Keep Calm and Carry On Trading

Hi nourhanfahmy,
Many thanks for your contribution to the thread. I agree completely. What you have described appears very much to me to be a requirement for a fully formed trading plan, and then having the discipline to stick to it.
Unless you know what you are doing in the market you will be dragged one way and the other by market moves, and little of it profitably. You need to be in control of what you do, not the market. It is an opportunity (and risk!) generating machine and the job of a trader is to pick out of it all only what you actually want. Still won't work every time - far from it - but at least you are in control at all times.

Hi BinhAutoDat,
And many thanks for your contribution also. Calmness and patience are emotional states of mind so I guess it depends on each individual's own makeup to find what it takes to get into this desirable mindset in trading. Very much a personal journey.

I do agree wholeheartedly that without the ability to call a stop you can indeed easily spiral a poor situation into something out-of-control disastrous. To this end I do employ a couple of other checks/stops in my trading in addition to my ever-present firm stop loss on all trades: first, I always see how I feel when I sit down each morning and if I feel out of sorts I'll not trade, just sit and watch that day to try to get back into the rhythm; and second, if I am trading but not going well I will definitely call a halt with an acceptable loss on the board rather than trying to force winner(s) to get back to all square. It never works and there is always tomorrow to have a fresh go.

Hi there OTM, i have been wondering bout something, maybe you would like to comment?

I read recently from someone that "everything in trading has been discovered already"

When you were starting out and moving through the "system consistency period" or the initial commitment to your chosen edge, how did you deal with the uncertainty of the process. Did it last months or years?

It seems to me that once you discover, then embark on a edge ( after you backtest/practise it) there is still that nagging doubt of

- i wonder how long my edge will last?
- i wonder if i am giving up a better (undiscovered) edge for this edge?

I would be interested to know how you dealt with this moment of your trading life during this time, maybe you had someone to guide you? or maybe you found your calling and just got on with it

edit: I have personally found the thrill of discovering a repeatable pattern in the market and then spending the weekend drafting up the plan on the system back tester, but once the process of execution starts , the "slow motion" of the market sends the plan (or mind, Im not sure) into a tail spin

Hi mikeeating,
Now that is an interesting post! I see several different things in there so I'll try to deal with them in turn:

1. Has Everything Been Discovered Already?
I have no idea whether or not everything in trading has been discovered already. That said, trading is not leading edge science like the search for dark energy in the universe, so I'm not sure what there is so big and important yet to discover in trading. Markets have been around a long time, prices go up and down in a fairly unpredictable fashion, what else do I really need to discover about that?

Well, actually, I did spend years researching and trying before I eventually convinced myself of one really important thing: that there is no 'holy grail' system out there that will guarantee you profits and 'beat' the market. That was a pretty major discovery for me. Just pick any sensible approach that suits your personality and beliefs about the market, and then see what you can do with it. Good traders will generate profits from any sensible method; poor traders will do the opposite. Of this I am now convinced.


2. System Consistency Uncertainty
Short answer is that my internal uncertainty lasted years, and split into two distinct phases. Initially, I had lots of uncertainty as to what the best basic approach for me was - trend following, mean reversal, big RR trades, indicators, price action, etc, etc. I pretty much tried them all and settled on the one I was most comfortable with, but I did have to try them all out with a period of live trading. Then, once I had settled what approach I was going to follow there was a second long period of uncertainty as to whether this method was good enough and whether I could generate consistent, risk controlled profits from it. There were a lot of up and down experiences until I basically learnt from the experiences and did more of what was evidently working and less of what was not. Eventually, this becomes self-reinforcing as you see your results streadily improve until one day you just "know" inside yourself you will be OK as long as you stick to your honed method. I did not have anyone to guide me, I am a self-starter in trading and have always worked as a solo trader. But that is just me, others may feel a mentor, peer group or similar is really valuable to them. To each their own.

I am also sure there are better systems out there; and I know for a fact that my method is sub-optimal in the way I apply it. But it does suit me best that way and I am content with the tradeoff. I do not want to be the world's best trader, I just want to make comfortable, consistent money and sleep like a baby at night. I'll happily leave all the guru status, trading competition winning stuff to those who feel it is important to them. It isn't to me.

Equally, I do not worry about the durability of my edge because one of my essential preconditions when I was searching was that the method had to be based on what I considered to be some inherent frequently occurring property of any freely traded, active liquid market. I could not see the point of creating a method that only worked, say, in a market panic or a speculative bubble. It had to be there all the time, day in, day out as a basic quality of the market. So, if I could find a method that worked, it would by definition be durable. Period.


3. Your Own System
It is indeed great to see something you like the look of and then structure something around it to test. I do, however, have a short cut for you (from my major discovery in 1. above): pretty much everything you will ever try will come out as essentially random if you test it for long enough across a selection of markets. As I said earlier, there is no holy grail out there. The problem with all great looking repeatable patterns is that they stand out on the chart whilst the false positives do not. You only really find this out when you start trading live. False positives are the achilles heel for anyone who studies historical charts.

