Trial and Errors Journal

[meanreversion]

Another book I've found to be useful is "Beyond Technical Analysis" by Tushar Chande. It's fairly number heavy and statistics oriented, but he does a good job of summarising the main points. Like many of these books, you really have to read it at least twice to gain appreciable benefit.

You really should not worry about your pct win rate, it's irrelevant. You could have a win/lose ratio of 10:90 and still make money if your winners are 10 times bigger than your losers (such a system would be one with a very tight inital stop with the occasional big winner).

Similary, you could run wide stops and tight take profits and very quickly you will find your win ratio goes much higher than 50 pct. Doesn't mean you are going to make money tho!

 

[rsd886647]

Perhaps someone could have a look at these figures. I'll get in trouble going with 10% risk, but let's say I would start with it using a low-risk trend following method and see how things go. I do wonder if some discounting is needed for strings of losses, not to mention lack of discipline.

Aiming for the moon expectancy model

Starting Capital 700 pounds. Risk per trade 10%.
Position size 350 cfd shares. Cost 6 pounds each.
Deposit 210 pounds. Stop margin at 20 points.
Average losing trade = 70 pounds.
Average winning trade = 210 pounds. R multiple of 3.
50% probability of winning trade.
One trade per week. Position size increased every 10 weeks.

(PW50%*AW210) less (PL50%*AL70)
105 – 35 = 70 – 25 (commissions, slippage) = 45
172.5 – 57.5 = 115 – 35 = 80
292.5 – 97.5 = 195 – 45 = 150
517.5 – 172.5 = 345 – 60 = 285
945 – 315 = 630 – 76 = 555

..................Risk..........Expected Profit..........Capital
Week 10.........70.................450...................1150
Week 20.......115..................800...................1950
Week 30.......195.................1500...................3450
Week 40.......345.................2850...................6300
Week 50.......630.................5550..................11850

 

[meanreversion]

What if your first 5 trades are losers and you are down to 350 quid? At this point are you still betting 10 pct (i.e. £35 now) or still the original £70?

 

[Manya1983]

RSD, are you a fan of RS Dravids by any chance?

 

[rsd886647]

I was wondering about this too. I think now you mention it that risk would have to be a constant percentage of equity. So then I would be betting 10% of capital if the capital went down, or if it went up too.



RS Dravids, the indian cricket player? If he is anything like me, let's hope he makes something out of nothing a lot and doesn't get bowled out for golden ducks then.

 

[rsd886647]

I've acquired a few books recommended by various peeps, inc. trade your way to financial freedom, stock market wizards, street smarts and the undeclared secrets that drive the stock market. I've learnt quite a bit about position sizing and exit strategies. And the price action stuff is fascinating.

I had to close my positions at the open today as I came to the decision that carrying losses is my biggest weakness and I shouldn't be doing it. It was hard, and by midday I was kicking myself because the market recovered and I wouldn't have lost so much, but at least I know that I will no longer let losses run. So that feels good. I'm off on holiday in a couple of weeks, and unless there is a second wind to the rally before then, I'm going to try not to trade but read all these books and absorb.

 

[meanreversion]

Make sure to read "Beyond Technical Analysis" by Chande. In it, he stresses the importance of developing a mechanical system with which to trade. In other words, you need trading rules, but not too many (10 or fewer). This applies not only to the entry but also the exit. Once you have rules in place which make sense, it takes the emotion out of trading. It's important not to hindsight yourself all the time (e.g. "I was kicking myself") and rules go some way to helping with that. Frankly, if your system is well designed and you are confident in its expectancy, then trading should be fairly routine. Once it gets "exciting", you have issues..

 

[rsd886647]

I was just going to say, that's one I'll be keeping my eye out for. thanks.

 

[meanreversion]

By the way, if you think you can turn £700 into £12,000 in a year, you have been partaking of some mary-jane.

Be realistic. Some people DO make multiple 100 pct profits per year, but very very few and probably most of those blow up in the end.

Aim for a 5 pct return per month at the very most.

 

[Shikamaroo]

thanks for sharing your mistakes. I dont trade quite so wildly but it has served as a bit of reinforcement for me when i get figety and want to click that button even though nothing sets up. (earlier posts)

 

[rsd886647]

Yes, I do get carried away. I was aiming very high. Of course, if you only get a little of the way there, that is fine. The main thing is not to bust out.

I've found 'the undeclared secrets that drive the stock market' extremely useful, and it has taught me how to read a barchart as it unfolds live. This has been singularly the most useful lesson I have learnt to date, and I couldn't resist but trade when the rally re-ignited, and could have made a couple of hundred pounds if I taken profits earlier, or as it happens, held on till the end of the day. Instead, I saw some selling on down bars and sold. I made a hundred, which I'm still happy about. I really felt that I understood what was happening with demand and supply, for the most part at least, and I was able to stick it through tests and shake-outs with a level of confidence because I had read strength previously. The first lesson in the book was about how a gap-up through a previous trading range is often done to encourage those who had been locked-in and seen big losses previously not to sell, as higher prices are seen coming. This is exactly what I saw with Kazarkyms and it worked out a treat.

Now my trading index has hit the highs, and I think we could be in for some profit-taking over the next couple of days.

