Back in a prior life, I used to work in credit risk management, where we would analyze and implement account management strategies on loan portfolios that were billions of dollars in size. It's not as exciting as it sounds, since managing a big bunch of loans would be similar to driving a big 18 wheeler, vs. trading at a hedge fund which would be like driving a Ferrari.
Through dealing with the analysis of large numbers, I learned that it's not necessarily the absolute value that's important. Instead, many of the metrics for comparison were based on basis points or percentages. So as I began down this journey of learning to trade, I wanted to make sure I kept the proper perspective on my progress, and to also find a way to minimize my overall personal financial risk.
Primary way I measure performance
First, I knew the absolute dollar amounts that I would be trading would be considered random daily P&L noise for experienced traders. So I wanted to measure my key performances, such as P&L and risk size, by basis points of my portfolio or the R-Multiple. I find this to be the purest way to measure your performance, especially if your portfolio is small. This way, as I scale up in size, it's not whether I'm betting $50 or $5000 per trade, it's just the same 'ole 50 (or whatever) basis points of my portfolio.
Yes, I do admit, for all the work I do, when I look at the absolute dollars I make or lose, it sure doesn't seem like much. But measuring your performance based on percentages helps to keep a better perspective on how you're truly doing.
You'll likely wreck the car (or your account)...
Second, I wanted to make sure that I'm not putting too much money on the line as I learn. When a teenager is just learning to drive, there's a good possibility that they're going to get into an accident and wreck the car. So even if you could, responsible parents just don't go out and buy a Ferrari for their child's first car!
Although I could open up an account significantly larger, it just would not be financially responsible. I know from past experiences that I will initially lose money. So my intention is to minimize the absolute dollar size of my account, so that I can use the $25k minimum pattern day traders requirement as my backstop to force a time-out. This is similar to how you would get locked out of your account at a prop trading firm after you exceed a certain loss for the day.
So what now?
After such a volatile day yesterday where I was very lucky to end the day slightly profitable, I was hoping to take it a lot more easy and be much more focused today. But I learned quickly that trading with a lack of sleep can be very hazardous to your trading P&L. That's no excuse for my lack of discipline. I wasn't so lucky today with a SODA trade to bail me out. I exceeded my $25k backstop oh so slightly, so now it's time to take a break, spend extra time evaluating what I did wrong, dust off, and refocus on my goals.
In the meantime, I'll take the humiliating and embarrassing action of sending a little more money to unlock my account. Nope, I admit, this isn't the first time I've had to do this in the past 4 months. I also admit, it's not like I really blew up my account, but it sure does feel like that to me. However, this is the first time I'm telling the world of the shame and disappointment I feel. This will motivate me to do better. On the bright side, I look forward to the days when I'll be withdrawing money from my account on a regular basis.
Wednesday, August 17, 2011
Tuesday, August 16, 2011
Recap: $SODA and $TNA - A tale of two strategies
Being a trader can mean a lot of different things. Every day trader has a different style, and as an example, what's considered overtrading for one could be standard operating procedures for another. There is no right or wrong, and as I have read countless times, it's important to find the style that works best for you.
Dr. Brett has written that many beginning traders generally have the process of discovering your trading style backwards. In the educational process for doctors, a student will go through intensive rounds of training in a wide variety of subject areas, which then help them decide which area of specialization is best for their interests and strengths.
But on the other hand, beginning traders will generally jump into one or a few different trading style, and then try their best to make it work in a not so strategic manner. Therefore, swing traders may never try learning how to scalp (too drastic of a change), and vice versa. This leaves open a good possibility that you may never have had the opportunity to find the trading style that best fits your personality.
I'm still finding my way, so here are two of the day trading strategies I used which were quite diametrically opposed in nature:
SODA - Sold under 15th 5min bar. This was a variation of the pullback to the retracement zone trade. Exited and then resold higher at top of the 14:00 bar. Fortunate to catch a stock that trended strong with little pain, and so I caught a big chunk of the ride.
TNA - 103 round trip trades (206 total trades)
As mentioned earlier, I actually made a conscious decision to scalp this, and I used 100 shares to try and minimize damage. I still lost several hundred dollars (small losses and commissions really add up, and it was a good commission day for TradeStation!), but it was a very good learning exercise that will provide a lot of insight for the future. In some ways, I had to get it out of my system -- I had to touch the fire and see if I got burned. But more importantly, I had to try to see if it is something that clicked with my personality...
