my journal

[Yamato]

Ok, this is the funniest Sopranos episode I've seen so far (I've seen about 30 of them, all about 50 minutes long). Very very well made. Tragic comedy or whatever it's called:

http://www.letmewatchthis.com/tv-4130-The-Sopranos/season-4-episode-4

 

[Yamato]

page 85-86:

As a result, being wrong on any given trade has the potential to be associated with any (or every) other
experience in a trader's life where he's been wrong. The implication is that any trade can easily tap him
into the accumulated pain of every time he has been wrong in his life. Given the huge backlog of
unresolved, negative energy surrounding what it means to be wrong that exists in most people, it's easy
to see why each and every trade can literally take on the significance of a life or death situation. So, for
the typical trader, determining what the market would have to look, sound, or feel like to tell him that a
trade isn't working would create an irreconcilable dilemma. On one hand, he desperately wants to win
and the only way he can do that is to participate, but the only way he will participate is if he's sure the
trade will win. On the other hand, if he defines his risk, he is willfully gathering evidence that would
negate something he has already convinced himself of.
He will be contradicting the decision-making process he went through to convince himself that the
trade will work. If he exposed himself to conflicting information, it would surely create some degree of
doubt about the viability of the trade. If he allows himself to experience doubt, it's very unlikely he will
participate. If he doesn't put the trade on and it turns out to be a winner, he will be in extreme agony.
For some people, nothing hurts more than an opportunity recognized but missed because of self-doubt.
For the typical trader, the only way out of this psychological dilemma is to ignore the risk and remain
convinced that the trade is right.

 

[Yamato]

page 86:

If any of this sounds familiar, consider this: When you're convincing
yourself that you're right, what you're saying to yourself is, "I know who's in this market and who's
about to come into this market. I know what they believe about what is high or what is low.
Furthermore, I know each individual's capacity to act on those beliefs (the degree of clarity or relative
lack of inner conflict), and with this knowledge, I am able to determine how the actions of each of
these individuals will affect price movement in its collective form a second, a minute, an hour, a day, or
a week from now."
Looking at the process of convincing yourself that you're right from this perspective, it seems a bit
absurd, doesn't it? For the traders who have learned to think in probabilities, there is no dilemma.
Predefining the risk doesn't pose a problem for these traders because they don't trade from a right or
wrong perspective. They have learned that trading doesn't have anything to do with being right or
wrong on any individual trade. As a result, they don't perceive the risks of trading in the same way the
typical trader does. Any of the best traders (the probability thinkers) could have just as much negative
energy surrounding what it means to be wrong as the typical trader.

 

[john_almighty]

I think you have written some wonderful last few posts. A lot of poeple hate maths but one of the most wonderful concepts of maths is Probabilities. What people do not get in first time is that even if you have a system with 90% win probability and no stop loss concept .. you can blow up your account when the 10% loss happens, all in the same time.. ie if you lose 10 times in a row before winning 90 times in a row for a 100 trade cycle. Stop loss is a very useful tool, if you set your losses like you have mentioned to only a particular limit each time which should essentially be smaller than the size of wins every time it works, you will make money in long run and keep making money. Backtesting is another thing not understood properly, if you have a system whcih works only even 30% of the time in the entire day, but all this 30% is concentrated at say lunchtime when markets are low volatility. understanding this immediately has provided you with something powerful. concentrate all your trades in those 2 hour lunch time and you have a system that suddenly is 90% profitable for those 2 hours you trade.
One also needs to understand what are the black swan events that can kill you. every system has its own. Another thing you need to understand is as you have mentioned the markets. what works for FX will not work for equity usually but may be untrue depending on your system.

And I am with you on broker.. a brutus back stabbing cheating bucketshop will always be more diff to beat than a good trader. i met a Olympic level shooter once, when he was a kid and was starting out, his father asked him if he was serious about it and he say yes to it. So his father went out and bought him a olympic level air gun which was a 1000 pounds much much more than a regular 30 pound gun. What his father said was epic " when you start learning you are going to make a lot of mistakes, I want all those mistakes to be your personal flaw so that you know it can be perfected." An olympic level shooter will find a 30 pound gun easy to handle since he knows all the flaws are in the gun and not himself. As long as the mistakes are only on one side, you will learn and find ways to fix it. I am on a journey of my own as well..

 

[Yamato]

Yes, I am glad we agree on everything, even the smallest details.

