Over the next few months, I plan to repeatedly post my paper trades in this same thread. If they are successful, they will serve as semi-permanent of online âproofâ of my good results. If they are not successful, then oh well, I havenât lost any real money with these trades. I will also be posting a summary of my paper trading results on this webpage: http://members.home.com/bobdek/trades.htm I have been studying trading possibilities for the Nasdaq 100 index for the past several years and believe I have found something that looks promising. It involves trading only once or twice a day and holding for a longer period of time, but not holding an overnight position. I realize nobody will believe me, but I think it is possible to make something between 0.5% to 1% average return per trade. And that would double to 1% to 2% average per trade using double margin power. That would be an AVERAGE return. I realize those types of returns sound impossible to experienced daytraders, but Iâm not trying to convince anyone of anything at this point. This strategy involves trading only in a financial instrument that tracks the Nasdaq 100 (NDX) index. This would include QQQ stock, or Nasdaq futures, or even the underlying basket of 100 stocks that represent the Nasdaq 100, etc. I am not trying to sell anybody anything, and I am not promoting any trading courses. So why am I going to do this posting? Good question. I am mainly doing it to prove to myself that this system actually works (at least in theory) when repeatedly put to use over long periods of time. I want to be âlocked inâ to my paper trading decisions so that I can properly evaluate them, that is one reason for publicly posting them, so that I am âcommittedâ to those decisions. If it works out, thatâs great, I will have proven something to myself. If they doesnât work out as planned, then I will have learned something without losing any money. My other reason is to generate a semi-permanent online record of my paper trades that I might later use as âproofâ to other potentially interested parties, if it turns out that my trading system works. I readily acknowledge that I am not an experienced trader. I have traded a bit using several online brokers, including a daytrading firm that offers me a Realtick interface. But I am not very experienced. If my system were to prove highly successful over the next 6 months, then the fact it is publicly posted might be my âproofâ to other interested parties that my system works. And at that point, perhaps I would have an opportunity to work with a much more experienced daytrader (or even a firm) to use my paper plan to generate real profits, and utilize the skill of an experienced daytrader in conjunction with my plan. Because an experienced trader would know much more than I do about avoiding slippage, minimizing costs, wating a few seconds to get a slightly better price, etc. BELOW ARE MY ASSUMPTIONS ABOUT ALL OF MY FUTURE TRADE POSTINGS 1. When I post either the word âLONGâ or the word âSHORTâ, that means that my paper trading plan would take either a long or short position in an underlying Nasdaq 100 Index instrument like QQQ, Nasdaq E-mini, etc. The trade is assumed to have occurred at that exact time, whatever the âtimestampâ on each message is will be the time I assume the trade is to have taken place. 2. It is assumed that the position will be held until I post the word âEXITâ. If I do not post the word EXIT, then it is assumed I exited the position at exactly 4 PM at the market close. No positions will ever be held overnight. 3. The ENTRY level will be assumed to be the average of the OPEN and CLOSE price during the one minute period that I entered the trade. For example, if the âtime stampâ on message says I posted it at 9:45 AM, then I will look at the opening and closing prices for the 9:45 AM minute posted on my Realtick chart. The chart symbol for the index is NDX (or $NDX.X when using Realtick). So if the opening NDX level for 9:45 AM was 1530.30 and the closing level was 1530.70, then I am going to assume I entered the trade at a level of 1530.50, which is its average. The same holds true for the EXIT level, it will be assumed to be the average of the open and closing levels for the âtimestampedâ minute of that exit message. 4. I fully realize there are inherent problems with this type of paper trading, given that you cannot actually trade NDX, you can only trade something that tracks the NDX. And I know my trade is not posted at an exact second in time, and that the NDX prices reported are about 15 seconds behind the QQQ prices, and that there are transaction costs, and slippage, and all that other stuff that makes daytrading so complicated. But it is not my intention to teach a class in daytrading, I am posting this for myself, to prove something to myself. And if this system produces a high enough average return per trade, then those things like slippage and transaction costs can be overcome, especially if I had assistance from an experienced trader. 5. I would always use margin to double the effect of any return. 6. If I post no message on any given day, that means I chose not to trade on that day. 7. I am not going the count the return on any day where there is an extremely MAJOR UNPLANNED event that significant affects the market. Examples would include a major terrorist attack, a sudden unexpected cut in interest rates, etc. Some will say this is âcheatingâ, but you have to realize I have another full time occupation and do not follow the market every minute of the day. If I had actual real money at stake, I would follow the market every minute that I had an active position. But I have to be realistic, this is only paper money, and at this point I still other full time (self) employment that consumes my days. And it works both ways, because if I have a short position, and the market drops 10% due to a terrorist attack, I am not going to count that as a gain. The key determining factor is that it has to be an UNPLANNED event. An interest rate cut after a Fed policy meeting does NOT count as UNPLANNED event because everyone knew a meeting was taking place. 8. I do not plan to post any reasons or explanations of why I chose to do a certain trade, and I do not intend to reveal my overall strategy. You are of course free to comment, but it is not my goal here to discuss strategies. So with all of that in mind, I am going to begin posting my paper trades, and the âresultsâ achieved. Of course anything can happen in the beginning, a run of bad luck could get me off to a bad start, but I am hopeful I will see paper success with my strategy over a period of time.