I suggest you do it all a little differently: think first and foremost about yourself. What are you most comfortable with? What type of market behaviour do you understand best? Structure something around that and then start demo trading with it, properly as if it were live. See what happens, learn and adjust. Go round in ever decreasing circles until it works for you or is rejected. If rejected, think of something else and repeat.

In the end, the only way you will achieve the confidence in your method that you need to have in order to succeed will be from empirical evidence. You will start making consistent money and feel comfortable with it, or you won't. As I said, it took me years and lots of blind alleys but I enjoyed the journey and I was careful not to lose too much on the way! It's a personal education in trading and will take you as long as it takes. Many never get there. A pity, but at least they learnt something valuable about themselves and can try a different and more productive avenue in life.

I hope the above answers your questions, more or less, and at least some of it may be of use. Good luck!

Thanks mate, thats a really great post. I always wonder how long the "adjustment" to the uncertainty will take, before it becomes a type of dis- comfort you can be OK with, especially if you need to survive off net earnings.

Hi mikeeating,
I would strongly advise anyone not to look to survive off net trading earnings in the early days, that is a very difficult ask indeed, it's trying to run before you can walk. Learning how to trade profitably and consistently is hard enough as it is, add on the pressure of needing it to work to eat is piling on the pressure a bit too high. I took part time afternoon/evening jobs for a few years to bring at least some basic money in (despite the fact I had a reasonable amount of savings), and used the time freed up to do my trading in the mornings. If you are trading longer term on, say, daily charts you can keep your full time job whilst you do so.

Even if you do get to the stage where you are making living money off your trading, it must be understood that it's really not like a regular wage. You have good and poor patches that you must be prepared for and have a considerable financial cushion there to cover the poor patches, to be replenished with the 'excess' profits from a good patch. It is much like being a small business owner whose fortunes can fluctuate from year to year and you have to plan for that.

Hello, Oldtraderman! Sorry, I'm new here and maybe I don't know what everyone around here knows. You write so convincingly and deeply. I would like to know more about your trading experience. In other words, who are you and why do you know so much and tell so soulfully?

Hi BinhAutoDat,
Seeing you ask: I have been involved in investment & trading for over 35 years now, right from my first job in the investment management business in London straight out of university. I was an institutional equity investment manager for some 25 years whilst trading intermittently for myself on the side before deciding to try trading full time on my own account about 10 years ago. If I know anything it is because I have been around a long time and have experienced just about everything the markets can do to you, several times over. You either die of the wounds or you learn something!

The reason I run my two threads here on FF is to try to relate some of my experiences and beliefs about markets and trading to others who wish to have a go. I learnt a tremendous amount (good and bad!) from others sharing their knowledge and experiences over the years that it only seems reasonable to try to do my bit in turn now. I am not advocating trading is a great idea for everyone, it isn't, and you can very easily lose all your money and more if you are not very careful. Because trading has low barriers to entry, far too many people wander in thinking it's an easy game to get rich quick and then suffer the pain and loss of discovering otherwise. If nothing else, I hope what I write makes wannabes properly understand the risks, the difficulty and the commitment required to make it work.

Hello, Oldtraderman. So your job here is important. Indeed, it is important that every beginner understands how difficult this path is.

Thank you for such a voluminous answer.

@oldtraderman It’s so nice that despite having 35 years of experience you are humble and want to help everyone while staying honest. I’ve seen that many people either try to scare people or set unrealistic hopes in the minds of new traders. It’s hard to find people who give genuine advice.

Hi all,

Should good trading be boring?

A combination of my trading experience this morning plus reading a couple of times this week that good trading should be boring, got me to think about whether this statement is actually true or not. I'm inclined to think not, I much prefer Jesse Livermore's take on it from his classic autobographical book, Reminiscences of a Stock Operator: “The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.” I agree!

Well, it can't be both boring and uniformly fascinating, something has to give. I prefer repetitive to boring. Your trading method should have you looking only for the clearly defined setup(s) you want to trade, the same ones(s), over and over again. That is definitely repetitive but I don't think it's boring (though that's just perhaps a sad reflection on me...). The market is ever changing and you have to get into a consistent slow journey through it, keeping mentally alert, applying your analytical intelligence, and maintaining emotional equanimity as and when your ideal setup frequently doesn't work out this time around. All just as Jesse advocates.

Which brings me back to the practical illustration of my trading today. Three trades, no others, all exactly the same pattern as far as I was concerned though each all obviously forming slightly differently - which is why you have to stay awake and not get bored. The first two tried for me but fell back and ended up as scratches. The third one also wobbled around but eventually got to my profit target. I needed the discipline and consistency to remain repetitive, correctly focused and risk-controlled in my trading but it certainly didn't feel boring.

