on the above statistics my plan needs to maintain a 0.20 expectancy rate to maintain an average of 4 points per trade according to how many trades I would like to make per day. If this doesn't make sense to anyone please let me know and I will explain my calculations further. So that gives me a goal I need to achieve in my testing to make what I would like to survive. Depending on my plan, I now how a risk reward ratio to shoot for according to win % and vice versa. For example if my plan give a win rate of 50% I know that it must make $1.40 for every $1 risked. I have also worked on some general risk parameters before getting into any in deep testing. I won't specify exactly what my figures are as they are personal and for anyone reading this and possibly using it to help them formulate a plan it is best that individuals make their own risk assessments. However thus far I have come up with how much draw down I am willing to accept before deciding my plan is no longer valid, what % per trade I wish to risk on any individual trade (however this can change according to the above statistics, it just serves as a guide to what I can personally handle), I also just noted some points about my risk tolerance in general. Now considering that I am developing my plan right from the beginning, normally I would start with setups and tweak them until the cows come home and then have a simple exit. Being that it has come to my attention this is the opposite to what I should be doing I am doing it the other way round. I am using just a very basic fade of an EMA and working on the exits. I'm not going to give exact details of my plan as I think it is important for traders to come up with their own ways of judging the market. The reason I am using the fade of the EMA is that it is something I have been using already and provides a black and white entry. So with the basic entry it is time to nut out the most profitable way to exit. I have been informed that time stops work well and I had used them in the past but more intuitively rather than statistically. It seemed like a logical place to start considering it would tell me how long I needed to be in the market to achieve the gains i was after. So I tested 10 days of the September trading exiting at different time frame intervals. No stop in place, just seeing where the market would be at different times. This actually was a big eye opener as in the past I thought being in the market for less time was better for me risk wise. I was right however it didn't give the market any time to make gains so I was shooting myself in the foot by the old "death by a thousand cuts". What I saw though was that there was such a thing as too long and too short a time in the market. In the past I had been trying to stay out of the market and then get in the market for the move. If it didn't go my way rather quickly I would get out and often miss the move. Just some quick statistics, every time frame I tested had positive results. Every time frame had an expectancy above 0.30 except for the longest time frame. The most profitable time frame brought in 158 net points over the 10 days with 68 trades. This equates to 15.8 points per day which was well above my 4 points I was aiming for. This actually shocked me as to how something so basic could render such good results. It didn't look closely at price action and try to get the best price, it simply was in the market long enough to make solid gains. Now I am yet to solidly test what introducing a stop loss will do however I did just briefly throw one in to see what difference it made. On the most profitable time frame, putting in a first glance stop as to what would suit best brought in an extra 20 points by reducing some of the bigger losses. It also improved the expectancy level but I will look at those statistics more closely when I start applying filters to the exit strategy. That was all good and well during a highly volatile period in the market. As most know, the recent market activity is largely more volatile than it has been. So I took the lowest volatility period according to the VIX we have seen this year to see if it remains profitable. I have tested 12 days during May thus far totaling 70 trades. The most profitable time frame was the same one from the high volatility period which brought in a total of 42.25 net points. This equates to 3.52 points per day made on average. It does however have an expectancy of 0.29 and does increase when I introduce a stop loss from what appears to be a good place to put it point wise. Now I am not surprised that the results are much less than the September results. What I am pleased about is that it has a positive result and a positive expectancy. That means that I can add contracts during low volatility periods as the stop loss is likely to be placed closer. It is just a matter of identifying when the volatility changes which I believe can be done using the VIX as a guide. So this is where I am currently. I have a very basic system as a base which has been tested during a high volatility period and a low volatility period. I am going to see how profit targets affect the results though at a trial run through they only reduce the results. Once I have filtered the exit strategy a bit more and seen what different elements do to the plan, I can develop my risk management and money management further. Once that is complete I can then look at my entries to see if anything can be improved. As the plan stands, it actually achieves most of my goals. It maintains an expectancy level above 0.20, it achieves more than 4 points during high volatility periods and achieves 3.5 points average during low volatility periods. This can be adjusted to add contracts as results are relative to the daily range. The average draw down as it currently stands is less than half my maximum draw down goal. It seems like this is a very profitable base system.

