eqsys

Trading 1 e-mini per $2500 in the account? That won't last long. You absolutely have to backtest your strategies to know what is the biggest loss you might sustain, then, you have to allow at least 5-10x that amount per contract so that when you do get the big drawdown, you won't go bust - you won't panic and sell at the bottom. I have been at this for decades and have experienced moves that will just take anyone that is overleveraged down in seconds. Remember the "flash crash" last May 6th, 2010? The really bad whipsaws come from some unexpected news event - some Fed official gives a speech and says something, there is a currency devaluation from some foreign country, there is some completely unexpected report that comes out, or the Fed raises interest rates more than expected, or, some rogue trader hits the wrong button and dumps a couple of billion dollars with of SP futures by mistake....lots of fun. When your account is small, you don't much mind moves that take your account value down by 30-50%, but as the numbers get bigger, believe me, you can't emotionally take these types of losses. If you are trading 1 e-mini per $2500 in your account, and your account is valued at 100k, then you are trading 20 contracts. The e-mini (ES) currently has an average daily range of $910.97 - so 20 contracts would be $18,219. You can walk away from your computer to go to the bathroom, and come back and be down that much. Even if you have a stop in place, you can get whipsawed by 1 range easily and quickly, and your 20 contracts will be sold out at BELOW your stop price, and you'll wish you had stayed in the bathroom. If you look at the profitability of the best hedge funds, and the best trading systems that are advertised, you'll eventually be beyond happy if you can consistently make over 50% per year in your account. Most of the best hedge funds can't even come close to doing that. The best trading systems that I see advertised are happy to make 3% per month. A goal of 100-400% per year sounds exciting, but it requires a LOT of leverage, and that means periods of large drawdown. When your accounts get over 100k, and you get swings of 20-50k, how is that going to effect your emotionally? My FIRST rule of profitable trading: know your max backtested system drawdown, then make sure that when this happens again, that this doesn't draw down YOUR account more than 10-20%. Most traders don't know what their drawdown might be - they just come up with something that they think works, and they trade. This is like riding on a motorcycle at 100mph with no helmet. It works for a while and is a lot of fun until you hit that icy patch in the road, then it's all over. Been there, done that.....

Good letter. Isn't it nice to know that the government is protecting us from ourselves? This rule has cost me a lot of money as well in the past.

I backtest, run automated strategies with TradeStation. I thoroughly investigated, tested various hosting companies to put TradeStation on their servers. Their virtual servers are slow, so you would have to get the dedicated servers - costs about $150-250 per month to equal the speed you'd get using any computer with the Intel i5 chip running - so this is costly. However, it saves you from most power and internet outages - nothing is 100% reliable. But, if you live in an area with occasional severe weather I'd go with a dedicated server. If you run the software at home, it's more reliable to use a laptop with battery backup. Remember, when your power goes out so does your internet router. You could get your internet data feed using a 3g or 4g card. Even if your power stays on and your computer and internet connection are OK there can still be occasional problems with the exchanges, so no automated system is 100%. You always have to monitor your positions to make sure that what you have is what you think you have.

Ninja is an excellent product. I use TradeStation to backtest, automate strategies. I started decades ago trading futures - but, I would recommend stocks. Start small. With futures you can lose a lot of money fast. With stocks, you can start with a very small position and work up from there. With futures I would recommend 5-10x the exchange required margin to trade 1 contract. If you use actual margin you will be wiped out very quickly. Simulated trading is NOT real trading, because it's not real money - not YOUR money, and so you don't make stupid emotional mistakes when the market moves against you. Still, I would rather SIM trade first if I had to start all over. That way you'll find out if you really have a system that works before you put real money on the line. Remember, everything changes when you start losing actual money. Trading is NOT easy. Best of luck.

One of the major problems we face as traders is the challenge of infinite possibilities. There are virtually unlimited types of systems, time frames, and chart types, stocks, futures, options, Forex, spreads etc. . How many lifetimes do you have to test all of these? And you absolutely know that somebody out there has figured this all out and is making tons of money, but isn't going to tell anyone what they are doing. All you have to do is just keep plugging away and you'll eventually hit the mother lode - maybe. So, what I do is try to keep things fairly simple. I suggest : trade what you know, make sure your system is fairly simple, and you understand what it's doing and why, keep the leverage down, and always trade your BEST system. Try to improve the system by increasing gains and reducing drawdown if possible. Try to maximize that gain/drawdown ratio. And, I mean intraday drawdown, NOT closed trade drawdown. You may experience a lot of drawdown before a trade actually closes. And, it's when you get hit with that drawdown that you're tempted to do something stupid. I use a form of "natural selection" - I trade my best system(s) until I come up with something better, then switch to that. You find what works, and what works for you - emotionally and financially.

