Dr. Toad's Journey to Bankruptcy or Financial Freedom

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Old Jul 22, 2015, 5:15am   #1
Joined Jul 2015
Dr. Toad's Journey to Bankruptcy or Financial Freedom

Join me on my journey to either bankruptcy or financial freedom. I have begun this journey after coming to some realizations:

1. I do not want to spend my life working. I do not need a huge stack of cash to enjoy life, and would rather spend my time on hobbies where I am my own boss than at a high paying job.

2. I can manage my cash as well as “professional” brokers. The catalyst that began my journey was after watching my “professionally managed” $45,000 investment account at Charles Schwab continuously decline to a meager $3,000 between 2011 and 2015. I figured I can do at least that good, so I moved my funds over to an account I now manage and have started trading myself.


After a month of trading with no real plan and getting a feel for how it works, I realized that I can’t just wing it and do well. I have developed a few trading plans that I am now testing out and sticking to rigidly. Over time I may add more plans, evolve my current ones, etc., but there will always be a plan for the trade I am executing and it will be formed prior to executing it and it will be stuck to.


In order to achieve my ultimate goal of becoming financially independent, I am setting some smaller goals:

1. Cut my current monthly spending by a third. This should be easily doable by cooking more. By doing this I will be able to add approximately half my monthly paycheck into my trading account.

2. Lose no more than 5% of the starting value of my account in any month. In order to help achieve this I will:
a. Not risk any more than 1.5% and rarely any more than 1% of my account on any trade. While live testing new strategies, I will not risk more than half of this.
b. Follow my execution plans and wait for appropriate times to enter into trades. No trading just to be trading.
c. Not have any more than 5% of my starting account balance for each month at risk at any point in time. If a trade moves so my stop loss puts me above my entry, the trades risk drops to 0 and I can enter new positions.
d. Not add more than 3% of risk to my starting account balance for each month on any single day. This should limit my new positions for each day to approximately 2-4.


I will declare myself financially independent once one of the following occurs:

1. The average income I generate from trading exceeds my job income over a 6 month period.

2. The size of my trading account exceeds my typical monthly expenses by 100% and I have had 4 consecutive 3 month periods with gains averaging greater than 5% of my starting account balance that month and no losing 3 month period in this timeframe.

3. The size of my trading account exceeds my typical monthly expenses by 200%.


I will stop trading and accept that my life fate is to work like most people once one of the following occurs:

1. I have a 12 month period with a net loss on all closed trades.

2. I have 4 consecutive months of losing more than 5% of the starting value of my account that month.

3. I have a 3 month period with a net loss that is a direct result of violating the trading rules and systems I have set in place.


I have determined that a handful of long term and a larger number of short term trades will be the best and most practical way for me to achieve my ultimate goal. As a result, I will dedicate no more than 25% of my trading account to longer term investments. These will be trades I expect to last over 1 month upwards of 1 year. The majority of my trades will last a few days to a few weeks.


The trading systems I have found/modified/developed will be noted as:

None – no system  Will no longer use this.

Pangolin-Z – A short term reversal trading strategy not developed by me. Back testing and live testing indicate trades last approximately 3 days to 9 days. Current strategy.

BB Squeeze – A short term breakout trading strategy I have modified to suit my methods. Back testing indicates trades last approximately 5 days. Currently live testing.

Aroon Cross – A long term breakout trading strategy I have developed to suit my methods. Back testing indicates trades last 1 month upwards to 1 year. Currently live testing.

The Big Win – A higher risk short term options trading strategy I have developed to suit my methods. Currently undergoing analysis and won’t start live testing for a while if analysis is promising.


I will be keeping a chart showing my cumulative profit/loss as well as my equity curve in this post starting at the end of this month which will be updated each month. Since I will be adding to my trading account each month, the cumulative profit/loss curve will be more telling of if what I am doing is working. I will post the trades I enter and the reason for their entry in subsequent posts. I intend to post these weekly with the reasons for entering to help keep my trading disciplined.

Wish me luck!


Current target:

The first target I am setting for myself is to have one month with a positive return. I believe I will achieve that this month and will bring my account back close to break even from my undisciplined first month.

Last edited by Dr. Toad; Jul 22, 2015 at 9:23pm. Reason: Updated money management rules
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Old Jul 22, 2015, 6:02am   #2
Joined Jun 2013
Quote:
Originally Posted by Dr. Toad View Post
Current target:

The first target I am setting for myself is to have one month with a positive return. I believe I will achieve that this month and will bring my account back close to break even from my undisciplined first month.
Instead of having a target of having a positive return, at the beginning you should focus on being disciplined and following your plan.

