The Kung Fu of Trading

[a_gnome]

Hi a_gnome,
I have enjoyed reading your thread for quite some time and thought it was about time to post a reply. With your Physics background it is great to see your risk and money management that you use in trading. It is great for new traders, even though most I am assuming don't trade the horses, to see your application of capital management. After all that is what keeps people in the game long enough to figure out how to trade profitably.

I agree entirely. Capital management and risk control are both far more important than anything else in trading. The entries and exits can be developed but if you don't get these two basics right then you're wasting your time.

Your issue of making gains early on and then later having them erode over time is not an uncommon one. Obviously you already know this with how much time you have spent with writing mechanical systems for others. Do you think the issue is an emotional one or a strategic one?

I've attempted to address what I think is going on in my previous post. Trading is a process of on-going development, gradually coming to new levels of understanding. I think that I'm just starting out on a new level.

I have found that low liquidity markets such as the horses you are trading can often change personality at the drop of a hat. Usually as a result of the big players loading up positions and then incrementally getting rid of them finally to remove the supply or demand. No doubt you know the style of Jessie Livermore.

This is particularly true for horse race trading. The big players make their living by pushing the prices around. It's something that one has to live with.

It is good to read your journal and keep it up as I'm sure there are many others watching in interest even though they may not post.

Thanks for that. I'm writing it largely for myself and I find the process very useful for getting ideas straight in my head but if it helps others too then that's great.

 

[a_gnome]

Thursday 7th March

R&D: -0.6%

Yet another losing day though as I said previously I am currently putting it down to R&D. Interestingly enough, my thinking was that I was going to need to attempt to find methods that work in markets that weren't obviously trending but this seemed to have got translated in my head as "take a punt on anything". I was way overtrading to start with and also trading in poor liquidity conditions. I came a real cropper when I got Backed in a very low liquidity market that I shouldn't have been trading and then they kept pushing it higher and higher. By the time I covered it I was down 1.5%. This poor trading continued so that at one stage I was down -2%. Eventually I started to be more choosy about when to trade and started to make some money back. I caught a good move or two and did some successful scalping so in the end the damage was fairly minimal.

Lessons to be learned: keep out of illiquid markets and be cautious and choosy even when scalping. You can't force profits out of the market how ever much you want them. All you can do is follow your methods and let the market reward you in its own time.

I didn't take any screen shots yesterday.

 

[jasont]

Hey Gnome,

Is there a way for you to track the big guys to make sure you're not on the opposite end of the big orders and could possibly join the rush? It would depend on the charting information and data the horses have available.

 

[a_gnome]

Hey Gnome,

Is there a way for you to track the big guys to make sure you're not on the opposite end of the big orders and could possibly join the rush? It would depend on the charting information and data the horses have available.

Well, when the big boys are pushing things around the only tactic that one can employ is to jump on board and hope that you are early enough so that you can sell out to someone else before they push it back in the opposite direction. It's difficult to see how one can spot it as it comes out of no where. They just decide to go for it and start "eating up" the book.

It does remind me though that I was thinking about adding volume plots to my tick bar charts. Hopefully that will add some extra information.

 

[jasont]

It does remind me though that I was thinking about adding volume plots to my tick bar charts. Hopefully that will add some extra information.

That sounds like it might be able to help you out. Not sure if this can help but big traders don't usually jump straight into the market and buy everything without first testing the market won't sell further.

In other words, the big guys themselves will be pushing the market lower with smaller positions so they can then gauge the best price to buy their bigger positions. They increase their potential return and manage their risk of buying into a middle market area.

 

[a_gnome]

That sounds like it might be able to help you out. Not sure if this can help but big traders don't usually jump straight into the market and buy everything without first testing the market won't sell further.

In other words, the big guys themselves will be pushing the market lower with smaller positions so they can then gauge the best price to buy their bigger positions. They increase their potential return and manage their risk of buying into a middle market area.

I appreciate your comments and what you are saying sounds reasonable for the financial markets. However for the horses the market is so small that I personally believe they can with sufficient size move the market without having to test it first.

 

[a_gnome]

Status Update

It's all gone rather pear-shaped! Since my last posting I've had two bad days. The culmination yesterday was some after-hours trading in the US markets where they started the race 1.5 minutes early whilst I was in the middle of a trade. Note these US markets often don't go in-play so the market closes at that point. I found myself left with a back risking 3% of the account on which of course didn't come in.

