Efficient Trading

[SOCRATES]

Socrates, would you mind commenting on the following?
A winning percentage (the % of trades that are exited at a profit) of something like 90% would fit this description. Much less than 90% wouldn't fit it, to my mind.
A win/loss ratio (the size of the average winning trade divided by the size of the average losing trade) of something like 10:1 would fit a description of a stop as being ridiculously tight - again, to my mind.

Purely out of curiosity, am I right in inferring that around 90% of your trades are winners, and your average win is around ten times the size of your average loss? If so, that is phenomenal. If not, did I make a big mistake with my estimates?

I have just looked at my ledger to give you an idea. Normally I do not do this excercise in this way for a very good reason. I only look in my ledger to see what the balances are and in what denominations. I do not look at it to work out win / loss, etc., because of the risk of gloating, which is a disastrous emotion, as it renders the trader emotionally charged which is very dangerous as it has a tendency to induce serial trading which is excessive trading most commonly motivated by greed. Being motivated by anything other than being right, absolutely right and then under strict self governance is a recipe for absolute disaster.

Here there are 97 entries. Four of these are flat, meaning the position was closed at no cost, because the profit covered the commission with a tiny surplus we shall disregard.
There is one wrong. This one wrong one represents one twelfth of one percent of the net operating profit for the period, which is twenty trading days.

This is by no means extraordinary. My record for consecutive winning trades is 143.

 

[wasp]

How many years have you been trading Socrates?

 

[SOCRATES]

How many years have you been trading Socrates?

30 + hold on....action stations !

 

[wasp]

Has that allways been for yourself or were you employed at any point?

 

[SOCRATES]

Has that allways been for yourself or were you employed at any point?

Many years ago I was on the floor of the London Stock Exchange. I started there as a junior.
I went there for what I could learn and not for what I could earn. I have to this day an original payslip from those days pinned on the ceiling of my office. The pay was £13.11.6d a week, absolutely pitiful, but what I was able to observe, experience and learn in there has served me very well over these long years. Nothing really changes, so for me the experience was priceless.

I am so glad I did it, and, looking back with hindsight, even if I hadn't been paid or even if I had had to pay for the priviledge, I would still have done it. I made a point to volunteer for anything that had to be done, however trivial. This keeness was not understood by my peers, who were there just to have a job. I assure you that because all experiences are formative, the extra effort that I put in, to observe, to learn, to absorb, and to experience has been repaid many fold over the years.

 

[SOCRATES]

Figures to be proud of Socrates, as in all fields, there is nothing to beat experience. Its pleasant to see you being so candid with your replies. I am interested about the journey you took to get where you are today. Not from a trading perspective, but because I am heartened by stories of people attaining success through application and hard work. Is that something you would be willing to divulge, I am not interested in the details just generalities. Or have you always been as proficient

I cannot allow myself to be proud of any figures, because, if I were to succumb to that, I would lose the most important ingredient of my edge. This is because pride contains emotion. Emotion impairs reason, and what is more detrimental, it disables the abiltiy to act, to act correctly as required, that is.

The maintenance of an edge depends upon the trader not succumbing to emotions like everyone else.

The Journey is a true odessey. It spans many years.

One starts at the beginning and finishes at the end. You cannot start at these levels when you are a beginner. It is a matter of refining and reviewing and of self mastery through adversity by sheer dint of will. But anyone who aspires to evantually overcome can do it, it is a matter of determination and focus, and of a burning desire to succeed.

 

[wasp]

Do you think you would be as proficient had you not had the experience of the LSE?

 

[zupcon]

Socrates, those are indeed impressive figures, and quite asperational, thanks for sharing. Your last few posts for me personally have been quite thought provoking possibly even helping yet another piece of the jigsaw falls into place.

What does interest me is your reluctance to analyse performance on an ongoing basis. I fully understand the reason you give and agree that a run of good performance can lead to a certain degree of complacency, with potentially disastrous consequences. I'm interested to know if analysis of your trading performance ever played any significant part in improving your trading at any point on your journey, or is this something you only dispensed with once you where consistent and highly efficient, or is this something you avoided from the very start of your trading career ?