 

[rsd886647]

The book warns that if you didn't have the temperament to paper trade and learn as much as you can before you start trading, then one is unlikely to have what it takes to be successful. That doesn't bode well. I guess success is relative and I'm pretty much guaranteed it by my record to date. I'm glad that the author spoke of his errors when starting out, such as impulsively placing a trade first, then going to the charts to look for supporting evidence. I've been there.

He also advises against offering one's opinion to others, and I think that's good advice, not least because it makes one look foolish. I am going to focus on lessons I learn instead, the initial purpose of me keeping this journal.

One useful thing I learnt today, for instance, is how to draw trend lines/channels properly. Okay it's obvious if you know, but I didn't, two lows and one intervening high point in an uptrend and two highs and one low point in a downward trend.

 

[meanreversion]

Have you started trading real money yet Rsd or still testing?

 

[rsd886647]

The rally looks to be back on now, so I'm in, trading real money. I am waiting for a dip now and will look to short when it comes. I find Xstrata's charts follow a familiar pattern in terms of price action and will only trade the major swings from now, high reward to risk.

 

[rsd886647]

Developing my Swing Trading Strategy

My Trading beliefs

I like to trade equities and believe it is best to get to know a few issues very well.
I want plenty of volatility to allow for high reward swing trading.
I like to short the dips as well as buy long after the retracement.
I don't want to hold on to a trade for more than a few days.
I want a simple system with simple rules.
I want a mechanical basis to the system to help me be more consistent and
prevent emotions from affecting trades.
It must have positive expectation and a reward to risk ratio of at least 3:1.
I am starting with minimal capital, trading cfd's for the leverage.
I am a bit of a gunslinger, so I must set rules about position sizing that
limit the risk and protect my capital.

Tools

I am using a 5 day momentum index, accumulation and distribution signals, buying/selling climaxes, volume spread analysis and price targets to help me anticipate turning points.

Problems to overcome
The shares I trade have high volatility. Reversals often happen with a gap up or down and a violent price movement, where stops can get hit and position is closed out at a very unfavourable point.

Entry point

Buy or short on pullback after intitial reversal breakout. Buy signals - a low volume low spread down bar followed by a high volume high spread up bar, a low volume test followed by an up bar, a shake-out followed by an up bar. Short signals - a double top followed by a high volume high spread down bar, a low volume low spread up bar followed by a high volume high spread down bar or an up-thrust.

Exit point

Set stop 2 points below the buy day low/above the short day high. Move stop to 2 points below previous day's low/above previous day's high soon after the following day's open.

 

[rsd886647]

A little bit more about the tools;

So I'm going to focus on trading one issue. I am monitoring Xstrata, Kazarkhyms and Vedanta on a daily basis.

Xstrata's chart from the start of the rally looks like this...

I started out intially working with Larry Williams's accumulation/distribution theory. My calculations look like this...

The graph showed buy signals where accumulation was taking place before an upward move in price.

I'm using a 5 day momentum index. It gives clear indications of turning points.

And I'm also calculating the percentage change in price on up moves and down moves to give me a rough estimate of targets.

The trading index I use takes the number of gainers on the ftse per day and the volume in gains and measures it against the number of losers and volume. Clear buy and sells signals are given at the extremes of the chart, .4 and -.4.

These are my tools and I should be able to make some profits with them.

 

[rsd886647]

Another statistic I'm going to remind myself now to keep track of is average winning trade, the ratio of gross profit divided by number of winning trades (perhaps wishful thinking). Payoff ratio is the ratio of average winning to average losing trade. Typical trend following system should return values greater than 2.

I also need to work on how to identify when the market is trending and when it is ranging, given that ranging markets are choppy and losses can be significant.

 

[rsd886647]

In regards to my entry point, a reversal breakout that spans more than 2/3 of the average trading range from the 20 bar moving average (5 mins) gives me the signal to enter. Currently, Xstrata is trading with an ATR of 31, so a 21 point move downwards would be my cue to short.

I spot a problem with the workings. As of this minute, with Xstrata trading at around 715, I would be shorting if the price fell to 694. If I placed my stop 2 points over the day's high at 721, given my current price targets, I would expect to close out at 2 R. If I want to keep a reward to risk ratio of 3:1, I would have to set a tighter stop.

A previous idea was to set the stop loss at 50% of the average trading range, which say at 16, would be set at 710. This would allow for a ratio of 3:1, so I will work it like this.

 

[rsd886647]

I'm doing a bit more testing on charts tonight. Still waiting for the next dip. I've updated my trading index, the momentum indexes and reviewed my price analysis and what have you, took the usual half hour or so, and then I took a look at the daily chart and got pretty much the same impression from a single glance.

The volume appears to be drying up, and one might reason that buying is unlikely to support prices for much longer. Of course, now I've reasoned that, Xstrata is going to shoot up for another seven straight days!

 

[rsd886647]

I've done a bit more testing tonight, and I would do well to avoid ranging markets. How to quickly judge that the market was in such a state would probably come down to suffering a couple of losses and having a gut feeling. I would be interested in hearing other people's methods.

Moving my stop loss to breakeven on the second day looks like a winner. It also seems that setting a trailing stop loss thereafter may not be as effective as simply setting one manually some time after the open, based on the high or low point of the previous day's trading.

The volatile price movements can signal unwanted possible entry/exit points based on 2/3 ATR breakout, but I've noticed that weak volume often gives the game away, so in addition to having this rule, I will have to use volume spread analysis in a discretionary manner.