Is the current Trade Planning and Trade Management a farce?

Discussion in 'Risk Management' started by Rabbitone, Mar 13, 2009.

  1. As many of you know from my prior posts in Trade Planning and Trade Management it a subject that I have thought and wrote about almost as much as automated trading. What I discovered through my personal investigation of Trade Planning and Trade Management by reading books and magazines over the last 20 years is that I could not apply it to my own trading successfully. Many of the rules stated by authors cause conflicts both in my planning and my trading and are inadequate as trading controls. These topics are hotly debated by traders, like me, because we are not satisfied with these subjects in print.

    I am going to present many items I have developed over 20 plus years of trading that will often go against or reapply what popular authors present in their books and articles today I have no intent to try to attack your favorite author directly. My objective is to present a different view of how to plan and manage trades that is not in print.

    My personal motivation for doing this because is because I am so dam angry about the crap in print and how much it cost me (2 trading accounts wiped out) in the first 8 years of my trading. But now that’s changed. The thing I’m thrilled about is my rewrite of trade planning and trade management worked so well in my third account - that I am retired. That is what I plan to share with you. A different view of trade planning and trade management.

    But first some background on me…

    I am now an automated swing and position trader in stocks full time day in and day out for many years. I have also traded everything from the Russell futures to Soy beans and QQQQ’s to SPYs with options thrown in.

    The logical question from traders is where did all of this knowledge come from about Trade planning and Trade Management or did I just dream it up. The answer comes from the last 25 of work before I retired to trade full time. I was a database manager in IT (Finance, Banking and Manufacturing) with a brief hiatus as a computer store owner in the early 1980s. Before that I was a professional computer programmer (Started in Fortran in 1968 on an IBM 360/30).

    I took extensive course work over my last 20 years in IT to increase my skill level as a manager, database administrator and small business owner. The courses that influenced me the most that I used in own trading were the business planning, project management and IBMs Database Transaction management.

    And what will be posted….

    From this point on I will post topics on Trade Planning and Trade Management. Part of the text I post will be condensed from other threads, but need more discussing.

    Please feel free to: write, cajole, bash, slam, criticize, condemn, censure, find fault and attack the messages I write. That is, attack the message but not the messenger. That is what an open forum is for.
  2. Trade planning and Trade Management are connected at the hip. Yet there is little I could find in print about how to affectively connect these two areas together (it killed 2 trading accounts for me). So I dug up my courses on business models and IBM transaction management and put them together. It took quite awhile but about 10 years ago the light in my head went on when I re-read the courses I had taken. From these courses I rebuilt my trading. Here are a few of the many principles I saw that remade my thinking:
    1. Define a specific business (trading) model that is tailored to your style of business (business modeling course). – This was an eye opener. Many trading authors don’t do this. They assume a futures day trader using 5 minute charts has a similar business model as swing trader using daily charts. Because of this my current business plan looks nothing like what is in current trading books or web sites.
    2. Transactions (trades) from your database system have a distinct performance characteristic that must be accounted for in your business model (from IBM database transaction modeling) - This was another eye opener. Trading authors lump performance in one big set of trade management rules for every one. Some authors assume a futures day trader using 5 minute charts has trades with the same performance characteristics as a swing trader using daily charts. In addition, they tell them to use the same trade management methods.
    3. The rate that transactions (trades) are performed defines the amount of (account) resource that will be taken for the period of performance measurement (trade review). – Another eye opener. This means if I used the wrong position size for day trading I will chew through my account in days and never make it to a performance review. On the flip side I have to build the performance characteristics of my trading transactions in my plan so I can measure them at a specific point in time.

    Let us examine a few simple business models:

    Day traders run their trading like a McDonald’s. The turn over is on average higher in hamburgers (trades). They need to have great cash management for each hamburger (trade) in order to make money. The hamburger margins (trade profits) are smaller per trade (transaction). Position size is a small percent because there are more trades in a performance review.

    Swing traders run their business like a Best Buy. The turn over is lower in large screen Tv’s (longer trades). They need to manage TV inventory (trades) so one big brand doesn’t chew up assets (account) and force unplanned sales (draw downs). Their trades need larger position sizes because there are fewer trades in a performance review.

    What do you think? Can you apply these rules to your trading business?
  3. nkhoi

    nkhoi Moderator

    nice, by 'the period of performance measurement ' you mean time staying in the trade?
  4. Rabbitone,

    May I say that this is a refreshing start to a thread.
    I respect your history, play it forward.
  5. Well stated.
  6. The period of performance measurement means how many trades (could be a range or specific number) are in your trade review. Here is an example:

    A Simple business model for an automated Swing Trading system.
    1. Performance reviews are conducted after every 6 trades.
    2. Trade Performance (Position size) will be set so that the largest drawdown is 2.5% (allow 1 std dev in total losses) of account for these 6 trades. If 2.5% is hit the system will be shut down (manually) for fine tuning or discontinued.
    3. A positive expectancy will be met for these 6 trades or the system will be shut down for fine tuning or discontinued.
    4. The outlier loss risk control rule is in effect to cut losses manually (from things like earnings announcements). This will stop trading of the system.
    5. Market conditions must remain the same.

    Simple Performance (trade review)
    1. Was the position size producing producing manageable drawdowns or does it need to be rebuilt?
    2. Did the system produce the expectancy in the same range as the last review and testing?
    3. Was the outlier loss hit for fine tuning or discontinued.
    4. Are the markets going the same way and have the same volatility.
    5. Are the transaction stats inline?

    What we are trying to do is measure business cost and profit per unit and grouping (6 trades). It is like saying for every 100 hamburgers MickeyD’s sells what are the business cost and profits per unit, what is the problem rate (bad burgers) and how are costs changing. By fixing the number of trades to 6 in each of my reviews it is easy to see the type of progress I am making with each new group of 6.

    What we are looking for is trends in trading. How do these 6 swing trades compare to the last 6 before them. Am I adding to my account at the same rate as the last 6 trades? Are losses staying at the same rate?

    For your business model you are now using quality control instead of a P&L once a week or month. Your goal is to produce continuous expectancy for each production run in trading.

    For example day trading may do a performance review every 2 or 3 days with 8 to 10 trades. Every time you do this the previous 10 trades are compared.

    What this does is drive the risk and money management calculation into the back end of the process. You build your business model and force risk and position sizing to meet your goals and objectives. Not the other way around.
  7. Thanks for your comments. This was part of applying a lifetime’s work to my passion for trading. It is a different approach to trade management that is well grounded in business practices. When I kept hearing others have the same problems with trading management I used to have. I said it’s to tell every one what I found.
  8. Not only is it different, it is simply common sense.
    Don't say this too loud, though. Anything new and logical will be met with, "Burn them at the stake". Just kidding.
    Forge ahead and thank you for sharing your experience. Everything I have read so far is a perfect fit to how a trader SHOULD manage their trading environment.
  9. If you found out something along these lines that offers and edge do not give it away.
  10. you are right 100% but I think Rabbit is lonely

    most geeks are lonely and will give the pretty skirt everything :cool:
    #10     Mar 14, 2009