Thanks for the great explanation Hlm. Your way of determining consistency in regards to how often your target is hit in comparison to stop being hit is a good method, hope you don't mind me taking that one myself. That can be different to win/loss ratio if one exits trades prior to PT or SL being hit. I also might use your volatility method as that will come in handy in regards to increasing size by assessing expected drawdown. Multiple timeframes appears to be a common element among numerous profitable traders I have spoken with. Thanks for the great help mate.

zdo I actually think this kind of experiment can help newbies with risk management strategies. There are plenty of traders who start with 50K+ because they have heard that to make money in the markets one needs a massive bank roll. Anyone who has been trading for a while knows that in the early stages the bigger the bankroll the more money you lose. I think this type of experiment shows newbies that having a consistent plan is more important than having more beginning capital. Therefore encouraging them to use a minor capital portion to learn consistency and lose small rather than a big capital without consistency to lose big. I am actually looking forward to this Chris and hope you do continue on with the experiment.

I believe about 2 weeks ago I wouldn't have understood the importance behind what you just said Hlm but must say it is spot on with my new understanding of what trading is about. I will make commentary as I go along but leave out some things that are either personal or I'd rather not make public on a forum. It should show what I am getting at in the way I am rebuilding my plan. Do you mind me asking what sort of expectancy you look for? Also in regards to consistency and volatility, what measures do you use to test your plan in volatile and non volatile periods? Myself I have been looking at using the VIX as a gauge though wanted to see what else is out there as well.

This is an interesting idea though not what I am getting at. What I am saying is that instead of starting with ways to enter and exit the market, it is best to begin with what one wants to achieve from the market. Although the market isn't at the beck and call of traders, I believe it is a good idea for one to know what they would like out of the market. Once you know what you want out of the market, then you can formulate strategies to achieve what it is you want. No point making a strategy that has 30% draw downs if one is very risk averse and can't handle it. The same goes for someone who only needs 1 point per day out of the market to live well, a trend following plan would possibly create more harm than good. Therefore some direction to particular strategies can be made simply by knowing what one wants both monetary and otherwise. In terms of the golfer, I agree that they need to be able to hit the ball consistently. However there is a big difference between whacking shots at the driving range and getting it into the cup. The basic swing is needed to be learnt first at the driving range however after that most would do better learning how to control the length of a drive, chip and putt. Similar to what you have said, it is impossible to do if they haven't learnt how to swing in the first place.

Thanks for the great post Hlm. I am actually talking about monetary as well as lifestyle goals at the beginning. As an example, let's say one would like to make $150 per contract per day as an average gain. That person now has something to shoot for and develop their expectancy around that situation. Roughly 3 points, no doubt more with commission and possible slippage, needs to be made per day. The less trades the better however if we took a 5 trades per day average, but to make life easy we will say it's 10 trades over 2 days we could work out the expectancy goal we are searching for and develop a strategy around that. I will list a few options below and the statistics needed to make it workable over a period of 10 trades: If you win on 25% of trades, one would need to win 4.2 times as much on the winners as lost on the losers. Expectancy of 0.30. If you win on 50% of trades, one would need to win 1.6 times as much on the winners as lost on the losers. Expectancy of 0.30. If you win on 60% of trades, one would need to win 1.16 times as much on the winners as lost on the losers. Expectancy of 0.296. If you win on 75% of trades, one would need to win 0.73 times as much on the winners as lost on the losers. Expectancy of 0.2975. I believe that knowing what one wants out of the market helps the trader find what entries and exits are needed to achieve what they want. The risk management should be implemented to stop over leveraging and keep drawdowns to a bearable level. I think the more work done into the Goals/Risk Management section, the more one is likely to follow the Entries/Exits to avoid over trading.

