my process up for criticism, please, go easy :)

[dr.blix]

hi, just wanted to put up my process for people to criticise...i'm very aware that there are huge holes and risks, i'm in the process of dealing with some of these now. sorry about the size of this post.

i started in october. i picked 10 FTSE 100 companies (with a few 250 companies) as i thought this would be a fairly safe way to start.

i only trade these companies...i realise this might be very limiting, but i don't have the skills or software to pick random companies and feel confident trading them. i think i'm beginning to get a feel for each company's price action in different conditions/markets. i've sort of spread sectors, but really i'm bank and insurance heavy. i picked companies who's share price is around or below £1, for some reason i found this easier psychologically and felt it simpler gauging their bottom (this may be utter nonsense?).

i use an online broker and use LSE's level 2. i traded for the first couple of months not knowing about charts/indicators. i used a level 2 order book and my daily price 'averages'...i'm sort of glad i didn't know how to use charts at first, it really tuned me into price and becoming accustomed to a companies price in different conditions. i still take the L2 order books ratio of buyers/sellers as a major indicator of a poss reversal, and through staring at the same companies order books every day for 3 months i think i have a bit of a feel for what can happen with different order book depths/ratios. i now use a 1 minute line chart with 14 period and 50 period MAs, a RSI and Volume.

my general idea now seems to be to try and make 5% on each position. i have 8K capital and each position is 2K. i learned how to use a spreadsheet so i can calculate the three S and R points around each company's daily pivot. i pick one of these support points (or the company's previous low) depending on what the index/company/asian markets are like. i set my orders before the market opens and wait. it can get a bit hectic when i have a few positions open at the same time.

one of my biggest problems is stops. i feel stupid saying this, but i rarely use them. i know this is going to knock me out until i get rid of this bad habit. 'timsk' has given me some great info on what my stops should be. my problem is, bar one occasion (BG.), every bad position i opened eventually cycled back and then exceeded my original position. in these instances, i either sold a few days before they would have made a profit, or sold for a small profit (thankful to be out of a bad position) while they went on to higher prices. through these few particular experiences, a bad habit has been formed where i hold onto bad positions until they reverse. so far they always have, but i suppose one day it won't and i'll be flipping burgers.

i've been living off my trading for a couple of months, so far i'm £500 down on my initial £8500 capital. although after this shocking past few days FTSE activity that may be a little lower now.

i would really appreciate criticism on my clunky process...sorry again for the huge post.

 

[cr6196]

I'll offer something about stops..nothing to original though lol. May help, may not.

i used to have a similar problem as i thought i would be right on every trade...so why would i need stops? I then after taking the obvious and inevitable losses came across the statistic that you only need a 53% probability of success on each trade to achieve a near 100% probability for the year.
I saw stops as useful from then on. I set them at point where if they are hit, i was "wrong".

So i dont set my stop according to what i can afford to lose but i choose a price before hand and adjust my position size accordingly. Average True Range is also a useful indicator when considering stops. Also consider using stop orders instead of limit orders, if ive understood correctly...

 

[Chorlton]

hi, just wanted to put up my process for people to criticise...i'm very aware that there are huge holes and risks, i'm in the process of dealing with some of these now. sorry about the size of this post.

i started in october. i picked 10 FTSE 100 companies (with a few 250 companies) as i thought this would be a fairly safe way to start.

i only trade these companies...i realise this might be very limiting, but i don't have the skills or software to pick random companies and feel confident trading them. i think i'm beginning to get a feel for each company's price action in different conditions/markets. i've sort of spread sectors, but really i'm bank and insurance heavy. i picked companies who's share price is around or below £1, for some reason i found this easier psychologically and felt it simpler gauging their bottom (this may be utter nonsense?).

