Efficient Trading

[zupcon]

Hi DB

I think that generally were all in broad agreement despite the argument raging back and forth. Id agree with you totally regarding developing a system with positive expectancy prior to trading, and that systems with higher strike rates are easier to trade psychologically. Id also agree with your comments on focussing on entries.

But that takes us back to the same old argument over free-wheeling it vs testing and preparation.

Now your quote above really did interest me. Ive spent all of my professional life solving problems in one way or another, and I tend to take a spiral type approach. With each pass of the spiral I gather information, I form a hypothisis, I test, I adjust, and I start the process again. I think the problem that many find is that without having considerable day to day exposure and involvement (free wheeling it), its extremely hard to form any coherent understanding that allows you to even begin the process of system development. A certain amount of free wheeling is perhaps required but we need to be aware of the unique set of problems caused by that exposure.

regards
mick

 

[zupcon]

May I comment ? It happens that you have included a key idea that is worth expanding on.

Of course, your comments as always would be most welcome

regards
mick

 

[turtle trader]

I suppose "everyone" is "arguing" about it because the principle is not quite as clear as you claim. You say, for example, that large losses reduce your equity more than small ones, or words to that effect, and this is true. But you go on to say that large losses are more difficult to recover from, and this is true only within the context of how one "feels" about the losses. There is no "consequently" here.

If the size of your account is reduced, you will ultimately have to reduce the size of your next trade(s) - that has nothing to do with feeling. Also your use of the word 'only' suggests that how one feels about losses is of little importance. You surely don't believe this?

You say further that to regain your original account balance, you have to "achieve proportionately larger wins", but this is the case only if one is trading by percentages.

Do you not agree that one should only risk a certain percentage of ones account on any trade - if so you are trading by percentages, and what I suggest therefore IS the case.

As far as reducing the "required stop size as far as possible", that may have a psychological benefit, but it has nothing to do with the probability of a successful trade, and may actually reduce that probability by increasing the chances of the stop being hit. Again, there's more to it than simply reducing the size of the stop.

Indeed, but does that mean we shouldn't try to both increase the probability of a succesful trade AND decrease the stop size required to achieve that success - perhaps we can work on our particular trade setup to achieve that?

Simon

 

[Profitaker]

BDP / Frugi

Well he starts by saying….

“Now consider the implications for an inefficient trader to have a string of losses using wide stops...”

With his example of 10% stops, and 10% being a wide stop-loss in my book, he seems to be illustrating how the trader gets deeper and deeper in the mire, and how more difficult it becomes to recover following a “string of losses”. You could be right about what was intended, but it’s rather academic anyway, as he ignores compounding and exponential growth in his subsequent post(s) and reverts to his usual patronizing waffle.

“What I think is meant is that say, i.e., you start off with 100 points to play with, each trade is opened with a ten point risk. In my reckoning five losing trades means that 50 points have been lost. That is 50%, right?”

You mean;

1st trade risk 10 points = (10 / 100) 10% of points risked
2nd trade risk 10 points = (10 / 90) 11.1% of points risked
3rd trade risk 10 points = 10 / 80) 12.5% of points risked
And so on…means that if you maintain the same points at risk after each losing trade then you’d be increasing your percentage at risk after each losing trade too. On that basis you’re correct.

Whether it’s wise to do so of course is another matter.

Turtle Trader

Yes I think this has the makings of a good thread. Nothing wrong with argument, even heated IMHO. The destruction seems to occur when certain individuals can’t get their point across and have to resort to personal and patronizing attacks. Here hoping eh ?

 

[dbphoenix]

Hi DB
Now your quote above really did interest me.

It has to do with a perpetual difference of opinion between Bertie and me. If you're new, you wouldn't know. Sorry.

 

[dbphoenix]

If the size of your account is reduced, you will ultimately have to reduce the size of your next trade(s) - that has nothing to do with feeling.

You don't have to reduce the size of your next trade unless you're using percentages or unless you're so bad at this that your account is nearly to zero before you awaken to the realities of the market.

Also your use of the word 'only' suggests that how one feels about losses is of little importance. You surely don't believe this?

One shouldn't "feel" any differently about losses than he does about wins. If he does, then he hasn't accepted the inevitability of loss. If he hasn't done that, he's far more likely to be afraid of loss. And that fear results in a number of issues.

Do you not agree that one should only risk a certain percentage of ones account on any trade - if so you are trading by percentages, and what I suggest therefore IS the case.

No, I don't. Therefore, I'm not. I realize that risking a certain percentage has been the going thing for a while, and many people accept it as "common wisdom", but while it may be common, it isn't necessarily wisdom, and it certainly is not a law.

Indeed, but does that mean we shouldn't try to both increase the probability of a succesful trade AND decrease the stop size required to achieve that success - perhaps we can work on our particular trade setup to achieve that?

