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Bob,
You asked:
"Ric, could we focus on why trendfollowing is difficult
for you? What exactly does your analysis of yourself in regards to
trendfollowing reveal about technique and your behavoral psychology. Can
you see and analyze trends? Can you not follow a trend, if so, why not?
Don't know when to get in or out? This really boils down to trading.
Perhaps we can learn something if you provide some specifics about this.
See if you can balance your psychological answer with some trading
vernacular."
This is all in the public domain - shared in another traders forum when
we all described our trading history etc. as a get-to-know-each-other
exercise.
Started trading forward/futures of the FT30 index/FTSE 100 index with a
bookmaker, then FTSE 100 with a discount broker and the
bookmaker. When I started making money, I went
back to the bookmakers to have my profits capital gains tax
free.
I now mostly trade the DOW, Nasdaq, S & P 500, FSTE 100, CAC, DAX and
Cable. If opportunities are identified I will trade pork
bellies, and anything that has reasonable volatility and dealing
costs.
My first ever trade was a winner - 13 points I recall. I was
hooked. I was a trend-following trader like almost all
newbies.
Initially I tended, through fear, to cut my profits and through hope, to
run my losses. I was losing at about 10% of my account each
month slowly reducing over the years to about 2% a month. The
end of refreshing the account was in sight but oh so far away.
By going back on the history of about 100 trades where I had cut my
profits earlier than my trading system suggested, I convinced myself that
in three quarters of the cases I would have been much better to have
followed my trading system. Over the next three months my
fear had dissipated, and this turned me from a significant loser (about
2% a month) to a small but erratic loser.
My next focus was on cutting my losses - but I seemed to have real
problems here - hope did spring eternal. Circumvented
the problem by using long options rather than futures.
Within months I was at break even - it had taken me about 10 years to get
to this point.
In the next two years or so, I made good progress and started to make a
little money without giving it back, and fairly consistently.
Looking back over the 12 years or so, my progress was steady, but
grindingly slow.
All entry and exit was at the market because I did not place stop-loss
orders in the market. In retrospect this was a mistake for
me, as I could not fully trust myself in the early days to execute the
stops as per my system. It was a common enough version
of 'discretionary trading' of the delusion kind!
So at this point (that is, several years ago) I now feel I am a
moderately successful trend follower. Using long
options I seem to have much lower stress than most of the similarly
successful traders I meet.
What I did not realise, through ignorance, was how poor regular 15% to
20% per annum returns were. But in my heart I probably
did understand that it was not sufficient recompense for the effort and
stress involved. But it was certainly better than losing
money and that was my perspective, and I was overly pleased with my
performance and progress.
My next moves forward as a trader will make more sense in the context of
what was going on in my mind for the prior 7 years or
so. I had given myself three trading mysteries
(mysteries that is to me) to solve:
- how
market makers could survive selling puts into a crash,
- how
two of the best FTSE locals would trade futures at the market open
and
then go home with open positions,
- how
100% p.a. was minimum performance of three FTSE pit traders.
These mysteries arose from listening to, and questioning one FTSE option
guy and two FTSE futures guys I occasionally met through two close
friends.
I never really fully grasped what they were telling me because I had a
trend following perspective and was misunderstanding their
wisdom. I now see they were all telling me a similar
story, if in different words and with various slants, but I was too thick
to see. I now feel my mind-set stopped me seeing
it.
I still occasionally laugh at myself, as at about the same time, and for
about 15 months, I had a regular 60 minute telephone conversation each
Monday with a home based FTSE 100 futures trader. I met him
at an open day at my bookmaker and we hit it off straight
away.
When the market was rising, he would say he was going to take an opening
trade, selling it at 15 points higher if it got there. In my
arrogance I assumed he meant he would buy it and he was just confused - I
never twigged why he seemed to make 40 points for every hard won 10
points I made and 100 points when I lost 5. God, I was
dumb! I still did not get it when, having been in and out of
employment and very poor, he retired at 28 to live in the
Bahamas!
Seven years after I first penned my note to try and solve the mystery of
selling of puts into a crash and surviving, I solved it - or rather I
discovered at least one way the option market makers managed to do the
trick. And i discovered that they made a fortune while
doing it rather than going bankrupt!