i use an online broker and use LSE's level 2. i traded for the first couple of months not knowing about charts/indicators. i used a level 2 order book and my daily price 'averages'...i'm sort of glad i didn't know how to use charts at first, it really tuned me into price and becoming accustomed to a companies price in different conditions. i still take the L2 order books ratio of buyers/sellers as a major indicator of a poss reversal, and through staring at the same companies order books every day for 3 months i think i have a bit of a feel for what can happen with different order book depths/ratios. i now use a 1 minute line chart with 14 period and 50 period MAs, a RSI and Volume.

my general idea now seems to be to try and make 5% on each position. i have 8K capital and each position is 2K. i learned how to use a spreadsheet so i can calculate the three S and R points around each company's daily pivot. i pick one of these support points (or the company's previous low) depending on what the index/company/asian markets are like. i set my orders before the market opens and wait. it can get a bit hectic when i have a few positions open at the same time.

one of my biggest problems is stops. i feel stupid saying this, but i rarely use them. i know this is going to knock me out until i get rid of this bad habit. 'timsk' has given me some great info on what my stops should be. my problem is, bar one occasion (BG.), every bad position i opened eventually cycled back and then exceeded my original position. in these instances, i either sold a few days before they would have made a profit, or sold for a small profit (thankful to be out of a bad position) while they went on to higher prices. through these few particular experiences, a bad habit has been formed where i hold onto bad positions until they reverse. so far they always have, but i suppose one day it won't and i'll be flipping burgers.

i've been living off my trading for a couple of months, so far i'm £500 down on my initial £8500 capital. although after this shocking past few days FTSE activity that may be a little lower now.

i would really appreciate criticism on my clunky process...sorry again for the huge post.

I'd like to add my 2cents regarding Stops. For clarification, I'm focus on a mechanical style of trading (without any discretionary factor) so I can only speak from this standpoint. Those who trade discretionary may adopt a different approach.

I personally believe that stops are critical to ones trading strategy. IMO adopting a "Buy & Hold (& Hope) " approach is dangerous because you only need a few trades to never reverse and you are sitting on a large loss. Depending on how aggresive you trade, these losses could wipe you out.

In my mind, trading is just a numbers game. The key for me is to try to shift the odds in my favour. This is achieved by allowing my winning trades to earn me more than my losing ones. To accomplish this I have to keep my losses short and get out immediately price moves in the opposite direction to which I'm planning on trading. In addition, I try to allow my winning trades to grow rather than taking a quick profit. Easier said than done though !!

However, by following this combination, I should (overtime) increase my overall captial / trade profitably.

Chorlton

 

[Adamus]

.... every bad position i opened eventually cycled back and then exceeded my original position. in these instances, i either sold a few days before they would have made a profit, or sold for a small profit (thankful to be out of a bad position) while they went on to higher prices. through these few particular experiences, a bad habit has been formed where i hold onto bad positions until they reverse.

Bad habits = read Mark Douglas 'Disciplined Trader' or 'Trading in the Zone' (affectionately known as TITZ).

Firstly I think you should have a stop on every position you have, even if it's way way off, just in case you get hit by a bus and lie in hospital in a coma for a month.

After that, the fact that your losing trades turned around - is it a pattern that you are justified in exploiting, or is it luck?

If it's a pattern, examine it closer and work out when you can rely on it, and how far the price has to go before it breaks the pattern and means you have to ditch it.

If it's luck, then stop doing it - that's gambling, not trading. Or perhaps think about it - maybe you *want* to be a gambler, not a trader?

Not that there's anything wrong with gambling, everyone does it once in a while, but a habitual gambler stands a lot less chance of earning money in the long term compared to a trader who's put time and effort into working out what they're doing.

 

[foredog]

If most of your postions went back into profit then you could have been out for a small stoploss then back in if they rallied again, therefore limiting potential losses but still being in the trade if it rallies again.

 

[Jaydee]

i use an online broker and use LSE's level 2. i traded for the first couple of months not knowing about charts/indicators. i used a level 2 order book and my daily price 'averages'...i'm sort of glad i didn't know how to use charts at first, it really tuned me into price and becoming accustomed to a companies price in different conditions. i still take the L2 order books ratio of buyers/sellers as a major indicator of a poss reversal, and through staring at the same companies order books every day for 3 months i think i have a bit of a feel for what can happen with different order book depths/ratios.