"...repetitive ...boring"
To be pedantic , the word you are looking for is "tedious". Some think it's synonym of boring; it's not. Boredom is a state of mind characterized by an emotional tension for which no activity seems apt to release (apathy differentiates in that it lacks the tension). Tediousness is associated with doing a repetitive and dull task, one that is not difficult in itself, but challenging because, for example, with trading, it requires unemotional focus and vigilance and timely action over many hours [as I assume you mean].

Oh yeah!

Hi Endoephemera,
I bow unreservedly to your adroitness (if that is the right word!) with language. I agree completely, and put far better than I could ever hope to achieve!

Hi all,

Clash of the Titans: Trading Strategy vs. Money Management

I was recently asked about what the difference is between trading strategy and money management. A good question and something I have not really properly yet addressed on this thread, so time to make amends now.

My starting point is that money management is one of three fundamental parts of your trading strategy rather than being distinct from it, the part that tells you how big a size to trade. Remember that a trading strategy at its most basic level only needs to concern itself with just three things: when to buy (the setup/entry); when to sell (the stop loss or profit take); and how big a position size to take (the money management). But what is worth noting here is that whilst the first two dictate your market actions, the money management dictates your financial actions. This is a difference well worth further consideration.

Let’s say you have studied the market and have evolved an entry setup and an exit process that you like. This is enough to trade with as far as getting in and out of the market is concerned, but it doesn’t tell you anything about how much money you are going to make (or lose!). That’s where the money management comes in. If you trade at a 5% risk level, i.e. risking 5% of your account at the worst case stop for the trade, you will be by definition trading 5x bigger size than a trade at a 1% risk level for the same trade on the same account. The trade in the market is exactly the same both times, the setup/entry and the stop loss/profit take do not change, but the financial result will vary by a factor of 5x for the exact same trade.

So money management is the thing that determines how much financial punch your trading will carry. It also determines how much financial risk your trading will carry. It exists separately from the market action decision parts of your trading strategy and wholly determines what will happen to your trading account in financial terms as a result of your market action decisions. Aggressive traders are aggressive not particularly because of the trades they take, but because of how much more they risk on a trade than a more cautious trader would. The aggression or caution lies in the money management, not the market analysis.

All this means you can think of your trading strategy as a two-step process: first your market decisions and then the financial decision you take on the back of them. They are both titanic decisions for the outcome of your trading but the money management is the one that wins the battle for me because it is the one that is concerned with your account rather than the market.

I hope you can appreciate the difference here. You see so much commentary and effort on great entries, somewhat less on great exits, and far rarer than both is consideration of great money management. A great failing I think when you consider that the relative impact of these three elements on the returns you are going to achieve is very much the other way around.

Hi all,
Given what we are seeing in the markets at the moment with the invasion of Ukraine, a rather opportune time to post on this Keep Calm and Carry on Trading thread. When things get volatile in the markets you have two basic choices: stand aside and wait for it to subside; or adapt your trading to the changed circumstances. The former is prudent and 100% valid but I'll focus on the latter course here.

Essentially, you must widen everything out to accommodate the more volatile conditions so you can continue to trade "normally" with your basic method as far as possible. It is not a time to go for the big plunge because you can see huge potential profits from the increased market action, that is a recipe for account disaster. Let your fear beat your greed in times like this.

I adjust by widening out my stops and targets in line with the increased volatility. A decent measure of the volatility is the ATR - average true range. Before the invasion my main trading market the DAX 40 had a daily ATR around the 250pts level, now it is around 500pts, so double. Thus I have doubled my usual stop and 1R target amounts and correspondingly halved the position size so that the cash effect on my account of a 1R trade - win or lose - remains the same and I can trade more or less normally as before.

I say more or less normally because of course the market behaves a little differently, not just seeing a bigger range. You'll notice the market is a lot more skittish, on edge, and prone to more very sharp and seemingly unprovoked changes of direction. This is market nervousness for you and you have to accept a higher percentage of your good-looking setups will just get blown away by some sharp, apparently random, behaviour. It is thus a rather more testing time for your discipline, risk control and consistency, so trade carefully. I'd also say that in the markets, nervousness = selling, so you probably want to be looking on the short side more often than not, though extremely sharp, short lived rebounds are always present so don't be too dogmatic about it.

Another way of adjusting is to change the scale on your charts. Below is the DAX today on my normal viewing scale, at 10pt increments on the vertical axis:
It looks ridiculous. Now the exact same chart at a 20pts vertical scale increment:
That looks more "normal" again. I needed to double the vertical scale to get there so I'll take it as being double the volatility and so double my stop and 1R target distance, and halve the position size.

However you adjust, adjust you should as you do want to keep trading as normally and naturally as possible in times like this.