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Thank you Scot. That is really the kind of post I enjoy reading. There is
always a new twist to things to be looked at!
Next to Method, MM, Discipline, I would add BELIEFS: All this can only work if
what you do is in phase with who you are. If the method or the MM are not in
phase, you will never get the discipline, because part of you will sabotage
every effort you make.
So along with everything else, I would highly recommend to figure out and keep
track of what makes you tick, and what pushes your buttons. That will give you
invaluable insights and greatly improve both damage control and efficiency.
Cheers to all,
Gwenn
Scot Billington a écrit:
> This is all only my opinion. Perhaps someone will find some of this
> insightful or simplifying.
>
> It takes three things to be a winning trader:
>
> I. Winning Methodology-The ability to forecast future price movement better
> than random. This tells you 'What' and 'When'. This covers when to enter
> or exit a given market. These entry/exit decisions must give one a
> positive expectancy or market edge.
>
> II. Money Management-The ability to size each position correctly. This
> tells you 'How many'. Having a stop loss in the market is NOT money
> management any more than placing an order is a winning methodology. Every
> methodology has a point at which the amount risked is too high turning the
> method into a losing proposition.
>
> III. Discipline-The ability to follow consistently one's trading
> methodology and money management parameters.
>
> The big three do not work in parts. One must have all three to be a
> winning trader. Trading without any one of the three will lead to the
> trader losing as much money as he/she is willing to lose.
>
> METHODOLOGY
>
> Market Edge - Expected return per $ risked on a one contract basis.
> Formula: W%*(avg. W/avg. L)-L%. Example- If you are paying me 6 to 5 on
> heads of a coin toss, my edge is (50*1.2)-50=10%. Therefore, on 100 $5
> bets I would expect to win $50 or 10% of the $500 I risked. Example II- If
> I have a system that wins 35% of its trades and the average winner is $3500
> and the average loser $1000, then the edge is (35*3.5)-65=57.5%.
>
> When deciding on methodology, I think the trader has three major decisions:
> fundamental vs. technical, systematic (by this I mean totally mechanical)
> vs. discretionary, and shorter time frame vs. longer time frame.
> Fundamental vs. Technical is a tired old battle continually waged by the
> various practitioners' egos. There are numerous examples of people who
> have used each style very successfully; therefore, I can only surmise that
> both styles can be traded profitably. I think technical has two major
> advantages. Firstly, technical trading is easier to systemize. Secondly,
> one can trade a much greater number of markets. It would be very difficult
> to become a fundamental expert in more than one market sector i.e. grains,
> energies, financials etc. Technical trading should be profitable in any
> market. (If your technical system only 'works' on certain markets, the
> system lacks robustness and has probably been curve fitted. If slight
> changes in the indicators' parameters result in large changes in returns,
> the system, again, has problems with robustness.) Multiple markets (20 or
> more) give one more diversity and more trades. More trading opportunities
> result in higher returns for a given period, quicker compounding of the
> investment, and performance closer to expectations. Do you think you would
> be a more certain net winner on the 6-5 coin toss proposition after three
> tosses or ten? How about 1,000? Would you rather have 2-1 odds on 50
> tosses or 6-5 odds on 1,000? Notice that the larger number of trades makes
> the inferior system (6-5 odds) much more profitable than the one with the
> bigger edge (2-1 odds).
>
> When discussing discretionary vs. systematic trading, I will begin again by
> saying that vast sums of money have been made using each style. They can
> be both traded profitably without question. The ultimate methodology would
> be discretionary, as it offers the trader the opportunity to have a larger
> market edge. It is possible (however improbable) for a discretionary
> trader to make 'all the right moves' and rarely have a losing trade, week,
> month, quarter, or year. The market edge of the best discretionary trader
> will be much larger than the best system. A system, by its nature, will
> have losing periods. By mechanically taking every signal, losing trades
> are virtually built into any system. Nonetheless, if I were a new trader,
> I would start with systematic trading, because it removes as much human
> emotion as possible from the trading decision. Human nature wires us to be
> losers in the markets. Problems at home, traffic, surroundings etc. all
> affect our emotional disposition, which in turn usually affects our market
> perceptions. It is rare to be able to make clear, consistent, rational
> trading decisions under the circumstances of life. It is very difficult to
> keep your 'mood', good or bad, out of your thinking process. Discretionary
> trading can not be back tested, and it is very difficult to judge the
> underlying theory, since the individual trader plays such a large roll.
> For example let's say I am trading discretionary method X, and I am not
> making money. Am I going through a normal down period? Am I bringing too
> much emotion and inconsistency into my decisions? Are my problems or
> triumphs at home influencing my trading? Or, does method X not give me a
> market edge? How do you tell? Am I looking at the wrong fundamental
> factors or am I nervous about my impending wedding? Systematic trading
> avoids these paradoxes. Systems can be back tested and future performance,
> therefore, estimated. Emotions are removed, and broken rules alert the
> trader to their re-appearance. Discipline and consistency are much easier
> to have and to track when one trades a system.
>
> Time frame is the last hurdle to clear when discussing methodology.
> Shorter term has an advantage by producing more trades, while longer term
> trading' advantage is lower costs (commissions, fees, slippage, bid/ask
> spread). Although an ultra-low cost short-term system would be the best of
> all worlds, I think long term trading is better for virtually every
> non-floor trader. In a day trading system that averaged $300 winners and
> $150 losers before costs, the costs ($60 a round turn) reduce each winner
> by 20%, increase each loser by 40%, and take the W/L ratio from 2-1 to
> 1.14-1, an 86% reduction. If one made two trades a day in a $25,000
> account, he/she would need 120% in profits per year just to break even.
> The costs would be greater than the original value of the account. As the
> costs become a smaller percentage of the average winner and loser, the
> necessary market edge of the method becomes smaller. It can be less
> predictive with regards to future market movement and still be profitable.
> I look at trading as a business, and drastically slashing costs will
> generally make a business more profitable.
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