Actually is the trader is VERY smart they are probably the CEO of their own company like that onondaga and they are not trading. A trader has to earn his money every day. It would be smarter to have a bunch of people earning money FOR you. Traders tend to be scrappy. If you've every met a group of floor traders they are not the pretty, corportate, ibanker-type stars. They are more like the pool hustlers in The Color of Money. They have a certain scrappiness and mental toughness. They take risks, many risks, but they are always calculated and limited risks. When traders find they are blocked or they top out salary-wise in the business world they try to write their own ticket in the trading world.
The posts on this subject are right on. If anyone hasn't read "Trading in the Zone" by Mark Douglas, I would highly recommend it. The whole premise of his book is based on these points. The third time I re-read it, it finally clicked in and has turned my trading around. I just accept that I don't know what the market it going to do. I take trades that I think have a good probability of working, but if I'm wrong, I just get out. Every loss is just one part of a big picture and by getting out immediately when I know I'm wrong, I know that any one loss can't hurt me, so I have nothing to fear. When I started thinking like this, my mind just became clearer and trading felt easy. I used to think of how much money I was losing in a bad trade, and what that translated to in real world assets. I would get sweaty palms and a sinking feeling in my stomach. I was scared of taking losses. Now I just say, "oh well, that one didn't work", and forget about it. It's true, if you can really understand and accept risk and not have anything to fear, trading is so much different.
From your previous posts, it appears to me that you're playing a completely different game than many of us are. Or maybe it's more like the difference between going into battle with a machine gun as opposed to a sniper rifle, though even that comparison may be inadequate. For me, the idea of keeping 40 positions open at once might as well be science fiction - if not total fantasy. Though I've toyed in the past with my own versions of basket trading, a really big, big basket for me would be 6 positions. In my current mode, zero positions (flat) is the norm - for hours on end. I usually trade one position at a time when I am in, and only occasionally get up to 2 or, still my beating heart!, 3 positions at once. If I make 10 full round-trips in a day, then I'm very likely overtrading. I am interested only in the day-trader's version of "money that's lying around" waiting to be picked up. I hate getting chopped, and have a fairly low tolerance for contrary moves. Heading into a correctly scoped-out set-up, I fully expect to win every time, though, what with my being human and the market being so dreadfully imperfect, I know that losses will occur, and that my only chance is to cut them off ruthlessly. Per-share pricing has been a boon to me, as it has become very economical for me to take part profits on the cessation of any direct move in my favor, and to continue to peel away lots, probability game by probability game. I have no problem with carving out a good day in tiny pieces - it seems to work, and, in the meantime, it keeps me off the streets - but I rather suspect that you would hardly even notice many of my trades if they somehow appeared in your account. Many that are "wins" to me, and give me a winning percentage that you and some others here may consider impossible, would very likely register as "scratches" to you. I hesitate even to mention my normal expectations for %Return on Equity and Winning Pctg. for fear of being called a liar or a nutball. In my observation, with few exceptions my only losing days occur as a result of failed discipline or of unusual exogenous events. The relative frequency of trades in the former group forces me to admit that I'm not even really a very good trader - yet. I hasten to add that, having actually spent some time as "the world's worst trader," I do feel a lot of pride in what I've accomplished since then. (There've been times for me, more recent than it's comfortable to contemplate, that a profitable week seemed like science fiction to me.) I believe that I could increase my position size and leverage without taking too much of a performance hit - but, out of respect for those out-of-the-envelope events, I resist doing so until I've banked more of my profits. Perhaps more important, and more in keeping with my original main point, I'm also aware of something like an inverse relationship between size of account and realistically attainable % ROE. Number of trades, number of positions, size of positions, and so on all likewise tend to reduce overall efficiency, as would stand to reason - even without reference to the liquidity problems that come into play on some otherwise very highly tradable stocks. And, by the way, though I admit my approach is somewhat taxing, I don't find it terribly "stressful" so long as I pace myself, take breaks, and, most of all, stay out of weak set-ups.
