Touch, pause, engage!

[searchlight]

. It's not up to the market to suit you. It's up to you to conform to the market's demands.

Well said.

Above quote also applies, different but related subject of choosing a trading style.

The most common advise given to the newbie is to find a trading style to suit his/her
personality. For some newbies in this board I thought ; gee that can be fatal.

To be successful trader we must be prepared to change some aspect of our "personality"
as well.(e.g need to be right all the time.)

searchlight

 

[dbphoenix]

I should also point out that failure to engage in this sort of preparation leads to the "emotionalism" that so many traders claim is unavoidable.

 

[jasont]

Db, has hit the nail on the head when he said you need to conform to the market. Many new traders try to find a trading method that can fit in between working 9-5. The beauty of todays world is the nature of global economies. Just because you are from the Uk, it doesn't mean you have to trade UK markets.

A long time ago when I first looked at trading I was told that trading a market closer to home was better because you know the companies. Today that is pretty inaccurate due to the ease of access we have to information on the net. You can find info on any company around the world on any major financial news site.

No one can tell you what you should trade. What I will tell you is that trading an instrument that doesn't suit the type of person you are will cause you a lot of stress and discomfort. Searchlight said we need to change some aspects of our personality for trading, I tend to think some people are just not suited to trading.

If someone has a tendency to need to always be right, they shouldn't be trading, they should do something else in life that compliments the need to be right. Many new traders don't want to hear this but it's the truth, everyone isn't suited to trading. Just as some people are great Footballers, Chess Players or Violinists, not everyone can do those well.

The only thing that could possibly help steer you in the right direction right now is to post up your social and academic talents for people to tell you what styles of trading and markets suit them. It's a very personal thing to do but for now it's the only thing I can think of. Forget your current commitments to work or other time constraints, you can find a market for those.

As Db stated, preparation is extremely important for not only deciding what to trade but trading itself.

 

[gododdin]

Been off sick for a while, but now I'm back, normal navel-gazing will resume as soon as possible...

 

[gododdin]

Thanks Jason T - whilst lying flat on my back I've had quite a lot of time to think about my motivations, social and academic talents etc. Now that I'm back I'll try to throw something coherent together (that isn't TOO personal!) in the next day or so.

 

[Chorlton]

I decided that in order to allow me to sleep at night my strategy would risk an absolute maximum of 2% of equity on each trade. Once I had made that decision others fell into place.

For example this meant that I had to place reasonably tight stops.

Hi gododdin,

This is not necessary the case. Where one places his/her stops should only relate to the specifics of the exit condition. ie. using price, S&R, etc, etc.

How much one risks on an individual trade has NOTHING to do with where the stop is placed.

A lot of newbies assume low risk has to equal tight stops. This is simply not the case.

Apologies if this has already been covered in other posts.

Regards,

Chorlton

 

[timsk]

How much one risks on an individual trade has NOTHING to do with where the stop is placed.

Hi goddodin,
Chorlton is absolutely correct. Here's an example:
1) Tight Stop
Buy 1,000 shares of XYZ stock with a 10 cent stop loss. Risk: $100.00
2) Wide Stop
Buy 100 shares of XYZ stock with a $1.00 stop loss. Risk: $100.00
This is what I do (which doesn't mean necessarily that it's the right thing for you to do!). The risk is the same in percentage terms on each trade. The size of the position is governed by where I place my stop (i.e. how tight or how loose) and NOT the other way around. It's essential that you place your stops in the right place for the right reasons. Where that place is is likely to be dictated by A) the volatility of the instrument being traded and B) T.A. decisions - e.g. above or below an area of support / resistance etc. Point B is more complicated because it requires experience and judgement. Point A is easier to solve. Like many traders, I use Welles Wilder's Average True Range (ATR) indicator to measure volatility and that provides an initial guide as to the area I should at least be thinking about placing my stop. If you're in any doubt about the significance of volatility, get up an intra day chart of two giants: Google and Microsoft. You'll see instantly that applying a tight stop to MSFT might be appropriate and workable, but it almost certainly won't be with GOOG. Sorry to labour the point, I do so because volatility is something I ignored for far too long and it's hampered my progress as a result. Like any new convert, I'm keen (perhaps overly so) to evangelise my beliefs. Ignore volatility at your peril!
Tim.

 

[Chorlton]

Ignore volatility at your peril!
Tim.

I agree 100%.

In addition, avoid the use of "fixed Percentage" stops. There are many other more effective ways to exit a trade.

Good Luck..........

