Essential Thinking and Success 4

BarroMetrics View: Essential Thinking and Success 4

Only two more elements to go, folks!

So far we have covered:

The penultimate element: entry

The function of entry is to buy us some time and space: after entry, the instrument moves favourably for some profit for some time. If it does this, it allows the room we need to manage our trade so as to ensure the worst result is breakeven.

Take Figure 1. There is a world of difference between an entry at 123.99 (green arrow) and one at 124.91 (red arrow). The latter gives us no time and space to manage a breakeven trade within the timeframe we are trading. Since I am trading a 5-day swing, I’ve found that the 60-minutes is the lowest timeframe I can expect follow-through to the end of day. Shifting down to lower timeframes exposes the trade an unacceptably high risk of whipsaw.

Finally, we have instrument selection. This element is especially important in FX. Over a large sample size, selecting the instruments to trade that result in profit is important. For example in Figure 2, the trader entered both pairs on May 12. The EURUSD is showing a profit of 302 pips, the EURJPY a profit of 40 pips.

So there you have it. What I view as the essential elements for success. In the piece, I wrote in order of importance. Let’s summarise in chronological order of a trade:

  1. Instrument selection.
  2. Entry
  3. Initial stop
  4. Position sizing
  5. Subsequent Trade Management
  6. Consistent execution.

Figure 1 EURJPY 60-min

FIGURE 2 EURUSD cf EURJPY (Daily)

Essential Thinking and Success 3

BarroMetrics Views: Essential Thinking and Success 3

Today I want to look at ‘Subsequent’ Trade Management i.e. how do we manage trades once they have started to become profitable.

The strategy has to be different for individual traders – the approach depends on our trading stats and personality.

My philosophy is best expressed by Trader Vic in Principles of Professional Speculation. In order of importance:

  1. Preservation of Capital
  2. Consistent Profitability
  3. Pursuit of Superior Returns.

As a result. I employ different trade management strategies when in Ebb Stage (than when I’m in Flow). When in Ebb, I take profits more quickly, and I am less patient when prices go against me.

For example, on Monday. May 15 I bought the GBPUSD at 1.2907. After rallying to 1.29560, it retreated to 1.28908. I exited the position at 1.28997. It’s now trading at 1.29618.

Any regrets at the early exit?

Nope: the only way I’d have captured the current move would have been to hang in. And, my stats show doing that in Ebb Stage, would produce a drawdown of between 15% to 21%.

Executing the current strategy keeps my losses tiny – I’m effectively flat until I have a winning month or two. But when I do have a winning run, my profits don’t have to chase losses. Applying this approach, I had my second best year in 2016.

Essential Thinking and Success 2

BarroMetrics Views: Essential Thinking and Success 2

Carrying on where we left off in yesterday’s blog.

Most retail traders ignore the next Essential – and it’s easy to understand why. When losses are viewed as unacceptable pain and profits as desired pleasure, trade management is seen as something to be ignored. Here’s the quandary trader’s face:

If I exit a position, and then it goes my way, I’ll feel bad. If I take a profit and the trade continues making money, I’ll feel bad. 

If I don’t exit a position, and I lose even more money, I’ll feel bad. If I don’t take a profit and the trade then reverses, I’ll have left money on the table, and I’ll feel bad. 

It’s damned if I do, and damned if I don’t.

To act on this Essential, we need to accept that losses are inevitable. I always dislike to lose money, but I accept the loss as a necessary consequence of doing business. With that acceptance, we can turn to a trade management strategy that best suits our personality and available time.

For me, I prefer to take small losses (with the risk of missing the occasional big profit). And, since I am a full-time trader, I can manage exits on an intra-day basis.

The result of the strategy is: most of my money is made in a month or two. The rest of the time my results tread water. The strategy calls for exiting on two levels:

  • a ‘soft’ stop – a situational exit. For example, if the trade fails to do ‘x’, I’ll exit immediately, and
  • a ‘hard’ stop – a price stop, placed in the market. If the price is reached, I am automatically out.

Figure 1 shows a swing strategy I employ:

  • This is a momentum trade. I buy on stop on the expectation that by day’s end, I’ll be in profit.
  • My ‘soft’ stop: by day’s end, the trade must not be in loss.
  • I took two trades both at the same price 123.97. The first I exited because, at day’s end, the EURJPY had failed to follow-through. I took the trade again the next day.

An alternative strategy is the Buffett type approach: we exit when the reasons for the trade are no longer valid. I know of some traders who are very successful using this method. But, it’s not for me. I’ve seen too many wipeouts to be comfortable with it

More tomorrow…….

FIGURE 1 60-min EURJPY

 

Essential Thinking and Success

BarroMetrics Views: Essential Thinking and Success

What is Essential Thinking? Stripping down a concept or activity to its core components.

In trading, for example, what are the essential components?