Regarding the broker/gun comparison. A bad broker (with expensive commissions) or a bucket shop that rips you off is like a gun that takes accuracy away from you. Also, I agree with the concept that you should keep your tools as perfect and simple as possible so to identify better the cause of your unprofitability. That's why I stopped trading options, because there's many more variables than with futures (time decay, liquidity, etc.), and it kept me from figuring out what was wrong with my trading. I am really not surprised when I hear that 90% of traders lose, because I've been through it. The only surprise is why I didn't give up yet, after 12 years of losing.

Another thing is that I feel very very close to Mark Douglas, which is the inspiration for all these posts you liked, whether I quoted him or whether my thoughts were caused by reading him. I didn't like him when I saw how everyone mentioned him but now I know he's not a scamster. I guess that my rule that what the majority likes sucks does not apply to trading: probably because the majority of profitable traders are all quite intelligent. He's talking and thinking like me, only - hopefully - from the other side, on the profitable side (I am quite confident that he's a profitable trader, but cannot be positive).

Right now, on the other hand, I am still very much on the unprofitable side. The past speaks clearly: lost every single year, starting from 1997. Yes, in 2008 and 2009 I made 30k each time starting with less than 10k, but then I lost almost all of it again, which is like saying that I broke even, but in reality it clearly says that my automated systems made money and that I am still unprofitable as a discretionary trader. Yes, as an automated trader, I am profitable since 2008. But overall I'm still an unprofitable trader, because for a reason or the other, I never kept any of the money I made. I have been an unprofitable trader until now. I hope this diary will witness the much awaited change.

 

[Yamato]

I was watching this thread, which I recommend:
http://www.trade2win.com/boards/trading-journals/70010-stock-day-trading-video-thread.html

The first video by shoot was simple, logical, and, typical of profitable traders in the disturbing way they accept their losses. Shoot's last sentence was a wake up call: "...object of the game is to have those losses smaller than your wins". It made me decide that my gun should be changed from now on into a different gun: I am going to have a stoploss half as large as the takeprofit. I will lose more often on my trades, but not to the extent that this change won't be convenient. I will use a 0.01% stoploss and a 0.02% takeprofit. Whereas before I was counting on being right at least two thirds of the time, now I could even afford to be right on less than 50% of the trades. Another advantage is that it forces me to train my accuracy, because I can't just enter whenever the heck I feel like counting on a very wide stoploss. Another advantage is that the loss will be half as big and so, in real trading, this helps me relax and take things less personally and if I do that, I'll be more objective.

With this method, I strain my eyes more in order to pick the precise moment, and I relax more because my lottery ticket is cheaper. The ideal would be to get even closer to a lottery ticket, which has an amazing risk/reward ratio of 1 dollar to 1 million (but a disadvantageous probability of winning).

Let's a hypothetical consequence of this change. Before I'd be expecting to see this kind of outcome:
+2
-2
+2
+2
+2
=+6
with a 80% accuracy (that's what I got with the sniper system)

Now I hope to be able to see something like this:
+2
-1
-1
+2
+2
=+4
with a 60% accuracy

No, wait, this doesn't make any sense... if i lose so rarely with the wide stoploss maybe I should keep it wide.

Somehow i still feel that I should use a risk-reward of 1 to 2. Let's imagine a different scenario.

With the old bracket order:
+2
-2

With the new bracket order:
+2
-1

I can afford to make money even if I'm only right half of the time. But that's quite easy to achieve, so this will take pressure off me. So the immediate consequence of this change is that the cost of my lottery ticket will decrease to a point where I won't feel any pressure in buying it. I'll decide later about how much my accuracy has gotten worse. The fact is that I don't expect to keep getting 80 percent of my trades right in the future. I feel that I've gotten lucky with the sniper system. I want to be able to be wrong at least half of the time and still make money. With this new tool I won't be afraid of making any trades. I'd be trading even at 14.30 CET, news release time.

Now I'll keep watching the other videos. To see if they are making me draw the same conclusions.

Here's the video that inspired me to make those changes in the bracket order risk/reward ratio:

Also make sure to check out this web site and read the story behind it, because it's very inspiring:
http://www.tradingapples.com/

Very intelligent, honest and sincere people, who explain everything in detail:
http://www.tradingapples.com/members/shootanappleoffmyhead.html
http://www.tradingapples.com/members/brendan-egan.html

[...watching their videos...]

I watched more videos and have decided to reduce my risk/reward to 3 to 1. So on the EUR it will be 10 ticks to 30 ticks, more or less, and on the CL it will be the same but different in percentage terms, so I have to take care of the hotkeys from that point of view. I have to put more stress on my accuracy, because this makes me improve.

