Grizzly Bear Turned Bull!

Good Luck to you as well. I am very familar with Elder as his Triple screen is the basis for my system. However, he states trade the daily chart with the direction of the weekly and enter based on 60 min time frame. When I followed his system I broke even or lost a little. It is not the best system but if you trade based on the weekly and 60 min for entry I do better. This is a "Double Screen" system of sorts. That was what i meant about not knowing that others were describing this and almost ignoring the daily chart in trading. ( focusing on weekly and 60 min instead.) Also I do not like Elder's system of takeing profit at the edge of a channel and buy at value. As you know stocks can hug the edge of a price channel line for long periods of time especially in a strong trend like gold over the last 20 years. Elder would take profits as the price reached the edge of the channel whereas focusing on the 60 min chart will show you when to take profits and expect a pull back to "value" for another reentry at the center of the rising price channel. Also, I do not like Elders method of looking at the Weekly 13 EMA as a sign of direction. I use the direction of the weekly MACD Line unless its near the 0 line and then as decribed above I go with the next lower time frame. My results have been dramatically better after these changes. Lastly with regards to your system with large drawdown it is obvious that we are both trend traders. However, I think focusing on longer time frames means you will have more time for a trade to go against you....time is money. AND, because you focus on longer time frames you need to reduce your position size because your stops will likely be based off the longer time frame and farther away than if based off a daily time frame. Think about changing to one time frame lower than what you currently trade...this made a big difference for me as well. Lastly, your system sounds like it has a low win rate but high profit per trade that wins. See my recent discussion in the following thread on page 13 (http://www.elitetrader.com/vb/showthread.php?s=&postid=3389866#post3389866). This will show you why you had a big drawdown even though your system didn't change. It may have been natural draw down as with any trend trading system or the markets may not have been trending at all. My discussion points out why with trend trading systems you generally need less risk per trade to help assure you do not have risk of ruin. That is why you lowered your risk per trade. If you run multiple MC Sims on your system you will be able to find the BEST % risk per trade for your system with an "acceptable" draw down or risk of ruin,...however you define those. I encourage you to read Van Tharps "The Definitive Guide to Position Sizing" where this is discussed.

Good Luck

 

N54,

You are doing an excellent job of articulating your trading methods and discussing trading issues. We need more of your caliber of trader here on ET.

I should give you some more background on my trading. What I have been discussing with you is my discretionary trading which is 10% - 15% of my trading and the automated trading I have not discussed which is 85% -90% of my trading. The automated trading is my main feed stock and keeps me in business and runs great. My discretionary trading is short and intermediate term trends as you guessed. My automation can trade trends, swings, volatility in weekly daily or high intraday time intervals. The discretionary trading is what gives me my problems with my set ups from time to time and what I have been reworking these last few years .

I also discretionary traded Elder’s Triple Screen System on MetaStock in the 1990s with some mixed success. The main problem was his third screen was not a chart or indicator to act as a trigger. So back then I defined mine own triggers on a 60-Minute screen to use the triple screen. What my long set ups looked like for this was the weekly trend was a buy, the daily had pulled back and the daily indicators where buy and intraday breakouts on higher volume were my signal to buy. You are right about this being crude by today’s standards. No one would ever trade with a 13 EMA today (just watch someone will prove me wrong).

What will forever stick in my brain in 2008 is a solid short term discretionary system of mine developed large over night risks. For example I would take a sell set up with a resized position based on volatility about a 500 share trade. Then the next day helicopter Ben would hint that he saving the U.S. and the stock opened 15 points up, blew through my Buy to Cover stop and I was out $7,500. These were the type of trades that extensive back testing did not hint at. So when trades like this one added up to a very large drawdown (over 16% of account) I was visibly shaken. My plan had a time out feature because of the large drawdown so I sat out that month. The next month when I started to trade again I was very apprehensive it took many months of discretionary trading to get back to normal.

This discretionary system I traded in 2008 did have a high W/L (avg 3.78) and low win rate (avg 43.61). Through most of the 2000’s this short term discretionary system performed close to tested. However, the problem in 2008 is the drawdown that produced a 16% hit was 5.8 std devs from the mean where the worst case in years of test data and trading was 2.41 std devs . Believe me position sizing or the system were not the problem in those wild times. I still trade it unchanged today and it is the best of my discretionary systems.

I agree completely about you less risk per trade comments on longer term trades. I have no problems in my longer term trades. I have been discretionary trading intermediate term positions in my 401K for the last 10 years and 20 years in my cash accounts. I built my own indicators to do this. I find trading Intermediate term time frames for trends is much different than short term trading. The stops are much wider, the positions are initially smaller, rules for pyramiding must be carefully thought out, risks must be smaller and price targets improve results. The idea is to stay in a trade through bigger price moves and not be stopped out by these normally large price movements. Doing this is the main reason I am retired today. I would be still slaving as a manager of Data Base Administration somewhere if I had not taken charge of my investments and trading.

Nice to hear you read Van Tharp also. I have read most of his works. My automated volatility model used some of his ideas to begin with on his percent volatility model.

Thank you for all you ideas. I will use them as a basis for reexamining my short term discretionary trades. I am still not as consistent a short term discretionary trader as I would like to be.

 

Thanks for the compliment. It has been rare that people engage in a discussion with me about the things I bring up. I often wonder if I am making sense on here. Either that or this entire site has me on ignore.

