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

 

The more things change, the more they stay the same

BarroMetrics Views: The more things change, the more they stay the same

Flashback: When I first started trading some 45 years ago, a very popular seminar was doing the rounds. The promoter promised ‘no loss trading’. His strategy called for ‘hedging’ a loss. By that I mean, you would take the side of the open position and hold it as an open position.

For example, I sell the AUDUSD at 0.7380. The pair moves up, and at 0.7410, I buy. Effectively that’s a loss of 30 pips. Instead of taking the loss, I hold open positions of short at 0.7380 and longs at 0.7410.

At some point, I lift the ‘hedge’ for one leg (usually the one in profit) and look for the other to retrace to breakeven. In Figure 1, the hedge is created in the ‘recover zone’: we have bought at the buy level and sold at the sell level. The market moves to the Profit Target, and we lift the buy leg. When the market moves to at least the recover zone, we lift the sell leg, thus allowing the trade to reduce the loss or to even breakeven on the trade.

I’ve done countless stupid things when trading, but accepting the ‘hedge’ insanity is not one of them. The fact is when you have a ‘buy’ and a ‘sell’, you have a closed postion, period. Moreover, when you ‘lift’ a leg, you are, at that point, instituting a fresh trade. To think otherwise is to engage in a self-deception of massive proportions! For example, when you lift the buy leg in the example above, you are in fact going short at the new sell price.

Flash forward: The insanity continues.The

The other day I found that MT4 does not permit part exits of open positions, unless you use a market order – which means we need to be sitting in front of the computer to exit part of our position.

BUT MT4 does allow hedging!

Now if there were a demand for partial exits, I’d expect MT4 to provide it. The fact that it does not, but does allow for hedging, tells me much about the way retail trading is being conducted. No wonder over 90% are losing – they refuse to accept that losses are an integral of trading. As traders, our only choice is to limit losses; we cannot eliminate them.

FIGURE 1 Hedge Strategy

Why We Fail 3 – Putting It All Together 2

BarrosMetrics Views:  Why We Fail 3 – Putting It All Together 2

So, we’ve identified the traits we need. The key takeaway from the “Why We Fail 3 – Putting It All Together” is to behave in a manner consistent with the traits.

The next step is a two-fold process:

  1. Formulate a vision of what success means to us. Break the vision down into its component steps and identify what is needed to attain those steps.
  2. Survey our current reality to discover the gap between what is needed and what we have.
  3. Implement a plan of action to fill the gaps.

In implementing the plan of action, we use the skill-sets required to bring our vision into reality. This necessarily includes taking the nature of trading into account – in particular knowing that our focus has to be on the process rather than the outcome of any single trade. The outcome needs to measured over a large sample size else we mistake luck for competence.

Trading success is not easy. We can do all the ‘right’ things and still suffer drawdown periods.. On the flip side, it’s the most rewarding profession in the world. Success or failure is totally within our control, and it’s the only profession where the majority of the competitors are actively contributing to our profits. For me, it’s worth whatever effort it takes to be a success.

 

Why We Fail 3 – Putting It All Together

BarroMetrics Views: Why We Fail – Putting It All Together

In Why We Fail and Why We Fail 2, I outlined why trading creates, more than any other profession, failures and the qualities as well as the skill sets we need to become successful. Here, I’ll draw the strands together to create a model for success.

We start with the need for the commitment to do whatever it takes, add the willingness to move outside our comfort zone, and finally, have the integrity and self-honesty needed. Included in the three is the resilience to bounce back from the inevitable drawdown periods.

Too many start trading without appreciating that without these qualities no amount of knowledge will allow them to succeed. This was recently brought home when I again met John at my recent gig in Singapore.

John had attended one of my courses. His story was a familiar one: trading off his mobile, he bought when the 5-minute chart was up and sold when it was done. In the process, he lost over $100,000. For a while, after completing the course, John would attend all the free presentations I give in Singapore. I used to think that it was his way of supporting me for the extra guidance I had extended.