 

[wprins]

Shoot's last sentence was a wake up call: "...object of the game is to have those losses smaller than your wins".

Hi Travis,

Well, I have a small problem with the above sentiment. We've discussed this before, but it boils down to the fact that I submit it's not either about win:loss probability ratio or profit size:loss size ratio in isolation, as *both* have an effect on profitability. The question is whether you're profitable on average, that's it, that's what it's really about. To put it like this: Having my winners being bigger than my losers is of no interest to me if I still lose money on average. Having my winners smaller than my losers is of no concern to me if I make money on average.

I accept that making that statement *is* a valid simplification in *many* cases/trading systems/edges, if you understand implicitly that the win:loss is at least 50/50, and then under that assumption make a statement such as that "the object of the game is to have your losses smaller than your profits."

So, for the case where you have a 50:50 (or better) win:loss ratio, such a statement woudl be true, but *only* for a strategy with a 50:50 (or better) win:loss ratio. The point is it is *not* true for systems/approaches where your win:loss ratio is less than 50:50 and consequently it is *not* universally true for all traders, for all edges, for all trading systems, which is what such a statement sounds like and that bothers me. And that is my point, and why I think such a statement is an oversimplification.

Consequently, why e.g. Tharp and others talk about "expectancy" or "average profitability per trade." Your expectancy or average profitability per trade effectively takes into both: 1) winners:losers ratio 2) average win size: average loss size which combined determines whether you're net profitable.

My point is this: Each system/edge may have different attributes with respect to winners:losers ratio and win size:loss size ratio. Making a blanket statement that you need to have your winners bigger than your losers is consequently an oversimplification, even it it will be correct for a great many systems, which may not be appropriate for your particular system/systems. And I feel uncomfortable that you are jumping to change your system as a result of this comment, without taking into consideration that it might not be appropriate for your system. The real question in my view is, what is your systems' values for both win:loss rate and profit size:loss size? And secondly, can you improve the overall profitability by changing your stop loss management and edge use?

I submit, once you understand what your actual win:loss rate, as well as average profit size and average loss size is, you have a far better understanding of what type of system you are trading exactly and possibly whether tweaking stop loss size etc may improve your system for a given market. (As an aside I've described in a previous post how to simply calculate these values from your trading history for a system, or all your systems together.)

So, as long as one has clarity on this, shall we say, subtle assumption in that statement in that video, then I'm fine with it. (I just have the sense that many noobs do not appreciate that subtlety.)

Have a good day!

 

[Yamato]

Hey, I specified the things you're pointing out, stressing out that the change in risk-reward won't compromise my profitability ratio to make such a change inconvenient. I clearly know that those two things have to be combined: we've had a discussion about it before, and I was the first one who stated that talking about risk-reward by itself doesn't make sense. Then (like today) you wrote a reply saying "you're wrong..." and proceded to say the same thing I had said. I look forward to meeting you online and challenging you on a risk tournament, so I will make you regret all these posts.

 

[wprins]

Interesting post by Brett Steenbarger

Interesting post by Brett Steenbarger who's blog I find usually very edifying:

The recent post on decision making in trading explained how our field of vision tends to narrow and our cognitive processes gravitate toward simplicity when we operate under conditions of psychological stress. Readers will recognize this as the availability bias described by behavioral finance researchers: decision-makers tend to gravitate toward the most available information--what is most salient at the time--when pressured to make a choice.

This is why traders seem to buy near highs and sell near lows with dismaying frequency. What is most salient at the time is that the market has been rising or falling. Afraid to miss the move or unable to take further heat on a trade, traders react to the most recent price action and act at the worst possible times.

How can we escape the narrowing of perception and biasing of decision-making under conditions of stress? One technique that I have found to be very helpful is a conscious routine that I go through whenever I am feeling pressured by the most recent market action. The routine has several steps:

1) Take a deep breath and get settled and focus;

2) Make a mental reminder that the situation requires my attention but is not an emergency. If I've sized my position properly and haven't touched a stop-loss level, adverse market action should *never* be an emergency;

3) Remind myself that other people in the market may be feeling similarly and may become reactive to the situation, making the current stressful situation a potential *opportunity*;

4) Purposefully broaden my field of vision to see what is happening in related sectors, asset classes, and indexes and what is happening in relevant market indicators, such as volume, TICK, etc.

5) Let the decision come to me based upon the broad survey and evolving market action, rather than impose a decision out of impulse.