20th - 24th October Weekly Wrap Up This week was well traded up until the last two trades I took. According to my trading plan, during high volatility times as identified by the VIX reading, trend trading appears to be the better method of trading. Frustration built up as I took a trend trade that didn't work out, it was a good attempt and according to the plan. However seeing that the Tick wasn't showing signs of trending I opted to try to get my loss back by trading my non trending method which resulted in two trades that don't suit my style in this market. I have posted this week's results below: Total Trades: 7 Wins: 4 Win Total: 9 Points Av Win Amount: 2.25 Points Losses: 3 Loss Total: 7.75 Points Av Loss Amount: 2.58 Points Long Wins: 3 Long Losses: 0 Long Trades Profit/Loss: 3.75 Points Short Wins: 1 Short Losses: 3 Short Trades Profit/Loss: -2.5 Points Win %: 57% Long Win %: 100% Short Win %: 25% Points Gain/Loss: 1.25 Risk/Reward Ratio: 1 : 0.87 I found it interesting to see how one day of poor trading could wipe out an entire week of good trading. It has in fact made me realize that my plan has been developed back to front. When I began trading the ES I was fixated on understanding the way the market moved so I could increase my odds of success. I put a little effort into the exits and very little effort into the risk and money management side of things. I thought if I could get the "right" entry on most occasions, I would make money. This is where my journey to find the best analysis came from and developed my need to be right in the markets. Well that has changed from wanting to be right in the markets to wanting to make money. I had previously built my plan in the form of entry/exit/risk management. The problem with this is that even though my entries may be good, I don't know what I am after when I use them. The only metaphor I can think of to explain this is golf. It would be like the pro who spent all of his time on his swing and once he got to the course he didn't understand the way it was played. He might be able to swing well but if he doesn't know where he is going to hit the ball on each swing his results are going to come up less consistent than if he did. If the golfer spends time working on where the ball is best played from on the course, where he can get better shots at the green from, where it's best to drive the ball to, then he has some goals. He now has something to aim for. Now he can focus on bettering his swing but every time he plays that course he has a plan of where he is aiming the ball for with each and every shot. For me, that means going back to the beginning with my plan and starting Goals/Money Management/Position Sizing/Exits/Entries/Set Up. Beginning with what I want from the market first. That way I can develop my plan around what I want and then the entries and exits can be made to suit that. It is a much better approach than creating entries and exits but not knowing what I want or can expect to take out of the market. Easy to build psychological problems that way. So I will keep watching the market but will be working extensively on my plan during that time trying to achieve what I want out of the market. It will take some time but it means making the plan the right way.

This is actually something I am working on right now Jonbig04 as I realized my plan was made back to front. I have only just realized the importance of building a plan around what you want out of the market. What you want out of the market forms goals, not just monetary but lifestyle as well as anything else you can think of. Take for example someone who wanted to make $1,000 per week to live which would equate to $200 per day. On the ES that would represent making 4 points per day, on the NQ it would represent making 10 points per day and on the YM it would represent making 40 points per day. Now the same person may want to trade because it gives them more time to spend with their family (after the long hours taken to learn trading in the first place). Therefore if this person makes their $200 for the day, they might go and spend some time with the kids or whatever else their goals suggest they are trading for. If they manage to make the $1000 in the first few days of the week then they might take the week off to do something with the family. If traders are concerned about giving their profits back by the end of the week, if they choose to continue trading past their goals, it is a better idea for them to scale back their position size as opposed to stopping trading. Instead of trading 4 contracts after reaching their weekly goal of $1000, they may trade 2 contracts for the rest of the week and if they experience a drawdown of $300 they will stop trading for the week. That way they can reduce the drawdown by reducing size and set themselves a limit to stop for the week whilst they are still in front.

