Group your positions for better risk management.
You can have stops on each position. Put them on the groups and sectors as a whole as well.
For example, you might have a stop on your open gold trade limiting a decrease in your equity by 1% from the current market level. You might have the same for Tesla or Apple Inc.
Consider putting stop on all the metals in your portfolio so that collectively the aggregate risk across all of them is set at 2% for example.
You can test for the best level for you. The question is “what is the probability that I’ll be down 5% for the period if I’m already down X% given the backtest?”
That means, if you have 4 metals trades on in gold, silver, HG, and platinum, you may stop out of all your metals although a particular stop on any one of them was not hit.
That’s one way you can improve your performance and lose less.
Another way is to put a stop on your overall equity for the day, week, or month.
I think there was one time in PTJ’s career that he didn’t want to be down more than 10% in any given month, so he put a stop on his overall equity of such.
It’s key that when you hit that spot and get stopped, you actually stop trading. In the case of PTJ, he’d be done for the rest of the month. That might be hard for you if you like the action. Most professionals or aspiring professionals want to be experts in managing risk, not making frequent transactions.
In order to deploy any of these strategies, you’d have to offset your positions manually and then go in and cancel your existing stop orders - and I would do it in that order. Stop losing money first. Cancel open orders second.
The one surefire way you can become the best you can be - they way you become great - is to focus on Rules not Patterns
Head and shoulders patterns are not carved in stone. They look recognizable but must be interpreted. Like the Chinese language, there are more than a dozen dialects to this pattern.
Humans like us are bad at estimation and prediction. Read Phil Tetlock.
For every well-known “chartist” there are 25,000 guys who tried the same and blew up or didn’t make it. It's also emotionally and mentally draining to have to replicated each day.
Recognizing a chart patterns are no different to me than recognizing an odd number from an even number. What do you do with it? What’s the context of the information?
When I moved to LA from Manhattan, we all got a book of street maps called the Thomas Guide. It’s a spiral bound book of maps that we all kept in our cars. GPS was not included in smart phone plans and you had to get it separately, but it was expensive.
If you don’t know where you are going, having a Thomas Guide in your car is not going to help you. It will help you get wherever you want to go, but you need to come up with the destination. Same with trading. You need to know when to enter and exit and how much to own (or how fast to drive).
If you “recognize” a pattern, you don’t know where to enter, exit, or position size. That’s why I don’t consider charting as a long-term methodology to trading for the majority of aspiring traders.
Whereas a certain chart pattern might appear bullish, you know you're bullish when you have an order in to buy an N-Day high and that the expected value of that trade is 4 times your risk unit - regardless of the pattern. Trading rules supersede all chart patterns and remove the paralysis from analysis, the interpretation, and the uncertainty that comes from not having a decisive plan.
In fact, the way most good traders become “great” or even just better, it’s by letting go of charts and focusing on process and trading rules that are not derived from chart patterns.
Trading is a lot like poker. You're trying to made smart decisions under great levels of uncertainty with imperfect information.
That has been the case since the beginning of speculation. In many bubbles and manias, there sometimes isn't any fundamental information that's worth knowing. In that regard, you have to trade against the crowd or herd.
Chart reading as a skill is lot like trying to understand spanglish. Most of it is about interpretation.
You need to automate your data scanning asap to make things easier on you. Not doing so will exhaust you over time. I know it might be fun to scan the markets by hand, but you're going to find that you can't compete with a computer and a scanning service.
The downside of doing things by hand is that after a great deal of manual scanning with no results, you become desperate in thinking that you are missing out because "the markets are moving."
If you're a directional trader, volatility does not equal opportunity. If you're putting "today's big movers" on your screen - what are you looking for? A clue on how you could have gotten in before the move?
Don't be a piker - automating your rules is the first step to avoiding that scenario. No pro is "doing it by hand" - that's how retail traders do it because they don't know any better and they've bought into their trading platform's features as being benefits. They are not.
A good tool to use is called "Unfair Advantage" by CSI Data. It's a premium service, but I've used it myself and I vouch. I don't benefit financially for saying so.
Forget the charting, UA has a built-in portfolio manager and a correlation study and these tools are much more valuable to help you make decisions based upon expected values than looking at charts.
Sitting on your hands is sometimes best. Like the Red Sox should have done with John Farrell.
Only trade when you have an edge. Casinos in Vegas never close because they "never" don't have the edge (in most games).