>I have so many more losing days, and like I have said here, my "average day" (something I don't believe in, but seem to be stuck talking about here) is more like 1/10th of 1 percent. Also, my largest daily losses are a whole lot more than just 15% of my biggest winners. Maybe my stats are horrible because of overnighting? Maybe you just are not taking as much risk as these others What do your drawdowns like? Returns are so difficult to quantify. There are too many games people can play. I find the simplest way to deal with returns is to think of âunitsâ for risk and reward. With my style I scale share size on every trade in order to risk the same dollar amount. Return is always driven by the amount of risk assumed. I hold overnight all the time, and have as a goal 10 âunitsâ a month. My normal draw downs are 3-5 units with a few spikes from time to time to -7. So once you can establish the averages for your style, you just do the math... If I want to make 100k a year, I have to risk $1,000 on my trades and be willing to see 5-7 k drawdowns. A million? $10,000 risk minimum as it will be harder to enter/exit, and expect 50-70k draws... Also, donât forget the connection between the risk to reward ratio and accuracy rate. Those who trade a lot and grind out the profits tend to have smaller r/r and higher accuracy rates. A position trader who is targeting 2 or 3 to 1 moves can expect an accuracy rate of 50% or less. Itâs an eternal argument... Trader 1 does 5 trades a week, risks 1k on each...40% accuracy rate, 3 to 1 target Loses 3 times (3 times 1k = -$3,000) Sees 3 to 1 on 2 trades (3 times 3 k = +$9,000) Gross +$6,000 with 5 round trips. Trader 2 does 25 trades a week, risks 1k on each...64% accurate, 1 to 1 target Loses 9 times (9 times 1k = -$9,000) Sees 1 to 1 on 16 trades (16 times 1k = +$16,000) Gross +$7,000 with 25 round trips. The active trader nets about the same as the slowpoke after commissions/slippage. Who is the better trader? The active one because of the higher accuracy rate? The slower one because he takes fewer trades, and therefore is exposed to fewer transaction risks? Itâs not a question that can be answered IMO. Itâs like debating Miles Davis vs. Benny Goodman, more a matter of personal choice and opinion.. You have to find what you like, what makes YOU profitable. Discover your edge, then press the hell out of it. Good Luck and Good Trading, -Bo Yoder
"The three of them did not communicate during the initial exercises; they were too intent on finding their own mental edges. Eventually it was like getting a second wind; a state of stability which lay beyond what at first seemed like the limits of normal performance. Getting there was a little like entering a trance state. There were certain tricks of concentration one could call into play: rote mantras which mediated the transition. It was never just a matter of wishing it and being there; it was more like climbing onto some awkward ledge. But as one did it--and did it over again--one found that the move became more fluid, and the ledge no longer seemed quite so high or inaccessible. But it was never reached simply, or without some expenditure of mental effort." --Alastair Reynolds, REVELATION SPACE (Ran across this a week or so ago, just wanted to share it. Comes from a science fiction novel, not a trading book or self-help book or something... Guess science fiction is Kymar's theme for the day...)
Actually, I would call it more a "shotgun" approach than a "machine gun"...but you are right....if I used the "sniper rifle" approach, I am sure that my percentages would be better. Actually, I do do that during the day. I need to check some runs to see my success ratios in different time frames. I will do that for sure during the week (numbers not available to me at home, and it is the weekend). BUT...to justify the "shotgun" approach. The reasoning for it is pretty simple. If a sector looks strong, I will buy virtually all the stocks in that sector. At least the ones that are trading on good volume relative to their own average volume. This accomplishes a few things. It spreads the risk to a degree, because you never know when something specific to one company will cause a big loss. (This is where the "sniper rifle" approach can kill you by the way). Conversely, if there is a positive development with one company, I am more likely to have a shot at capitalizing on that. Another reason for carrying so many positions is that usually I am on both sides of the market. Now when I say both sides, I WILL NOT be long and short stocks in the same sector....that is a recipe for disaster. For example, I would never be long KLAC and short AMAT. But I could, for example, be long equipment makers, and short networking stocks, or whatever. So if techs are overall strong after I am positioned, I know I am likely to lose on my shorts. But it is just a hedge. If techs are weak, and I am more long than short, well I lose less. (Just as I make less if they are all strong). Soooo...you may ask, "why not be lighter long, or lighter short rather than on both sides". This is a valid question. My answer would be that having SOME WINNERS gives me a psychological lift. It enables me to trade out of my losers