Don't Panic!!

Cable Sal

Member
70 7
Hello reader,

Feel free to ignore this journal, I'm writing it for the purely selfish reason of tracking my own progression as I set out on a personal journey to learn how not to panic when trading.

I'm going to start with a bit of history, to explain how I built up a panic mentality, then hopefully outline a self-development plan that I aim to follow, then if all goes well, I'll follow my progression along that path.

Although I'm not writing this for anybody but myself, I'm aware that I'm 'putting myself out there', by publishing this, so I'm happy to answer questions if anybody wants to ask anything.

Oh well, here goes nothing...

Sal
 
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Cable Sal

Member
70 7
My early trading history

I'm nearly 40 now (nearly, nearly, not quite there yet), and my interest in trading begin in the 1980s when it seemed that every 18 year old barrow boy in London was driving a Ferrari after investing a day's wage in the stock market and becoming an overnight millionaire.

I didn't live in London, and I didn't think I'd suit a stripy jacket either, so working in a stock exchange didn't seem to be an option open to me. I was about 13 years old, I bought a book called "Fair Shares" which explained how stocks worked, and fascinated me. "One day, when I'm rich, I'm going to try that."

My first opportunity came when my funeral-expenses-fund matured at 18 years old. (Poor people often insure against their kids dying and not being able to afford a funeral.) £250, which was mine to invest. After a bit of shopping around, I found a few unit trusts that would take small sums, and picked one to invest in. Three years later I withdrew it to pay for my rent while I was a student, it was now worth £300.

I graduated from university in 1995, the only member of my family ever to do so, and had a fabulously varied and exciting career. At one point I had a job which involved travelling the world, we were given 3 months to hand in our expenses, which left a bit of room to pick your timing according to what was going on with the Forex markets. My single biggest win was £100 on Polish Zlote, my single biggest loss was £50 on Venezulan Bolivar. It was good fun, and made the dull job of preparing expenses in 7 currencies or more a bit more tolerable.

Gotta go now, so I'll follow this on a bit later.

Coming soon... the big win that put me off trading...

Sal
 

Cable Sal

Member
70 7
Trading For Real

About 10 years ago I ended up working in the telecoms industry in the UK. I held an influential position within a telecoms provider - influential in that I was a market maker; a government-level negotiator; with the sweep of my pen I could breathe life into a supplier or bring them bankruptcy.

It seemed that everybody in the office was playing the stock market at the time. Even our secretary had a trading account. I was reminded how fascinated in the markets I'd been as a kid, and how I was now "rich" enough to afford to lose some cash.

I began to dabble, using my bank as a stock broker, an absolute noob with no idea what I was doing, but having a good lot of fun winning a bit, losing a bit. I now know that what I was doing was position trading stocks based on fundamental analysis alone.

Then came the UK telecoms stock crash. All of us in the industry had seen it coming, none of us were working for profitable companies - it was all Enron-style smoke and mirrors. I was still surprised by how the market couldn't see which were the 'sensible' companies and which were based on business strategies full of holes. Share prices in our industry fell to penny shares - 2p, 5p, 13p - were prices I remember buying at. I didn't know what the stock market was going to do, but I did know who was going to go bust without finance and who wasn't. So I bought. And bought. And bought some more. And I sat on it all, waiting for the market to recover - which it did.

I didn't really pay it enough attention, I'd put all my play money into shares, and then left it alone to multiply, pretty much forgetting about it. Eventually I was putting together a tax return, and decided to consider what if I pulled out my shares - what would I owe in capital gains? What were my shares worth now?

My play money had turned from £1,500 cash into a quarter of a million in share value within the year. It was a hell of a shock! A nice shock, but still a shock. Some of that cash had to be invested in a tax accountant to sort out how to get the rest of the cash out of the market without being stung too hard for capital gains. Where do you go from there? A quarter of a million was more than I'd ever dreamt of - it was lottery win proportion. I put most of it away safe to be my pension-type-thing.

My trading career was over. I felt as though I'd walked into a dragon's lair and grabbed a treasure chest while he wasn't looking. I'd gotten out without getting burned, I had no intention of going back in again. I had my treasure.

I walked out of the markets, I also walked out of my job. I bought a cheap house for cash and decided I wanted the quiet life for a while.