Exiting Winners can be a hard trade. You don’t want to get out too early, and you don’t want to overstay your visit so to speak.
In order to make the most money and have total sanity around winners because you’ll be executing the same trade effectively for each winner you have. That leads to consistent behavior. Consistent behavior in trading leads to consistent and profitable trading.
No second guessing yourself.
Sometimes you’ll get knocked out.
Sometimes you’ll get to stay in the trade and it will continue to grow.
Don’t isolate your trading to fret about one winning trade. Think in terms of how you’ll be in this situation 1,000 times in your career and now you’ll have a plan to handling exits with your winners.
The LAST place you want to be is to have to make decisions around handling winners each time you find yourself in a winner. That’s emotionally exhausting.
Know what you’re going to do BEFOREHAND and follow those rules.
Here are three potential techniques to exit winning trades:
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It's been a big week on behavior... You have to be willing to feel all your feelings around trading. What might be holding you back from great success could be your reluctance or lack of willingness to feel new feelings around techniques or trading styles that are different from what you're currently doing.
Go back and listen to the "Rituals and Routine" episode. You might understand a trading technique or style intellectually, but you don't know it thoroughly until you've experienced it emotionally and psychologically.
Ed Seykota taught me that "the feelings that I don't want to feel have as much power over me (my trading) as the ones I do want to feel."
When you are willing to feel all your feelings, none of them can control you. They are all trying to teach you something. Are you open to listening at least?
You can test a new system (feeling) with 5 or 10% of your capital. If you trade enough, you'll realize that certain trading styles and techniques are there for the sole purpose of generating the emotions you are willing to feel, even if the trading strategy is an economic bad - day trading, for example.
You might be married to your current methodology not because it's the best one for you, but because you like how executing it feels. I suspect this is how most aspiring day traders feel.
You get to hang out with other guys, talk shop, have a sense of community, yet practice a belief system around trading that is not effective for long-term success.
Your Daily Process Can Be Killing Your Career or the prospects for your trading career. Professional traders bifurcate their trading day into preparation and tactical.
After the close, pros get prepared for the next day in terms of research and running their models.
During the following day, they spend their time focusing on trading tactics and managing risk.
This type of focus on your behavior provides a platform for enhanced performance due to your focus.
If you try to do 14 things at one time while trading, the lack of focus can lead to your making errors, missing trades, or taking small losses.
This is a short list of what can happen... I would not try to find trades "on the fly."
That's amateurish and chasing trades or markets is not a sound strategy in order to build a long-term track record on your P&L, nor is it behavior that you can replicate for years and years energy-wise.
Do your work the afternoon or night before, and spend the next day executing the plan.
Don't waver from this discipline. It will serve you better.
Routine or ritual? The things that you do might feel good, but not actually effect your P&L.
That doesn't mean they are bad, but it's a good idea to keep a journal on your activities so that you can measure their efficacy. Why?
Time and energy.
Physical and emotional economics.
Your trading career is summed up by your trading P&L but also what you need to experience in order to achieve those results - regardless if the P&L is positive or negative.
This pertains to trades that you are in, not trades that you are about to enter. Consistency and discipline will show up on your P&L. That's the numerical representation
If you see a chart on Twitter or StockTwits, delete it. It's not helpful, insightful, nor entertaining.
How do you handle your winners?
Do you feel enough anxiety to want to take it out of your portfolio and get rid of it?
Are you afraid you're going to lose it?
Those are emotional issues, not financial ones. These emotions might appear for you whether you're a discretionary chart reader or system trader.
Do you have the willingness to love it and let it grow up and develop into something amazing?
Do you become overbearing and stalk the trade and keep it on your monitor all day?
When the vol expands, you can trim the position so that you have the same percentage risk that you did when you added the position to your portfolio, or when you added your last risk unit.
When vol expands, you can cut the number of contracts per risk unit.
Allocators are looking at your daily equity volatility and in today's environment, they are looking for low-vol gains.
Practice Having Discipline Like for a baseball pitcher, it's about feel and consistency.
That means discipline.
You need to do the same thing over and over in order to be good an anything and that's especially true for trading.
In trading, that means you have to start with good habits, trade positive expected value trades, and consistently replicate that process.
If you have a smaller account, you might think you are relegated to penny stocks or fallen angels.
I would not do that because the emphasis is on making lots of transactions. Unless you are an HFT firm, the number of transactions work against you.
Stay in your winners for as long as you can. They go a long way to ensure you are successful or are becoming a successful trader.
