Hitting the “Reset” button…

(Not so) Brief history… fascination with trading began in ’92 upon purchasing / digesting Ken Robert’s course on commodities. Paper traded while saving a small stake from ’92 to ’94. Began trading real-time in March of ’94. Lost money. Read everything I could get my hands on from ’92 – ’95, the result of which was confusion, frustration, system switching, no trading plan, no money management skills… all while being grossly undercapitalized.

Finally found some really good information in ’95… a course called Trend Dynamics written by Joseph Hart. This was distributed as a monthly newsletter. Later, members (many of which were professional traders) interacted via private forum. It was through this publication / collaboration and the mentorship it provided that awareness dawned on me… the shapes and forms of which are way beyond the scope of this (my first) post.

Knowing the limitations of my undercapitalization and how it would prevent me from being able to manage risk appropriately, I proceeded forward anyway hoping to land a nice catch to finance my startup capital. This exercise was frustrating in that I lacked the capital to hold multiple contracts (commodities), multiple positions or sometimes even a single position (no open positions, nice setup, not enough $ for margin requirements). I had to pass on many opportunities and could not put my trading into the long run.

I did make a little money in ’97 (not much). Got married in December of that year and liquidated my account. It was time to shift focus to other things. While I did quit spending hours every day studying and charting, I never fully separated myself from it. I always kept a glance of what was going on in the markets.

After going back to school, settling into a good job for a few years and saving a decent stake I began actively watching the markets again. I put together a trading plan defining entries, money management principals and markets to be traded with a focus on minimizing risk. The system leveraged reactions within defined trends. Initial profit objectives were defined at technical levels and ideally multiple contracts would be traded to allow holding on to partial positions to ride the wave if the trend strongly reasserted itself. I was still undercapitalized and new it would be a while before I could trade multiple contracts.

Thus began my second go-round with real trading, this was 2006. At the end of the year my returns were in excess of 70%. Had I remained humble perhaps I would have been well on my way to accomplishing my dream. However, I began to pull money out of my account to aid in significant purchases (bought two vehicles that year with $$ down and short term financing). I thought it would be a temporary setback to my account and I could trade my way back up.

Well this is when confidence became over confidence. I had placed 9 trades total in 2006. I diligently waited / watched / waited some more and executed for the most part only when opportunities presented themselves. I still had a few trades I kicked myself about for they were what I felt were marginal setups that cost me money. The interesting thing is I started to take more instead of less of these “marginal” trades with this new found confidence. The main contributing factor though was the time frame I had successfully leveraged in the past was not yielding enough “at bats” to satisfy my desire to trade.

So I began taking more swing trade setups using my actual account (instead of paper trading new ideas first) thinking I had a feel for the market. I lost money in 2007 (not a lot), but it got worse 2008, 2009 and 2010. I lost focus and started trading all kinds of intraday setups and losing money only to find myself far less prepared for the better opportunities when they presented themselves. I kept adding funds to my account, I had no trading plan… doing all those things “professional” traders are said not to do.

Even when my analysis was dead on, I did not make money. This bothered me the most. For example… my main interest is currencies. Having watched CD’s drastic climb throughout 07 that finally broke at the end of the year, I continued to watch as it could not muster even a significant rally for 8 months. Once it broke out to the down side, I anxiously monitored the reaction up from the Sept. low in ’08. Due to the time this setup had taken, I felt strongly we would see a test of the last major bottom of Feb. ’07. This target was derived using long term charts. On 9/24/2008 I went short the Dec. ’08 contract at .9687. I was stopped out the next day at .9712. Anyone interested can take a look at that chart, those dates and the end result. This is just one example, I have others but this one hurt enough to remember.

Anyway, having gone from being profitable with 6 trades in 2006 to non-profitable with 62 trades in 2009 (have not tallied 2010 yet), I have learned a lot about myself, the psychology of trading and waiting on the right opportunity. I ceased real time trading completely in November to step back and re-evaluate. However, I am keeping a journal of all trades as they setup including entries, stops, profit objectives and results while working on my compulsive behavior when constantly watching markets. While being more selective this has only been 3 swing trade setups. I do feel I have found some things that work in the lower time frames if I can be patient enough to wait on those setups. We will see…

I have put together a new trading plan. I will begin trading it in January. The maximum allowable drawdown to liquidation will be 40%. This journal is to track this effort, to post my trades in real time and to hold myself accountable. This is it for me… sink or swim.

 

Best of luck to you.

Does your plan include any trading breaks after x amount of drawdown or just the full 40 ?

 

Currently just the full 40%. Good thought though. I may modify it to include a few step back points. Do you have any guidelines from personal experience?

 

I'm day trading and have break points based on daily loss limits when i 'll stop for the day and weekly and overall drawdowns where i go back to sim trading.

You need something in your plan whether it's based on , maybe a 10 % drawdown or a set number of losses in a row and then how you deal with it whether stop trading or reduce position size.

I posted a trading plan template on Hooti's journal.

The fact that you took November off from trading shows great discipline. (I'll admit i still have the mentality of being afraid to miss a great trade. ) Based on your history i'd guess you've worked through a lot of the pyschological issues of trading. Now make sure you understand your set ups and that they work.