Dr. Brett has written that many beginning traders generally have the process of discovering your trading style backwards. In the educational process for doctors, a student will go through intensive rounds of training in a wide variety of subject areas, which then help them decide which area of specialization is best for their interests and strengths.
But on the other hand, beginning traders will generally jump into one or a few different trading style, and then try their best to make it work in a not so strategic manner. Therefore, swing traders may never try learning how to scalp (too drastic of a change), and vice versa. This leaves open a good possibility that you may never have had the opportunity to find the trading style that best fits your personality.
I'm still finding my way, so here are two of the day trading strategies I used which were quite diametrically opposed in nature:
- A "typical" day trade - Used a setup that's a part of my standard plan, but I really kept the stops wide and didn't set any profit targets. See SODA.
- Scalping -- Went down to a 1 min alongside a 5 min chart, as well as the $TICK index. Also used TradeStations matrix, which is similar to a Level 2 screen. See TNA.
SODA - Sold under 15th 5min bar. This was a variation of the pullback to the retracement zone trade. Exited and then resold higher at top of the 14:00 bar. Fortunate to catch a stock that trended strong with little pain, and so I caught a big chunk of the ride.
TNA - 103 round trip trades (206 total trades)
"The moment, you own it, you better never let it go"
Look, if you had one shot, or one opportunity
To seize everything you ever wanted in one moment
Would you capture it or just let it slip?
To seize everything you ever wanted in one moment
Would you capture it or just let it slip?
"Lose Yourself" - Eminem
Hard to believe it has been nearly 10 years since "Lose Yourself" came out, but this song still has a way of firing up my soul. I appreciate good music and lyrics from all genre, and I believe Eminem is a gifted genius who uses music as a way to help guide his tormented soul.
Along the same lines, I'm using this blog on trading as a way to help guide both my heart and mind via writing, as I make my way thorough these difficult times climbing up a learning curve I can't imagine any more steep than it already is. But as difficult and frustrating as learning to trade can be, I love it, and don't consider it work at all.
I've been following the markets long enough to know that we're in some extraordinary times with regards to market conditions. Bella wrote a post the other day titled "You need to make more right now", and that kept me awake and thinking last night.
The markets are pitching hanging curveballs all over the place -- and I should be hitting them out of the park. It's like I'm getting dealt 2 aces with the dealer showing a 6 nearly one after another (and well aware there are many 10's still left in the deck). And the best part of trading vs. blackjack is that I can make my bet AFTER I see the cards. Then why am I continuing to play (trade) lousy hands (setups)? It's sad when I know I have better discipline at the casino vs. the markets. This will change.
Bella ends his post with:
A close friend who is twice as smart as me started in 02, a market a new trader could not succeed in, and now practices law again. Luck plays a part in whether you make it as a trader or not. Again congratulations to all the new and developing traders in the world. You caught the best break from the trading gods with this market. But you now have an obligation to maximize this chance. You need to make more right now.
This passage is what made me recall the song "Lose Yourself" -- a song about how you are given very few moments in life where you have an opportunity that can change everything. So when that moment comes, you better take it and run. I'm currently in a very fortunate and unique position in my life where I have time to give almost everything I can into becoming a successful trader, but this moment won't last forever.
So I'm not letting this opportunity slip, I chose to seize the moment.
The moment, you own it, you better never let it go
You only get one shot, do not miss your chance to blow
This opportunity comes once in a lifetime
Sunday, August 14, 2011
Preliminary trading journal analysis
[Edit: 8/15/2011 - Greg from Tradervue.com has just added the feature to allow searches by multiple tags, so the "Reports filter one tag at a time" section is not longer accurate. Big kudos to Greg for being very receptive to his user community!]
[Edit: 8/17/2011 - Once again, Greg has made my "Grouping of Trades and Tags" section below obsolete. Please see the comments section below or his blog post here!]
------------------
I finally completed updating the tags of all my historical trades in the free online trading journal at Tradervue.com last week. I went back over 4 months of trades since I started day trading the beginning of April 2011, and am now in the process of cleaning up the tags. With nearly 700 journal entries accounting for over 1000 trades, I know there is likely some tedious cleanup work remaining.
However, there's a point of diminishing returns and based on my requirements, I don't intend to or need to have perfect data. Just something good enough for relative comparisons and insights. It's not like I'm using this data to file my taxes. My primary job is a trader, not a statistician.