It lasted a while, but I got bored doing nothing and decided to go find something new to learn. What do tax accountants do? They exploit loopholes. I'm good at exploiting loopholes - maybe I should learn to be a tax accountant. I decided to find out by talking my way into a job working as an assistant to a Local Government investment banker. He needed a bookkeeper, cash handler, tax preparer, record keeper - but only had the budget for a data inputter. He taught me his trade, particularly the tax element, while I did a massive job for little more than minimum wage. We were both very happy.

Then came the banking stock crash. It was fascinating watching it from inside the whirlwind - we had millions invested with the government specified 'top 20' banks - luckily a loan with Northern Rock had matured only 1 day before the whole Northern Rock thing kicked off, but we did get a bit stung by one of the Icelandic banks.

I had spent three years up to this point watching money move on the money markets, talking to our brokers, learning everything I could about this fascinating aspect of banking. I saw how crucial Local Government and Central Government departments were to the liquidity of the UK banking sector. Here we were now, being instructed to pull out our cash! Put it all into bonds! Oh my god, the money markets will freeze! Yup, that's what happened.

Deja vu. I was inside an industry with crashing stock prices, with pretty good information about who was least likely to go bust. I decided to risk another little venture into the dragon's lair, see if I could grab another pot of treasure. I invested far more cash this time, £10,000. Same set up, same plan - although I didn't know what a set up was, and I didn't exactly plan it out. Buy underpriced shares in stable banks and sit on it for 6 months or more, see what happens. This time I couldn't see it through. It was too much money, I was too nervous, last time I had made a quarter of a million, it was too much money.

Something happened, an announcement by the American government, the value of my shares quadrupled literally overnight. I panicked and withdrew the lot, I think less than a week since I'd invested it. So much for 6 months!

I decided that maybe I should stay out of the stock market - it can't be a good thing being a panicky trader. Maybe I was more suited to property or something like that. Again, I pulled out of the market and quit my job.

(As I write this I realise that both times I've run from the stock market I've also quit my job. I wonder if there's a connection?)

So that brings me to where I am today. Well, nearly... I've been tempted back again, and I'm now in T2W - obviously there's a bit more to this story yet. I'll put that in my next post.

Sal
 

0007

Senior member
2,277 586
This is a fascinating journal so far! (All the material for a good "City" story and the writing talent to match.)

I look forward to more instalments. :)
 

Cable Sal

Member
70 7
Lol, thanks Travis and 0007 - I've gone a bit bashful now that I know somebody else is reading this! :LOL:

Anyway, I'll get the journal up to date with the here-and-now, and close out this binge-writing session.

Planning for re-entry

So now, here I am a couple of years on. I'm working as a data analyst, looking for patterns in charts to forecast all kinds of random things, then turning my forecasts into a set of actions for the business to take so it can achieve its objectives. I love the job, I love graphs, I love maths, I love being a statistician, I love telling people what to do. I'm always looking for new technical tools to apply to stats to see if I can make sense of a trend. I came across some statistical tools that are used by traders that I apply to a completely different thing.

It's made me wonder if I'd have known about technical analysis when I used to play the markets, would I have been so panicky. Probably not. I'm a strategist, a planner, an analyst. For all of my good luck in the markets so far there's been no skill, no sense to it. I've been in the right place at the right time and made decisions that were not the wrong decisions.

Another thing has got me motivated, and it's a bit more personal. I've been in a long distance relationship with an American for a year and a half, and we spend a fair bit of time commuting back and forth across the Atlantic. Aaaaaaargh! I can't resist the urge to look at the forex charts - what's cable doing these days? Do I buy my holiday money now or next month? Do I prepay that hotel while the rates are good, or do I forfeit the prepayment saving in return for a better exchange rate later. I've been watching forex for 18 months, and I keep getting tempted. I wish there was a market in hotel room prices - I'm an expert at picking the right time to buy!

Convergence has happened. I've picked up some new understanding of how trading can be carried out using plans and analysis rather than gut instinct. I can't avoid needing to know what's going on in certain markets. I've picked up a whole range of new analytical skills at work. My American is also very interested in the markets, in my past success and is encouraging of both of us getting involved.

So what now? I admit I've always wanted to be a trader, but never known how to do it properly. I found these forums a little while ago and I've been lurking in the shadows - researching... researching... researching... From Timsk I've learned how a trade plan can be written, from Pozzyp I've learned how to follow price action. From countless others I've learned all kinds of things.