Chorlton

 

[gododdin]

Thanks both Chorlton & Timsk - I still have much to learn on this journey! So if I've got this right - if the risk percentage is determined by where you place your stop, and that in turn is decided by the volatility of the stock, then in the early days of trading when equity is limited there will be times when you just won't be able to enter a trade because, due to the stock's volatility, it exceeds your risk percentage. In this case stock volatility becomes a much more important factor than I had realised. I shall do some reading about ATR, but I'd really prefer to learn to judge the volatility of the stock by looking at the price action directly if that's possible.

 

[gododdin]

This is not necessary the case. Where one places his/her stops should only relate to the specifics of the exit condition. ie. using price, S&R, etc, etc.

I wonder if you'd mind expanding on this a bit? I think I've grasped the rest of it, but I don't really understand what you mean by the 'specifics of the exit condition'.

Thanks, G

 

[timsk]

I shall do some reading about ATR, but I'd really prefer to learn to judge the volatility of the stock by looking at the price action directly if that's possible.

Hi gdn,
What you suggest is fine when you've got experience, but isn't so easy when you haven't! It's harder still if you trade short timeframes and have to make fast decisions. Also, don't confuse using ATR with trading with indicators. Yes, ATR is an 'indicator', but in the context that I'm referring to it, it's a risk management tool as opposed to a tool to make buy or sell decisions. Therefore it's not in the same category as MACD, RSI and CCI etc.

Chorltons point that you request further clarification upon is, I think, the same as point B) in my last post.
Tim.

 

[rags2riches]

From 1 newbie to another

Hello Gododdin,

Expect a slow and difficult journey to achieve trading success, but with so many helpful advisors around there is enough info to make it possible.

I found Nine's thread very helpful in dealing with trading psychology

http://www.trade2win.com/boards/general-trading-chat/29598-useful-things-i-ve-found-net.html

For what it's worth, I do believe in using indicators but what I am finding more and more these days is that there is a strong discretionary element to my trading. Just because the indictors tell me to enter a trade doesn't mean I should do so mechanically. Watching the market day after day has meant that I have started to recognise certain patterns and setups, slowly developing a gut feel for when the indicator signal may be a false signal.

They say the pros don't bother with indicators but imho you need a lot of experience to be able to trade without them. For me they are the stabilisers while I learn to ride the bicycle. If I survive the trading game a year from now, I may find I need them much less .....

I will be interested to see what methodology you come up with.

 

[gododdin]

Hi timsk - yes I see now the difference between using the indicator as a buy/sell indicator tool and using it as a risk management tool.

 

[jasont]

Hey Gododdin it's great to hear you are feeling better and are back in action. I get the feeling you might get a bit of information overload in near future. There is a lot of great information and advice being offered to you right now an no doubt it's hard to know where to start.

If you are truly looking for a way to trade price, once you have found the instrument you want to trade, something that has helped me and I'm guessing many other traders out there was to remove everything except price. To understand price you need to dwell in it. I'm not talking about watching it for a month and then thinking that is it. I personally have spent over a year and a half just watching price in different markets.

Whilst watching price learn from guys such as Db about particular price tendencies. If you search hard enough you will find someone who trades price in the instrument that you end up choosing who will give you a few hints about how that market trades. Every market is different and they have particular nuances that they follow. Do they typically try to get rid of weak traders behind support areas?, do they commonly make false breakouts? etc.

After learning market patterns and typical things the market does, investigate how other things are moving with the price. Volume, Tick indicators if your chosen market has them, different time frames, related markets or other things that are as simple as possible. Again speak to some guys who trade the market you choose.

When watching price action, especially when learning, you need to watch it without a bias. You need to be open to everything and take it all in without making assumptions. Just see how it waves up and down. Get to understand the very base principals of the market and move forward from there.

No one can tell you how to trade and I still believe trading can only be learnt, not taught. How you interpret the market comes down to what you know best. People can offer what works for them and you can try it, but if someone is great at trading tops and bottoms, it doesn't mean you have to do it that way. You may be better at trading with the trends or according to divergences in related markets.

 

[mp6140]

MP -- how to earn your blue blazer and wingtips !

. . . . . . .. . .. . . . . . . . . . . . When watching price action, especially when learning, you need to watch it without a bias. You need to be open to everything and take it all in without making assumptions. Just see how it waves up and down. Get to understand the very base principals of the market and move forward from there.QUOTE]

======================================================

While thats exactly what i tell newbs, I also introduce them to support and resistance, the reasoning behind the moves you watch, cause sooner or later youre gonna have to pick a place in that silly movement, get off the train and collect your winnings !

you can trade any danged way you wish, as long as you know where support and resistance are -- use it and pretty soon you too shall be a "master of the time space continuim" and allowed to wear the double breasted blue blazer and wing tipped shoes of the international forex banker !

enjoy and trade well

mp

 

[Chorlton]

I wonder if you'd mind expanding on this a bit? I think I've grasped the rest of it, but I don't really understand what you mean by the 'specifics of the exit condition'.