Simon

Sure. However, the trader who works primarily on the former will generally find that the latter isn't all that important. Working on both simultaneously is fine. But if one is focused on stops, he is likely trying to avoid loss, and that can't be done, regardless of what some people claim.

 

[zupcon]

Hi DB

Ive read T2W for some considerable time, but I very rarely post as Ive very little to say or contribute !

I pretty much know who's who in this particular zoo, and have often enjoyed reading your "differences of opinion" :cheesy: Argument and constructive critisism are healthy and useful, and its always interesting to gain an understanding of how others percieve things.

regards
mick

 

[SOCRATES]

It has to do with a perpetual difference of opinion between Bertie and me. If you're new, you wouldn't know. Sorry.

That is not correct.

You have opinions, and the opinions you have are from time to time the wrong ones., and you know that, but you persist in arguing interminably over the slightest detail just to make posts.You are apt to express these opinions of yours in ways that are detrimental to members who do not know enough to discern between what is correct and what is not.

I do not have opinions. I have views. Views are very different to opinions, as they are not tainted by sentiment or emotion of any sort, but lay out the facts. And facts, are the result of irrefutable supportable evidence as a consequence of having very long experience spanning a lifetime which you do not have. And this is not your fault. But what is your fault is your persitence in arguing for the sake of it.

A very good series of examples of this are the numerous posts preceding this one in which you succeed in boring all of us to death with your pointless nit picking.

 

[Chicken Curry]

Twaddle, all of it.

 

[SOCRATES]

Hi DB

I dont think anyone ever suggested that using tight stops was a quick fix.

Soc's is arguing that new traders, due to lack of experience will, on average generally lose more trades than they win, REGARDLESS of the size of stop they employ, and Im sure that we'd all agree with that. If theyre going to lose anyway theyre better off losing smaller amounts whilst gaining much needed experience.

For most of us losing 80% of our starting capital would have a devastaing effect on our phychology, and consequentially on trading performance.

Personally Id argue that new traders should be demo trading, or trading extremely small amounts in order to get the experience, and THEN work on the psychological aspects and problems that live trading brings as a seperate problem.

The answer to your question is of course that its equally as easy to make or lose $10. For anyone who doubts this, open a demo account, and take trades randomly based on the toss of a coin, with a variet of risk reward ratio's. Do if for a couple of years and see the result, you'll break even minus transaction charges !

regards
mick

I have taken the liberty of highlighting the pertinent reference in bold red.

This is a very important concept.

The first stage is wide stops.

The second stage is losses greater than would be an acceptable norm.

The third stage is deepening losses and emotional pressure created by them.

The fourth stage is dereliction.

The fifth stage is desperate serial trading in an attempt fo recover these serious losses.

The sixth stage is inevitable wipeout.

All of these psychological and trading difficulties emanate again from not controlling losses, from the very beginning by not being attentive to the dangers of using wide stops.

I cannot understand why there is resistance to using the tightest stops possible.

Actually using wide stops leaves the trader open to being unfavourably stimulated in this way.

You must teach yourself to learn that losses (controlled losses) are a fact of trading life until you are able to evolve and these become more and more sporadic as your proficiency in picking winners improves and finally perfects.

You must teach yourself to learn that using tight stops are crucial to preserving capital, not only when you are a beginner, but right through in your personal development as a trader, through intermediate, advanced, and expert.

These are the costs of doing business. You have to view them professionally, and not unprofessionally if you want to ultimately succeed because you are competing with professionals in a professional environment.

Consider the costermonger fruiterer in a street market.

He is delivered a consignment of apples.

He now tips them onto his 'barrow ready to be sold.

What does he do before he sells them ?

He unhesitatingly picks out all the ones that are not up to scratch and throws them in the gutter. He does this because he cannot risk the bad ones contaminating the good ones and ruining his stock.

He does not get emotional about it. He may mutter or grumble. But he does it.

He does it because for him it is necessary to do it. He knows he has to do it as a consequence of his experience. He also knows that if he does not do it it constitutes
dereliction.

Dereliction comes in various guises, it is a virus that no trader can afford to become contaminated with whether the product is apples or tradeable instruments of any sort.

 

[Profitaker]

Is it me, or has he actually managed to put a post together bordering on constructive ?

Soc

Could you not have summarised that post by saying something along the lines of "when the times comes take the loss" ?

Tight stops or wide stops ultimately won't make any difference to success or failure, only the speed at which you get there.

 

[wasp]

Tight stops or wide stops ultimately won't make any difference to success or failure, only the speed at which you get there.

Isn't that the point, smaller the stop the further failure is away?!

 

[dbphoenix]

Isn't that the point, smaller the stop the further failure is away?!

Depends on whether you'd rather have your leg amputated with a fork or a surgical saw.