I have found that in the name of "R&D" that I am just punting around and am right back to my old losing habits. Thinking back on it, the reason why I started making money was the following:

1. A healthy respect for the markets believing that most of the time I shouldn't be in as it was too risky.
2. There was no point in trying to scalp as the markets are far too heavily manipulated
3. I was taking my time to assess the nature of the market: how much liquidity there was, how much volatility and how much manipulating.
4. Due to the volatile nature I was attempting to trade the bigger picture with the ideal trading frequency being 1 trade in the 10 minute market.

Where it started going wrong was:
1. The markets went through a period of not really moving properly. They also became extremely illiquid at the start.
2. I wasn't making any money and felt that I needed to adapt to the new conditions. However this just lead me to start punting around trying to make something in difficult conditions.
3. I found that I no longer had a coherent strategy and was trading on impulse.

What needs to be learnt:
1. The markets will always go through periods where they are not profitable for your method. One needs simply to be patient about this. It's best not to trade if the conditions don't warrant it.
2. There's nothing wrong with R&D but it should be done on tiny stakes.
3. Be wary of trading those US markets close to the off. Unfortunately that's when all the liquidity is so one might just have to leave off those markets altogether.

The bottom line is that I am about 7% off my equity highs. This is no big deal if one is making money consistently (which currently I'm not) but I'm not really worried about the drawdown. What I am more concerned about is getting back to winning ways. To this end I may take a break for a few days. I was also revert to my winning strategy method. Any R&D trades will done on tiny stakes.

I did learn one thing yesterday. While scalping a low-volume market I noticed that the market would often trade just on one side lone enough to move several ticks against me despite my placing an order on the offer (say) to get out. In a higher volume market there would be more two-way volume so my exit order would be filled. It's something to bear in mind about low volume markets.

 

[a_gnome]

I'm now trading with tiny tiny sizes, looking to get back into my profitable groove. I feel that the basic trend strategy is sound but that there are also other opportunities around which needed to be sorted out from the rest of the trading session where one basically loses money (as I have demonstrated).

Above all the key thing is the right attitude of mind which I am well aware was completely lacking for the last few sessions. I need to rebuild this and then move forward. The main thing is reducing my trading size right down and I'm not going to increase it again until I am once more making money consistently.

Today was a better session. I only traded a few races but I did catch some good moves, I no longer attempted to scalp and I am also working on some new techniques which do seem to have some promise. Given the tiny trade size there was virtually no difference to my bottom line.

 

[a_gnome]

Friday 14th February

Much better trading! Trading with 1/5th my usual size I put in a much more consistent performance. Had I used my full size I would have made 1.2%.

I am coming to terms more with the less liquid markets that seem to be around at present. My strategy for these conditions is to look for areas where there is some size and use that as my "get out" area if the trade goes against me. I am also developing a new style of trading which is based on some of the ideas from DbPhoenix and his support and resistance/trading price group. It basically involves trading breakouts from quite small areas of congestion. I still need to "tune myself in" properly but it's looking much more promising. I am also no longer bothering with the scalping and am less interested in the jobbing as well.

I hope that I can get back to trading my usual size in a few sessions.

 

[jasont]

Great to see you back in form. It does appear that your biggest nemesis is the liquidity issues and you have come up with what should be a great solution. Parking close to the volume. Good to see you have moved away from scalping a low volume market, I can imagine scalping with little volume markets would be one of the hardest things to do.

 

[a_gnome]

Status Update

Thanks for the support Jay.

I just thought that I'd give an update on what's going on. I'm a bit busy at work at the moment so am not doing much regular trading. However I have made a bit of a break-through with regards to trading the US markets in the evening. The problem in the past was always of getting caught in a position when the race starts and not know exactly when this might occur. I've now had a couple of web-sites pointed out to me which give a countdown to the actual start for US races which is often surprisingly different from the publicised start time. This allows me to trade these markets with more confidence and I am making money steadily on them. I thought that I would at least take my account to new equity highs in this manner. The problem with these markets is that they are rather thin so while I can do what I'm doing on small stakes the approach is not scalable to bigger size. For big sizes I will have to revert to the regular trading.

I did have an insight whilst doing a bit of reduced-stake regular trading: I realised that basically the only times where I really make any money are on the big moving markets. All the scalping and all the other new techniques that I was trying to come up with don't actually make me any money at all. The obvious conclusion therefore is just to concentrate on trading these big moves and during times when there are no big moves the best course of action is simply not to trade. Simple really! I'll see if I can put this into practise over the coming days.

Once I am back in the swing of trading regularly I will start publishing my daily journals again.