If the chart pattern does is not conjugated with the average volatility of the instrument you’re about to trade, you could be in for a very frustrating time. A trade set-up might work for you when you compare what you’re willing to risk per trade and the 20-period ATR, for example. But what is your risk with respect to the rest of the chart?
This effects everyone in the market, not just newer traders with smaller account sizes. I just posted a video that help traders disqualify trades based on this key concept. Remember, your first order of business as a trader is to protect your capital. That process starts before you put on a trade.
You can spend days upon days wasting time in front of the computer screen and not make any progress in your trading career if you don’t understand this concept. Progress in this sense means growing your account balance. I don’t want you working for the occasional $200/day gain.
Michael Marcus did not turn the $30k into $80 million staring at screens all day.Continue Reading...
I am very excited right now as I’m working with a student who has some amazing natural talent.
This came about when he listed the goals for 2014. We reviewed his goals for 2013 and found out that he did not hit one of the most important goals: being profitable.
As a converting day trader, he’s amazed how much ego had gone into his trying to determine price targets for instruments he traded.
It’s one thing to get the instrument right, another to get the direction right, and a third thing to get the position sizing right. So we did a little exercise.
We built a spreadsheet of all his trades of 2013 and created 3 columns: entries, exits, and a “Where Are They Today” column. In 97% of the cases the longs were higher than his exit price.
When we multiplied it by the position size, we can see the money left on the table in dollar and percentage terms.
This represents the opportunity cost of being a day trader.
How much is being a day trader costing you?
Watch the free Volatility Study lesson.
Watch the free Vertical Put Spread lesson on AAPL.
Here’s a recent review of Inner Voice of Trading.Continue Reading...
I just received the best LinkedIn Recommendation that I’ve ever gotten from a student. His name is John Crowe and you can see it for yourself if you happen to connect with me on LinkedIn:
“Michael is a gifted trading mentor. Over the course of several initial conversations he was able to assess my situation and recommend trading strategies that were harmonious with my personality; while at the same time attending to my family’s financial needs. I cannot stress enough how life changing this was for me. As a trader I now believe it is crucial to find strategies that fit “me.”
My entire belief system regarding the markets has changed as a result of my mentor-ship with Michael. Michael has remained a constant guide as I continue to mature as a trader and manager of market risk. His guidance has provided me with the self-confidence I required to pursue a career as a money manager, which I am currently pursuing.
In short, I would highly recommend Michael’s mentor-ship and educational skills to anyone who is serious about improving their performance and self-understanding.” — John Crowe, Kansas
Part of my mentoring traders is also the ability to teach students new insights about how to look at the market. I find that new traders spend way too much time (10 hours a day) making a losing insubstantial capital.
After 2 years, they’ve not really done anything to build a career except go through rituals – they look like traders to outsiders, but their P&L doesn’t delineate much more than confusion. If you immerse yourself in my program, you’ll get where you want to go much quicker.Continue Reading...
What to do when your Trading System is not the problem
You think you have great entries and exits, and you have position sizes that you’re comfortable with. Yet when you systematize them, the hypothetical results are not critical to the extent that you can use them to manage risk — or raise any capital to trade.
So you go back into the dashboard of your simulator and you start the tweak the living daylights out of your entries. That doesn’t work. You tweak your exits. That does’t work either. You test smaller positions. That doesn’t work.
You begin to add indicators to your rules. They bring small but positive changes, but the overall hypothetical results still stink. You layer another 47 indicators on top of one another and you finally have something that will make money. But now the problem is that the system makes only 3 trades over the last 10 years. It basically needs to be Leap Year for you to put a trade on.
You’re about to scrap the whole file and start over. You’re feeling enormous buyer’s remorse because although the simulator isn’t necessarily expensive, it feels so when you can’t get it to work. You may become so frustrated that you want to quit.
The problem could be with your data. Yes, it’s important to have clean data in that you don’t want any bad prints to trigger trades in your simulator that will otherwise destroy your ethos when it would otherwise yield results that would look promising on the first pass. I’m talking about the universe of names (tickers) in the data that you’re pumping through the simulator.
You may need to rake the data before you run it through the simulator. Gold does not trade like Sugar does not trade like Apple. Why would you have them in the same data universe? You wouldn’t and that’s an easy one to understand. Suppose your trading rules worked better in one asset class that another? Or suppose they worked well for one capitalization but not another? Maybe you should consider segregating the small caps from the large caps…
Here you are double-clicking your mouse for 10 days trying to get your system to work and the problem is not with the system, but in the data.
