I’ve been thinking for a while about writing a post on trading. I think trading is a job like any other.
I’ve been trading since 2008, before the stock crash, with different instruments: forex, options, stocks, and futures; and I had the chance to meet some great traders (e.g. my mentor Andrea Unger, who is also an exquisite person) along the way.
What I noticed is that it’s very difficult to be a successful trader, not so much because of not having a good trading system, but because of the emotions related to trading (greed and fear). Greed wants to make you invest too much and increase your risk beyond your emotional threshold, fear wants to leave the market, usually when there are the best opportunities to take.
Every trader has her own strategies, and unluckily very few are willing to share with others both strategies and actual results, and there are many people in the industry who seem to be good traders, but are actually just good teachers (and make a living out of it instead of trading: which is not bad in itself as it reduces the risks of directly losing money in the market, but it seems a bit of a conflict of interest, at least in some cases).
How do I trade? I’m hardly ever a discretionary trader: I prefer systems, especially if automated, so that emotions can be taken away from the table (as much as possible anyways). I trade mainly options (naked puts), but I’m now focusing on developing automated systems for futures and forex to achieve better diversification and less stress.
A few suggestions, some taken from my friend Mario Cesolini here (post in Italian):
- THEORY (trading strategy): each strategy you choose should have an average trade much greater than 0 (minimum 5 times the commissions+slippage), at least while backtesting your strategy (i.e. while you try it on past data). The drawdown (DD, i.e. the greatest overall loss of the strategy) should be below 10% of the initial invested capital while the returns should be on average >20%/year. This way you’re willing to lose 10% to make >20%. It’s not so much the percentage the important part, but the ratio gain/drawdown which should be >2 (e.g. DD of 30% and gain >60%). While backtesting, keep the last 6 months of data as out-of-sample data to make sure that performance is consistent!
- PRACTICE (going live): your strategy will decrease its performance, especially during intraday or swing trading (i.e. trading of few days or less)! This happens for a number of reasons, if you use Automated Trading Systems (ATS), including (I suggest trying your strategy on a demo account for a few weeks to tune all these issues, before investing real money):
- data feed provider: some brokers have different data from others, especially for forex, and feeding your strategy with data not consistent with backtested data is asking for trouble! (iQFeed is a good option if you need intraday data, and if you give my name when you set it up you’ll save the $50 start-up fee.)
- trading platform (broker): some brokers open the forex market on Sunday night at different times from others! Some are more user-friendly, some are more complex but more powerful allowing you to manage very complicated orders and positions (I use Interactive Brokers)
- signal generating SW: the SW gets the data from the data feed provider, elaborates the signals, passes the signal to the broker… and all (almost) in real time! for Murphy’s law, something can easily go wrong if the overall system is not robust (I use MultiCharts, but also Excel and Matlab.
- internet connection: I don’t need to mention that stable electricity and internet connections are key…
- computer clock: this is a subtle one… If there’s a difference between the trading platform clock and the signal generating SW clock (which it’s usually the PC clock), bar creation might not be consistent (e.g. when you reload the data the next day you see signals that didn’t appear, usually because of bad data feed but also for the clock not being synched)!
- time: markets change over time and unluckily so does your strategy performance… 😦 Recurring monitoring is needed, and strategies adjusted…
- Money Management: as the Carnot engine has its physical limits, so does your trading strategy. You can increase performance of your strategy by trading more contracts if you win (anti-martingale approach, which I recommend), but only to a certain point, beyond which the risk that a streak of losses (DD) will hinder your ability to recover becomes too great. Money Management done properly can make an o.k. strategy work well, done poorly can make a good strategy lose money!
- Portfolio: diversification here is key. If you have only one strategy and it works great: awesome! It takes less time to monitor and it’s easier to manage. It’s difficult to have one like that though, so having a few strategies (hopefully not-DD correlated with each other) can help each other in tough times. Not only for better results (or lower DD), but especially for the emotional roller-coaster you’d feel with only one strategy!
- Emotions: This is THE SINGLE MOST important aspect of trading. Everybody hates losing money and I did very not-so-smart things just because I couldn’t think straight during market turmoil. The strategy must be clear and executed (without trying new things on-the-fly), but most of all, if you invest little (i.e. you have many strategies with little capital invested in each of them) you won’t be emotionally attached to money so much and will be able to execute the plan properly.
- Mentor: having a good mentor with a proven track record can give you the confidence that it is actually possible to make money trading in the long-term, and not just for a few years.
- Trading buddies: If You Want To Walk Fast, Walk Alone. If You Want To Walk Far, Walk Together. Especially if some have good ideas and others are good executors.
The time is gone, the post is over, Thought I’d something more to say… so enjoy your trading, I wish you great results! 🙂
PS: feel free to stop by at Skilled Academy and have a look at all the courses I’ve been creating to boost your trading!