Jay's Journal

[sdoma 10]

Identify The Trend And Note Changes In Trend Where Needed

 

What are your criteria for identifying a change in trend? I don't remember seeing them listed.

[jasont 10]

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.

[jasont 10]

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.

 

[jasont 10]

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.

 

[jasont 10]

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.

 

[jasont 10]

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.

[Hlm 10]

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.

*highlighting done by me

 

First of all, I hope that any new trader stops and re-reads your entire last post. There are so many GREAT points in there. I went ahead and highlighted two very important "light bulb" comments that any new trader really needs to pay attention to.

 

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.

The one thing that stood out to me was that you had "Goals" listed there for "going back to the beginning". From my personal experience, the only goal starting out should be a measured positive expectancy with a volatility within your range of comfort (i.e. drawdown). Maybe this is what you meant. Keeping monetary goals at the end naturally keeps you from over leveraging yourself and taking on more risk than desired. Of course there can be several different ways to accomplish the same task.

 

By the way great journal. Keep up the good work!!

[jasont 10]

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.

[Hlm 10]

Is your thought that positive expectancy should be created by a group of trades that aren't necessarily similar in structure versus based off of an individual setup/trade that has it's own positive expectancy? Maybe I am confused. It will be interesting to see how you go about this. Keep us informed.

 

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.

Just another way to look at it...

 

It does no good to know where the ball is best played unless one has the ability to put the ball where they want it. Yes, to be "great" one must excel in both. However, one is never going to win any competitions unless they can hit the ball consistently. With experience a golfer will learn how to strategically position the ball and remove a few strokes by avoiding trouble in the first place.

[jasont 10]

Is your thought that positive expectancy should be created by a group of trades that aren't necessarily similar in structure versus based off of an individual setup/trade that has it's own positive expectancy? Maybe I am confused. It will be interesting to see how you go about this. Keep us informed.

 

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.

[Hlm 10]

I think I understand what you are trying to say now. My mindset has always been that once you have a positive expectancy created from ratio derived from consistency and volatility then making more money is just a matter of adding more contracts...in a highly liquid market that is. Like you said, it's not about timing the market, always being right, and catching the whole move. For me it's all about that one number. The number that will make or break you in the law of large numbers. However, neither way is necessarily more right than the other. Like I said before, it will be interesting to see how you go about this and how the potential/estimated benefits are realized.

[jasont 10]

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.

[Hlm 10]

Do you mind me asking what sort of expectancy you look for?

The key here is that it has to be positive. Just like any other business plan, the first rule is that you have to expect to make money over the long term.

 

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.

First of all, my comment on consistency and volatility was for the values that affect your expectancy. Consistency would be how often your trade hits target 1 2 etc before hitting your stop. How often do you walk away with a positive trade? The volatility is not only your risk reward for the individual trade, but also the draw down created when the risk reward takes into account your consistency. In other words it's the deviation from your mean expected over time. I myself am a very conservative day trader. I mainly play trend continuations with a micro confirmation entries. Though sometimes I may miss some large moves, this gives me the ability to enter with the risk of the smaller time frame while enjoying the potential of the larger.

 

what measures do you use to test your plan in volatile and non volatile periods?

Since I trade on the concept of multiple time frames logically stacked in fractal formation (see this reply for a quick generalization) I really don't use anything special to figure out the type of periods. The periods are naturally defined by what size of swing highs and lows we are currently up against and dealing with. However, if one is looking for a simple way without having multiple charts and time frames up, there is the technique of putting a dozen or so sma (fib numbers). Yes, they are lagged and averaged but that doesn't stop them from giving you a basic idea as two the harmony and gaps of the time frames.

[jasont 10]

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.

[jasont 10]

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.

[jasont 10]

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.

[firewalker 10]

 

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.

 

Great work jason :thumbs up:

[jasont 10]

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.

[BlowFish 10]

Great job. You really seem to have made quite a journey in a remarkably short time!

[firewalker 10]

At this stage my early testing of the money management has my account increasing 300% of the regular results when implemented.

 

:shocked:

 

I am surprised how much difference MM can make... would you say it is something you never really taken into much consideration before? Because 300%... well that just seems unreal...

[jasont 10]

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.

[LiggerPig 10]

hi Jay, great to see you're still working to improve your trading.

Sorry, I haven't had much time in recent months to keep up with your blog. I like the transition away from short-term turns in sentiment to using ma's. :thumbs up:

 

Recently, I've been trading online with a newbie to ES and we've been building her trading plan around the use of 9ema and 20ema, 50ma and 200ma on the 15 min ES chart. It has helped me to avoid some of my more high risk positions or at least I highlight them as higher risk before explaining them to her.

 

Your target of 4 ES points per day is pretty ambitious over the longer term. Right now the high volatility makes it embarrassingly easy but when the market eventually settles down it will become harder work. I had to work my way from 3 points and it was a big step to consistently average 4.

 

Excellent to see you use the VIX to determine stop size. I don't know of any simple alternative to allowing VIX to tell me to trade small with a wider stop.

 

Scaling out and trailing stops have been problematic in the recent environment. I've given up using them many times. Often, it has been more rewarding to wait for the market to offer re-entries. I'm caught between using them or not and analysis of my trades shows I need to adjust how I exit rather than give up on them. I now try to judge it trade by trade according to market sentiment.

 

Thank you for posting your findings re money management. I find it food for thought since my idea of money management was always to assess reward to risk of every trade prior to entry and to never get into any margin difficulties.

 

Keep up the good work :applaud:

[jasont 10]

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.

[jasont 10]

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.

[jasont 10]

Cutting Losses Short and Letting Profits Run...

 

Every period I have tested up until November has been profitable thus far. Of course there are losing days and the odd losing week also. However as a whole the winning periods were much greater than the losing periods.

 

Come November and I am faced with a month currently standing at a loss roughly just under half that of my best winning month. In the grand scheme of things it wouldn't be such a problem however the early stages of this plan could see sizable drawdowns should the current market continue.

 

At first I jumped straight into the new strategy camp thinking that my problems would be solved by getting a new plan for this period in the market. That is probably the most obvious approach to take. It took me a while but after some time I stood back and realized that if that was the approach I would take, I would be chasing the almighty holy grail every time the market changed it's tune.

 

I personally believe the market has similar tendencies to repeat over time and my plan which has found an exploitation in that proves to me over time it is so. Therefore a different approach was needed and cutting losses short and letting profits run came to mind. I had tested out the theory of stopping trading during the day should x amount of losses be taken and it provided poorer results for me. I had actually left my testing at that as I thought it best to trade a full day out.

 

However I didn't test out losing days in a week. I personally believe the market tends to change persona from week to week. Sometimes it decides to play quiet trend down for most of the week, other times it plays volatile sideways for the week. I noticed in my own statistics that if I had a few bad days early in the week, the rest of the week was equally as bad.

 

So I did some testing and found that cutting my trading for the week should I encounter two losing days that put me into negative territory for the week improved my results. It lowered my total drawdowns by 2%, increased my highest profit and in fact smooths out some of the volatility in my account. I had previously only applied cutting losses short and letting profits run in my exit strategy yet taking it to the risk management level made a big improvement. It leaves my losses during November at a quarter of what they were and improves results in other months.

 

I could have spent my time going through the vicious cycle of trading a strategy until it hit a losing period and then creating a new strategy to deal with the new market pretty much forever. Chasing that Holy Grail every time the market changes it's tune. I have already created different risk management solutions for different volatility markets that works. Some days, weeks and occasionally months the market just doesn't suit a particular plan. I realized the important part was to cut the losers during this period and let the profits run during the winning periods.