Paradigm Shift

BarroMetrics Views: Paradigm Shift

Of Mice and Men generated some emails. I was surprised; I didn’t anticipate the response.

I’ll look to answer the questions raised.  One batch was similar to Omran’s – why change when the process is making money? Because as traders we need to improve – you can bet our competitors won’t and if we don’t change and get better, they will leave us behind. Tudor Jones, for example, is now embracing AI. At one point, Tudor believed that men were better than machines. But over time, his views have changed.

Another theme was the difference between the two approaches.

In one sense, there was no difference: my first principle is ‘protection of capital’. That idea runs true for both approaches. The difference is, with that achieved, how do we go about producing superior returns.

There is a direct relationship between timeframe and size of return. The shorter the timeframe, the smaller the average win. Consequently, we need a high win rate.

The major difference between the two is found in that idea. In short-term timeframes, we need to:

  • Take profits more quickly and
  • Be more aggressive when managing our trades – to ensure that once in profit, we don’t let the trade turn into a loss.
  • The above ensures a high win-rate.

For example, in the EURUSD entry I failed to take, I’d have been stopped out after having exited some positions at the first target. Still, the result for the trade would have been a gain of 64 pips for every 600K taken. That’s a reasonable return when you consider that the trade failed to get to the 2nd target – the one I call the ‘core profit’ exit.

The final difference between the two styles is the amount of time spent in front of the screen. Undoubtedly, the shorter timeframe is more exhausting. I am going to have to lose weight and exercise more!

7 thoughts on “Paradigm Shift”

  1. Thanx Ray

    I believe it is wise to adapt.

    but : What playing in different TF’s is not easy as you will get biased ; this is what think.

    Anyhow : for the EURUSD trade you supposed to take : was it 600k size ? what is the right account size for such trade sizes ?
    I mean : what leverage you will use on all your open trades / positions ? what win rate you look for ? what RR you look for ?

    thanx

    1. Hi Omran

      Yes that’s true. When you trade different TFs, it’s important to keep focused on the TF you are trading. Having two totally different approaches helps.

      Turning to your questions:
      1) Account size? The account size is a function of your Money Management. I have my rules (and I expect so do you). The advantage of CFDs and FX is you can trade a size that fits your capital base: in FX you can trade from micro lots to 1m and above. In turn the MM rules are based on your philosophy of trading. A long time ago I adopted Trader Vic’s 3 principles which have served me. The first is protection of capital. This is mainly achieved with the position sizing given your trading stats.
      2) What win rate do you look for, etc? I think these are the wrong questions. In a mechanical system: the trading rules, the backtesting and real-time trading (testing-size) dictate the win rate. You then have to ensure that the avg$W, avg$L will generate a positive expectancy, given the win rate. That’s the function of the initial stop and trade management. Once you have the expectancy, you determine if the system is generating the returns you want.

  2. Hi Ray,

    I absolutely agree that changes can improve our skill both mentally and technically.

    “To improve is to change; To be perfect is to change often”- Winston Churchill.

    But I am curious on what stimulate you to think of having a change on trading style? the market volatility? the past performance?

    Analyzing the past is much more easier than forecasting the future. Future is uncertain. Lower TF did able to minimize the uncertainty as you need to entry quick exit quick. the longer you hold the trade, more uncertain of the performance. In short TF, it all about probability. (just like casino, they are using the probability to generate the revenue instead to simply winning visitor’s money)

    Best Regards,
    Owen

    1. Hi Owen

      Thanks for the comment

      The stimulus for change came by accident.

      I was looking to create a ‘reversion-to-mean’ mechanical system for my next seminar. In generating the ideas, I tried a process I read about in ‘The Net and the Butterfly’ (the art and practice of breakthrough thinking). When the backtesting reviews came in, I realised I had something special. So after the ‘Deliberative Practice-Rule Changes-Backtesting’ loop, I started trading real-time in May. The May results have been better than the backtests. Only 10 completed trades, so still a ways to go but the future looks bright.

  3. Hi Ray, Some time ago you were working on a breakout system based on Tony Crabel, i think?
    How did that work out?
    cheers Baz

    1. Hi Baz

      Worked out OK- I developed a system with a positive expectancy.

      As you know, my preference is to a discretionary rule-based approach. I develop mechanical systems for my seminar participants who prefer to trade that approach.

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