Trading For 23rd October Trading Goals For Today: Identify The Trend And Note Changes In Trend Where Needed Only Place Trades At Reaction Points In The Direction Of The Established Trend Place Every Trade My Plan Says To Only Trade After 9:50am 9:16 No major news out today. Currently 10 points down from yesterdays close. VAL is at 901.25 and VAH is at 929.75. VIX is hanging out between levels of 50 and 80 at this stage. Volatility is sticking with us currently though I have noticed less panic this week in comparison to the past couple of weeks. If we do begin to move lower today I wouldn't be surprised if that panic returned. Gold and Oil both saw some weakness yesterday which was also seen on all of the indexes. We are ranging at the moment so it will be interesting to see which way we do break out of this range. 9:31 Just an interesting point that we opened at the VAL area and have surged 5 points into the value area. Tick is positive but very early stages at this point. Just thought the nature of the open was interesting. 9:39 Ranging at this point though it does appear stronger to the downside. Made an attempt at higher prices but right now we have been thrown back to the VAL area. No clear trend seen on the 1 minute or 5 minute charts. Tick playing across the zero area at this stage suggesting a back and forth type morning. 9:42 Downtrend developed on 1 minute chart. Tick moved into negative to make new lows. 9:47 Only strong RP area I have currently is at 900 though 896 has a minor area of interest. Volume supporting the move down and Tick still showing selling pressure from stocks. 9:54 Fair bounce off the 882 support area that had a volume spike on the 3 second chart. 892 is a possible area of interest though I'm not confident in it. Tick made a good move into positive territory. 9:58 In short at 892 for the RP area, EMA's, SMA and volume spike. Stopped out at 895 for 3 point loss. Not to worry, it was a good attempt that was according to the plan. We have now moved into positive area on the Tick. 10:02 Hmm thats interesting, reached the 900 RP area and moved down at this point. Didn't think we'd actually see that level again. Missed the entry on that one as I was typing again. 10:08 Interesting market action we are seeing here. Sharp reversal similar to that seen at the close yesterday. Tick in the positive, Volume not supporting the rise on the 5 minute chart. Currently in an uptrend according to the 1 minute chart. EMA's are not really being respected today. Day appears to be a volatile back and forth type day. 10:13 Tick divergence appearing, volume lighter on the rise than the move down. No RP areas I can identify at this point. 10:17 EMA's and SMA coming up sideways. No idea of what this market is doing currently, whilst it is throwing curveballs like this my way its best for me to stick on the sidelines. 10:30 We came back from the 906 area and currently has shown reluctance to go beneath the 892 support area. Pretty fugly action to me at this stage. Sideways EMA's and SMA so they cannot be used for trading. Tick is not showing trending tendancies so I am switching to reversal trades unless we see some trending. 10:43 Ok well now we have some trending hehe. New highs for the day though it has been a large turnaround from the 882 area lows. Coming into the 917 resistance area on big volume and a tick extreme. We may just keep going here but otherwise I will look for some sort of reversal. 10:49 In short at 911 for the reversal off resistance on big volume and Tick extreme. May be way too late on the trade. Stop taken. Well that's what happens when I mess with the rules. A trade like that benefits from entering on a pullback on light volume. 10:57 Short again at 914.25 for this reversal which is where I would have ideally entered in the first place. Stop moved down to 916. Stop taken. Well calling it a night, not a great day of trading but I will learn from today. Daily Wrap Up Today became a good learning day. The first trade I took was according to the plan and I am happy I attempted it even though I thought it wouldn't work. The last two trades were actually not part of my current plan. I have a rule that states only trading retracements in the direction of the trend during high volatility periods and I began trying to trade my low volatility rules. The great part is that having specific rules such as those allow me to see where my plan was not the problem, it was my discipline. So being that I had a losing day, had I followed my plan to the letter it would still have been a losing day but no doubt a smaller one. A few good things I picked up on today to help me out in the future: - When we travel across the EMA's and SMA as frequently as we did today it represents a back and forth market that isn't ideal for my plan. - When I can't find solid RP areas I am best off staying out of the market. - Stay with the high volatility plan during high volatility periods. So for following my plan today I give myself a 4 out of 10. I took a loss of 7.75 points which brings me back to pretty much break even for the week. A bit disappointing but I do realize that had I followed the plan today my results would have been better so it is helping cement that message in.

