Millionaire Traders - Market Maker or Market Taker?

Indeed.

 

Hi Jbt,

Based on conversation in this thread, I am looking forward to reading this book.

Psychology is very important, but not the most important factor.

The most important factor is edge. If the odds of the system are not in your favor, no psychology will help. Roulette is a good example, no psychology or money management will help in the long run since the house has the edge, it is just around 5%, but that is enough.

Once the edge is found/mastered than psychology comes into the picture. One of the best books that deals with psychology is "Trading in the zone", but that is the second stepping stone.

The psychology becomes very important later because traders tend to mess their odds themselves. I have been many times in situations where after 3 losses in the row, I skipped the next trade, and guess what, it would have off set all my losses and got me into green. Learning how not to screw up the odds is a lengthy process where a lot fail.

Regards,
redduke

 

Yes Redduke couldn't agree more. Please understand when I use the word psychology it is not meant in the "rah rah" Tony Robbins kind of way but rather as synonym for behavior. The edge comes from accurate understanding and interpreting that behavior. - which frankly is a b-tch to do.

 

Kt - that's very interesting. Without divulging anything proprietary can you give us an example of an algorithm that you may use to make trading decisions?

And in the much broader sense - are you a reversion to the mean trader or a momentum trader - or if neither could you give us an idea of the underlying philosophy behind your trading ?

TIA

 

AMEN

 

OK, here is another valuable insight that we uncovered from our interviews.

ALMOST ALL SUCCESSFUL TRADERS SCALE OUT.

I know there has been a tremendous amount of threads about scaling on Elite and I know that all the engineers and all the mathematicians will tell me that scaling out is a mathematically inferior behavior. But what is mathematically optimal is often psychologically impossible.


I've often used the analogy in my writings that a trader who sees his mark to market profits evaporate only to turn into losses is like a factory worker who loses a week's worth of wages as they slip through a hole in his pocket. No matter how many pep talks you give yourself about the "probability spectrum" you will be pissed and then most likely turn to revenge trading which will only exacerbate the problem.

Our desire to ring the register is so strong and so wired into brains that if we don't accommodate it we are in fact sabotaging our chance for success. Scaling out addresses the need for greed and allows us to partially stay in the trade and allow it to work.

Yet the most interesting insight we discovered is the just how powerful and profitable even a small partial position can be. More on that in the next post.

 

So true what is said about scaling out, IMHO.
I do it too, but then I scalp and there is no other way.
May approach is what I call, scalps within scalps.
A signal is fired, if nothing gigantic off the bat, I take the smallest size trade on it, if it goes against me, which is normal since at that stage it's kind of jumping the gun just to make sure not to miss the boat, then at the stage when the maturation of the trend is sensed I place the second trade and there might be a third trade usually occurring between the first and the second.
My Mm is based on FILO(first in last out), hence the first offset goes to the last trade etc. and will make sure to make all of them end positive and if not at least say the last 2 to have helped place all 3 combined in the green.

Cy

 

Cy after three entries if it still goes against you - how much do you let it ride? And also when you do get hit how bad is the hit? Is is 4 or 5 times your average win?

 

So one of the most interesting things that came out from our conversations with traders is that you don't have to hold a large portion of the position to make very big profits.

As we write in the book

"Everyone wants to be able to let their profits run, but in real life financial instruments rarely follow a smooth straight path to riches. Instead prices often retrace the majority and sometimes all of their gains leaving many inexperienced traders empty handed. Paul Willette, however, has come up with a method to harvest some profits right away while ensuring that he can still benefit from an occasional extension run in his favor. What’s noteworthy about his insight is that even leaving a small proportion of his original position on could contribute significant profits to his overall account.

How does this work? Let’s assume that we trade like Paul does with a position of 20 contracts. The stop on the position is 1.00 ER (a mini-Russell 2000 stock index future) point. At +1.00 points in his favor, Paul would sell five contracts and move the stop to breakeven. At +2.00 points he would sell another five contracts. At +3.00 points he may sell an additional 5 contracts. At +5.00 he may sell two more contracts and at +7.00 he may finally sell the last three remaining contracts. In total the trade would have netted +61 points, but note that fully 31 of those points—or more than 50 percent—came from the last five contracts or just 25 percent of the original amount of the trade. Paul teaches us that we do not need to make money on more than a small portion of our position in order for the whole trade to be substantially profitable."

 

My trading style does not implement scaling in or out. I am all in or out. I do use tight stops, but that Ok with me, since if the trade does not move into green relitively fast, I will close it and wait for next opportunity. I do let the wiining trade ride, but I am extremly impatient when it comes to cutting losses.