Your target for today should be:
Did I follow my plan? If Yes, target achieved.
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Old Jul 22, 2015, 8:48am   #3
 
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Old Jul 22, 2015, 9:52am   #4
Joined Feb 2002
Quote:
Originally Posted by paszkman View Post
Instead of having a target of having a positive return, at the beginning you should focus on being disciplined and following your plan.

Your target for today should be:
Did I follow my plan? If Yes, target achieved.

Totally agree. Lose sight of the money, and perfect your techniques.

Just to go a bit further and excuse me for stating what might be obvious -
Ignoring the money sounds counter-intuitive because the problem is how to make money and through our education and normal professional work we are taught to know more and more about a problem in order to solve it - the problem is your enemy.

But in trading the market, the charts, news, prices, other traders, volatility etc. etc. are not your enemy - your enemy is yourself and his weapon is temptation to make decisions with emotion - meaning either greed or fear (possibly the same thing anyway). You have to conquer your own enemy - yourself - and the measure of success in this campaign is through discipline to adhere to a developed strategy, not the monetary outcome.

Sorry to jump on someone else's thought train but I really respect Dr. Toad's process and discipline - this already places him/her on the fringe of success.
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Old Jul 22, 2015, 9:17pm   #5
Joined Jul 2015
Dr. Toad started this thread Thanks to all for the advice and best wishes. You are both correct that I should set my initial target at following the plans I set out. Fortunately for me I have a leg up on most people in this respect...I am very methodical by nature.

In fact, the main lessons I learned from my first month were:
- Have a plan going in
- Do not deviate from the plan
- Do not trade on emotion

The not trading on emotion will be simple for me with my plans in place since the only decisions I will make is which trades to enter in on. These trades will only be from the approximately 1-15 that meet my current screens each day. The screens are purely statistically driven, so I am only allowing a small amount of emotion to select from the valid options.

Since one of my main failures in the first month was decisions based on emotion, I see value in not doing this. Also since I already lost 42k in investments (catalyst to me taking charge of it myself), a large portion of the fear has been taken out of me, the only barrier I may have is greed.

The Pangolin-Z system has a target profit and a stop loss, so as long as I adhere to that, there will be no emotion driven decisions. So far so good with that one.

The BB Squeeze and Aroon Cross systems have no set targets, but a set method to move the stop loss, so no emotional driven decisions in these systems as well as long as the plan is stuck to. Still in the early testing stages for this, but I do not forsee myself deviating from the plans after seeing what happens when I do that in the first month.


In reviewing my initial plan, I did discover a flaw with my money management rules. I have limits for how large of a position I should take, but the initial plan did not have any rules for how much total risk my trading pot will be subjected to. For this reason, I am adding 2 more rules (c and d) to help prevent a month with greater than a 5% decline in my trading pot. I will be closely monitoring the risk of my trading pot for the next month to make sure the percentages I am setting right now make sense, so they may be modified slightly in the future.



I realize a bit of an intro of myself might be good for a "journal" in case anyone actually starts following this. So, the basics are this:

I fairly recently finished my studies as an engineer and currently hold a position in this field. I am a he :P. I spent way to long in school (went all the way through and got a PhD). Part of the reason for spending all the time in school was I knew I would quickly grow bored at any job. I wanted to have as many options in the future as I could and figured having a PhD would get that for me. I teach as an adjunct on occasion in addition to my main job, which I thoroughly enjoy, but I do not want to reliant on anything but myself as far as a career goes...I want to be able to do what I want when I want, and teaching as an adjunct gives me that, but really doesn't pay anything.

Being a student for so long taught me how easy it is for me to limit my spending and still enjoy things. Fast forward 2 years and I am bored with my current job and realizing that I have a lot of money just sitting in my bank account doing nothing. I can either spend it on things that I will not have time to do/use, let it sit there, or be proactive and make it grow. By making it grow I will have time to spend on things I purchase, but there really aren't many things I desire. To me time is valuable, so this is why I set my goal of becoming financially independent, and my living style drove the criteria for me declaring myself as such.
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Old Jul 25, 2015, 10:50pm   #6
Joined Jul 2015
Dr. Toad started this thread Activity for the week of 7/20/15 – 7/24/15:

Opened Positions:
WUBA 07/20/15 – BB Squeeze
MW 07/21/15 – BB Squeeze
SYKE 07/21/15 – Aroon Cross
DHI 07/21/15 – Pangolin-Z
DENN 07/21/15 – Aroon Cross
AET 07/21/15 – Pangolin-Z
KBAL 07/22/15 – BB Squeeze
IART 07/22/15 – BB Squeeze

Closed Positions:
WU 07/23/15 - Net loss of $5.15 on trade
MW 07/24/15 - Net loss of $46.50 on trade


The only reason the WU was not closed earlier for a profit is because I had a partial sell order fill where 80% of my position sold at a profit, so overall this trade was a small profit in the Pangolin-Z system. I closed this trade earlier than the Pangolin-Z system dictated since I wanted to close out the remaining at approx. break even and WU had been going sideways for about a week. I do not consider this a breach of my rules since the position would have remained open if it were still the full position.