Perhaps…

I say ‘perhaps’ because it so happened that I also met a mutual acquaintance at the recent Singapore event. It turns out John had long abandoned the lessons of the seminar and had returned to his old way of trading and to his old way of losing tons of money.

He reminds me of another trader I met at an event held (many, many moons ago) by a broker for his most active clients. The gentlemen had been in serious drawdown mode since opening the account (high six figures). In our after event festivities we had this conversation:

“Do you think you can help me make money?” he asked

“What do you think needs changing?” I replied.

“Nothing. I just need my trading to become profitable.”

So I asked: “Let’s see if I have this right.

  • You don’t want to change what you are doing.
  • What you are doing is leading to losses. And
  • You’d like me to change the outcome of your ‘doing’ so it becomes profitable?”

Incredible isn’t it? Yet that’s how many unprofitable seem to think. They are unwilling to move outside their comfort zone and make the changes that may lead to a different result. And, the commitment to keep making the changes they need to make until they achieve success. In the process, they will need to invest time, effort and money. In the process, they kid themselves that they are doing what they need to do to succeed.

The same points are made in Mike Bellafiore‘s “One Good Trade“. Mike’s SMB is one of the premier prop trading houses in the US. He also runs SMBU, a training program for budding intra-day prop traders. I do have an alterior motive for mentioning Mike’s book. I was reading it last night and on page 97, he recommends ten blog sites from which newbie traders can find value. This site was among them.

More tomorrow

 

 

 

Why We Fail 2

BarroMetrics Views: Why We Fail 2

  • and how to succeed!

Without a doubt, failure is a precursor to success. I don’t know anyone who has not failed first before succeeding. But, that does not mean we’ll succeed just because we fail. If that were true, then the success rate would be over 90% rather than the reverse.

To make failure a part of the success process we need to learn from our failures. And this learning or lack of it is the key ingredient that separates the 90% (unprofitable) from the 10% (profitable).

So, what do we need to have to be willing to learn?

Well, there are three values that are critical:

  • The commitment to do whatever it takes – time, effort and money. This value necessarily encompasses
  • The willingness to move outside our comfort zone.
  • Integrity and honesty with ourselves. By integrity, I mean keeping the promises we make with ourselves; by honesty, I mean not consciously faking reality.

We’d also need some skill sets:

Tomorrow I’ll put it all together

 

Journaling

BarroMetrics Views: Journaling

Baz was kind enough to provide a link to a free video utility, ‘Loom‘. Baz’s suggestion is it would be a useful tool for journaling. My view, it should be, but most retail traders wouldn’t use it. I think for three reasons:

  1. Journaling that acts as a learning tool is usually time-consuming, especially if the initial recording media is a video.
  2. Even if kept, most retail traders, don’t revisit to extract the info needed to improve.
  3. Even if they revisit and extract, often they don’t know what to extract.

The main function of keeping a psych and an equity journal: to have a database from which to extract lessons for future improvement. In a word, by keeping the journals, we know what to avoid and what to keep doing. In this way, we raise our skill level from ‘competent’ to ‘mastery’.

There are two steps in the process. First we ‘enter’ the data, second, we extract the lessons.

The ‘entry’ can take any form. We can write and take snapshots; we can video and extract the info, or we can use a combination of the two. What is important is we have the info, firstly to identify the qualitative factors (psych entries) that hinder our success and those that assist it; and secondly, to identify the objective factors (equity entries) that do the same thing.

With psych entries, we are looking at items such as the conditions under which we are likely to be disciplined and the conditions under which we won’t be e.g. following consecutive wins or losses.

With equity entries, we are looking for stats: Maximum Adverse Excursion, Average $ Win and Average $ Loss, Win and Loss Rate, etc.

Once have the info, you need to learn from the entries. For example, what has been the effect on my equity curve of ill-disciplined trading? It’s best that this info is displayed visually. Research shows visual lessons from trading journals have the best impact.

One of the main reasons I recommend Edgewonk is because it does all this seamlessly and mainly automatically. For a one-time payment of USD 169.00, it’s one of the best value tools around.