Trading For 22nd October Trading Goals For Today: Identify The Trend And Note Changes In Trend Where Needed Only Place Trades At Reaction Points In The Direction Of The Established Trend Place Every Trade My Plan Says To Only Trade After 9:50am 9:09 No major news out today. Well the overnight market is down roughly 30 points on yesterdays close. We are quite a way from yesterdays VAL which is at 960.25. VIX still showing readings above 50 at this point. We are seeing a contraction in price ranges on the major indexes at this stage though today could open that up. 9:35 The open has seen a bit of movement up whilst the Tick remains in the negative. Stocks appear pretty gloomy at the open and rightly so with such a big gap down. Seem to be trading at the 934 resistance area. I do wonder if we have actually seen the worst of the selling yet or if there is still the ace up its sleeve in the form of a major fast paced crash. 9:44 No clear trend evident at this stage. Market has moved down from the 934 resistance area and we are seeing the Tick trade mainly on the negative side though it is currently having a crack above the zero. Volume is seen declining on the latest push from the lows however we did see some big volume come in on the 3 second chart at the lows. At this point it is a matter of waiting for the market to sort itself out a bit. 9:51 Showing a down trend in both 5 minute and 1 minute charts now. Possible RP area at 923.50 though 926 could be more important. TIck remains negative suggesting a trend down type day, volume picking up on the 1 minute as we move lower. 9:57 Tick Divergence noted from 917 support area. Will monitor the Tick to see how much it trades in the positive. 9:58 I wonder if I deliberately type at the most inappropriate times on occasion. As I was typing I missed the move up to 923.50. 10:01 I am now watching for the 924 RP area. Market is strongly trending down as seen in the 1 and 5 minute charts. 10:18 In short at 922 for the RP area and EMA and volume spike on the 3 second chart. Could be a touch early on this but we'll find out. Stop moved down to 923.50. Market came within 0.25 of my stop and now has moved lower, stop at 923. Stop moved down to 921. Stop moved down to 920.25. Volume spike on 3 second as we reach 915 area. Don't have any direct rules to get out early but this looks like it could be the end of the road. 10:28 Stop moved down to 918.25. Stop down to 916.75. Stop hit at 916.75. A good trade according to the plan, gain of 5.25. 10:30 Tick made a move into positive territory and still battling to stay afloat. Still trending down though a possible 1-2-3 bottom may be in the works. Trendline yet to be broken, volume picked up on the most recent low. 10:36 Downtrend broken. 10:47 Tick has continued to gain strength but volume has declined on this move up. Trending up on the 5 minute chart and the 1 minute chart. 10:56 No more opportunities presented themselves to me for the rest of the morning. Going to call it a night and see what tomorrow brings. Again I managed to get the second trade but the first one I missed as I was typing. Something to keep in mind for next time. Daily Wrap Up I feel like some consistency is coming through with my trading now. I am identifying the areas to trade according to my plan and when the opportunity comes I am taking the trade. At least when I don't get sidetracked typing or doing something else as has occurred on occasion. Having set rules for entry is making a big difference as opposed to entering on part rules part feel. Now I now exactly what constitutes an entry, I am noting my entry point in advance and there is less umming and ahhing. Today I missed my first trade which was unfortunate but I am accepting it. The second trade was entered according to plan, I moved my stop down according to the plan after some movement. I was almost stopped out as we traded back and forth and then once we went my way I trailed the stop accordingly. After that no real entry opportunities presented themselves so there were no more trades. For following my plan today I am giving myself an 8 out of 10. Everything was done well and the only improvement I can make is paying more attention during the times we reach my RP areas. I finished the day up 5.25 points which was a positive. On a side note I am actually looking into FX at the moment as from charts I see there tends to be more trending movements occur. Just a passing thought as this volatility we have seen lately seems to compliment my trading a bit due to its trending nature. It would also have the added benefit of better trading times. I'd have to do a lot of investigation into the FX market first so will suss it out.