better. It enables me to start adding to positions (occasionally averaging down, but rarely...more often adding to winners). In any event, I need to see some black on my p&l. Nothing is more disheartening than losing across the board. So as long as I have winning positions, I am still in the game so to speak. I can't stress how important the mental "game" is. For me at least, I MUST have something going right for me to keep me trading without FEAR. Does this strategy cut down on my overall returns? Obviously it does. But does it keep me mentally balanced? Yes. Will this work for other people? I don't really pretend to know. I have trained many traders. I have learned that what works for me (or anyone) may not work for the next guy. You need to find what you are comfortable with. What works for you as an individual. That is why you always hear about "trading styles". If there was one style, or one strategy that worked all the time, then I for one would be replaced by a computer (since I do not trade my own money). When I started trading, I thought the restrictions place on me were dumb. "Why?" I asked, "can't I trade more shares of one issue? "....I couldn't understand the logic then of having to look for other trades after I was all maxed out in what I liked best. Why go after second best? I was told it had to do with several issues. Some were related to risk. Some were related to the firm's haircut structure. But mostly, it was the way the boss wanted it. He was a billionaire. I was a rookie trader. I learned to just accept that that was how it was. I should have realized sooner that he was so successful for a reason. He knew what he was doing. I was just learning. I played by his rules, and low and behold....I got to actually succeed. (It did take a lot longer than I wanted....but those first years of not making money was my "tuition"). Yes, I am playing a completely different game than most of you. But it really is only about buying power. The basics can be applied to anyone. If I were trading my own money, certainly I couldn't carry so many positions. And I am sure I would have a hard time getting myself to put on "insurance trades" that I would expect, maybe even hope, to lose on. So my specific techniques now would not work if I were to trade my own small account. But, in the end, I believe I could still succeed. Because trading is really about adapting. And attitude. And discipline.
Very valid point. I'm aware of the risks involved in holding any unhedged position, and, though I think you can minimize the odds, I know that there's nothing you can do to eliminate it completely. With this problem in mind, I rarely use much margin except when set-ups in contrary directions create a hedge against general market risk. I'll use some margin when I'm trading multiple positions, but not if the set-ups are all in the same direction and the vehicles in the same or closely related sectors. I've been hit by a few CNBC specials (short on some stock when a tout comes up out of nowhere), but I've never been gobbled up by an EMLX-type event. Sooner or later it'll probably happen to me, I guess, but I try to keep things so that, at worst, it would set me back a month or so, not blow me up completely. Never hurts to remind oneself of these dangers. Should probably add some version of the safeguards to my absolutely unbreakable trading rules. I'd think in the highly leveraged basket-trading approach, even if you're somewhat hedged, there must be times when, on balance, you're very highly exposed. Weren't there some times post-9/11 when you were net long, maybe majorly net long, and sweating bullets (and I don't mean conversions) over some rumor or echo of a rumor or just the sheer fact that there could be a rumor? Or net short and worried that OBL was going to turn up toasted? Everyone who was making good money during the initial post-9/11 period, at least through November or so and probably up to the present in some way, was getting paid for taking on such background risks, I think.
Truth is, I lost money in the post 9-11 period. I was negative for the last quarter of 2001. Enough so that it made me net negative for the whole 2nd half of the year. Like I said earlier, I must be one of the worst traders in the world. I don't make money all the time like some of the people on this site claim. For this year ('02), I am averaging not much more than 4 cents a share....which actually puts me in the top 20% for my firm. So this is a very difficult trading environment for me and for the guys I work with. I guess we should be embarassed. After all, everyone else iseems to be making consistent money. Read about the guy at Worldco who has been trading a few months and had 4 losing days? And got raised to 25,000 shares? Hell, I still can't touch him after trading forever. But after all these years, I guess I can only look forward to better times returning. Meanwhile, I will adapt by trading different instruments. I am amazed to learn on this site that guys are making money 90+ percent of the time in this market. Maybe I should go back to being a ski instructor. Oh wait....I am not that young anymore. AND....it's summer! Uh oh! PS: HAPPY FATHERS DAY TO ALL WHO QUALIFY!!!!!!!