Some caveats on the data and results
Based on R-Multiples
In order to keep everything on a relative basis, I have converted the figures into R-Multiples. Trader Mike posted an article on R-Multiples back in 2006, and this concept works best for me as a day trader. I'm currently risking a very conservative 25 to 40 basis points (.25% to .40%) of my portfolio per trade, since the current name of the game is to survival while I learn. So I'll use a weighted average of 30 basis points in my calculations as my current R. In other words:
The shocking...but really, not so shocking results
Reminder, see caveats earlier regarding the data...think relative not absolute regarding these results. Based on how I tagged my trades in Tradervue, here are the results to date:
Note: As mentioned in the caveats, a trading record may contain more than one paired trade, and therefore more than one "grade." So the sum of all records, as well as the sum total R, will not square with my actual figures to date.
I could likely just stop here with my "no-duh" analysis to become a consistently profitable trader -- simply take only A and B setups. Only taking those trades would have resulted in 206 trades (~12 trades/week) being 65% accurate with +228R gross profits over 4 months. Very respectable. With better trade selection and execution, I have no doubt taking only A and B setups in the future will result in 70+% accuracy with even greater average profits (and risk/reward) per trade.
Taking C, D and F setups combined resulted in -243R. Now this part, I admit, I did find shocking. Taking these setups actually lost more than setups A and B combined. And if commissions were included, then the gap is even greater. I have to remember that taking lower quality setups, even if I risk "only" 30 basis points, are toxic to my P&L. Death by a million paper cuts.
Summary
Next Steps
I really need to understand those setups that feel nearly effortless and produce great results, then really focus on them. I also need to learn to avoid, or at least minimize, all the others. In other words, really focus on my strengths, and let them completely overpower my weaknesses.
And perhaps I also need to better understand why I occasionally fall into the overtrading/rogue mode, learn to lookout for those triggers, then smash those patterns. Or who knows, maybe I should embrace this by evaluating other trading strategies and methods that better fit with my natural tendencies and strengths?
In the days and weeks ahead, while making sure I avoid the analysis paralysis trap, I'll continue to dig into the data for more advanced insights, and especially determine which setups have worked best for me. My work has only just begun.
[Edit: 8/17/2011 - Once again, Greg has made my "Grouping of Trades and Tags" section below obsolete. Please see the comments section below or his blog post here!]
------------------
I finally completed updating the tags of all my historical trades in the free online trading journal at Tradervue.com last week. I went back over 4 months of trades since I started day trading the beginning of April 2011, and am now in the process of cleaning up the tags. With nearly 700 journal entries accounting for over 1000 trades, I know there is likely some tedious cleanup work remaining.
However, there's a point of diminishing returns and based on my requirements, I don't intend to or need to have perfect data. Just something good enough for relative comparisons and insights. It's not like I'm using this data to file my taxes. My primary job is a trader, not a statistician.
Some caveats on the data and results
- Data quality - garbage in/garbage out? My data is not perfect as described above, but I believe it's more than good enough to provide useful and valuable information. To any other trader, my database is likely of very limited value, since it's not a reflection of who they are and their actions. But to me, this data is priceless, it is me.
- Selection bias in the data. In other words, this database is a reflection of my real life ability to see and execute the setups, for better or for worse. So the accuracy or average profit of a particular setup in my journal does not reflect the optimal outcome of that setup -- again, only my ability to see and execute it properly (which hasn't been consistently great). In the future as I improve, the nature of this dynamic database will shift and grow with me.
- For example, there are instances where I took a setup that was grade "B" and would be considered profitable based on backtesting. But in real life, I totally chased it, executed it poorly, and possibly lost money. So that particular B grade trade will show up and be calculated on my reports as if it was a losing setup. It's not the fault of the setup, I just botched it. As my execution improves, this will become less of a factor.
- Grouping of trades and tags. Tradervue currently groups trades together into a single record if they occur within a certain timeframe. Therefore, if you're scalping (or in my case, overtrading) a stock, it's likely that you'll have multiple trade pairs in one journal record. As a result, the tags in that one particular journal record might contain tags of multiple setups, grades, outcomes, etc.
- This is not a problem if I'm just reading my journal entries, but when I query tags for certain statistics, I will not be getting the most accurate results. A query for A grade trades might also include D grade trades, and the average P&L outcome of all the trades in the group will be included in both queries. However, these calculations seem to wash out as the sample size grows.