Trading For 21st October Trading Goals For Today: Identify The Trend And Note Changes In Trend Where Needed Only Place Trades At Reaction Points In The Direction Of The Established Trend Place Every Trade My Plan Says To Only Trade After 9:50am 9:11 No major news out today. Market is currently trading 23 or so points down from yesterdays close. Looks like we may open within yesterdays value area. Whilst we are in there again I will be cautious of any trends. VIX took a decent sized move down yesterday and whilst I was trading I noticed the volatility had dropped off a touch. All three indexes took a stab at moving higher yesterday but failed to make much ground on Friday's highs. 9:34 Tick has opened in the negative, that is expected considering the gap down I guess. We have hit the 66 area support and at this stage seem to be making an attempt higher. Currently we are testing the VAH from yesterday which will be interesting to see how it unfolds. Volatility appears to have toned down a bit also. VAH is 972 area and VAL is 950 area. 9:41 Currently uptrending according to the 1 minute chart as we reach the 975 resistance area. The Tick moved into positive territory though we appear to have been push back into the negative area. Hard for me to pick up on the higher probability direction at this point. Volume tapering off on the moves higher. 9:51 975 Resistance has been respected at this point and direction is likely to be down. Tick is working predominantly in the negative suggesting strong selling from stocks. Currently in a downtrend on 1 minute chart but no trend yet seen in the 5 minute. No obvious RP areas seen at this point. That usually indicates to me a choppy style of morning. 9:58 1 minute down trend broken, no trend currently on the 5 minute chart. Volume declined on the moved down as seen on the 5 minute chart, no clear pattern of volume seen on the 1 minute chart. Tick made its highest move into positive territory thus far. Definitely a messy area we are playing in right now. 10:03 New highs for day, appear to be in 5 minute and 1 minute uptrend. RP is at 976 area. 10:07 Had resting order in at 976 but we missed it by 0.25 of a point. A bit rough but that happens every now and then. 10:10 May still come back to that 976 area so will wait and see. Tick now in the positive area though has made an extreme. 10:23 Bit of a divergence seen in the Tick currently, as we push higher prices on the ES, the stocks seem to be less enthusiastic. Tick has been moving above the zero area for the majority of the past 20 minutes though. Volume lighter on the most recent push higher. New RP area I am watching is 978-76. 10:36 In long at 976.75 for the EMA's at the RP area and the volume spikes on the 3 second chart. Stop moved up to 976.25 as we made a new 1 minute candle high. Stop moved up to 977. Trade stopped at out 977 for a 0.25 gain. 10:59 Market now in downtrend as seen on the 5 minute and 1 minute charts. Tick has switched from positive area to negative area today reminding me of what we would see during less volatile ranging periods. Calling it a night now though. I managed to get on one of two possible trades today. The first one would have been the better runner but it is something to learn from. Daily Wrap Up Today appeared to hold a different characteristic to past days we have seen. There was a bit more choppy action than I have grown accustomed to over the past couple months and less volatility it would seem. It is funny the way I can experience changed conditions for a period of time and those new conditions become the norm in my mind. I missed an early trade at 976 today and I know it was based upon the fear of being shaken out of the market. I'm not going to try to sugar coat it at all and each time it occurs I want to point it out so I know what to improve upon. I had my order sitting at 976 as we traded at 976.25 and I didn't want to get in just in case that 0.25 was the reason I got shaken out should the market go my way. I do believe it stems from my currently ingrained belief system that I assume I know what the market is going to do next. It is not a conscious