I have done extensive testing and trading of systems using tick bars with TradeStation. The tick data is only available back 6 months - so not enough data to get a proper analysis. I have done extensive testing of the same systems using bars of various lengths - tick and intra-day bars (1min, 2min, 5min, 10min, 15min, 20min, 30min, daily). My conclusion is this: tick bars have insufficent data to test and the backtest takes too long. The bar lengths of less than 10 minutes take a LONG time to backtest a volume of data - minimun of one year of data. The performance results don't really change that much whether I'm testing tick or 1 min out to about 30min bars, so why use the tick or 1 or 2 min bars? You would think that by using the tick or 1 min bars you'd be able to catch the moves more quickly, but I have found that this also results in catching false moves. There is a lot of "noice" in the markets - prices rise and fall as traders enter and exit positions for unknown reasons. It's easy to get sucked into overtrading. Also, having tick or 1 or 2 minute charts with systems and indicators added to the charts pushes my computer to the max. So, it's just more efficient not to trade the tick or 1 or 2 min bars. I use automated execution enabled - there is no way a person can react fast enough to catch some of these entry and exit points when the market is moving rapidly. In the late 1990's I filled my office with computers, data feeds and phones and set out to day trade futures - this was BEFORE auto execution with TradeStation. I went at it for a couple of days and it was emotionally exhausting. By the time I was able to see the signals on the charts, call the trades into my broker and get filled - it was too late. I was consistently losing on trade after trade. Real time results did NOT match theoretical back test results. Also, I realized I couldn't divert my attention away from the computer screens. As I say, "life happens when you're trying to trade". Example: the market is moving rapidly and you're waiting for a signal - the phone rings, you have to go to the bathroom, somebody is at your door, you hear a crashing sound in the other room, the power goes out, your computer freezes, you get a headache, etc. After two days I stopped the madness, and stopped losing money. Experiment failed. Now, I test systems and let the computer make the trades for me. Occasionally I do lose power and have computer problems, but the trades are spaced fairly wide apart in time, and the problems are far and few - and I always use automated trading, so I don't have to stare at the screen anymore.

The problem with using the Kelly formula, or any other formula that considers closed trades is that there is no consideration of what happens DURING the trade - in other words, the drawdown that can and does occur while waiting for the system to close out of the position. Not only is there the drawdown that happens during one trade, but there is the accumulated drawdown from a series of trades. Even if your system produced 100% profitable trades on a closed trade basis, if the intra-trade drawdown is large, it is going to cause you much grief and it is likely you will bail on your trade and system well before your system pulls you out. I use TradeStation to backtest my systems, and always look at the Strategy Performance Report. Then I look at the Max Drawdown Intra-day Peak to Valley calculation. I then allocate 10x this number to trade 1 futures contract. This way, when this drawdown occurs again (and it WILL) I will only be down 10% in my account equity - a number I have found I can handle without getting extremely upset. If your account is small, you might be able to handle up to 30% drawdown before you panic, but as your account size increases, it becomes increasingly more difficult to take drawdown of this magnitude. If you get extremely upset, and everyone has a different point where this occurs - but it does and will occur, you will 1) exit your trade at the wrong time, 2) be unable to sleep, 3) stop trading your system, or 4) some other irrational behavior. Have you ever just said, "I can't take this anymore", and just sold everything? If you are overleveraged and trading futures, you may just run out of equity and get a margin call - and that's the end of your trading either permanently or temporarily. The trouble with a system that shows a 2:1 profit factor, that is, winning trades make double the losing trades, but you have fewer than 50% winning trades, is that you have a lot of losing trades - tough to handle emotionally. Also, the winning trades come from a subset of the whole universe of closed trades, and this might mean that the winners were based on some unusual price behavior not llikely to occur in the future. The ideal system has maximum gains and minimum drawdown, and ideally, seldom has a losing day. The simplest example of a system that is almost impossible to trade, yet looks great on paper (compute the Kelly formula) , is a buy and hold. It may have 1 profitable trade,and no losing trades. However, the intra-day drawdown peak to valley might be HUGE. That's what will bury you as a trader.

If anyone wants to make money as a trader they have to: 1) have a system 2) backtest the system 3) know the max drawdown that has happened with that system 4) allocate 5-10x the max drawdown to trade one contract (if futures), or 5) allocate 5-10x required margin to trade one contract Otherwise: 1) you will be trading on emotion, and will lose money 2) you will wake up one day and some event will cause your position to spike against you 3) you will panic and sell on the bottom, or cover your short at the top You can't be overleveraged. Do you really want your total equity to be moving up and down 20-40% every day? Do you want to sleep at night? Currently the TF has a daily true range of $1456 over the past three months. The exchange required margin is $3500 - so an average daily move is over 40% of margin. Do you REALLY want to subject yourself to volatility of that magnitude? The ES currently has an average daily true range of $845, and the YM $717. The ES margin is $5625 so it moves 15%, and the YM margin is $6500 so the daily move is 11%. With your money moving up and down like this you really have to be able to take crazy moves against your position and still do the right thing, stick with your system, stay calm, and stick with your plan or system. If I were a beginning trader I would just stick with something very simple - put the odds in my favor. Pick a stock that's going up - one that you know, and trade a small position from the long side. Unless you are wealthy you will be uncomfortable with hourly swings in your equity of more than a few hundred dollars. If you buy a few thousand dollars of NFLX and you have breakfast, and come back and it's down $400 this might make you sell the positiion, just as it's going up again. All sorts of things can happen to you in the market that are out of your control - unconfirmed rumors, unusual events over the weekend, your power goes out and you can't see your positions or trade, your computer crashes just when the market is moving rapidly, you sleep 8 hours per day, you leave your computer to have breakfast, you get a bad headache and can't look at the trading screen, and on it goes. In other words, life happens while you're trying to trade. If you're over leveraged or don't have a precise system, you'll lose money, and often, all of your money. I pass this on after 31 years of trading.....