The core objective is to make money over a large sample size. How do we do that? In two ways, via

  1. our win rate and
  2. the relationship of our average dollar win to average dollar loss. The larger the skew to the win, the more likely it is we’ll make money.

There is an inverse relationship between the win rate and dollar win: the larger the win rate, the more likely it is our dollar win rate will drop. For example, the highest win rate tends to be among algo traders, the majority of whom, tend to be scalpers (or at least very short term traders).

The longer the timeframe, the more difficult it is to eliminate losses. Focusing on reducing the average dollar loss is probably a more worthwhile endeavour.

So, the essentials for the longer timeframe trader in his quest to make money from his trading is to have a positive expectancy. To do this, he’d be better off focusing on reducing the average dollar loss.

How to do this?

Well, first off is to have a set of rules for both our Method and Money – then to ensure we execute our a high degree of consistency. Consistent execution (provided we keep psych and equity journals) provides the data for improvement.

Our Money rules provide us with our optimal position sizing. My ideas here are perhaps different to most. I adjust my position sizing according to whether I am in Ebb, Normal, or Flow State – with increased size during Flow and decreased size during Ebb. Within the State size, I also increase and decrease my size depending on the setup I am using.

For example: My normal size for FX is around 2M. But, when in Ebb State the size drops to no more than 600K. So, my best setups in Ebb State will carry 600K; but, different setups will have different position sizes. It’s important to track the effects of adjusting the size. I do this by keeping accurate records and doing ‘what if’ scenarios. Here Edgewonk is very helpful.

Essentials so far:

  • Our objective is to make money over a large sample size.
  • Consistent execution of our Method and Money is a must.
  • To optimise our ROI, we need a set of position sizing rules. I prefer to vary my rules according to firstly my State and then my setup.
  • Journal keeping is essential because it provides the assessment data.
  • We also need……

More tomorrow

Comey Circus

BarroMetrics Views: Comey Circus

It’s impossible to ignore the circus events posing as US politics. The problem is the ‘circus’ has the possibility of impacting market volatility.

Let’s see if we can take an objective view of the situation.

There is no doubt Trump has the authority to sack Comey UNLESS the sacking is for reasons of self-protection or self-aggrandisement. What do I mean by that? If it is subsequently established that a reasonable man could infer that the sacking was Trump’s attempt to block or hamper the FBI enquiry into possible Russian links with Trump’s staff, that would probably constitute grounds for impeachment.

Trump detractors argue:

  1. The dismal was due to the FBI’s investigation of the Russian connection, and not for the reasons stated in Roenstein’s memo recommending dismissal. (Figure 1)
  2. They point out that had the real reason been the handling of Clinton’s email server, the dismissal would have come once Trump became President.
  3. There are reports “A longtime friend who talked to the President over the weekend described him as “over Comey investigating the Russian meddling and not investigating enough the leaks from the White House”.

The fear is not the dismissal but that the replacement will kill the FBI investigation.

  • Trump supporters argue that:
  1. Trump acted within his constitutional powers
  2. His failure to sack Comey earlier was because having sacked Yates, Sessions need to be approved before a move could be made against Comey. The matter was further delayed when Sessions had to recuse himself from the investigation. It was only when Roenstein was appointed that Comey could be sacked.
  3. Comey brought the sacking upon himself through his poor performance at the Senate testimony on May 3. Moreover, he refused to preview his testimony with Trump.

If we bear down on the essentials, we are left with this picture:

  • The FBI is investigating the Trump team (and perhaps Trump if the evidence leads there)
  • To date, the FBO has not disclosed any evidence that the Trump was involved.
  • In an ongoing investigation, the FBI seldom reports on its findings, doing that only when it concludes.
  • It’s a convention that ‘justice must not only be done but must also be seen to be done’. Sacking the head of the FBI at a time when there is an investigation that may link you and your staff to a wrongdoing breaches that cannon.

All the rest is fluff and smoke. Trump did the wrong thing by sacking Comey at this time. Let’s see if he makes the next error – appoints a head who puts an end to the Russian investigation.

Roenstein memo

FIGURE 1

OCD Help

BarroMetrics Views: OCD Help

The Mastery blog hit a nerve with quite a number of you. I received emails along the lines in the attached doc (Posting it to this piece would have made the entry too long). Essentially, all were asking for help. I wondered how many readers were, are, suffering the same issues but did not write in.

(The author of the email suggested that he may be suffering from OCD given he had not learnt from his mistakes. Hence the title of this blog).

Here are some general words of advice.

Make sure you Method has an edge. Optimally, you will backtest the system (or setup), then forward test before you start trading it. This testing forms your first step to acquiring confidence in the Method. If you don’t know how to test, then find a service to do it for you. Drop me a line in the comments section if you need referrals.