belief but one that needs to be weeded out at the subconscious. From there I identified my next level I was looking for at 78-76 and jumped in a trade as we stopped at 76.50. What I was pleased with about this trade was that I had an order in again at 976 but when we were stalling at 976.50 I got in. This was an improvement because with this trade instead of presuming I knew where the market was going, I left the trade up to the edge of probabilities my plan has. I trailed the stop well but it was shaken out for a small gain. That brings up an interesting observation as when I placed trades against the intended trend, we don't show the strong movement on the 1 minute chart that we do when going in the direction of the trend. There is more back and forth as we move against the trend. The one trade I took left me up 0.25 for the day, pretty much a scratch day. For following my plan I am giving myself an 8 out of 10. I was attempting to place trades in the direction of the current trend, I trailed my one trade according to the plan, and I managed to get on one of the two trades that were according to the plan. Quick Testing Update I just quickly wanted to outline some interesting findings with my backtesting in comparison to my live simulation trading. My backtesting of high volatility days not including the live simulation trades has been 12 days. There has been 9 days of live simulation testing currently. This isn't a great sample size but something to go from initially. Here are the results below: VIX Above 20 For Backtested Days Total Days: 12 Actual Traded Days: 12 Total Trade Ideas : 47 Wins: 20 Losses: 26 Total Trades: 46 Win %: 43.5% Points Gained: 79.5 Points Lost: -51.25 Total Points: 28.25 Average Win: 3.97 Points Average Loss: 1.97 Points Risk Reward Ratio: 1:2.02 Average Points Per Day: 2.35 Average Points Per Trade: 0.61 Max Win: 10 Max Loss: -3.00 Max Daily Gain: 12.5 Points Max Daily Loss: 7.75 Points Max Daily Drawdown: 7.75 Points Average Daily Drawdown: 3 Points No. Of Losing Days: 4 Expectancy: 0.31 VIX Above 20 For Live Simulation Days Total Days: 9 Actual Days Traded: 6 Total Trade Ideas : 9 Wins: 6 Losses: 3 Total Trades: 9 Win %: 66.7% Points Gained: 26.25 Points Lost: -9.00 Total Points: 17.25 Average Win: 4.37 Points Average Loss: 3 Points Risk Reward Ratio: 1:1.46 Average Points Per Day: 2.87 Average Points Per Trade: 1.92 Max Win: 13.5 Max Loss: -3.00 Max Daily Gain: 7.5 Points Max Daily Loss: 3 Points Max Daily Drawdown: 6 Points Average Daily Drawdown: 2 Points No. Of Losing Days: 1 Expectancy : 0.64 What the above tells me is that having all the tools I use for my trading does increase my win ratio, keeps me out of more trades, improves my average gain per trade, improves my average gain per day traded and increases my expectancy. Now I'm not looking at this data to find a way to reduce losses from my trading as I may have previously done, what I am looking to it for is to increase my $ gains. After all this is a business and its core aim is to make money. Less brokerage but higher returns is a good start. The live simulation results are not as consistent as I would like due to missing some trades though. I am currently looking at ways to improve my risk and money management and once that is done will get my plan fine tuned and ready to trade live again.

This is a goal for keeping an eye on trends through my journal. It is really there to make sure I look at trends and know whether I am trading with it or against it. My criteria for uptrend is the basic Higher highs and higher lows and vice versa for the downtrend. Examples are at 9:44 "no real trend seen on the 1 minute or the 5 minute charts. Still appears to be chop.", at 10:38 "Market is in down trend according to 1 minute chart.". My two trades I took were in anticipation of an uptrend after making new highs for the day. We did make a higher low but then threw in a lower high and broke the previous low. During the making of the lower high it became evident we were down trending on the 1 minute chart. Had I continued trading instead of stopping, I would have looked for short trades in the near term.