I have an outline of a strategy for re-entry now, and I'm ready to go public. I'm aiming to start live trading next year, around about April maybe. That seems a way off, but I've got a lot to do between now and then. I'm in no rush, the market will wait for me.

I'm going to spend another couple of months researching - reading, asking questions. I've started to experiment with building models (the mathematical kind, not the Airfix kind). I think my 'thing' might turn out to be spread-betting either stocks or forex. I'm not sold on this though, I'm happy if between now and October I completely change my mind.

By October I think I should have the outline of a trade plan in my chosen instruments, with a basic model built to check that I'm on the right lines. I want to spend a couple more months just watching my chosen instrument, learning it, modelling it, tweaking the trade plan. By December I should be ready to start paper trading, and testing the robustness of the plan during the dodgy holiday season.

If I'm happy and still raring to go by January, I should be ready to set up a / some account(s) with what I currently assume will be an SB platform. I notice IG has a 6 week course, and other companies offer demo accounts. So, a couple of months of practicing with the platforms will be next - that'll be the really hard bit, preventing myself from diving straight in once I've got an account open.

This probably sounds like a crazy amount of time to take over preparation, but to regain calmness over panic, I need to reach a level of certainty with each stage of my progress, and be eager to move on to the next stage.

It'll be interesting to see how my thought processes twist and change over that time period, I hope this journal will help me track that. It'd be all too easy to lose track of my objective: to trade calmly.

Thanks for listening,

Sal
 

timsk

Legendary member
7,023 1,847
Hi Sal,
Welcome to T2W!
As 0007 says, a very interesting start to a journal. Few people who commence them are prepared to offer insight into their personal circumstances in the way that you have here - what an interesting journey!
I look forward to further instalments.
Cheers,
Tim.
 

Cable Sal

Member
70 7
Hi guys,

Thanks for the encouragement! I guess now that I've whizzed through the last 20 years and I'm gonna get into the nitty gritty of what I'm up to, it'll be a bit less interesting to follow. :sleep:

I love spreadsheets

If you'd have asked me a month ago, I'd have told you that I was only really interested in buying and selling shares, I'd heard of spread betting, but I thought it was probably a scam, I understood the concept of going short on something, but it seemed an added complication. My vision of trading was one of buying some shares, holding them long enough to actually receive the certificate (there is something quite nice about that), and then selling them once they've gone up a reasonable amount. That's what I was aiming to learn how to do properly. I figured if I learned how to do it properly, with stats and analysis and all that, I'd be able to trade calmly with confidence.

I had thought about other instruments in the past (only I didn't know they were called instruments). As I've mentioned before, I've got a natural attraction to the forex market - it kinda sings to me whenever I'm in the proximity of foreign currencies for practical, everyday reasons but I was under the impression that you needed to be either very rich or a professional trader to get into that. Gold and bonds and wholesale gas contracts I understood, but didn't think they were for little people like me. As for lean hogs or orange juice futures - I wasn't even sure they really existed, I mean why pork bellies? Isn't there better meat on the leg?

I'm telling you all this, 'fessing up to my quite recent naivety to explain why I've build the tool that I've built. It's based on actually buying - with hard cash - stocks.

I finished reading Pozzyp's journal last week - a great inspiration, both to get writing and to start testing out some of the theories and methods I've been reading about all over T2W. I was itching to build a spreadsheet. The only problem was that all of my costings and data were aimed towards swing trading stocks through a broker. Oh well, I can still use some of the concepts that I've learned about to pull together the bones of a model, which I can later build on to reflect more accurately what I've been learning.

I imagine that to some readers it may seem like the hard way to go about learning to trade, starting by building spreadsheets, especially while I've still only scratched the surface of technical analysis and how to use it. But by trade I'm an engineer, I like to know how things work, and since being a little kid I've always pulled stuff apart and then tried to put it back together again. For me, it's the best way to get into something.

History tells me I'm going to build a monster spreadsheet, so complex and intricate and full of idiosyncrasies that nobody can follow the formulae, and the bugger keeps crashing. And yet it will start from something so small and simple.