Hope that helps.

 

Without understanding the vulnerabilities of your trading system, 40% is one hell of a chunk...!!!

If you are able (willing) to share your size allocation strategy there may be some people willing to provide some guidance to get the '40% drawdown' lower. It is either that or your strategy is not sound.

Your point related to being under capitalized earlier in your endevours is a very important point and hopefully others will understand the importance of being adequately capitalized.

It seems that given fair luck you will be a successful trader...good luck.

NiN

 

Thanks for the info, I will certainly check out the trading plan template mentioned. When trading the monthly timeframe good setups present themselves infrequently enough that breaks are part of discipline (get tired of waiting on a good setup).

I will still be seeking postition trades based on the monthly timeframe. However, I will be leveraging the weekly timeframe for swing trading too. Intraday charts will be used for entries.

Still working on tweaking the plan. Your input certainly helps and is much appreciated. Thanks.

 

Hello NiN

I agree, 40% is a chunk and considered a line in the sand. It is where I must make myself walk away. My risk on individual trades never exceeds 5%. Usually I try to keep it around 2-3%. That figure can be difficult while keeping stops at technically meaningful levels with my capital though.

My issue has been patience. Over time I found myself drilling down into ever lower timeframes and taking setups that had little chance for success.

I have learned many things while playing in the lower timeframes that I believe will assist me primarily in regard to Risk / Reward. On losing trades I am usually out within a few hours. Those same trades usually take 2 - 5 days to reach profit objective when successful (swing trades) and the R/R is often 1:10 or higher.

I am now thinking I will define some drawdown points at which I will cease to trade prior to hitting 40%. That number is to keep from allowing things to get out of control.

Thanks for your input.

 

Huh, I have read and had subscribed to Trend Dynamics as well and do recall a private forum back then. A subscription that had to be digested several times before one would get the understanding. But it did do me well for day trading, but not for long term trading.

Account size has much to do with trading long term trading of commodities, so 40% based on a say $25k account is about right to see if your method will be the right one. Long term commodity trading is far different from stock trading because of the reduced number of markets. And my style of long term is even more of a waiting game as I don't trend trade for long term, but hope that after I get in, a trend will develop. Especially for long term commodities, I find entering in a defined trend, too many whipsaws for continue small losses and very few profitable trades often times leads to stagnant returns. But patience is the name of the game, some years there are many signals and just trying to stay at breakeven for the year and then one year will be incredible returns, but this is the norm for commodities, markets rise jagged and when you can find the top, often times it rips down like a rock. Then a long basing happens and cycle repeats itself.

I have tested hundreds of long term methods in my time, some I bought and others I designed. Some markets are always choppy like the meats, and others trend for years like the currencies. But almost all react the same way at extremes. And some trades you just stay the path and sometimes have to sit with positions a very long time waiting for them to start trending, I have been short Eurodollar futures for a year now, just waiting for them to go down, keep rolling over. Have to be patient.

What is so funny in my views, long term trading provides the most and easiest as far as time factor to be had, most of what I have made is far using monthly, weekly and daily bars, but so many just have to day trade. I have been so fortunate to do it the other way around first, trade long term then go to shorter timeframes, so much easier that way.

 

Interesting. I remember studying Hart's Set Theory for day trading the S&P... seemed very sound. Most the curriculum was based on the monthly time frame though. I was a subscriber for years, kept reading and studying well after liquidating my account in '97.

One thing is for certain, watching Hart go in and out of markets in real time while explaining his reasoning for doing so was nothing short of fascinating. Very successful trader that knew his strengths... pure price action analysis, trends, multiple time frames and patience. Once a market was deemed in a trading range according to his model he just stepped aside and waited for clarification of trend, even if it took a year or more.

I still use a good deal of his philosophies to define market conditions and trends of various time frames in my own analysis. Price Action purist for certain.

I like currencies, financials and occasionally energy and metals. Liquidity prevents things from getting too one-sided and these markets trend the best.

I agree, it helps to have a good grasp on the long term perspective. I like to know when I am going with the flow and when I am fading it.

 

Cause of my rules for entry for long term, and even though I follow some 40 commodities, I might have to wait four years for a market to enter my "zone" of interest. There is usually something to trade on a yearly basis, but my in and out is very limited after I get to breakeven stop. Once at breakeven, I revert back to using only weekly bars as to when to move my protective stops. I do have one target, and it depends on actually what the exchange says for margin as to what this target is, often time exchanges increase margin when prices get higher, so my target gets higher. And rest of position is based on weekly bars.

I just don't have the time to warrant swing trading, long term takes no time with my method coded, but day trading have to sit there just waiting for next signal, but I do get 20-40 signals a day. Very fast to lock in a tic.

Actually, for my day trading, I am always fading the ES, whatever the trend is, I am trading against it. I have only found one day trading method that consistently made two point targets, but I am considered a scalper cause I normally go for 1-4 tics, ocassionally I might get up to 20 tics, but very seldom. It is pretty much totally against what is taught in Trend Dynamics