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Found 6 results

  1. Trading is a business like any other. Treat it accordingly. It’s about the evaluation of risk for a potential trade. Everyone who has been involved in the financial market for a while will know to appreciate a trading plan. Market participants who have been hurt with losses regret not having had one from the first moment on. After all, it is more exciting to jump into the first trade and get the drill immediately. Imagine you were about to buy property. Wouldn’t you balance the pros and cons of the location, the buying price, or your monthly annuity? You certainly will not buy the first property that comes across you. Unfortunately this is precisely how beginners approach trading. The hurdles of opening a trading account and depositing some cash are far lower than, say, registering your own business. Henceforth, trading is not taken as seriously. When composing your trading plan, you have to understand most of all yourself. Why do you want to trade? What are the specific goals you are trying to achieve with trading? How much time during the day can you dedicate to it? Can you handle a loss of $50, $1,000, or $5,000 per trade? How would such a loss affect you? Do you prefer to harness large trends, or quick trades throughout the day? The next step is to find the right market and the right time frame. For example, I have chosen the ES for myself because I want to focus on one instrument and trade it well. My primary time frame is the 1 hour chart. Going further, you need to know your specific trading strategy. Create one that is as objective as possible because such will stand a higher chance to last throughout various market conditions. I have abandoned all indicators and focus merely on the price. This is what every market participant is seeing. Define where your stop-loss would be at and what the potential loss is if it gets hit. I want to make sure to quit the trade if the original reason for entry is no longer given. I take visible peaks or troughs to put the stop-loss at. With the help of the 1 hour time frame, I am able to detect significant support and resistance areas which help me to find an entry. Everyone will notice if a new high or low is taken out. Do not miss to test your tactics on paper before risking real money. Prepare a trading journal once you have collected some experience and want to get to know yourself better. Write down your emotions, your reasoning for each action made, and a lessons learned for upcoming trades. It seriously helps at becoming more objective in your trading decisions. You engage yourself with the decisions made and will be more alert of making mistakes in future.
  2. New traders frequently have difficulty pulling the trigger, and when they do they frequently exit the trade too early. It makes no difference telling them to remove emotions from their trading. So what is the real problem? On most trading platforms we view profit and loss in terms of the deposit currency. The trouble is that we are all programmed to evaluate money in terms of what it equates to in real world terms. For example, when we go shopping, we look at prices and assess them in terms of value for money etc. Hence it is no surprise that when we are trading, looking at risk and return in dollars causes us to think about what that really means in the real world, and emotions suddenly overwhelm any more abstract reasoning. A solution to this problem is to only present risk and reward information in terms of the percentage of the account balance. After all, we are primarily focused on growing our accounts, hence viewing our trading in terms that relate to that objective makes a great deal of sense. Personally, I no longer look at dollar values whilst trading, the percentage values allow me to focus on what I'm really trying to achieve (growing my account), instead of emotive thoughts about the dollar value at risk. Staying focused is key and anything that helps us maintain that focus, must be a good thing. Paul Anderson
  3. I chanced upon this rather interesting blog, would be interested to hear other members opinion. http://andihammer.com/stops-or-not-to-stop-that-is-the-question/
  4. Currency Trading Option scan be used in a variety of different ways. This allows for enhanced diversification and risk management that can be advantageous in many cases.
  5. One of the main tasks of financial institutions is to manage aggregate and limit exposure to adverse price swings. This can be seen in debt defaults, for example, and a financial manager’s job is to adjust position sizes so that excessive exposure is not seen at any one time.