What I would do if I had a small account or was underfunded, is to either trade commodity spreads or option strategies.
You can create hedges with either strategy and limit your risk while putting the odds in your favor.
The margin requirements are also smaller so you don't have to tie up a great deal of your trading equity in one trade.
The benefits of running a system are multi-fold. Once you trust your model, you can go deep...
Once it's live and trading, you will learn about the markets, your model itself, and most importantly, yourself.
You have to be there and be conscious of all that's around you. A good trader will not become too euphoric in good times (they are what they are) nor too despondent during the bad times (as long as they are 'in model').
It's possible to have worse results than what you saw in the Monte Carlo simulations. That requires a great deal of discipline, for it's the daily discipline that will help you express your edge...every day, every week, and every month.
It's the consistency to be disciplined that will show up on your P&L.
So you can outperform a great lot of traders, even some pros, if you can be consistent with your daily discipline and not wavering from it.
We traders are people who have to live with uncertainty and make decisions with imperfect information. No way around it. We willingly decide to take this lifestyle on.
Most people can't live with the uncertainly. John Q. Public and Public Pensions will pay you handsomely to make the decisions under the conditions that we must make and as long as you are consistent, they will continue to do so.
You can't do this from the beach or it flip-flops. That's Tim Ferriss stuff. If you want to be a beach bum, go for it. This is not for you.
You have to be dressed as if your best client can walk through the front door at any time. Looking like a frat boy is not how you install confidence and you're not going to trade $2,000 into millions.
Tiger Woods played his best golf while his personal life was a big lie. Think about the emotional system he needed to play his "game."
When his personal life blew up, so did his game. It's as if he needed the secrecy and his clandestine behavior to play at a high level consistently. Maybe that's how he got "in the zone."
That's how his emotional model served him. How is yours serving you?
Nothing should get in the way of you feeling happy and trading. If trading is making you feel bad, you can quit trading.
Go for a quality, happy life first. Put a protective stop on your trading career to preserve your happiness. Driving yourself nuts is not worth it.
Setting Price Targets is fear-based behavior and you don't want to let fear dominate your trading.
Setting price targets is about your fear, not greed. You set a price target so that you seem "reasonable" with yourself in terms of what you want from the trade.
Why set your sights so low...?
You need to start thinking bigger to allow your trades go to 20-1 in a reward to risk ratio. Let the market tell you where the bigger move is over.
If you can't imagining it happening, it won't happen for you.
You may have been coached wrong or have been instructed in a small-minded fashion in setting your sights to low.
It's your fear that gets you out of the trade too early. Only small traders are looking short-term. Let the HFT guys chop them up, not you.
Join the big boys and let the institutions push your trades further into profitability. Use the market forces against competition for your greater profits, like in judo.
Whatever trading edge you think you have, you cut it at the knees by taking profits too early.
Price targets hurt your performance.
Human beings are "bad" at prediction. There is not much science in guessing where a bull or bear run will end. Previous highs don't necessarily infer a price point where a rally will stall.
Institutions - the biggest traders in the crowd - place their wagers based upon fundamentals and their overall business. If you don't have a simulator, you can trail the trade structure with a protective stop.
Place your protective stop on your unrealized gains where you'll be financially and psychologically ok if you stay in the trade and eventually get stopped out.
You can ask yourself "How much of my unrealized gains am I willing to risk in order to stay in the trade longer?" The recent bull move in the S&P is a good example of how you can (and should) let your winners run.
Once you do it a few times, you'll become very comfortable with this strategy. You'll come to find that "you didn't have to do anything" to make the extra gains.
Sit on your hands and forget price targets. Let the market tell you when the move is over.
Take a mental health day whenever you feel you need it.
No one is going to be there to give you permission to do so. Trading is a grind and a marathon.
Doing the same thing day in and day out can become monotonous. You're not loser nor are you losing focus by taking care of yourself.
If you're taking 3 day weekends ever few months/weeks, you might not feel the burn that others feel.
I think it's very healthy to put some distance between yourself and the market for no particular reason.
You don't have to be in a massive drawdown to do this. Shake it up a bit and get back to center.
As you might have heard me say, "there are no external solutions to your internal problems," changing your routine can be refreshing when you're in a lull.
Preserve your sanity by implementing maximum levels of allowable losses per day, week, and month.
When they are hit, you stop trading for that period of time.
For example, if you set a daily loss on your equity of 1% and you lose that much on your overall positions, you go flat.