You can rake your data before you run it through your system and create your own universe of securities to test. Here are a few examples:
–NYSE listed securities only
–Average Daily Trading Volume (ADTV) > 10MM shares
–prices between $20 and $75
Test everything at the portfolio level to make sure that your rules are robust, and try to keep your rules simple so that you can explain them very easily to a non-pro.Continue Reading...
There are many misconceptions about creating a mechanized trading system. Some feel that mechanized systems are better than discretionary systems as if they give a trader an edge. I think this may be true for those traders just starting out. However, I personally know many discretionary traders that have done just fine without systems. The key is to do what’s best for you. Allocators will give money to traders who can perform. Lastly, discretionary trading is a form of a system unto itself. More on this in another post.
I tend to see those traders who wish to become CTAs going the mechanized system route and those that are endeavoring to become prop traders go the discretionary route. What separates them is either years of experience and normally a focus on one instrument or sector.
Overall, I believe that it’s a great idea for a new trader to get to know and build systems from scratch with a simulator such as Trading Blox, for example, to get a very intimate understanding of all the moving parts that involve a trade: volatility, volume, price action, trends, and large counter-trend moves to name a few.
What’s lost on most most new traders is how their emotional intelligence is a major factor on their mechanized trading rules. Hint: they’re there whether you know it or not.
For example, if you are a risk taker in life, you’ll find that your personality type is manifest in your ultimate trading system. If you tend to be methodical and “slow and steady,” you’ll find that your approach to your mechanized trading rules is the same. If you don’t trust yourself, you won’t trust your system no matter how long you spend putting it together. If you have self-doubt, your rules will likely be the perfect system for generating tons of indecision and self-doubt.
Ultimately, all the decisions you make in creating your trading system are discretionary. That includes how much to risk per trade, positions sizes, entries, exits, and what instruments to trade. To say it in writing, there are no rules in creating your trading rules. That’s where your intelligence, emotional constitution, sense of self-awareness, and emotional intelligence all come together. I think the best traders are strong in all of these areas. Wisdom in these areas does not come easy. After I’d completed a great deal of what some of you are about to endeavor, I STILL needed to get my head handed to me. I documented a great deal of what I needed to live through in my book.
You are using your judgement and are weighing the tradeoffs between parameters and hypothetical outcomes to see which “feel” best. Feel here is emotional not intellectual, ie, “I’m scared and fearful about my long gold position,” not “I’m bullish or bearish on gold.” How you feel will affect your behavior and your behavior determines and predicts where you end up in life.
You can set up a system to be geared for triple-digit returns or for fractions of percentage points per month. You get to make those decisions, and as such, your system like all others has a discretionary element. But know this: if you swing for the fences, you’ll have to live with large drawdowns (realized and unrealized losses). You determine the calibration of these tradeoffs — and that is discretionary. Keep in mind, small hypothetical gains go with smaller drawdowns of shorter duration, and large hypothetical gains go with larger drawdowns of longer duration.
Discretion Two Times: Creating the rules and then following the rules.
Creating the rules is discretionary. Following them can be mechanical. The key is how much of your rules capture how you feel in the NOW-NOW and later-NOW. And that’s hard because there are those of us who believe that the future (the later-NOW) doesn’t exist: all we have is the ever-evolving moment of NOW, the NOW-NOW. Knowing how your feel later-NOW is hard to predict. But you’re likely to have an emotional system that you’ve been running for years, and as such, you might be able to get a sense how you’ll behave in the later-NOW because you’ve been doing it for years. That’s where self-knowledge is absolutely key.
[Your emotional system has the part that you're aware of and the other part that you either don't want to look at, or is subconscious and you're not aware of it. That's where a men's group or a Trading Tribe can do wonders for you. For me, I have always put my money where my Tribe is: I was a member of the IVTT for 2 years (while living in LA) and I also concurrently ran the LA Tribe. That means I had a Tribe meeting every week for 2 years.]
What makes your system completely mechanized comes down to your ability to follow the rules alongside your emotional system. At best, the two have converged or at least are running parallel as your grow both intellectually about using Trading Blox, for example, as well as learning a great deal about yourself.
Discretion can appear after you’ve built out your trading rules, even with the help of a simulator. You can get a signal to enter or offset a trade and not follow it. Over-riding your rules here is discretionary. You may not have a signal from your system, but have a bona-fide hunch about an instrument and you affect a trade outside your systematic rules and put it on. That too is discretionary.
Neither use of discretion at this point are bad, evil, or wrong. You get to determine the rules and how you want to stick to them. They are your rules and they are personal. No one can tell you what’s best for you other than you. Even if you look to Bill Dunn – a fully systematic trader – you can have an element of discretion in your trading.Continue Reading...