The key is that I turn from the market to myself to steady myself and focus my attention before cognitively reversing the narrowing of perception. Seeing the whole field is much easier if I'm in the right state of mind and body. Often, just a few seconds devoted to self-management and a broadened perspective can allow traders to avoid impulsive decisions and turn seeming crisis into opportunity.

 

[wprins]

Then (like today) you wrote a reply saying "you're wrong..." and proceded to say the same thing I had said.

Hey man, I didn't say you were wrong this case. I was responding to the video and what I perceived as you wanting to change your system based on what that guy said which appeared to not take into account this aspect that we spoke about before. I know we've spoken previously about this and we both seemed to understand what we spoke about then, but I thought I'd comment anyway again, for the sake of clarity and to ensure we were both still on the same page. Sorry if I read you incorrectly and/or it came across as me saying you're wrong or as criticism, it was well intentioned. (As an aside, unfortunately I also have this bad habit of sometimes repeating myself, apologies if this bothers you. )

 

[Yamato]

Anyway, I look forward to meeting you online and challenging at a game of risk. We've got to settle our differences without violence.

If anyone would like to play risk online:
www.missionrisk.com



Two more wonderful videos by shoot, that I want to remember:

http://www.tradingapples.com/index.php?pageid=ProCoursePreview16

and:

This last video is very clear, finally a clear video on volume. The problem though is: can we count on interpreting volume for futures? I am not sure. Futures follow the forex, and the other futures follow the underlying security, so I'd rather not count on volume unless I am sure of what I am doing.

 

[Yamato]

And sure enough, the people at tradingapples like Mark Douglas:
http://www.tradingapples.com/homepage-news-feed/61-interview-mark-douglas.html

Here's the interview they posted (at the link above):
http://www.4shared.com/embed/96740657/227e2748

The other guy with mark douglas doesn't sound like a trader, but like a journalist. Douglas writes more clearly than he speaks. Ok, the other guy is not a journalist but a former floor trader, but he still sounds and looks clueless.

The interview kind of sucks, because I wouldn't read the book after watching it. Instead the book is great. Maybe it's because all interviews suck, or because the journalist sucks. Maybe he should have just asked him to leave and gave a lecture.

Minute 23: Douglas talks about how Richard Dennis was losing 95% of the time and still making money.

The journalist sucks so bad that they have 1 hour to talk about simple things and he's making Douglas so uncomfortable that he's rushing as if he had only 5 minutes to talk.

 

[Yamato]

All right. I've thought about it for a while and I am still not good enough to push my accuracy as to having a stoploss of 0.01%. So I am keeping my bracket order as it was, of the same size in both directions. Maybe if I'll get good at understanding the markets, I will change this. Right now I don't have the accuracy, so no point in making every single trade a loser by expecting too much of myself. Somehow wprins had a point, even though I wasn't wrong about anything as far as understanding that my profitability depends on risk/reward * % wins.

 

[Yamato]

This is even better:
http://www.tradingapples.com/index.php?pageid=ProCoursePreview21

However, I only understood it partially.

 

[dog4]

Anyway, I look forward to meeting you online and challenging at a game of risk. We've got to settle our differences without violence.

If anyone would like to play risk online:
www.missionrisk.com



Two more wonderful videos by shoot, that I want to remember:

http://www.tradingapples.com/index.php?pageid=ProCoursePreview16

and:

This last video is very clear, finally a clear video on volume. The problem though is: can we count on interpreting volume for futures? I am not sure. Futures follow the forex, and the other futures follow the underlying security, so I'd rather not count on volume unless I am sure of what I am doing.

A couple of comments on your last point (by the way, good video re. explaining volume):

- I would think that high futures volume would mirror high FX spot volume. In the FX market, spot trading is much, much bigger than futures
- apparently, however, in the stocks world, sometimes the futures trade in such high volume that these drive the underlying direction of stocks (rather than vice versa). this I learnt from an acquaintance who does index arbitrage for one of the big banks in London

dog4

 

[Yamato]

Oh, thank you. I'll keep that in mind. So you're saying that overall, for the big volume futures, I should be able to interpret volume the way they explain in the video.

Another thing I want to say is that these two guys, the guys at tradingapples, are so intelligent and even lucky for having met good mentors who spared them years of efforts (one had a mentor and then mentored the other), that they almost made me feel for a second that everyone is profitable except me. The reality is that these two guys are like the youngest profitable traders who are also trading educators with an online web site: I've met a young profitable trader who's even younger than them, but they're the only young and profitable trading educators I know of. I mean when you hear a trader explaining you stuff on how to become consistently profitable and saying "in my early days" and he's talking about a year ago when he started... he made me feel really retarded.

