Andy's Day and Position Trading Journal

Hi Andy, can you tell me what happens at the rollover? Is it something that happens automatically, or do I have to do something about it?

The rollover is the time when most traders get out of one month to get back in into another month. On the rollover, the volume moves from one month into another (not necessarily the next contract month). Even if there is a specific day when the rollover starts, it normally takes a few days until most traders have moved their positions into the new month. If you want to roll from one month into the next, you either have to do it on your own or tell your broker to do it for you. When you are long, he will sell your position and buy it back in the new month. When you are short, he will do it just the opposite. If you want to do it on your own, ask your broker about the rollover. He will notify you a few days before the rollover starts.

 

Hi Andy, how do you handle “targets”. Very often the market comes close to my first target, but doesn’t reach it. The next day I get stopped out with a loss. Am I doing something wrong?

I know, it is against what you can read in most trading books, but maybe you should take your profits sooner. Whenever a trade comes close to your first target, your entry has been right. Even if the trade doesn’t reach your target your overall trading idea was the right one. Should you give back all your profits or even accept a loss? I don’t think so. Take some profits or move at least your stop to break even! Of course you will get stopped out from time to time too early, and the market will move your way right after you got kicked out at break even. But remember, you can always get back in! Always take care about your losses, try to keep them small. The winning trades will take care about themselves.

 

Hi Andy, should I be looking at fundamentals?

Andy: There are a number of reasons that cause many traders to favour technical analysis over fundamentals. For starters, fundamental traders tend to be commercial firms; that is, they are involved in the actual production or consumption of a commodity. Because of this, they have intimate, day-to-day knowledge of supply and demand. The commercial firms have information that most of us cannot afford to acquire. For example, are you able to check global soil conditions in an agricultural commodity you wish to trade? Can you check crop conditions? Commercial firms can and do check such things. They also check long-range weather forecasts, crop yield forecasts, and existing inventories.

Commercials have the best fundamental information on a market. You and I have a harder time getting pertinent fundamental information, especially in markets that are more thinly traded. Fundamental analysis generally requires a longer term trading horizon. Fundamentals tend to change more slowly than do technical conditions.

Technical traders tend to be almost everyone except the commercials, such as commodity pools, funds, and retail speculators. Speculators tend to trade in shorter time frames, and technical analysis may better serve shorter term traders. It's unlikely that fundamental analysis will tell you where beans may be next week, but technical analysis may do so.

The widespread use of technical analysis raises an interesting question - does technical analysis work because it actually helps interpret the markets, or does it work because it is widely followed, and thus creates self-fulfilling prophecies for the markets? Whichever it is, I don't care, as long as it works!

 

Andy, can you tell me something about the winning percentage? To me it seems any trading method with a winning percentage of over 80% is a real good method?

Andy: The winning percentage alone, without all the other statistical figures, doesn’t tell you anything about the trading method. Let me give you an example: Let’s assume you have a method with a winning percentage of 80%, but you have to risk 50 ticks to make 10. In the long run you can expect to lose more then you make (expectation: 10 x 0.8 – 50 x 0.2 = -2). Now, let’s assume you have a method with a winning percentage of only 40%, but you make 2 times the risk when you win. Your expectation in the long run would be 2 x 0.4 – 1 x 0.6 = +2.

Beginning traders seem to misunderstand these numbers. Most professional outright futures trader will tell you they have a winning percentage of less then 50%. But if they win, they win at least double their initial risk or even more. They will also tell you they make the “big” money with only 3% - 6% of all their trades. This means they need very good money management to stay in the water long enough to catch the big wave!

Therefore, when you look at statistics, always look at all the important parameters at the same time. Try to see the complete picture of how the parameters interact with one another.

 

Andy, nowadays all the markets become electronic. Should I take my trades based on the open outcry hours or based on the electronic hours?

Andy: It is not easy to give you a general answer. Let’s have a look at the different markets.

Currencies and metals: All liquid currencies and metals are a 24 hour markets and you should take the entries based on the electronic hours. Taking the trades only at the open outcry hours will be difficult. You will get a lot of gap openings.

Interest rates: The over night trading in the interest rates markets is not as much as it is with currencies and you can take your trades based on open outcry hours only. I personally would take my entries only during open outcry hours.

Grains and Soy complex: All side-by-side markets at the CBOT are very thin during the over night trading and I would recommend to take the trades only during open outcry. You might leave your protective stops in the markets, but I wouldn’t do so.

All the volume is moving from the open outcry to the electronic markets at the moment (except the meats) and this might change in the future. Before you trade any market, have a look at intraday charts. Look at a 30 or 15 minutes chart and see what happens during the over night trading and then make your decision when to trade, only during open outcry or electronic session.

 

Andy, what do you think about paper trading? Does it fit into professional trading somehow?