Thanks, G

Hi G,

I am simply referring to the "rules" that you choose to exit a trade.

Out of interest, you mentioned that your strategy would risk an absolute maximum of 2% of equity on each trade. Can I ask how you derived at that figure?

IMO How much one risks on each trade is dependant on two main factors:

Firstly, is your own personal approach to "risk" and this is the point that most people / books refer to. However, I believe the other factor is the actual System/s that you intend to trade. Let me try to explain:

The popular figures used regarding the Max amount to risk is normally anything between 1-5% of total capital. For this example, lets use your figure of 2% and say a starting capital base of £20,000.

So, using a quick calculation, on each trade you are willing to risk £400. You consider that £400 seems a comfortable amount so you decide to stick with the 2% risk, while trading your system.

However, if you intend to trade multiple positions (say with a portfolio of stocks) then this calculation which we have just performed is on little value as the actual risk when trading "live" will not relate to this. Instead what will be important to the trader when trading a live account is Max Drawdown, number of consecutive losses, smoothness of your Equity Curve etc.

Personally, when I design a new system I use an initial risk of anything between 1-2%. After carrying out backtesting, I am able to see the Max Drawdown, # consecutive wins / losses, etc of the system. Then, by adjusting the % risk, I am able to optimise the system, so as to meet my own requirements.

I have had some very interesting observations modifying the % risk and re-testing the system. In one example, increasing the % risk resulted in no real improvement in Net Results yet the Max DD increased beyond an acceptable level. In another example the opposite happened!!

IMO, most traders will spend the majority of their "development / research" time looking for the best Entries / Exits and will (where possible) modify / optimise these to offer the best rewards. However, I believe the same procedure should also be undertaken when it comes to calculating "risk" ie. The Money Management / Position Sizing element of the System.

Personally, whatever time you take to develop your Entry and Exit conditions, you should spend an equal amount of time developing your Money Management rules.

As Traders, we can only control one thing in the Markets, and that thing is RISK. Focus on this and the profits will look after themselves.........


Also, as a side note, can I ask whether your current System which consists of your Entry conditions, Exit Conditions and Money Management Rules has a "positive" expectancy, and equally important how you know this?


All the best,

Chorlton

 

[gododdin]

Wow! Many thanks Jay, MP, R2R & Chorlton - I have some homework to do!

 

[gododdin]

We were invited out to dinner last night and in the course of a very pleasant evening the conversation came around to trading. The host was telling me, 'Trading - don't touch it with a barge pole! You will lose all your money!" I tried to tell him that I was approaching it very cautiously and trying to learn the business as well as I could before risking any actual money, but it made no difference to my host's position - apparently his brother lost his total equity of £40k recently in trying his hand at share trading. It was (quite literally) a sobering story. :whistling However, whilst I can see how this could happen, it seems to me that if I'm careful I should be able to avoid such a disaster (of course, I realise that I may regret writing that one day and have to eat a large helping of humble pie!).

Another chap I know was telling me a couple of days ago how he's made £12k in the last 2 weeks without ever looking at a chart (he uses Bloomberg apparently), and that it was time for me to "...stop learning and just get on with it"! When I asked what percentage of his equity he'd been risking he just smiled rufully and said, "Well, let's just say that I was taking more of a risk than it sounds like you would!" I in turn just raised an eyebrow and took that as a complement, thinking that despite his impressive gains, sooner or later he's going to come unstuck! Of course, I couldn't help but be a little envious of his success, but my philosophy is 'all in good time' and in any case I have a feeling this guy would be less keen to tell me about his losses, so I'm probably getting a very skewed picture.

 

[gododdin]

Since Jay suggested I should post some personal profile stuff to enable a possible assessment of what I should trade, I've decided to give it a go. I don't want to make it too personal - rightly or wrongly I'm a little nervous of someone using it for identity theft or something nasty like that. But anyway, here goes:

Education - to post-graduate degree level in the arts (many years ago)

Career - I've worked in conservation management for more years than I care to admit!

Personality - I'm a very sociable person - I really enjoy talking to and learning from people. I'm pretty outgoing I guess - I'm the lead singer in a rock band (at my age I really ought to know better!). I also play a number of musical instruments.