- Reports filter one tag at a time. The ability to query tags on Tradervue is currently setup to filter based on one tag at a time. So there are some instances where I will bring the data into Excel or Access for more sophisticated queries. In those instances, there may be some results I discuss that you may not be able to easily reproduce from Tradervue alone, at least at this time. Let me know if you would like to know more details on how I do this and I can write a future post.
- Gross P&L only. Although this might change in the future, the figures from Tradervue are currently gross profit/loss, and therefore exclude commissions. For longer term traders with a minimal number of trades, this is not a big deal. However, I have over 1000 trades over 4 months. And I am essentially a scratch trader according to gross P&L (-2R), but include commissions and all I can say about my net P&L is...OUCH!
Based on R-Multiples
In order to keep everything on a relative basis, I have converted the figures into R-Multiples. Trader Mike posted an article on R-Multiples back in 2006, and this concept works best for me as a day trader. I'm currently risking a very conservative 25 to 40 basis points (.25% to .40%) of my portfolio per trade, since the current name of the game is to survival while I learn. So I'll use a weighted average of 30 basis points in my calculations as my current R. In other words:
R = .003 * my portfolio valueAs I become more consistently profitable in the future, I will raise the R-Multiple and balance it with the level of draw down I will eventually be comfortable with. And I will likely consider incorporating tiers, so that if my level of conviction is high for a particular trade (e.g. A+ setups), then I will establish the trade with something like a 2R risk.
The shocking...but really, not so shocking results
Reminder, see caveats earlier regarding the data...think relative not absolute regarding these results. Based on how I tagged my trades in Tradervue, here are the results to date:
GRADE # RECORDS % PROFITABLE TOTAL R AVG R PER TRADE
A 24 92% +61R +2.54R
B 182 63% +167R +.91R
C 206 33% -32R -.16R
D 483 16% -141R -.89R
F 171 25% -70R -1.42R
Note: As mentioned in the caveats, a trading record may contain more than one paired trade, and therefore more than one "grade." So the sum of all records, as well as the sum total R, will not square with my actual figures to date.
TYPE # RECORDS % PROFITABLE TOTAL R AVG R PER TRADE
Revenge 475 20% -136R -1.12R
Rogue 87 22% -68R -.78R
(non-strategy)
I could likely just stop here with my "no-duh" analysis to become a consistently profitable trader -- simply take only A and B setups. Only taking those trades would have resulted in 206 trades (~12 trades/week) being 65% accurate with +228R gross profits over 4 months. Very respectable. With better trade selection and execution, I have no doubt taking only A and B setups in the future will result in 70+% accuracy with even greater average profits (and risk/reward) per trade.
Taking C, D and F setups combined resulted in -243R. Now this part, I admit, I did find shocking. Taking these setups actually lost more than setups A and B combined. And if commissions were included, then the gap is even greater. I have to remember that taking lower quality setups, even if I risk "only" 30 basis points, are toxic to my P&L. Death by a million paper cuts.
Summary
- When reviewing my A & B trades, it's really quite a confidence booster. There's no question I have the ability to find good setups and to execute properly....
- ....then why the heck am I taking all those C, and especially D and F trades?!? I've got some serious work to do. I'm upset by this, and I'm going to channel these emotions to further fuel positive change.
- Only taking A & B quality setups are truly good to your P&L's health
- Taking C, D and F setups produce losses greater than profits from A and B combined
- Revenge trades don't work. Surprise...Not! But I am surprised at the level of punishment these trades had on my P&L
- Rouge trades (trades that are not part of my defined strategy) don't work as an aggregate. Surprise...Not!
- Everything seems to rank order well, so my initial grade assignments worked relatively well
- However, the ranking of C setups might need adjusting. I was expecting about 40-50% accuracy and breakeven gross profits. Therefore, perhaps some grade C trades should actually be rated D.
- I was disgusted with nearly all D and F trades, so I wasn't as careful grading between them.
- My risk management is solid. I don't mess with my stops nor do I risk too much on any one trade. But I do have a problem with stops being too close when I adjust them.
Next Steps
I really need to understand those setups that feel nearly effortless and produce great results, then really focus on them. I also need to learn to avoid, or at least minimize, all the others. In other words, really focus on my strengths, and let them completely overpower my weaknesses.
And perhaps I also need to better understand why I occasionally fall into the overtrading/rogue mode, learn to lookout for those triggers, then smash those patterns. Or who knows, maybe I should embrace this by evaluating other trading strategies and methods that better fit with my natural tendencies and strengths?