Paper trading results can be exceptionally deceptive for many reasons. The first and foremost reason is that you make a gigantic assumption that you are being filled at certain prices just because the stock traded in that range. When you actually start putting in orders, you may actually alter the pricing of the stock. This can happen even with very small orders (using the "straw that broke the camel's back" parallel). We encourage those trying new strategies to simply trade 100 shares (costs you 80cents or so) to get a real feeling both for trading and a real comfort level in the results. I have had dozens of traders come to me with pages and pages of paper trading results only to find that when the "rubber hit the road" they lost money. I am not saying that back testing strategies is not viable, but paper trading can be a real problem. I am not trying to burst any bubbles or alter your thinking, just giving you some real world advice from my 20+ years of trading, and experience with hundreds of traders. If you have any confidence in the methods you are coming up with, try them small for a while...you'll be much better off in the long run. IMHO
One thing I didn't see mentioned was how you plan on dealing with trades that go against you. If you plan on making 1% to 2% per trade, I assume your stop is going to be like 1/2% or so. Would I be right in assuming that?
I think bobdek wants to prove this system with paper trading before putting small money at risk. Of course paper trading does not compare to trading with real money, but it is helpful for a trader to practice his game plan. bobdek, do you have any sort of stop associated with your buys or shorts? Is it possible to post them with your entry? It is written in several books that you should know your exit before you enter a stock.
Another comment, take it for what it's worth. Using stop orders is tantamount to showing your poker hand to other players. "Mental" stops provide a trader with the ability to visually scan the overal market conditions without getting taken advantage of. Let me give you one prime example of something that literally happens every day: Assume a stock is trading 50.00 /50.10 10x10 Now you see the quote: 49.00/50.10 1 x 1 Your (sell) stop is 49.20. Most experienced traders actually put in buy orders as quickly as they can when the see the bid price drop since they know that a "negotiated print" is about to take place at a much lower price. Now the stock prints, say 100K shares at 49.10 and your trigger is set off, and you lose money. The stock in all liklehood will actually rebound back near it's previous price since this was simply an example of a "trade through" abberation. Since many brokers in the crowd (and MM's at firms) are "holding orders" (so they can get extra commissions), they must rush to buy the stock at their limit prices...the stock goes back up, you lose....when if you were using mental stops, you would actually not only not sell (great double negative, eh?)...you would be buying (the obvious trade), and making money. Floor traders, specialists and MM's understand this phenomenon, and use it to take advantage of stop orders and pricing variables. Again, just something to think about.
In regards to a couple comments above: 1. I realize there are many problems associated with paper trading. In fact I personally think that any paper trading system that is producing less than an average 0.2% per trade is going to be a losing system, because it will get killed by commission costs, slippage, the inability to get in and out when you want, etc. The 0.2% profit will get eaten up to the point there will be nothing left. But I think if I could produce paper trades that averaged over 0.5% per trade (the doubled with margin), such difficulties could be overcome because there is enough margin then for error. I might be an inexperienced trader, but I am well aware of the limiations of paper trading. 2. Getting filled becomes less of a problem because I would be dealing in instruments with massive volume. QQQ is has the largest Island volume by far and it seems to be growing every month. You can trade $200,000 at any time of day, it will costs you a few cents more later in the day because most of the volume is in the morning, but its always possible to get in and out. I know next to nothing about the Nasdaq e-mini, but my understanding is that they are also extremely liquid, although I don't know how well and individual trader could trade them, or even how or where they would trade them. But I'm sure you people out there know. 3. At this point in time, I do not plan to have stops in my paper trading. This would be suicidal in any individual stock because you could get wiped out in one day. But because I am only trading an indexed product, even on the worst day imagineable, when trading QQQ your losses should be held to "only" about 10% (doubled to 20% with margin). Yes, that is a whopping loss, but I don't expect it to happen very often, if at all. Sure, I could use set stops, but I feel that with what I have in mind, all I will end up doing is getting out at the worst possible time that day. 4. Like I said, I run another business full time, and since its only paper trading, I am not going to sit in front of a computer all day and stare at the screen watching each move. Doing that would ruin my other business. Of course I will be checking in throughout the day, checking charts, reading news headlines, etc. But I won't follow it every minute, I just can't. If that means I am not really "daytrading" then so be it. This also means even mental stops are not going to work, because I won't be there to see them happening. At this point, I am going to "take my chances" and let things run the course of my plan. I do not plan to bail out with stops before the time I had in mind.
No stops, mental or otherwise, is suicide and will bring you to ruin in the long run. Taking a 20% hit is survivable, but statistically your risk of ruin is very high (the statisticians on the board can explain that). Also, if you want to attract money down the road, investors look at the volatility of your portfolio to determine risk, and even if your generating 100% a year, but your volatility is too high, they'll pass you over for safer returns. Sounds like you may have a good base system though. Good luck.
bobdek, I do not plan to post any reasons or explanations of why I chose to do a certain trade I can see the value of putting your paper-trading strategy in writing to "box" yourself in, and placing them in a spreadsheet on your computer would serve that purpose. But since you don't plan on discussing any reasons whatsoever for your trading decisions, quite frankly of what value is it to members on this board? No one here knows you, no one here can "hold" you to anything, putting them in your own spreadsheet would serve the same function. Seems like public mental masturbation to me.