I've read in several places that many experienced traders minimise their risk exposure to 2% of their account. 2% sounds like an awfully low figure but I love awfully low risk figures! I decided I'd build a spreadsheet to calculate where to put stops based on a 2% risk. As I'm not sure of how much cash I'm going to put into my trading account, or how big a stake I'll put into any one trade yet, I left those as variables. 2% seeming quite low, I built in my % risk as a variable too. I tested it, fiddled around with it for a bit and got it working. I banged in some numbers and got a feel for what a 2% risk stop looks like on shares, it's obvious when you watch the numbers dance - the smaller the stake that you place, the wider the gap you can have with your stop for any fixed amount of capital in your account. Okaaaa-ay, I just learned something that I didn't know before.

What next? going short, that's what. I was much more comfortable with the concept after reading Pozzyp's journal. The maths isn't quite so intuitive, but what the hell, I literally am a qualified rocket scientist, surely I can master the sums behind going short! (Rocket science really isn't that that difficult, not like trying to learn Spanish or make shortbread, both of which have eluded me.) Cracked it eventually, I had to cross-reference a few sums to ensure that the answer would come out the same no matter which way around I calculated it.

Now what? Well, I was kinda eager to put it to the test with some real data, but that needed some thinking about. A few people have mentioned the theory that if you cut your losses quickly and let your profits run on, you'll come out an eventual winner no matter how randomly you chose your trade. I'm interested in testing that theory, because if it's true, it'll form a fine bedrock to a trading strategy. Still mostly thinking about stocks, I picked 10 company names that I'd not heard of from FTSE 250 and plotted their end of day bid, ask and volume. To truly test the random theory I should have modelled 5 going long and 5 going short, but that seemed a bit pedantic and not much fun. I waited until the next day and got two more points of data for each, a midday update and another end of day update. I'll let the market lead me - if three points of data show an upward trend, I'll go long, if three points of data show a downward trend I'll go short. It's still a very random way to pick my trades, and allowed for the fact that a few of them were range bound within those three points.

How to choose the value of my stake? I went back to my spreadsheet. The value that I'd need to invest was linked to the cost of the trade. Some early research that I'd done suggested a fairly average-to-worst-case cost of transaction would £10, so to buy and sell would be £20. I would need a large enough stake that a favourable price movement would cover the £20 cost per trade, without requiring an enormous step change in share price. I fiddled around with some formulae and build another set of sums. As expected, the higher the stake, the less the share price has to rise / fall to breakeven of the cost of trade.

Ahhhh... The higher the stake the less the price has to rise to cover the cost, but the higher the risk becomes, so the tighter the stop. Hmmm, this is gonna take some experimenting with. Eventually I came to the conclusion that £500 per stake was about the best balance - although the stops look scary close and the prices have got to move a long way to cover off the costs.

A week on and I've been stopped out twice and everything else is still in its first running, time will tell whether the profits will cover the losses or not. I suspect not, my costs are too high and my risk % too small for this kind of trading.

In the meantime, there's so much more that I want to model, and now that I've got documented decisions on where I went long / short or left alone I can replay the same experiment with different variables. I'm particularly interested in what would happen if I changed the cost base from broker trading to spread betting. I'd have opted for this straight away, but I don't understand the SB cost base enough to model it yet and I was too eager to wait for more research. Using typical SB spreads, does the stake come down, the stops move wider and the ability to breakeven get more likely - or does it go in the opposite direction, the leverage on minimum bet sizes pushing the risk up and the cost of failure? I don't know yet. I'm about to go back into my spreadsheets, so if I go quiet for a few days, you know where I am, I'm in the land of little grey squares!

Back soon,

Sal
 

JRP2891

Established member
752 125
2% sounds like an awfully low figure but I love awfully low risk figures! I decided I'd build a spreadsheet to calculate where to put stops based on a 2% risk.

it's obvious when you watch the numbers dance - the smaller the stake that you place, the wider the gap you can have with your stop for any fixed amount of capital in your account. Okaaaa-ay, I just learned something that I didn't know before.

Sal

Hi Sal, 2% won't seem like a low figure when you have a bad run of losing 6/7 or even more trades in a row, because it will happen at some stage. Actually 2% is pretty weighty in my opinion, and if your win rate is around the 50% mark you'll get some significant equity swings with that % risked.