An overview of my own personal approach to trading was to develop a process with the following objectives

a) Protect capital,
b) Increase capital,
c) Increase efficiency

I cant think of an approach to achieving objective c without some degree of analysis of performance, your post was interesting as it brought into focus the potential risks involved in doing this.

regards
mick

 

[SOCRATES]

Do you think you would be as proficient had you not had the experience of the LSE?

The answer is definitely yes.

I will explain that when I was on the floor I encountered things that did not fit in a textbook sense, but because I was so keen I often volunteered and did them, whilst the others shirked. Nothing major, just little things.

Sometimes it can take a few years for the penny to drop as to why this or that was done and how it fitted with this or that. Had I not had floor experience I would not have encountered these ideas, that now, many years after the events, in the context of what I know now, make perfect sense, but not at the time.

Therefore proficiency has nothing to do with floor experience, but having had floor experience enhances and brings to life many events that unfold, that had I not had floor experience, I would simply overlook like everyone else. Strictly speaking, it is not necessary to go on the floor to become proficient. The experience of having been on the floor in a busy exchange is a bonus, because it serves to put a reality on things, that's all.

 

[SOCRATES]

Socrates, those are indeed impressive figures, and quite asperational, thanks for sharing. Your last few posts for me personally have been quite thought provoking possibly even helping yet another piece of the jigsaw falls into place.

What does interest me is your reluctance to analyse performance on an ongoing basis. I fully understand the reason you give and agree that a run of good performance can lead to a certain degree of complacency, with potentially disastrous consequences. I'm interested to know if analysis of your trading performance ever played any significant part in improving your trading at any point on your journey, or is this something you only dispensed with once you where consistent and highly efficient, or is this something you avoided from the very start of your trading career ?

An overview of my own personal approach to trading was to develop a process with the following objectives

a) Protect capital,
b) Increase capital,
c) Increase efficiency

I cant think of an approach to achieving objective c without some degree of analysis of performance, your post was interesting as it brought into focus the potential risks involved in doing this.

regards
mick

OK, I will explain.

The single most important thing you have to concentrate on is limiting losses.
You do this by using stops.

As you become more procicient at picking winning moves you have to tighten your stop loss policy.

Limiting losses to the absolute minimum is the key. All else is peripheral.

Now that is a simple statement.

If everyone did this, everyone would survive long enough to eventually become proficient.

But very few have the self discipline to persist in this way.

I strongly suggest you follow the lead I have just given you.

 

[tunnel1x1]

OK, I will explain.

The single most important thing you have to concentrate on is limiting losses.
You do this by using stops.

As you become more procicient at picking winning moves you have to tighten your stop loss policy.

Limiting losses to the absolute minimum is the key. All else is peripheral.

Now that is a simple statement.

If everyone did this, everyone would survive long enough to eventually become proficient.

But very few have the self discipline to persist in this way.

I strongly suggest you follow the lead I have just given you.

Socrates,

Thanks for sharing your insight. This is an extremely important topic and one that I wish there was some consistency on. All the experts say to keep your losses small. However, no one really defines what "small" is. Is it just a percentage of your account, such as 1%? If so, then the dollar size of the loss will vary widely depending on acct. size. Or, is it a pure dollar amount? Many experts say that you should place stops at technical points as opposed to either a % or dollar amount. Likewise, many experts a la Jake Bernstein say that it is the amateurs who place tight stops and the pros that have wider stops, thus stopping out the amateurs very frequently. Then there is the question of whether this relates to the specific vehicle traded, such as whether one is trading corn or S & P. Does your definition take into account the ATR of the item you are trading? If so, are your stops tighter than 1 ATR over a period of 14 days. Personally, I like the concept of tight stops, but given the conflicting information from the "experts", I cannot decide which is best.

I get the impression that your use of tight stops coincides with very good timing so that your stops will not get hit as often since your timing is better. Whereas, sloppy (or mechanical) entries might well cause ultimate losses through the use of tight stops.

If you could elaborate on your definition of a "tight" stop, it would be greatly appreciated.

tunnel

 

[OpenMind]

'Small' means just a few points per contract for futures and just a few pence/cents per stock for stock markets. For traders like Socrates this translates to a tiny risk, way below the 1% that conventional wisdom suggests.