Yes, I personally think it does. Paper trading cannot replace real trading for many (mainly emotionally based) reasons, but it can be an important part of the process of finding and trading a new method. First you might have an idea about how to trade a market based on price bars, candlestick charts, indicators, or whatever you use for your trading. Next you would back test it with older data. You would do it manually or by using a back testing software. After being satisfied with your back testing, you could start to do some paper trading. Many trading ideas or methods seem to work pretty well during back testing, but cannot make any money in the “real world of trading”. Paper trading can definitely help to find the weakness of any method, but you should take the paper trading seriously. Only if you are satisfied with the paper trading results should you start trading your method with real money. Start with very low risk to see how your method performs with the reality of actual money on the line. Then, if it seems to perform well during trading it for a while with only low risk, you can increase your risk based on your money management. By the way, you should go through this paper trading process with every new method you want to trade, no matter whether it is your own method or a method you have just bought!

 

Andy, lately I've been thinking a LOT about my exits. I analyzed previous trades, did some back testing with my computer. And I thought and thought and thought. I'm in a huge conflict when it comes to scaling out or when to take profits. Any comments about it?

The problem you are facing at the moment is a tough one. It is so tough because it is definitely one of the most important factors in trading. I went through the whole process more than once, and found out “there is no best way” (as often happens in trading).

Everything from “scaling into a trade” to “scaling out of a trade” will work, but it depends on the trader himself, and on his or her way of trading.

What you can do is to go over your own past results. Find out what would have given the best results for you each time, and then use that information to make your trading plan for future trades.

Also look at different ratios for your lots when scaling out. You might find out it is better to exit all contracts at once, but you feel better when taking some profits at the first target. If this is the case, maybe a 20% first target, 80% final target could be a solution. Or even 10/90, or any other ratio. Try to find out what works best for you! But don’t try to find the perfect way – it doesn't exist.

 

Andy, in the first quarter of 2008 I gave back around 30% of my profits from 2007. Now the trading is getting better again, and I have had a few good profitable trades lately. Anything I can do prevent the “up and down” (especially the down) of my equity curve?

Andy: To be quite honest, there isn’t much you can do to prevent it. That’s the nature of trading. All you really can do is to set up the right money management. You have to make sure you can survive the draw downs to make back your money during the good times. Unfortunately, there is no way to predict if the next trade will be a winner or a loser. It is quite normal to get scared after a losing streak. But if you use good money management, even a losing streak of a few really bad trades shouldn’t kick you out of the game.

 

Andy, how much volume do I need to trade without the risk of really bad fills?

Without having the details about your trading, I will not be in a position to give you a concrete answer. It depend on the following factors:

- How many contracts are you trading? Are you trading 2 contracts or 20, or even 100, and in what market? Trading the bonds with 100 contracts shouldn’t be a problem, but you would have a hard time trading even 20 contracts in the E-mini Russell 2000.

- Are you a long- or short-term trader? When you trade short-term, even slippage of one tick can make the difference between winning or losing. If you trade long term, slippage of a few ticks should not make much of a difference.

- What markets are you trading? Trading the meats with a volume of over 1,000/day should be ok for every position trader. Trading the Eurodollars gets difficult with a volume below 5,000/day.

- Are you trading open outcry or electronic markets? When trading electronic markets, you can check the bid and ask on your trading platform, and you can see what fill you can expect. You can also see if there is enough volume at the moment you want to enter (bid/ask volume). You can also see the bid and ask of the open outcry markets, but most of the time this information is worthless because you cannot believe what you see. The only way to find out the bid and ask in any open outcry market is to call your broker.

To find out if the market fits with your trading style, talk to your broker. He should be experienced enough to give you some information about the market you want to trade. Also, test the market with a few contracts to see what fills you can expect. Then increase the number of contracts step by step as you feel comfortable.

 

Andy, what does “optimized” entry or exit mean? Is it part of spread trading only, or is it also used in outright futures trading?

Optimized entry or exit is part of seasonal patterns. For example: the spread X–Y shows a strong seasonal up move in July with an optimized entry date on July 3 and an optimized exit date on July 28. This means “usually” the spread moves up between July 3 and July 28, but this is just based on statistical data of the past and does not give any guarantee about the future. A lot of statistical analysis is involved in seasonal trading. Think of a bell curve used in statistical analysis of distribution. The optimized date point lies at the top of such a curve, and is probably not the best in any one year, but best if used overall. Such a statistical sample usually uses 15 years to calculate seasonality, but, as you can imagine, the optimized entry or exit date cannot fit each single year. That’s why we cannot look only at seasonal patterns. We also have to look at the chart, or use any other tool to optimize our own entry. Seasonality gives you an edge, especially in spread trading. Combined with good money management, you should come out a winner.