The MW trade I should not have entered in the first place, since my criterion for entering in the BB Squeeze system was not met. I am not sure how I missed that one, but I need to monitor/check my screener and make sure there isn’t an error somewhere in it since entering when the criterion wasn’t met is not something I would do. The failed trade is shown below to remain for all eternity.

Click the image to open in full size.

I followed the criterion set in my system of keeping my stop just below the next higher low. As a bit of an aside, this does look like it might be a good long term play. If you look at the MA200 it is starting to go up at a quicker rate. It looks like there is a good S/R level at around 60, so I don’t expect it will be going much south of that and this might be a good time to buy in for a long term position. The company does not match my criterion for a long term trade though (high F score) so I will not be doing this.


Looking back on the SYKE trade I entered, I am not sure why I went in on this.

Click the image to open in full size.

This stock is clearly subject to being range bound for long periods of time before making a quick break up. I am looking for ones that are not as range bound and are in an uptrend for my long term strategy and this one is neither. Due to this, I am going to sell this if it fails to break above 25 on its next trip up, and if it does break up I will be managing it using my BB Squeeze criterion (trailing stop below higher low) since it is not a trade I would take today for a long term hold.


As a positive, one of the positions I entered has started taking off.

Click the image to open in full size.

To me it looks like it is sitting just above an S/R level at the moment, and there does not appear to be much resistance until around 75. It looks like if it continues back up and makes it past about 68 in the next couple of days, it will have a pretty quick ascension to 75. If it goes back down, I still am banking profits. It is trading on fairly low volume though, so probably more likely to head back down. Any other opinions on this one?

Most of the other positions I have open right now are sitting within about 2% up or down of where I went in at. SYKE being the worst open I have at -2.76% but I will be surprised if I get stopped out of that one. DENN being the second worst open I have at -2.48% which is a long term position that I expect to continue the uptrend.

My current open positions are summarized below:

Click the image to open in full size.

One thing I need to pay attention to in the future is when earning dates are. What are others thoughts on trading around earnings? I would like to stay away from it on my short term positions since these are where you can have the large down (or up) gaps. I didn’t check earning dates until after I had entered these positions and I expect I will still be in my positions for the DHI, IART, and KBAL when they give their earnings reports. I will ride it out and monitor the before/after hours trading this time to avoid deviating from the plan while still maintaining some control over my stops if bad earnings are posted, but I do not think I will be opening short term positions within 10 trading days of their earnings in the future.
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Old Jul 26, 2015, 11:22pm   #7
Joined Jul 2015
Dr. Toad started this thread Outline of Aroon Cross strategy:

I figured I would outline my long term strategy to open it up for critique and get suggestions for improvement. To me it seems pretty solid and over the course of reviewing it while writing this up I have made some improvements. As a result of this, some of the images in this post may not be exactly correct per my improvements but I will be documenting how the strategy evolved.

The basic strategy started out as waiting for a well performing company to have an aroon up/aroon down crossover using 100 days as the look back. Obviously, the buy in would be the aroon up crossing over the aroon down from below. The initial stop loss and position sizing would be based off the last support/resistance level the price broke though. The stop loss would move up at subsequent retrace levels. By retrace level I mean a stock hitting a higher low, going back down, and then continuing up. My original thinking for this strategy is as outlined in the below image with ASGN.

Click the image to open in full size.

From this chart it seems that if there is no clear trend prior to the signal the overall strategy is less likely to succeed. Basically if the crossover results from a quick spike, success is uncertain. When this happens, the aroon crossover using a 50 day look back will occur very close to the 100 day look back. The “failed” signal ends up with basically break even over about 1.5 months while the “successful” signal ends up with approximately 17% gain over about 2.5 months.


The next chart I looked at was ALSN which is another “failed” signal.

Click the image to open in full size.

The signal is a result of a jump up similar to the “failed” one from ASGN. This one would again net approximately break even after 1 month.