Anyway, I am probably the only trader who's started trading in 1997 and who's still not consistently profitable. The others have all either stopped or learned.

But that's because I've been only focusing on my edge, on how to get every goddamn trade right, instead of focusing on money management and on how to not lose everything when I am wrong.

I've been focusing on increasing my accuracy, without noticing or caring that my risk/reward was: everything / 200 dollars.

I guess this is because my dad all my life has stressed the importance of being right, or rather, somehow he got that point across to me: that being right is the most important thing. That explains why I get so upset when wprins states or implies that I might be wrong about something.

So, I can also say that wanting to be right has been my worst enemy, in trading, and probably in every area of my life.

In my life, I avoid all activities where I can't win. I don't play tennis because I am not good, and I don't want to not excel at things. So I either make a good impression and shine, or I'd rather not engage in some activity. The learning part has to be hidden so i look good to people. Like sometimes I'll edit a post 100 times, to write it better, but then I'll post it all over again and delete the previous version so it will look like I didn't even edit it once.

I think my mistake was this, which is a huge one and explains my unprofitability. After discarding women who weren't willing to say yes to me before I even asked, after discarding sports I couldn't excel at before even starting, I looked at trading as the place where I'd get my revenge and where I could be right.

I said: ok, finally something where I can show how good I am. I will show them all. And showing how good I was to me meant being right about my predictions. That's it. I was looking for a place to be right. And this means you're not going to be able to take your losses, and will rather blow out your account than admit you were wrong. Because the moment you're officially wrong is when you close a trade with a loss: until you're in the trade, you don't feel that you are wrong, no matter how much you're losing. That's how I blew out my account dozens of times. And never even learned anything from it.

It may be the same reason why some people, like me, take so long to graduate from college (especially in Italy, but I managed to graduate in 8 years in the States, for just a BA): the moment you realize you were a lousy student and were behind with exams, credits and requirements is when you graduate. So, until you graduate, you're not facing the balance of your studying. Then I graduated, and it sucked because it felt better to say I never graduated than to say that I graduate from college in 8 years (because I didn't want to finish my two math requirements and kept failing them every summer school).

It's a good thing that I didn't give up on trading because I have eventually understood what was wrong. But for the same perseverance/stubbornness I also didn't give up on every single trade, thereby blowing out my accounts. Well, anyway: I am glad I am in good company, if, as they say, 90% of people never become profitable (or whatever that 90% figure means).

But once again, like in college, I am the oldest student in my class. My two math requirements this time, keeping me from graduating, are... or rather "is": the ability to accept losses, accepting your limits, accepting that you can be wrong.

 

[Yamato]

Wow... I just heard a good Sopranos quote to be tested on trading: "more is lost by indecision that by wrong decision"

It's at minute 10:50 of this episode:
http://www.letmewatchthis.com/tv-4130-The-Sopranos/season-4-episode-13

Would this be applicable to trading? It could and could not.
Before you enter a trade, it doesn't apply, because you shouldn't rush into a trade, but wait until your positive.

After you've entered a trade, it does apply, because if you have a bracket order of equal size, your trade has a 50% of being right, and so, if you had an edge to begin with, it will bring you money. If you're undecided instead, you're risking blowing out your account by not exiting with a given loss, and risking also getting out too early with a win.

So this Sopranos quote revealed to me once more that you should let the bracket order take care of your trade all the way. And only use your brains and appraisal before you enter the trade. So you'll have no indecision during the trade, because the bracket order will take care of everything. And you must make sure not to enter it unless you're positive about it.

 

[Yamato]

Ok, after all this talking and quoting, tomorrow I should have no problems at all making money, and so the following days. But I might still do some paper trading, because it is actually a good thing. I'll just keep my real money trading for the things I am feeling positive about, like overnight reversals and such.

 

[Yamato]

Hm... I thought Carmela sucked as an actress, but I have changed my mind after seeing this (minute 44 and neighbouring):
http://www.letmewatchthis.com/tv-4130-The-Sopranos/season-4-episode-13

She just has to play the role of an unpleasant person. And she plays it so well that the parts of the series she's in are dislikable. This series is so good that you actually feel that such a family exists and that the Sopranos and all the other characters are real people.

It's all great acting, by her and the others: throughout this episode. This is one of the best episodes.

 

[wprins]

Found this post on will power and self discipline and how to improve that, I thought the author's reflections were quite on point and useful. (Motivates me to really make effort to improve in that regard this year.)