 

A Tool for Success 2

BarroMetrics Views: A Tool for Success 2

Although I have been speaking about journalling as if it were one, there are actually two aspects to it:

  1. The stats side and
  2. The psych side.

The stats side require the details of the trade. For example, date of trade, instrument, long or short, entry, exit, initial stop, size, setup and trigger. The minimum stats required would the Expectancy Details – either or:

  1. (Average Dollar Win x Win Rate) – (Average Dollar Loss x Loss Rate) = $X
  2. (1+(Average Dollar Win/Average Dollar Loss))x Win Rate -1 = %.

The two stats are slightly different. The first produces a dollar result, whereas the second produces a percentage result. The first says, given my results, each trade will generate $X; where the second says ‘for every $1.00 risked, I can expect, on average X% in the S’.

But other stats are useful, e.g

  1. What if I set my stop using a different method?
  2. What if I entered using a different trigger? etc
  • If you are trading mechanically, some questions:
  1. Has the system stopped working?
  2. Has the critical sequence of loss been exceeded?

The psych aspect seeks to record the conditions, internal and external, under which we trade best and under which we trade poorly. For example: under what conditions are we likely to breach our rules? Following a sequence of consecutive wins? Following a sequence of consecutive losses?

Before Edgewonk the answers were often difficult to find and certainly time-consuming. The software makes life a lot easier.

 

 

A Tool for Success

BarroMetrics Views: A Tool for Success

At least 90% of retail traders lose money in the long run. You don’t believe me, just Gooogle “90% of traders lose money”. For example, here’s a reported study from Tradeciety “Scientist Discovered Why Most Traders Lose Money – 24 Surprising Statistics“.

So if I were to say to you: “Use this tool, it will guarantee improvement!”, Would you use it? You’d think so, right? Especially since the tool could be free or at most cost only a minuscule amount when compared to your trading capital.

Yet, this has been my greatest challenge – to help motivate at least most of our students consistently use the tool. And the tool? Keep a trading journal. Yes, I know, you’ve probably heard it a million times! But, do you keep one?

You do?

If the stats are right, you’d be one of the few.

So why is journal keeping important? Think of it as a performance metric – akin to the data a professional athlete keeps about his performance – and for the same purpose: it’s the info we need to improve. 

In this piece, I’ll be looking at the most common reasons why ‘I don’t keep a journal’.

I don’t have the time! I am too busy trading!

For scalpers and active day traders, this may be a legitimate reason. Still, it takes only a minute or two to write a few bullet points that can be filled in later.

It’s important to write down the key points as soon as possible – if only because the longer the time-lapse between entry and journalling, the greater the possibility we’ll miss a key point.

I appreciate that the shorter the trader’s timeframe, the greater the temptation not to journal because journaling distracts from trading. Still, no matter how active, there will be a spare minute or two for bullet points.

For the swing trader and longer time-frame traders, “too busy” is an excuse. You have more than enough time for your journal entry.  You need to ask yourself: “what’s stopping me?”

Usually, the answer is found in our avoidance of pain strategy. If we refuse to accept the pain losses bring, we tend to run from losing trades. So, we find ‘we don’t have to journal this losing trade’. If we have a couple of consecutive losses, we soon find that we are way behind in our journaling. Now we have another excuse – “I don’t have the time to journal because I am too far behind!”

The solution is to:

  1. Make an entry as soon as possible after the event: pre-entry, entry, during and review.
  2. Breaking a trade down into its parts makes it much easier to journal.
  3. Also, you have ‘sunk costs’ working for you even if a trade turns out to be a loser. You’ve done most of the entry, only the review needs attention.
  4. Accept the losing trades bring pain. I’ve been trading over 30 years, and I still hate to lose money. But, by
  • accepting that losses must happen,
  • seeing losses as a learning experience, and
  • anchoring the feeling to making a journal entry

I’ve been able to make sure that every trade is journaled.

Tomorrow, I’ll look at what to journal.