Not Seeing the Forest for the Trees?
It's interesting as traders that we find ourselves on all mailing lists. We receive promises of riches beyond our wildest dreams that are just around the corner, if we are just prepared to shell out another $199 for the . . . "Greatest Discovery this Century!"
Don't get me wrong, I am the first to admit there are some good ideas out there, and you probably do to. I have a library of trading books, and some trading systems. After all, who was it that said, purchasing someone else's brain was the cheapest investment.
But by far, the most valuable knowledge that is available to you as a trader is what you learn about yourself over many years of trading. To be successful, these questions need to be answered:
1. Are you a subjective or an objective (system based trader), or do you fall somewhere in between (if you are very careful?)
2. What time frame are you comfortable trading? It's no good buying or designing a trading methodology that takes trades for periods of two weeks to a month, if you are worried about your profits every day. It's no use saying you are going to day- trade, if sitting in front of a screen all day is going to give you a nervous breakdown.
3. How do you handle drawdown? What are you doing looking at systems where profits are large, but there are drawdowns of $15-$20,000 in any annual period? If you can't handle drawdowns of this magnitude (and there's nothing wrong with that) then don't go with these methodologies.
4. Simplicity - If a methodology is not easily understood and clearly written, you're in trouble. Remember the average human can only take in a maximum of seven pieces of information at any one time. So if your screen is showing two time frame bar charts, two moving averages on each, channels, and a couple of indicators thrown in for good measure... and you are trying to trade, then you are kidding yourself. Your brain has told you to take a hike and just won't make any decisions, how could it?
A good test to see if a system is suited to your personality/psychology, is if you have the discipline to stick with it. Even if you've spent months designing what you think is the perfect system, you find yourself looking for excuses not to take trades or picking holes in it, chances are that besides other problems you may have, one of the major ones is the methodology not being suited to you. Take another look, and be on the lookout for this behavior.
If you are purchasing systems, make sure it has the ability to back test and walk forward the methodology to become comfortable with the results. You want to make these systems your own. You need to know what the drawdown patterns are. What the percentage of profitable trades are. How it performs in good and bad periods and how long it stays in trades.
Why on earth would anyone buy a black box on a promise? At the first sign of trouble, you will stop using the system because there's nothing to enable you to have confidence in its ongoing performance.
Many thanks to Dave Green for an excellent publication. It's great to have such a wide forum for views, ideas and inspiration available to traders. One common theme that I have noticed from the articles being written. I wonder if you have to? Those traders that are doing well have a relatively simple and clear explanation for their trading methodology, while others that seem to be struggling are lacking a clear direction and methodology.
From my own experience, I believe that while many traders would like to trade off the screen with some subjectivity, most need strict rules to trade by. This would include in its crudest form, a trade sheet which provides for ticking boxes when trade criteria are met (as some of mine are), with order levels and stops to be placed, to computer generated orders printed out by programs such as SystemWriter (also as some of mine are).
My methodologies tend to be relatively short-term (1-3 days), typically have extremely low drawdowns by most system standards, and have a relatively high percentage of profitable trades. Longer term trades stem from short-term low risk entries, and would typically run for 3 to 10 days. Hopefully this has been of some assistance to those of you still struggling to find your trading identity.