If you have a 8% rule on your overall equity for the month, you quit for the month even if it's only the 21st of the month.
As you approach 8% for the month, you'll want to haircut your overall trading equity (what you base your positions on) by 20 or 30% so that your losses will be even smaller.
If you trade with protective stops in place (and you should), you can calculate how much of your equity you will lose if they all get hit.
You can do this with open trade equity and trailing stops also. It's a very helpful process.
Chartists are discretionary traders. This is true for those who have a CMT designation.
How can you define your edge if you are looking at the same charts everyone else is looking at?
Charts need to be interpreted. That's discretionary.
You don't have the same emotional makeup that your chart-teaching coaches have.
You don't have the same life experiences that they do.
If you haven't backtested your rules, you don't know your numbers. What is the expected value of a trade that you put on in a head and shoulders formation?
It's integral to know if you are trading too big or too small for the risk that you are willing to take.
What is your optimal bet size for any trade that you put on?
What is your risk of ruin?
Don't optimize for share size or contracts...that's amateurish.
Most indicators are lagging indicators, they don't give you trade signals for entries or exits.
Indicators are emotional band-aids and won't relieve you of having to live with the uncertainty that we are traders must live with. We must make decisions with imperfect and incomplete information. That's the world we choose to live in.
Learn to develop your inner voice - for free.
Measuring your activity is a good way to begin improving your trading. Time blocking is more quantitative.
You can add qualitative aspect of it also by calculating the sum total of all your trading activity each day.
By the end of the week, you'll be able to see what you're earning per hour.
Marry this with your trading journal and you'll be able to determine what your time and efforts are worth fundamentally.
How effective and how efficient are you at what you're doing?
Challenge yourself to always get the most insightful information you can on your own behavior.
Be brutally honest with yourself. No one else will and you don't want to mindfuck yourself into eternity.
Control what's controllable.
Here is a great book on gaining insight on yourself. It's free.
Your #1 job as a trader or speculator is to play superior defense. "Your first loss, is your best loss."
Bad news becomes worse news, it rarely gets better. Offset the risk and then you can think with a clearer head.
Don't lament over a losing position when your emotional and financial systems are shocked. Use you entry rules to get back in. That's the best you can do today.
Your main goal is to preserve you capital and play superior defense. I'm not a big fan of band-aid positions - to me it's black and white. You're making money or not.
Follow you rules, but have a circuit breaker that you enact when an outlier event hits one of your positions.
How you place value on your time or money determines your trading style.
If you value your time more, you're likely not sitting in front of a wall of monitors all day. It's not worth your time.
If you value your money more, you may be holding on too tight and thinking that you have more control over your risk by sitting at a monitor. You don't.
That's the illusion of control.
Stop orders will get hit regardless of whether you're watching them or not. Let your control issues go. Delegate your hyper vigilance to your stop orders.
Acting this way is a bad habit.
Find out what works and scale that.
Backtesting will get you a good idea of what has worked in the past.
If what you're using is available to the general public, how do you think that adds to your trading edge? It doesn't.
Two Free Offers:
Learning to pitch backers is a great skill to scale your trading business.
Go from trading your account to several accounts to getting big allocations from Global Macro Hedge Funds.
You are great at what you do and it's a unique skill to manage risk in the markets.
Business owners know what they know about their own business, but it's a rare skill to have to manage risk in the markets. Partner up with successful business owners because they are risk takers by nature.
Even just the simple process of keeping losses small is a big leap for many potential business owners who you can partner up with.
Two Free Offers:
When bad news hits the tape everything is correlated and it always works against you.
You have to be careful that parts or segments of your portfolio don't become "one big trade."
Study the correlation risk between instruments and modify your position sizes in your trading system and portfolio accordingly.
Since instruments can behave similarly, you can inadvertently end up with the financial effect of over 100% of the risk you think you have.
This will cut your vol and smooth out your equity curve.
Two Free Offers:
Consistency is the key to your success as a trader. You might have to learn to deal with the monotony in order to do so.
New York Yankee Closer Mariano Rivera had one pitch that he relied on - a cut fastball - and although the opposing teams knew the pitch was coming, he was very effective at what he did.
Rivera has the most Saves in the history of MLB.
You can reduce your activity to what creates alpha and trade set ups that have positive expected value.
Be economic in your activity b/c you'll also need to conserve your energy. It's a marathon, not a sprint.
Do one thing very well, create alpha, and keep losses small and you'll have a long career.