In the days and weeks ahead, while making sure I avoid the analysis paralysis trap, I'll continue to dig into the data for more advanced insights, and especially determine which setups have worked best for me. My work has only just begun.
Friday, August 12, 2011
End of week review
A recap of week ending 8/12/2011.
What's most disappointing is not the actual loss for the week, which is really nothing considering how much worse it could have been during this unusual week. But the fact that I should have known better, (especially after going through hundreds of my previous trades this past week) that trading in choppy markets can be a disaster for me. I'm so disappointed and demoralized with myself, but I'm very lucky that I didn't end up with a significant loss!
Is overtrading bad?
I hear and use the term, "overtrading", quite often, usually in a negative context. However, if your trading style is that of a scalper, profitably averaging hundreds of trades a day, is that a sign of overtrading? One consideration is that maybe I need to learn how to scalp trade. The techniques are quite different than the standard Trader-X methods, so perhaps this is a sign that I need to make the efforts to discover whether this is something that could be a strength.
What changed starting Thursday?
Up through Wednesday, I was holding a profitable EURCHF forex swing trade position. For some reason, it could be that knowing I had something profitable on the table took some of the anxiety away from having to "get in the market." I would glance at the profit from the forex trade, and that helped me to stay out of anything less than a B rated setup. I'll need to work on changing that mindset.
Positives?
I continue to do well controlling my actual $'s risk. A stop might get adjusted a few cents, but never have I ignored a stop loss, or let a loss of trade get out of control. This is a strength that I am certain I possess, and my performance has proved it. Another positive is that for the first few days this week, I took some good setups, and managed many of the trades very well. And finally, I have finally completed the updating of my trading journal on tradervue.com.
Warning signs -- overconfidence?
After Wednesday's close, I was actually feel quite confident and excited about my potential for trading. But maybe I let a little too much confidence make me sloppy. So I'm going to take all of this in over the weekend, and prepare myself for new week with much better results!
- Very volatile week, but I was actually doing pretty well, that is, until today.
- Monday, Tuesday, and Wednesday were profitable days, with selective trades and good returns. I was up about 19R post commissions (R=my average $ risked per trade), with about 65% accuracy.
- My overall portfolio as of close on Wednesday was up nearly 4%, while risking less than 20 basis points (.2%) per trade. My execution and stock selection wasn't necessarily great, either, so the figures could have been even better.
- However, Thursday the cracks started to show and due to some overtrading, losses erased all of Wednesday's gains.
- Friday, the morning was a scratch, but the rest of the day turned into a chopfest in a choppy market. A touch more than my entire profits made earlier in the week was gone.
- Ended up scratching/slightly down for the week
What's most disappointing is not the actual loss for the week, which is really nothing considering how much worse it could have been during this unusual week. But the fact that I should have known better, (especially after going through hundreds of my previous trades this past week) that trading in choppy markets can be a disaster for me. I'm so disappointed and demoralized with myself, but I'm very lucky that I didn't end up with a significant loss!
Is overtrading bad?
I hear and use the term, "overtrading", quite often, usually in a negative context. However, if your trading style is that of a scalper, profitably averaging hundreds of trades a day, is that a sign of overtrading? One consideration is that maybe I need to learn how to scalp trade. The techniques are quite different than the standard Trader-X methods, so perhaps this is a sign that I need to make the efforts to discover whether this is something that could be a strength.
What changed starting Thursday?
Up through Wednesday, I was holding a profitable EURCHF forex swing trade position. For some reason, it could be that knowing I had something profitable on the table took some of the anxiety away from having to "get in the market." I would glance at the profit from the forex trade, and that helped me to stay out of anything less than a B rated setup. I'll need to work on changing that mindset.
Positives?
I continue to do well controlling my actual $'s risk. A stop might get adjusted a few cents, but never have I ignored a stop loss, or let a loss of trade get out of control. This is a strength that I am certain I possess, and my performance has proved it. Another positive is that for the first few days this week, I took some good setups, and managed many of the trades very well. And finally, I have finally completed the updating of my trading journal on tradervue.com.
Warning signs -- overconfidence?
After Wednesday's close, I was actually feel quite confident and excited about my potential for trading. But maybe I let a little too much confidence make me sloppy. So I'm going to take all of this in over the weekend, and prepare myself for new week with much better results!
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