If you pick high probability entries, you will rarely be stopped out because of the tightness of the stop. If you are indeed stopped out, then you should be out because your entry didn't work out.

 

[SOCRATES]

Socrates,

Thanks for sharing your insight. This is an extremely important topic and one that I wish there was some consistency on. All the experts say to keep your losses small. However, no one really defines what "small" is. Is it just a percentage of your account, such as 1%? If so, then the dollar size of the loss will vary widely depending on acct. size. Or, is it a pure dollar amount? Many experts say that you should place stops at technical points as opposed to either a % or dollar amount. Likewise, many experts a la Jake Bernstein say that it is the amateurs who place tight stops and the pros that have wider stops, thus stopping out the amateurs very frequently. Then there is the question of whether this relates to the specific vehicle traded, such as whether one is trading corn or S & P. Does your definition take into account the ATR of the item you are trading? If so, are your stops tighter than 1 ATR over a period of 14 days. Personally, I like the concept of tight stops, but given the conflicting information from the "experts", I cannot decide which is best.

I get the impression that your use of tight stops coincides with very good timing so that your stops will not get hit as often since your timing is better. Whereas, sloppy (or mechanical) entries might well cause ultimate losses through the use of tight stops.

If you could elaborate on your definition of a "tight" stop, it would be greatly appreciated.

tunnel

Right Sir, on another thread on these boards I made two statements about what in essence are fundamental principles for any stock operator, futures trader or dealer in securities, commmodities or even currencies.

Anyone who is accomplished in the art of trading effectively in any market will recognise the validity of my statements, and I may add, that silence gives consent from the really expert few, but what happens is that when statements of quality are made on these boards they tend to stimulate the rabble to respond unfavourably when in fact they ought to be listening intently and not interrupting with rude and inept comments.

The two statements I made were "Survival of the Fittest" and "Merit, Ability and Conduct".

Let us take the first. The markets are not there for the benefit of individuals who have a gung ho attitude. They, as a by product of the way they are constructed, serve to punish, and I may add, punish severely those who adopt a cavalier attitude to trading, because, contraty to what is popularly disseminated here and elsewhere, it is not some silly little game that anyone can play, it is a profession. For this reason, the market sorts out the cavalier trader from the prudent and skilled. Luck, which may for a time be on the side of the unprepared, is not sustainable. so first of all there is a proper way of going about things and an improper way of going about things with ultimate inexhorable results.

This brings me to the second statement "Merit, Ability and Conduct"
We are going to concentrate for the purpose of this illustration to follow, on the question of Ability.

Because this is a profession and not a pastime, it requires the development of skill. This skill has to be underpinned by knowledge. And this knowledge has to be a vast pool from which to draw, because at any given moment any component of this pool has to be accessible in an instant, without hesitation of any sort, to be able to properly identify what is a real opportunit;y, against a very convinving mirage to be avoided by abstention, or by opposite response, as appropriate.

Now in simple terms, what happens is that none of us are born knowing. If we were, everyone could and would succeed immediately, which is not the case. In consequence of this obstacle, we have to undergo a process of learning to teach ourselves. This is a gradient which can take a very long time to climb, but I promise you, there is an ultimate end to it. It feels like climbing a mountain and finally getting to the summit, where there is no more mountain to climb but the reward is a sort of anticlimax, like the view the climber is entitled to enjoy.

Throughout this long climb, the act itself of climbing causes the climber to teach himself to climb more effectively. A seasoned climber who has climbed many mountains will climb more effectively than a new climber. Let us transpose this idea to trading. What I am imparting to you is that persistent attempts lead to improvement in ability.

Commensurate with the level of ability is the capacity to undertake what we shall call missions. Fortunately there are only three, Long, Short and Abstention. It could be worse, so we must be grateful there are only three possibilities, three options in this regard.

As the level of ability rises, together with the rising of this level and harmonious with it also three things develop. These are choices. Because they are choices they cannot be mechanised, they cannot be fudged, and they cannot be altered, because they are the expression of will. They constitute committment. As they constitute committment, once committed they cannot be undone, which is what makes this profession unique.

But what happens is that through the gaining of proficiency, these three choices do not exactly take on a life of their own, but evolve and become more and more accurate, and more and more refined.

I am specifically referring to Timing, the Point of Entry and the Point of Exit.