After backtesting, test it on a micro account. The best asset class for this is CFDs. Unfortunately, they are not available in some jurisdictions, like the US and HK. I’m not sure if US residents are allowed to open overseas accounts. If you are, then I’d take that step. Just be careful, there are more than a few brokers that are less than legitimate. The best jurisdiction is Singapore – its Monetary Authority is the strictest I know of. Or you can go to Forex Peace Army and do your own due diligence. Most Forex brokers offer CFDs.

I emphasise, use the micro account size. Your objective is to get a feel for your method. Around 15 or so trades should do the trick. To give you an idea of the micro size: the S&P mini is USD 250.00 per point. The S&P CFD is USD $1.00 per point. Consequently, the CFD allows you to practise without being a danger to your wealth.

If you can’t or won’t use CFDs, then at least spend some time trading a simulated account using Deliberative Practice. The practice will acclimatise you to the way your trading rules react to market conditions.

Have Money rules: a way of calculating your position sizing, portfolio risk and when to add profits to your capital and when to subtract your losses. The Turtles ideas are a good starting point. I have attached some info here.

Finally, you need to manage your impulse trades. Having a Method in which you have confidence helps – immensely. Also, use Acceptance and Commitment Training (ACT). The Happiness Trap book is a great starting point. There are some free resources at the Happiness Trap website.

ACT Made Simple is a more complete introduction but is also more difficult to read. The Happiness Trap resource page also has some freebies for this book.

You could also Google ACT. But, be warned, much of the material is for practitioners, and I found the reading heavy going.

The 5 Money Management And Position Sizing Secrets Of The Turtle

Traders turtle rules

2017-04-28 email

Mastery

The current Mastery course is proving to be a gold mine of information.

Participation was only by invitation  – perhaps that accounts for the fact that the commitment to succeed is so high among the attendees. That’s not to say that the commitment is uniform – in any group, there will be those with a higher drive to succeed than the others. But, it is to say, that as a group, the commitment is higher than most.

Perhaps I should take a step back and outline the purpose of the course. Mastery assumes you have integrated the basic knowledge for trading success: you have a method with a positive expectancy, you keep your journals, you apply ACT so as to remain calm enough to allow your neocortex to manage the fight, flight or fear response, you execute your risk management and method rules with a high degree of consistency, etc., etc.

Mastery assumes you have integrated the basic knowledge for trading success:

  • you have a method with a positive expectancy,
  • you keep your journals,
  • you apply ACT so as to remain calm enough to allow your neocortex to manage the fight, flight or fear response,
  • you execute your risk management and method rules with a high degree of consistency, etc., etc.

Its objective is to move to the next level of discretionary rule-based trading: rather than see the chart as a series of individual patterns & processes; traders start to see the whole picture, they start to see what is important, in this instance, and what is not.

Think of the as a course designed to produce chess grandmasters. They scour the board and see the patterns that are developing rather than merely seeing individual tactics.

What I’ve found with my group is while they are competent in seeing trading as a single pattern e.g. they see a Spring Change in Trend Pattern, they aren’t quite there when it comes to seeing the whole picture e.g. why in this case, the pattern is likely to fail.

BUT, the fab thing is I am seeing such rapid improvement that it has made the endeavour well worthwhile. In the process, I’ve been taught what works and what doesn’t. The course has certainly put paid to the idea that you can become a master by attending a tw0-day or three-day seminar.

The course has certainly put paid to the idea that you can become a master by attending a tw0-day or three-day seminar. The attendance is but a start. After the seminar, you need to put in the work – first attain competence, and then to seek Mastery.

So where are you at? Beginner, Competent, Master? And what are you going to do to get to the next level?

LOOM – WARNING

A warning from my good friend, Joshua Fong:

“How’s it going?

Just a note of caution that it appears the app can read everything you type, including passwords etc, even when you are not recording. Just saying…”
I missed the warning when I looked at the software. My aplogies.
?

Presentations

BarroMetric Views: Presentations

My blog publication schedule may be disrupted March 22 to April 2.

I’ll be in Singapore for two presentations.

  1. On March 23, a presentation only for Oanda clients, the Elite Trader’s Club.
  2. On April 1, a public event – at UOB Kay Hian Auditorium, 8 Anthony Road:

“How to Leave the 90% Who Lose Money and Join the Winning 10%”!

At UOB, we’ll be looking to provide:

  • the knowledge needed to become successful and
  • the models needed to integrate that knowledge into a set of skills.

Also, there will also be some great giveaways:

  • Four high-quality books – among the best to help traders become better, and
  • A lucky draw for a mystery gift, one that has led to phenomenal improvement.

Needless to say, I expect the event to be highly successful. It’s certainly the case if our registrations are anything to go by. The auditorium holds 100, and we are more than half-full – we started the marketing just today!

If you’d like to attend, register at

http://www.barrometrics.com/ray-barros-trading-success-foundation