Also with regard to stop placement, the % you risk per trade shouldn't dictate where you put your stop. It's better practice to have a technical stop which is placed at a price where you are wrong on your trade idea. You then divide your 2% by the number of pips of your stop loss to get your trade size. This is called a fixed fractional approach where you're always risking a consistent % of your account, so it decreases when you're losing, and increases when you're winning. The result, exponential profits when you're trading correctly.
 

timsk

Legendary member
7,023 1,847
Hi Sal,
Sounds like you're having fun!
It's extremely tempting for me (and, doubtless, others reading your journal) to wade in with advice - 'do this and do that' etc. However, I think this would be quite wrong, as we each have to learn from experience and find out what does and doesn't work for ourselves, rather than accepting someone else's experience. With this in mind, feel free to ignore my next comment!

When designing your models and building your spreadsheets, there is another factor that you've not listed (so far) that you might want to consider. It's especially important to equities traders - particularly those trading in the short term. In a word: volatility. I agree with JRP289's comments about stop placement, but volatility must also be factored into the equation, IMO. In this article, Trader333 explains why it's important and offers a simple and practical way of incorporating it as part of your stop placement and position sizing model: Position Sizing as an Approach to Risk Management
Enjoy!
Tim.
 

Cable Sal

Member
70 7
Thanks guys. :cheesy:

I'm more than happy to listen to any suggestions of 'do this or do that'. This is the time to experiment for me, so I'm up for anything, although I can only try out as much as I have the time capacity for. So, no promises that I'll follow through on any suggestions, but everything I have so far is entirely based on what I've read from other people.

Speaking of time capacity, time to go do the day job...

Later,

Sal
 

timsk

Legendary member
7,023 1,847
Speaking of time capacity, time to go do the day job...
Sal,
Please familiarize yourself with the T2W Site Guidelines. Next time you use language this offensive and distasteful, I'll have to report you to the Mods!
:LOL:
 

0007

Senior member
2,277 586
Sal,
Excellent points from JRP2891 and Timsk. But what I do like is your completely fresh and personally original approach to the business of trading - perhaps this reflects your engineering background? It's so very easy to read all the accepted wisdom and be quite a successful trader from that; your approach may lead to some blind alleys but I bet it will also throw up some very worthwhile points.

Keep it going - best read I've had in a while.
 

Cable Sal

Member
70 7
Sal,
Please familiarize yourself with the T2W Site Guidelines. Next time you use language this offensive and distasteful, I'll have to report you to the Mods!
:LOL:
Oh my! Bad Sal! Detention for me and 10 sides of lines "I must not swear in front of new friends" :p :LOL:

Lol, just taking a break from the little grey squares. Very interesting article Tim, and the fractional approach to stop placement looks well worth investigating too.

For the moment, I'm just attempting to convert my share buying model to a share SB model. I'm basing my assumptions on the parameters that are tucked away in the IG Index site, and for the sake of simplicity I'm starting by assuming their minimum criteria for everything, and basing it on the guaranteed risk account. It makes for less variables at the start, I can soon add in more complexity once I've got this bit working.

So, my parameters:

1. Minimum bet is £5 for a price of 499 or less, £3 for 500-999, £2 for 1000-1499 and £1 for 1500+.
2. SB price is assumed to be 0.1% lower/higher than the bid/ask price quoted on Yahoo.
3. The minimum stop distance allowable is 7.5% measured from the bid/ask price for long/short respectively.
4. The guaranteed risk premium is an additional (not cumulative) 0.7% penalty to the opening price.... Ah, I've just realised, it should be cumulative - I'll fix that.
5. The deposit = the total value of risk.
6. Rollover fees are a % of the bid/ask price for long/short respectively, 0.0075% per day for long, and 0.0006% for short.

Hmm, that's all the costs and parameters that I've identified so far - I think everything else is within my power to specify. Does anything there look crazy-out to anybody? Is there anything I've blatantly missed at this point?

My current model gives me a suggestion for the value of my stake, where to place the stop and where to start scaling out. Admittedly, it's a bit rough and ready, but if I can get this SB one doing the same thing, it'll give me some bones to start putting the flesh on.

... Had a bit of a 'do' this evening for a friend who's leaving for Texas, so I might not be on quite my best form, algebraically speaking. I might leave the next set of the formula writing until tomorrow. Starting to flag somewhat.... Damn you rum and coke... :sleep: :sleep:

Sal
 

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