 

[zupcon]

I cannot understand why there is resistance to using the tightest stops possible.
/QUOTE]

I hope you dont feel Im being flippant, but there are probably a number of explanations for this

For many (myself included) trading brings a number of quite uniqe psychological problems. I think that there is a general tendancy for people to be attracted to systems with a high win rate (regardless of expectancy). Subconciously they'll do anything they can to achieve a higher win rate (or decrease their loss rate), and unfortunately the easiest way of beginners to improve their win rate is to increase their stop sizes, and reduce profit targets !

To take a ridiculously extreme example, taking 1 point profit, whilst setting a stop of 1000 points could very likely result in an extremely high win rate system, of course at some point you'll be wiped out by one huge loss. How often do we see people behaving in exactly this way, letting losers run, and cutting profits. Which one of us here can honestly say that at some point in their trading career we havnt done just that ?

The other problem of course is that due to the nature of the trading people can often recive rewards for completely stupid behaviour, whilst often being punished for taking totally correct actions !

regards
mick

 

[dbphoenix]

The other problem of course is that due to the nature of the trading people can often recive rewards for completely stupid behaviour, whilst often being punished for taking totally correct actions !

I suspect that the vast majority have gone through this (if not everybody). The market is particularly good at teaching the new to do the wrong thing. You try to control losses and think that the easiest and simplest way of doing this is to make your stops tight. So you make your stops tight, the trade seems to be good, reverses, takes out your stop, then resumes its move in the original direction. This happens just enough to persuade you to widen your stop. So you widen your stop just in time to catch that reversal that not only wipes out all the profits you made in the last week/month, but also puts you in a mental state that is hardly conducive to making the best decisions.

There are all sorts of variations on this, from entering on the basis of a coin flip then entering an MOC order then going to the zoo, to scalping for ticks and having to urinate into a bucket while subsisting on potato chips and Twinkies.

There is a general presumption of failure and a fear of loss in these posts that is self-sabotaging. I don't know why the thread is called "Efficient Trading" since the focus seems to be on stops. But I suggest that focusing on how to win rather than on how to avoid loss might be of equal or greater benefit.

 

[Profitaker]

Isn't that the point, smaller the stop the further failure is away?!

Not really. If you and I both use the same flawed methodology to trade, with you using tight stops but with me using wide stops we will both bust out, agreed ? You will have more frequent but smaller losses, whilst I would have less frequent but larger losses.

As I said, it doesn't affect the outcome.

DBP

"Depends on whether you'd rather have your leg amputated with a fork or a surgical saw."

Succinct as ever !

 

[wasp]

I don't know why the thread is called "Efficient Trading" since the focus seems to be on stops. But I suggest that focusing on how to win rather than on how to avoid loss might be of equal or greater benefit.

Capital preservation and controlling losses is just as relevant for 'Efficient Trading' as the winning part, but don't let me stop you continuing with the success part...

 

[zupcon]

I don't know why the thread is called "Efficient Trading" since the focus seems to be on stops. But I suggest that focusing on how to win rather than on how to avoid loss might be of equal or greater benefit.

Ive often observed that people do tend to get what they focus on !

regards
mick

 

[dbphoenix]

Ive often observed that people do tend to get what they focus on !

regards
mick

You provide a clue when you say "often being punished for taking totally correct actions". If one is trying to focus on his plan and on "trading well" rather than on the money, he will of course sometimes occasionally often lose, depending on his plan. If he considers that to be a punishment, then he will begin second-guessing his plan, such as it is, assuming that he had a plan in the first place and that it had been tested.

One wins, therefore, by having a consistenly profitable strategy, then following it without exception, knowing that some trades will be losers and not being surprised or depressed by that since loss was incorporated into the plan. The reward is doing the correct thing, or trading the plan, and one doesn't abandon all that just because of a loss or two.

Of course, if one has no plan or if the plan is one of those "feeling" plans, there's really nothing to stick to, and "trading well" can be interpreted to mean never losing, which is not possible.

 

[Bigbusiness]

That is not correct.

You have opinions, and the opinions you have are from time to time the wrong ones., and you know that, but you persist in arguing interminably over the slightest detail just to make posts.You are apt to express these opinions of yours in ways that are detrimental to members who do not know enough to discern between what is correct and what is not.

I do not have opinions. I have views. Views are very different to opinions, as they are not tainted by sentiment or emotion of any sort, but lay out the facts. And facts, are the result of irrefutable supportable evidence as a consequence of having very long experience spanning a lifetime which you do not have. And this is not your fault. But what is your fault is your persitence in arguing for the sake of it.

A very good series of examples of this are the numerous posts preceding this one in which you succeed in boring all of us to death with your pointless nit picking.

I can't take anyone who has such a high opinion of themselves seriously. Sometimes your facts have been wrong. I still remember the post you made about me going on an Updata course. It was about as factual as an article in the Daily Mail