Hi Dr Blix

I thought I'd give my thoughts on the L2 stuff.

Be careful with looking at the number of bids to offers on the order book. The order book is full of rubbish in the sense of spoof orders which will be deleted as soon as the price trades near them. Also, there will be Iceberg orders (an order where you can only see part of it. Once this part has been filled, it loads up the same amount to be filled at the same price again. This is done at the Exchange side) and reloaders (similar to Icebergs but they reload from the client side often using an algorithm). Therefore, the true nature of the order book can never be known just from looking at the passive orders.

If you want to use the L2 to your advantage, you must use it in conjunction with a ticker which will show the aggressive orders hitting and lifting the passive orders. By looking at how these two types of orders interact, you can sometimes get a good feel for the momentum.

Good luck.

 

[timsk]

So i dont set my stop according to what i can afford to lose but i choose a price before hand and adjust my position size accordingly. Average True Range is also a useful indicator when considering stops. Also consider using stop orders instead of limit orders, if ive understood correctly...

Yes, agreed.
I posted this on another thread for a U.S equities trader, emphasising the need to assess the volatility of an instrument. Arguably it's nothing like as big an issue for U.K. equities traders as it is for U.S. ones, but it's worth considering nonetheless. The text refers to dollars rather than pounds, but the principle remains the same . . .

VOLATILITY
Forgive me for shouting, but its significance warrants it. Most of your trades have the same position size of 100 shares which suggests that you are not factoring volatility into the equation to determine how large or small each trade is. Unless you're an absolutely brilliant trader, you'll want wide stops for very volatile stocks and tight stops for the docile ones. If you're in any doubt about this, put a $0.10 cent stop on both GOOG and MSFT and see which one gets stopped out first. There are various ways to gauge volatility, but the most straight forward is Welles Wilder's Average True Range indicator (ATR). Depending upon your entry strategy, you can set stops as a multiple of ATR. GOOG will have a high ATR whereas MSFT will have a relative low ATR. Consequently, you would trade fewer shares of GOOG with a wide stop and a lot more shares of MSFT with a tighter stop. Wherever the stops are placed, the loss in each case would be the same and set to a fixed percentage of your trading capital - e.g. 0.5%. The value of this approach is twofold:
1) You never lose more than a pre-determined and fixed amount of your capital on any one trade, regardless of whether it's a volatile beast like GOOG or a gentle giant like MSFT.
2) If you want, you can choose a stop according to other criteria that you may have (i.e. support / resistance or a chart pattern etc.) so that if you require a $1.00 wide stop - (as you have done recently) - you may do so by trading a correspondingly small number of shares to ensure your loss is always the same fixed percentage of your account.