When the market begins to "talk to you" instead of just baffling you, the Point of Entry selects itself for you and the Timing is the right one. In consequence of this, you repeatedly and confidently experience the position going in your favour immediately. The stop, which is a crucial safeguard for everybody, is now quickly left behind. With progressive increases in proficiency leading to accurate entry and perfect or near perfect timing, the stop can now be narrowed and squeezed to the limit, taking into account the spread. The other thing that happens is that the exit point becomes clearer and clearer, as you begin to detect exhaustion or imminent reversal.

One percent of capital employed is a vast amount to risk. One fifth of this figure is what you should ultimately aim for or thereabouts.

But in the very early stages in your development as a trader you should begin to cultivate the use of tighter and tighter stops as you progress, because not to do so constitutes dereliction of control. Ultimately risk is about being able to control unforseen losses.

Nearly all of trading is about control. The most important aspect is the control the trader places upon himself to start with. With attainment of progressive proficiency over time, you will see and experience that everything else takes care of itself and falls into place neatly.

The price you have to pay is self governance of absolutely the highest order, and nothing else.

I therefore do not agree with theories involving wide stops or stops placed under the last reversal and such other tripe, I maintain that the trader has to assume complete and utter responsibility for his decision, all else is an excuse.

This attainment of self governance of the highest order is the single most difficult discipline most people have difficulty in mastering. You must take steps to master it, otherwise it will master you, with dire results.

I hope and expect that this comprehensive explanation serves to satisfy your query.

 

[OpenMind]

If so, then the dollar size of the loss will vary widely depending on acct. size. Or, is it a pure dollar amount?

Also note that what Socrates has said is opposite to conventional position sizing theory. All books will tell you that you should first decide how much risk per trade you should take, then decide where your entry point and initial stop will be, all of which will determine your position size.

This means that when your trade doesn't work out and reverses immediately upon entry, you will lose the full 1% or 2% or whatever you have decided you will risk. Imagine you are a new trader who is not yet capable of consistently picking high probability entries, but is keen to place tight stops. You will get blown pretty soon. Keeping tight stops goes hand in hand with high probability entries. You cannot have one without the other.

Back to position sizing: what traders like Socrates do is not to concentrate on a fixed risk (e.g., 1%), but to fix the position size. I.e., they decide that they would trade 50 contracts or 5000 stocks. Then they decide their entry point and their initial stop, and decide if the risk is still acceptable (i.e., tiny). If it's not, they reduce the size to maybe 40 contracts or 3000 stocks.

I should point out here that the other essential element of this type of trading is extremely small costs. You cannot trade like this if you have to pay 0.2% of your position size in commission each turn, like the UK CFD companies charge. High costs will deplete your account very fast during the learning phase.

 

[charliechan]

socrates - i am sure many people will benefit from what you have posted. it is accurate and truthful. lets hope the jerks dont derail your train of thought here in their frustration at being serial losers in life.

 

[wasp]

Agree CC,

The lost half dozen posts from Soc have been extrememly helpful from my point of view and appreciated the effort. They have helped me to save money by carefully analyzing my stops and entries further.

Cheers

 

[Splitlink]

Socrates got me onto the trail of using tight stops a couple of years ago. Since then he has ruffled my feathers several times and I have, more or less, kept away from his posts, unless the thread interested me for some other reason.

This thread has shown him in a more illuminative mood than for some years and the paragraph concerning tight stops is to be taken very seriously. Unfortunately, it has to be found amongst all the other stuff that he writes.

Split

 

[Profitaker]

I do not look at it to work out win / loss, etc., because of the risk of gloating

Ok, now that's funny.

Here there are 97 entries. Four of these are flat, meaning the position was closed at no cost, because the profit covered the commission with a tiny surplus we shall disregard.

This is by no means extraordinary. My record for consecutive winning trades is 143.

Now the odds against are truly astronomical. That's make old Soc either a walking miracle or a fantasist.

I'm entitled to my opinion.

 

[OpenMind]

That's make old Soc either a walking miracle or a fantasist.

Or an extremely good trader.

 

[Profitaker]

Or extremely good at what he does.

He may well be extremely good at what he does, I don't know. What does he do ?

143 consecutive wins would be truly miraculous.