  6. One of my systems has historically returned, via hypothetical backtest, around 60%-80% per year (for the past 10 years) when tested with a wide stop loss. The return jumps into the 100%-120% annual range when the system forgoes the stop completely. A 10k account will grow to over 2.5 million dollars in just 8 years with a 100% annual compounded return! These results lead to some interesting questions. First, we always read that past performance is not indicative of future performance. Obviously, various agencies and regulatory authorities require such disclaimers. Yet, anyone who trades a system believes that past performance is a good indication of future returns. I doubt there is any trader who doesn’t believe that. Of course, traders understand that such extrapolations are often wrong. Yet, I don’t know anyone who would trade if they didn’t on some level believe that historical performance had value. Even if its not a backtest and someone claims that the performance in a future test is important, the implication is the same which is that eventually your past performance has some value. A reasonable question is that if we rely on the historical results to guide our trading and the system performs better without a stop then what is the justification for using a stop loss. Personally, I do like the idea of the stop loss and I understand that one bad trade could wipe out a highly leveraged system as I describe. In fact, the variation that I offer has such a stop loss and stop loss guidance for this very reason. One reason that’s the case is that its my personal preference, secondly the system with the stop still produces a strong return, and last but not least is that I do design systems, like any product, for a target audience. I know that my consumers would not accept a system without a stop loss. Yet, all those reasons aside there is a strong logic that if we accept the historical results as being indicative of future returns, which we already have by virtue of using the historical returns in the first place, then without a rational basis we should trade the best returning system -- which in this case was the system that didn’t use any stop loss! I know that some will rush to judgment and assume that trading with very high leverage and no stop loss that one would be destined to blow up the account. However, the system I’m describing is a real system and was backtest over 10 to 12 years and the largest loss without a stop would have been around $2500 and there were probably no more then a couple losses that large out of hundreds of trades. It could also make sense to use a stop loss wider then any historical loss. Such a stop loss would both be unlikely to ever be hit and could provide much needed peace of mind and would, moreover, protect the majority of the account if a truly unusual deviation were to occur. I think part of the reason we like stop losses is because we don’t really want to accept the risk inherent in trading. Perhaps more to the point, we believe we can time the system or we’ll get lucky and avoid the historical losses. As a discretionary trader, I do feel that it is possible sometimes to time systems. Yet, if we choose to rely on a statistical methodology, that is not introducing unknowns, then it is rather likely that the account will be completely exhausted or mostly exhausted by the time we could recognize that the system had failed. A different approach would be to consciously allocate the entire starting balance to the system with the intention of trading the system until failure or success. It is basically a bet the farm approach. The mindset has some advantages. One primary advantage is that such an approach is simply the act of consciously realizing and accepting the risk inherent in trying to achieve the desired returns. Following this logic, we would also see that using the stop loss wasn’t optimal and may choose rationally to trade without the stop with the full knowledge that single trade could wipe out the entire account. Mathematically, sense we are already extrapolating the past performance into the future, we can also extrapolate the returns and come up with a “valuation” for the system based on the historical performance. A system that returned 100% with a 10k starting balance would be worth, as described, approximately 2 million dollars with an 8 year horizon. We could even look at it like a single trade. In this case, it would represent a 200x potential return for the starting risk! There is a problem with the extrapolated returns though. Even accepting that it could make sense to risk a small nest egg on a high risk trading system: it is much harder to justify the risk required to meet the returns extrapolated. In other words, one would have to risk 100k to make 200k and 200k to make 500k and 500k to get to a million and a million to get to 2 million. At some level, the risk required to make more just simply doesn’t make sense. As such, the extrapolated return isn’t realistic and therefore we face that problem of valuation again. Remember, we had justified trading our 10k starting capital based on the valuation that the system would produce over 2 million dollars. Clearly, this thought experiment is missing a very critical element required for implementation. The missing element was first introduced to me from another trading associate and CTA, and that missing element is the systematic method of taking out profits as the account balance grows in value. This cash flow principle completely solves the problem conceptually and completes this idea. The extrapolated returns will, of course, be reduced but the overall theses becomes workable. In fact, there is certainly a possibility that the system could fail and take a complete account loss while the trader actually produced a net profit. If the system generates enough cash flow to “pay off” the initial investment before failure then one can walk away with a net profit even in the event of system failure. The method for this calculation is based on fractional position sizing and is outside the scope of this article. Completing the paradigm would involve trading multiple systems and treating each system like an individual trade. The stop loss would be the starting account value and each “trade” or system would offer a very high extrapolated return compared to the starting balance. In this paradigm, a total account loss doesn’t infer that one “failed” as a trader but merely the system failed. The reward to the risk taken was already accepted. It goes without saying that I would only even attempt this with systems that I had a very high confidence in because bad systems could easily result in a total loss. But, let's assume we start with 50k and 5 solid systems with 100% annual returns per system and an 8 year time horizon. We'll reduce the implied return to 1 million per system due to the anticipated withdrawals. The actual reduction depends on the rate that we withdrawal profits. Furthermore let's assume that every single system but a single one fails. The net result is still that we made 1 million dollars from a 50k starting investment and that doesn't even take into the very real possibility that some systems could have payed off the initial investment and even made some profits before failure! The net result is achieving nearly 50% annualized return with an 80% system failure rate! It is clear that having a plan to withdrawal and protect profits is the cornerstone that completes such an ambitious plan. The trader who wishes to execute such an ambitious methodology needs both the capital for at least a few seed systems and perhaps more importantly the wherewithal to execute the plan over many years. Notably, there is no requirement that the trader/system developer remain inactive and dormant over so many years. The more professional approach would be to invest some of the cash flow into new systems, update working systems, and adjust allocations based on performance and market conditions. -- Curtis http://themarketpredictor.com
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