The next chart I looked at was BIIB. If you are paying attention you will notice that I am not cherry picking these, I was just going in alphabetical order of the current ones I am watching. I started with ASGN instead of ALSN since it showed both a “failed” and “succeeded”.

Click the image to open in full size.

When I got to this one, my thinking evolved as to what I was considering a retrace. Simply a higher low after a drop was too stringent and didn’t allow any price fluctuation. At this point I evolved my definition of a retrace to require the following:
- The low must increase 3% or more from the current stop day low.
- The low must then decrease 3% or more from this higher low.
- The low must then increase again 3% or more from the low.
Once this sequence occurs, the SL could be moved to 2% below the lowest low of the sequence and this was my new stop day.

Another observation I made on this one is that a clear trend prior to the signal does not necessarily mean it is a bad signal and having a clear trend prior does not necessarily mean it is a good signal. For the first signal on this chart, there was a clear trend prior to it (not shown). This was a good signal that resulted in a net gain of approximately 36% over a 6 month period. The second signal on the chart also had a clear up trend prior to it (with a good bit of noise though). This was a bad signal that resulted in a net loss of approximately 6% over a 2 month period. The third signal on the chart had no clear trend prior to it, but was a good signal resulting in a net gain of approximately 20% over a period of about 5 months.


The next chart I looked at was BLT.

Click the image to open in full size.

The first signal which is a “failed” one has a slight upward trend prior to it and results in approximately break even over 2 months. The second signal has a more pronounced upward trend for about 1.5 months prior to the signal and results in a net profit of about 18% over about 7 months. One interesting thing that occurs with this one is the 50 day look back aroon has a crossover down and then back up while still in the system. I thought this may be a good signal to use for increasing the position size. In this case the increased position size would result in about break even.


The final chart I looked at was CHE.

Click the image to open in full size.

In this chart the first signal has a crossover of the aroon down almost immediately after the entry signal crossover. If this occurs in the system, I am taking it as a get out signal. That one results in about break even over a few weeks. The second signal that occurs is a good one though, but my procedure evolved a little further on this one. Using the retrace definition I have previously set, you would get stopped out many time on the way up this one. But, this is the type of investment I am really trying to target with this strategy.

I figured that since this is a higher priced stock, a little more breathing room was needed for price fluctuation. Due to this, I redefined the retrace criterion to use 5% instead of 3% on higher priced stocks. With that more relaxed criterion, you would still be in this one with a current amount banked of greater than 52% over 1 year and 8 months (calculated up to the current SL, it is around 83% gain at the current price). I figure I would have increased my position size 3 times on this one: once at the 50 crossover in July 2014, once at the 50 crossover in November 2014, would have ignored the 50 crossover in February 2015 since it is at the same level as the November 2014 one, and once at the 50 crossover in June 2015.

One thing I noticed while doing these is all of the prices retrace after the initial signal. So, my thinking has evolved to the following as the Aroon Cross strategy I will employ going forward:


1. Once an aroon crossover with a 100 day look back occurs on a stock I am monitoring, start watching for the retrace.

2. Buy in at market open the day after a higher low following the retrace (don’t wait for the full retrace criterion). Set the position size and initial SL at 2% below the S/R level preceding the signal day. Do not buy in if the retrace level is below the preceding S/R level.

3. Move SL up to 2% below the low when the following criterion are met:
a. For a stock below $50, low must increase 3% or more from the current stop day low. Low must then decrease 3% or more from the higher low. Low must then increase 3% again before setting higher SL at 2% below the low of the low in the sequence.
b. For a stock above $50, low must increase 5% or more from the current stop day low. Low must then decrease 5% or more from the higher low. Low must then increase 5% again before setting higher SL at 2% below the low of the low in the sequence.

4. During a prolonged upward trend, increase the position size if the 50 day look back aroon up crosses below the aroon down and then back above the aroon up. Buy in the day after the aroon up crosses back over with an appropriately sized position at the current SL in the trend.

5. In the event that the 100 day look back aroon down crosses above the aroon up prior to being stopped out, exit the position on the following day market open.


Anyone have additional thoughts on this? Something I am overlooking?
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Old Jul 27, 2015, 7:31am   #8
Joined Feb 2002
Nice to see some systematic development going on, evidence based rather than random hunches.

US stocks are not my field but -

5 charts only? can that be a sufficiently broad model for a strategy?

is there really justification for treating higher priced stocks in a different way? Respecting a price threshold like $50 per share is not something seen in systems other than US stocks but is it really valid?

surely price behaviour can evolve, and the way a chart behaves this year can not be assumed to be the same next year: does the model have enough flexibility to respond itself to this or would it take a rather a manual re-set?
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