Attached is an MS Excel worksheet to give an idea of how this works in practice. It is offered purely as an example and you will need to play around with the figures to suit your own risk : reward parameters. I'll walk you through it: the table is based on an account with $30k capital and and a maximum loss of 0.5% per trade, i.e. no more than $150.00. I'd recommend that you work out a pro rata table with smaller losses (i.e. 0.1%, 0.2%, 0.3% and 0.4% respectively) and work up to this. Okay, so what do the headings mean?
ATR
This is the reading from your chart (irrespective of time frame) and is based upon the default setting of 14 periods. The key point here is that if - for example - the stock has an ATR of 0.18, you can trade a maximum of 400 shares. You can trade 350 shares (or less) with a wider stop if you want, but you can't trade 500 share and above.
QUANTITY
This is your position size based upon the ATR reading and / or the position of your stop loss. Never start with the idea of trading X number of shares (e.g. 100). The quantity should be determined by a combination of ATR and the Max Stop.
MAX STOP
This is - as the name implies - the maximum you'll lose on any one trade. It doesn't matter whether you're trading 50 shares or 1,000 shares - your loss will be the same. In this example, the Max Stop is 2 x ATR. However, it could just as easily be 0.5 x ATR, 1 x ATR, 1.5 x ATR or 3 x ATR etc. You will have to decide what fits best with your style of trading. The Max Stop can be determined by T.A. (chart patterns and S/R etc.) but it should not conflict with ATR. For example, your reading of the chart suggests that you can safely place your stop $0.36 cents away from your entry, giving a position size of 400 shares. However, the ATR reading is 0.35, indicating a position size of only 200 shares. Always be conservative and play safe: trade the smaller size. With experience, you may decide that you're being too conservative and missing out on profits. At which point, you have two choices. You can either risk more per trade (i.e. 0.6% instead of 0.5%) or you can reduce the ATR multiple from 2 x ATR to 1.5 x ATR or 1.00 x ATR etc.
TARGET
Again, this is up to you and, indeed, you may choose to dispense with this altogether as lots of traders don't like targets. In this example, the target is 1% of the account size, i.e. $300 which is 2 x the risk.
VALUE
This is arrived at by dividing the account size ($30k) by the quantity, assuming a black swan event that wipes you out completely. You can alter these values according to your risk tolerances and how much leverage you wish to take on board, as well as how many trades you have open simultaneously.

There are so many variables that I doubt any two traders would have the exact same table, even if they trade the same market in the same time frame with the same size account. That's why I stress this is an example only and NOT an 'off the peg' table that you (or anyone else) should use as it stands. Needless to say, it's the relationship between 'Quantity' and 'Max Stop' that is most critical, governed by the volatility of the stock - as indicated by the ATR. If you're a techie, you can get bolt on software that automatically works all this stuff out for you and you don't have to anything more than click the buy and sell button.

Enjoy!
Tim.

 

[dr.blix]

really appreciate that gents.

sounds good cr6196, and thanks (yet again) tim for that in-depth expansion on ATR.

thanks chorlton, sounds sensible (loved chorlton and the wheelies...don't make kids tv theme tunes like that anymore).

thanks for your input (in both threads) adam, i'd like to think it because i buy bargains where i've slightly misjudged their bottom...but i could be just gambling, so letting open positions ride must stop.

total sense there foredog, thanks...that's def what i should do from now on.

really interesting jaydee thanks...i've read other stuff on here about the ropey things on L2 order books...i've noticed the massive orders that miraculously disappear when they come to be filled...and i can spot the more obvious huge orders that are chopped into smaller chunks, but only when the chunks are the same size. i'll look about for more info on order books.

thanks again chaps.

bryan

 

[mray]

i've been living off my trading for a couple of months, so far i'm £500 down on my initial £8500 capital. although after this shocking past few days FTSE activity that may be a little lower now.

This is a bit off-topic and probably stupid but I'm just curious :S
When you say the above, does that mean you have paid for all expenses(mortgage, food, other necessities) for the past couple of months and are only down $500 total (meaning you have turned profit trading just not enough to sustain your current lifestyle without dipping into the balance of your trading account)

Or do you just mean you've lost $500 of your acct and are funding your lifestyle seperately?

 

[dr.blix]

500 loss through trading, then not replenishing my capital before taking any profits...not a good habit really. and now i'm down £1500 after the last weeks drop in the FTSE and not using stops on old positions i had open.

looks like i'm learning the hard way...

 

[Adamus]

looks like i'm learning the hard way...

Interesting how detached one can be about their own trading behaviour, yet seemingly powerless to change it!

 

[dr.blix]

not so adam. i started the thread with the positions already open and looking gloomy.

the advice from yourself and all the other extremely helpful people on this forum (timsk has been incredibly helpful) has enabled me to realise that without understanding and implementing the information on risk i've just received here, i'm in no position to carry on trading.

getting out of the positions as best i can is all i'll be doing until i have a firmer grasp of risk management.

best,

bryan

 

[Adamus]

To be pedantic, I think risk _management_ is easy - it's establishing what the risks are to begin with that is difficult and complex.