With regards to your discretionary system, I would be interested to know more about it if you dont mind sharing more details. I ran a MC Sim based on the numbers you ran and assumed a $100K trading acct and 1% risk per trade. The maximum draw down was just about 21% (close to the ~17% you experienced) but the system generated a MINIMUM 78% return in a year with 200 trades. I ran the sim with 10,000 times instead of 1,000 to get a more accurate picture of the system. So I think this was just a string of bad luck but well within the system observances. Just know that these MAY happen and try to design a system that has a minimal risk of draw down.

If you read "Definitive Guide to Position Sizing" Van Tharp describes a "10% risk of MAX Draw Down and 1% risk of ruin" Each person defines their own MAX draw down and risk of ruin. If you define max draw down you can stomach as 50% and risk of ruin is 100% and I define them a 10% and 20% respectively then you and I MUST risk different amounts even if we were trading the EXACT same system. The great thing about a good MC simulator is that you can see the % chance that you will have these levels of draw down and thus maximize your risk per trade yet still minimize these events from happening. Essentially, what you are doing is drawing a line in the sand between the red line and white line on theMC Sim graphs & charts above as the maximum loss you are willing to tolerate and adjusting risk per trade to meeet that objective. This is the "optimal" risk per trade,...for THAT particular trader using THAT particular system. Kut2k and intradaybill above have mentioned Optimal F and other methods but Van Tharp dispels these as they will usually cause you to risk too much to achieve the goal you have in mind,...kut2k was right on that one...

The Simulator I use is free and is not quite this capable but I am eyeing the purchase of a more capable one to help me here.

 

Intradaybill,

One thing I think you are failing to realize and what Kut2k is trying to explain with his math/formulas is that even with a win rate of 50% or less ruin is NOT CERTAIN,.....UNLESS,....you live forever.

See the thing is,... if your win rate is <50% it is true (as you have mentioned) that you could experience drawdowns of length and magnitide to wipeout a trader. However, if this risk of ruin is only a 1% chance and you adjust your risk per trade to make sure this is the case then you should have little to worry about. I do not need 100 years of good trading I only need about 20 years of good trading and i am willing to accept a 1% chance of being wiped out over a 1 year span during that 20 year trading lifetime. If I expected to live to 150 and needed income for the next 100 years then what you say about EVENTUALLY being wiped out would be more important.

Just my 0.02

 

I went back and checked my library. I do not seem to have a copy of "Definitive Guide to Position Sizing". I thought I did. I have Tharps “Secret Report on Money Management” and “Trade you way to Financial Freedom”.

You asked for the general gist of my discretionary swing trading. It will look to most at first as a Barry Rudd general set up. To others it looks like a swing trade from the “Ultimate Trading Guide.”

Just keep in mind the criteria that I actually live trade with are quite different and many conditions have been substituted. I don’t use the moving averages I will illustrate with. My set up is similar to a standard pullback swing trade. Here is what my long trade example model outline does look like:

1 Establish probable trend – For example all price bars are above the 20 EMA and the 20 EMA > 40 EMA establishes probable trend up.
2 Define Trade Trigger mechanism - Price makes 3 consecutive lower Highs where the low of the lowest price bar pierces the 20 EMA.
3 Confirm Price Pullback – Use the indicator of your choice to confirm the pullback. Could be a CCI(5), Stoch(5,3), etc….
4 Trade Execution – Trade execution takes place $0.05 above the prior days high.
5 Initial Stop and Trail Stop – Trade Stop loss placed $0.05 below the entry days low or prior days low whichever is lower. Once two price bars have occurred trail stop until the target is met.
6 Target – The target is the $0.05 above the first pullback bar.

 

have you backtested this simple filter to see if it gives you any edge by itself? it's hard to understand why it should provide any edge whatsoever.

 

Just checked this thread I started back in 12-11 for th efirst time in a few weeks.

Actually YES I have tested my system and it is very profitable and this is the basis for my current system that I trade.

As an aside it looks like my BEAR to BULL call was right on the money. Reading my first post again makes me proud that I am doing something right.

 

Not to worry, I'm proud of you as well. I've ran across alot of sharp and astute traders here at ET and you are one of them. Too bad there are guys like the cycler who just muck up the works. I appreciate the charts you have been posting and they would be better served not being seen with the likes of the cycler's thread. Spx/es is a good thread or you rate your own.

I'm short-term cautiously bullish trading vertical credit spread options on the weekly spx and similar. As soon as I learn more about the mechanics of getting into and out of a trade and setting stops in TOS, I'm about ready to try trading the /ES. Of course I have to pick a system as well.

Keep up the good work.

 

Thanks for the kind words. i know its not polite to pat oneself on the back but I couldn't resist.

May I suggest starting with stocks or ETFS as I think they ae easier and the trends are more obvious. I think futures are more difficult but maybe that's just me. I have had more success with stocks and ETFs. I'm now starting to paper trade my system with the Forex market now to test it out on those instruments.

As for the machanics of trading are you referring to where to place stops and risk management? If so then I would suggest reading Van Tharps "Supertrader" for risk management. Some people do not like him because he is not a trader himself and is a psychologist. However, I have learned a tremendous amount from him and would recommend any of his books to any serious trader. For stop placement just think about where you would be PROVEN wrong in your position. That is where you place your stop. That may be a long way away from the curent price and that would mean you either buy fewer shares or pas on the trade. Only take trades with risk reward ratio of at least 1:3.

Good Luck

N54_Fan