BarroMetrics Views: Your Trading Plan
Mind x Money x Method is the foundation for long-term trading success.
Why have I emphasised ‘long-term’? Because the random nature of the market can deliver success (or failure) in short-term bursts that tell us nothing about the viability of our success in the future. And, it is the future that we care about. Think about it, if we want to become full-time traders, are we concerned with a two-week result, or are we concerned with a two-year result? Clearly, it is the latter.
The problem is the market provides a random dispersion of profits and losses. We may experience consecutive winning trades. As a result, we often confuse being lucky with being competent. I make a point of this because there is so much hype about incredible systems that will make ‘only 5% per week’. Assuming, that we trade 40 weeks a year, that will give us 100% per annum. I know of no one that has attained 100% per annum over a large sample size. It is important that we keep our expectations within realistic bounds.
The ads do the newbie a disservice by raising their expectations that lead to overtrading in terms of size and/or frequency. In turn, the overtrading leads to ruin. If the trader is to succeed, he needs to keep know that the name of the game is firstly preservation of capital and then attaining superior returns (thanks Trader Vic!)
With that in mind, let’s turn to a discussion of Method.
A Method’s objective is to provide a positive expectancy return. To do that it must provide:
- Exit – Initial Stop or exit strategy to limit losses
- Profit target or profit-taking strategy
- Position Size
The question is, how do we get there? That depends on our personality.
There are three types of traders:
- full discretionary (gut, all intuition)
- rule-based discretionary, (where one has rules, but the rules permit deviation)
- systematic trading (where one follows the rules without deviation)
The only full discretionary traders that I have encountered were the pit traders of old. I understand that now order flow traders are in this category, and this is a class of traders with whom I am not acquainted.
If you are a full discretionary trader, I invite you to do a guest blog, telling us how you arrive at your decision-making.
The next category a trader I want to consider are the mechanical traders. Mechanical traders spend their intuitive moments designing their system. Lacking the expertise to backtest, some traders rely on services. Two of the best are Robert Hanna (Quantifiable Edges) and InvestiQuant. Both have free downloads that serve as primers.
Once the rules are in place, the objective of the mechanical trader is to execute them.
Tomorrow – the nature of Mechanical Trading…..