I enjoy solitude too though - I'm an experienced mountaineer, and usually prefer to do this on my own. But that doesn't mean I'm an unneccessary risk taker - of course there is inherent risk in mountaineering but I tend to carefully calculate the risks and will turn back rather than reach the summit at any cost. I have several friends who are qualified and experienced Alpine guides and I've learned this approach from them. Sadly, I've lost good friends to the mountains too over the years, but it never stopped me wanting to do it. I recently took up sea kayaking - and I love it - such a simple but seriously seaworthy boat that enables you to venture where larger boats dare not go...

Motivation - unlike (I'm guessing anyway) some people on this forum, I'm not out to make a fortune from trading. I agree with Van K Tharp who says that financial freedom is having enough money to live as you want to live. Personally my aspirations are modest (what the hell would I do with a Porche, other than get speeding tickets? ) but I'd like to be in a position where I don't have to worry about money, and be able to travel once in a while. Most of all, I'd like trading (in the long term) to make me 'time-rich' so that I can enjoy playing music, mountaineering, walking the dog or whatever. Other than that general level, I'm afraid that my specific dreams are my own, and off-limits!

I guess it's possible to persuade oneself of anything, but I was thinking that because I know so little about any of the 'instruments' traded I should make a virtue out of this disadvantage. It seems to me appropriate that I should just choose something and from that standpoint of ignorance, learn as much as I can about the 'character' of the instrument I choose, and as Jay says watch its behaviour over time on the charts. For some reason I can't really explain (but probably because there are so few of them) I'm drawn to currency pairs and have been watching EUR/USD and EUR/GBP charts for a short while. Any recommended reading would be much appreciated.

One thing I will admit is that I've never been great at 'numbers' - I've always said that I do 'words not numbers' and obviously I can see this could be a potential disadvantage in the trading business (Alexander Elder certainly seems to think so!). So I'm trying (along with my family) to improve my mental maths skills - just by playing number games etc.(Nintendo 'Brain Training' is good for this I find ).

 

[jasont]

Great work Gododdin. It is good that you keep a level head when someone boasts about their gains in the market. Many other traders I have come across tend to jump onto that persons bandwagon following what they do and end up much worse off for it. I think people to lose their entire capital is so common in trading because all it takes is one mistake whilst not following any strict money and risk management rules. Say we have someone who is new to trading has their first 3 trades as winners, they think its easy and risk a lot more than they should on the next trade only to have their account wiped out. One silly idea can do that.

I don't like making assumptions based on little information but I'll try my best to help you out. With your personal information you gave it seems like you are a pretty active person. Mountaineering, Sea Kayaking, lead singer in a rock band, playing a number of musical instruments, being very sociable. To me this appears as though you're not one to laze around and you always like to be doing something.

On a trading front, that can work for you both ways. Let's say you wanted to trade the currency pairs, unfortunately it is the one area I haven't investigated in my trading so I can't give too much advice. From what I have seen there is enough liquidity in the currency pairs to trade whatever time frame you like. I've seen scalpers and I've seen longer term traders. Obviously you need more cash for the longer term because your stops are likely to be bigger increasing your risk or you will have to reduce your reward if you position size.

Now you appear to be quite an active person which I'm guessing (only from what I have read and this could be wrong) that you wanted to trade on a few day time frame partly due to your busy schedule. However in a way I think that could cause you a bit of stress because there is a lot of in between time. It's not so much the waiting for the days to pass but more so the waiting to find out if you've made a good or bad trade. From the activities you have stated, it looks like you would make a lot of on the fly decisions. Sea Kayaking and lead singer of a band requires quick thinking should things start to get shaky. I'm guessing you enjoy the quick decisions and quick feedback on your performance or activity. Whether it be you get tipped on a wave or stuck on a rock whilst sea kayaking or getting a roaring cheer at the end of an on stage performance.

You don't need to be "great" at numbers to trade unless you want to create complex systems based on math. Many Hedge Fund Managers tend to do this to offset their risk they take in markets. For trading a directional system, meaning buying and selling an instrument, you need "basic" math. How to add, subtract, multiply and divide simply to work out your own risk.

I'm sure some other people can offer advice on this as well but in the end it's what you feel best doing. If you like the currency pairs, then do as you have said, begin watching them. The benefit you have to the pairs is that they can be traded on the longer term or shorter term. Although you said you would like to trade a few day time frame, your other activities you are involved in tend to say you like things a bit quicker paced.

Please do not take what I have said and think it is what you must do. I can not possibly give you an accurate description of your tendencies from a forum, I don't know you well enough to direct you on the right path. I can only offer a suggestion according to the general activities and tendencies you have provided. I hope you do nothing more than read what I have said and think deeper about the things you do and how they relate to the market. If you like the currency pairs then go for it. Just find what time frame gels with you best.