Some random thoughts: When you only get into trades once a month as I do, it's good to remember that trading skill, like many other skills is perishable, i.e. it atrophies over time. If you have a recipe that works, write it down and follow it each time you make a trade. I'm a private pilot and no matter how many times I fly, I still take out the checklist and follow it. My life and the life of my passengers may depend on it. Why should I treat my financial life less seriously? I'm also an engineer and can't help tinkering. Modifying my recipe means that I do some backtesting (think engineering computer simulations). Then I do some paper trading (think building a prototype) Only then do I modify my recipe or introduce a new recipe for a different strategy. I started my career at a Research Center. There I learned to keep a journal. Just the act of writing down your decision process, even when following and established recipe, forces you to confront your proposed decision. This means journalizing your entry, your in-trade management decisions, and your exit. I review my journal daily, because every day I'm in a trade, I must make a decision. Even if that decision is only to do nothing. It's not as complicated as it sounds to keep my journal. I have an Excel spreadsheet that shows my current positions, their performance and market parameters required for my decision-making process. All the data comes from a direct connection to my TOS desktop platform. I add some calculations to provide some additional decision support. I add a comments column where I enter my currant decision and sometimes reference a rule in my recipe. The four to eight positions I'm in every day takes only two to five minutes to review, add, delete or change the comment field and save a copy for a review whenever I exit a trade. This is a picture of my IC Journal shortly after market close last Friday.
If you gave ten people exact instructions to follow a system and if they followed the rules they would make money. Most would fail to follow instructions. They lose patience or start thinking they know better. This explains why humans create accidents in all parts of society
How do you evaluate if your method is working? Just for argument let's assume you are shooting for 60% success rate you will need over 30 trades to evaluate the system. That's 2 and 1/2 years for you. The market changes your strategy changes so...
I disagree, most persistent edges exist precisely because they are difficult to apply, either because they are contrary to normal human nature (for example, buying during panics and bad news, and selling during euphoria and good news) or because they involve large amounts of effort. If they were easy, then competition would become widespread and the edge would disappear. If you have an edge that is easy to apply, then expect it to degrade quite seriously over time, or at the very least to have periodic fallow periods where performance sucks enough, for long enough, to make you seriously question whether the edge has gone for good. That's not "easy" to handle, it requires psychological discipline in the form of staying power, and even if you have that, your clients may not. Furthermore, discipline provides a serious implementation advantage even when the edge is simple and profitable. If trader X and Y both have the same strategy, but X has the discipline to delve deeper and wider and find more opportunities to apply said edge across all available global markets, X will earn more with less risk than Y. Things like constantly scanning different markets, information sources, annual reports, broker reports, news feeds, price charts etc require discipline to do. Finally, discipline is an advantage in coping with the unexpected, things like strategy obsolescence, changing conditions, systemic risks, and so on. Even the best traders of all time have almost all experienced occasional large drawdowns or problems with degrading returns. These are all the result of not having sufficient discipline to think of these things well in advance and prepare for them extremely thoroughly. Any trader who has ever been caught by surprise is a case of insufficient discipline/preparation. For example, to my knowledge no trader predicted 9/11 or making multiple billions on that day. Yet someone who had prepared a plan for how to trade in the event of widespread terrorist attacks should have made an absolute fortune on that day and subsequent days/weeks/months. Discipline is difficult, rare, and very useful. That is why it is so profitable.
That's a great question. I did two years of backtesting to determine if the recipe had potential. Backtesting has its limitations, but it is generally good enough to identify a worthwhile candidate to prototype. I prototype traded (paper trades) credit spreads for five months. I used my recipe on index options and stock options. I put on from two to four spreads on each candidate. One or two for the current month and one or two for the following month. At expiration, I move on to the new "following month." My objective is an Iron Condor, but my rules require a minimum return at a given probability of touching the short strike. Sometimes only one side of the IC meets that requirement. On rare occasions, neither side of the IC meets the requirements and I wait or pass. While I stated that I only get into trades once a month, that may involve up to four trades as you may observe I trade options on both the RUT and NDX. I also did not include my rolling strategy which may include additional trades if I have made sufficient profit on that side and there is another attractive spread on the same side. Thus my margin requirements are not affected. Being an engineer, I frequently respond to questions about what time it is by starting with the history of clock making. :eek: I hope I answered your question. If not, give me another shot.
example .... Joe is waiting for an entry LONG - he spots a nice uptrend - he fires his "discipline gun" and watches like a hawk, wating for the correction (for Joe and his ilk this be called a dip) - which never comes - happens in all markets in all instruments in the middle wave. Missing the middle wave is akin to working at McDonald's for 20 years compared to catching the middle wave and not needing to work for another 20 years after cashing in within weeks. Oh oh oh oh terribly sorry, I forgot, Joe works on the 3-minute timeframe. Cancel the concept.
Yes D... I have a system that is insanely effective but every time it says trade I think "are you serious"?.. 20 minutes later I am itching to chase.. Slowly gathering data on it and hopefully that builds confidence in it.. I keep planning to for one day take all signals but I haven't achieved it for a single day yet it hasn't had a losing day in the last 20 trading days.. In my mind I am sure the day I take all signals is the day it has a nasty down day.. even though I use stops. go figure.
Rashid, I thought I was the only person who has that same irrational thought all the time! In fact, every time I trade a breakout I basically hold my nose and place the buy or sell stop above/below the high/low of the day, certain that it will fail for no other reason than the fact that I decided to trade it