Thirteen months of nice profits, trading option spreads followed - and
not a single trend was considered let alone followed in that
period. My reward to risk ratio went up about 7 fold
just in the first four option months and it started 3 times higher than
my trend-following efforts. I had now solved the 100% p.a.
mystery at least for one approach. It was the
spectacular profits from the 1997 mini-crash that helped persuade me to
retire at 48 - some 20 years older than Martin had retired, aged
28. Part of the key to solving two of my 7 year old mysteries
was the concept of service to others. My coaching
service started to build during this period as I had more time and more
mental space to help other traders. And perhaps more to offer
and the service concept was in process of copying out of trading to other
aspects of my life - a spiritual experience if you will.
Then I discovered even higher reward to risk strategies - spreads of
related markets - it was so difficult to lose and so easy to win and I
gradually switched to this and have never looked back. It was
my second application of the service concept that has served (sorry about
the pun) me so well. And it got me back to trading
futures.
But I had still not solved the second mystery - sell futures at market
open and go home and be one of the most admired traders in the
pit.
It took several lateral thinking insights to get there:
- providing
not seeking service,
- multiple
entry,
- volatility,
- all
gaps are good,
- swapping
volatility opportunities for gaps,
- the
simplest of market behaviours - standard retracements,
- abandonment
of prediction,
- under-trading,
- counter-intuitive,
- simple
but not easy
- ...
It all boiled down to market making. When I put myself in the
shoes of one of those go home and forget guys, the scales started to fall
from my eyes. The go home guy just had a week or longer
time-frame - what he missed in volatility he gained on average in
gaps. Gaps in either direction worked to his benefit - that
is why he could go home without a care in the world.
So when it dawned - I paper tested while working in Portugal and calling
my broker for prices - I could not believe the profits. I
finally started trading very small units via the bookmaker - in those
days, penny a point internet trading was not available, so I felt quite
daring.
When the running losses at normal worst case scenarios seemed to match
the standard margin and only exceeded them when the exchange upped the
margin levels, I realised how the market operated, why the margin was
what it was, why and when and by how much it was increased - I was in
tune with the markets at last.
I tried various parameters - all had similar results - more money than I
dreamed was possible was thrown at me and all effortless as long as I
under-traded many times the level I had traded when trend-following or
spreading. What appealed most to be psychologically (even
though it was a small part of the profits) was that after all those years
of paying slippage, I was now being paid slippage!
I tried it with long options as well - less profits, but still more than
spreads.
I tried it successfully with short options.
I currently trade several trading systems at differing time frames:
- in
pension fund: market making style with a time horizon of 3 to 12
months,
- market
making with profits enhanced with spread strategies using
a
roughly weekly time horizon,
- day-trading
using market making with different parameters and position
sizing
concepts to improve overall reward to risk ratios,
If
market goes directly in favour of first days entry I turn the trade into
a
trend-following
trade using a stop-loss based on common retracement
percentages/trend
reflection concepts.
It is all done as a background task fitting in with my social life - and
if I feel like it.
For example, today I traded once before going out in the afternoon
(taking a 1 'step' volatility profit) and once before going out in the
evening (a nice gap of 4 'steps').
Some days I do not trade at all and do not look to see what my open
positions are doing.
Other days, when working on the computer, sometimes I flick to the
browser screen every 15 or 30 minutes - it depends what I feel like doing
- it is fun and effortless and optional.
I do take it seriously when my pension fund is getting close to an
opportunity - but this is perhaps a few hours over a week every 40 days
or so.
Cannot imagine going back to reward/risk ratios in the 1 to 10 range AND
having to monitor changes all the time. Nor do I miss the
stress.
On a technical front, during my trend-following days, I used Elliott wave
for entry and exit - supplemented by trying every technical indicator my
technical analysis software supported.
For me, and my then current style of trading, point and figure and Gann
percentages and cycle analysis were good secondary indicators for my
primary Elliott based trading system. It was only later I
discovered that cycles and Elliott were almost the same thing!
When I worked in various Continental European countries, I learned to
trade the 'tape' - my broker telling me the market price over the
'phone. This proved to be wonderful trading skill to gain -
no technical indicators survived except the point and figure - but even
that fell into disuse as I did not use it as a primary
indicator.
Currently investigating additional pairs of markets for spreading and
continuation probability distributions for various time horizons on each
of multiple markets.
Also preparing the ground for trading on a 1 to 3 year time horizon - a
new venture for me.
So I now use no technical analysis software, no charts, no indicators, no
fundamentals, no graphs - just tape reading if you will, and 100%
mechanical systems. I pay for no data feed - supplied free
whenever I log onto an internet dealer or 'phone a free number - so my
costs are almost zero.
Hope this answers your questions.
many of my clients have similar stories to tell and many have at least
30% overlap - but each is unique.
What is your story?
Unconditional regards, Ric.
www.traderscalm.com
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