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Trading is not a Business

  • #61
  • Jul 20, 2012 11:35am Jul 20, 2012 11:35am
Quoting forexhard
Instead of telling us all what trading isn't, how about you tell us what trading is?
Brilliant idea - I was musing on doing just that. So here we go (I know someone will try to bend what I say into business lingo, just like Dr Strangelove couldn't help strangling himself with his own hand).

As I’ve stated several times in this thread the numero uno task is positive expectancy. This means having a system that wins more money than it loses. I started another thread to explain how this is achieved - here is the link http://www.forexfactory.com/showthread.php?t=374498 - strange that not many people seem to be interested.

I’ll give you a simple example. One of the US stocks in the IT sector displays the same signals to buy and sell year after year for the last thirty years - almost to the day every year - and there are several of them. I’m not going to say which one cos it cost me too much in time and money to make these discoveries.
So with a fairly solid positive expectancy I can be confident that around two out of three trades will win and that winnings will be about fifty per cent larger than losses - and confidence is key. My own experience is that hard numbers and repeatable behaviour instil confidence. This stock has been a money spinner for me. I would have used a forex example but they are much more complex (I only trade daily bars by the way).
I’m happy to risk 2% of my account on a trade, but may have anything up to 20 trades on poorly correlated instruments at any time.
Since I’ve analysed past behaviour I know what drawdown for any instrument is acceptable and when it’s going belly up.
As far as I’m concerned there is nothing more to it. As some famous trader said - there is much less to trading than meets the eye.
So to summarise:
1. If you are rigorous building your trading models and have studied how to do it (it’s almost an engineering problem - although I’m not an engineer) confidence will permeate throughout your mind.
2. When you are confident then discipline, patience, risk management and so on are pretty well automatic. These things become a problem when confidence is missing.
3. Trade execution becomes a matter of ‘Devise a mechanical trading system & eliminate fear & greed. Fixed stops & targets, set & forget. Trade like a machine.’ - the signature of jag1966 on Fx factory.

For me there is nothing more to it apart from continual development of systems. I don’t know where a plan would fit into this or even what it would do.
Irregular
  • #62
  • Jul 20, 2012 2:32pm Jul 20, 2012 2:32pm
Quoting bigblue
Ninety per cent of businesses go bust in the first year. ........
Excellent post IMO.
  • #63
  • Jul 20, 2012 2:55pm Jul 20, 2012 2:55pm
Quoting bigblue
One of the US stocks in the IT sector displays the same signals to buy and sell year after year for the last thirty years - almost to the day every year - and there are several of them. I’m not going to say which one cos it cost me too much in time and money to make these discoveries.
Big Blue of course aka IBM.
Audentes Fortuna Juvat
  • #64
  • Edited 3:13pm Jul 20, 2012 2:57pm | Edited 3:13pm
Quoting jag1966
As for trading 2% on multiple instruments at the same time you are just compounding your risk, you may win big but you may also lose big too. Stupid thing to suggest IMO.
Not necessarily. It depends on the degree of correlation between the instruments. For example:

 

  1. Risking 2% per instrument simultaneously on 10 instruments that are 100% correlated represents a total exposure of 20%.
  2. Risking 2% per instrument simultaneously on 10 instruments that are 0% correlated effectively represents a total exposure of 2%.

I posted a more detailed explanation here. Read Dr Ryan Jones' book for the mathematical proof.

  • #65
  • Jul 21, 2012 5:58am Jul 21, 2012 5:58am
Quoting Pipalicious
Ironically, i work with 40%-60% margins
Wow, that's huge but kudos to you if you can get it. We generally worked on 20-30% margins. Sometimes more, sometimes less depending on the client (housing trust/council/insurance/private). But I was told a couple of times by different blokes that there were similar sized businesses working on 10-15% margins. I don't know how they survived on those margins .... or even if they still exist today ....
Nothing worth having is easy.
  • #66
  • Jul 21, 2012 6:00am Jul 21, 2012 6:00am
Quoting jag1966
I couldn't understand why you were so upset until I re-read the whole thread.

The gift of the gab reference was not directed at you at all, it was a reference to real people I have met throughout life that start a business with very little planning no clue about the work required or any clue about profit and loss or running costs, it all goes belly up very fast.

I can see why you would have been upset, I apologise for any offence I caused you, none meant at all.
That's very polite of you jag and totally unexpected. When I used to have a rant in the office everybody usually ducked and it generally resulted in stunned silence so thank you for clarifying that point and I also apologise to you.
Nothing worth having is easy.
  • #67
  • Jul 21, 2012 6:21am Jul 21, 2012 6:21am
Quoting Nijee
Big Blue of course aka IBM.
Nice try
Irregular
  • #68
  • Jul 21, 2012 8:14am Jul 21, 2012 8:14am
Quoting bigblue
Positive expectation from your trading method is everything - all the rest is kindergarten stuff. Discipline, money management, patience, risk management blah blah blah are the things people make a big deal about cos they can't solve the positive expectancy problem - which is demonstrably beyond most people.
Perfectly stated. All the crap you are getting right now is from losers who haven't solved that nagging problem.
  • #69
  • Jul 21, 2012 9:10am Jul 21, 2012 9:10am
Threadstarter: Your points are valid but trading surely is a business. I too founded and sold a business. I actually never did anything else in my life - besides trading. The kind of business person you describe is not a real one. That's all the wannabes e.g. paying big bucks for some coffee franchise and store space without calculating that they would have to sell upwards 1000 espressi a day to even break even...

The mind / challenges / virtues of a real entrepreneur very often and very much equal that of a successful trader. In fact most successful traders that i know (being able to make a very decent living out of trading) have either a theoretical background (physics / math) or come out of entrepreneur world themselves. And that doesn't mean you have to get up at 5, dress up in a suite and whatever. You don't have to run a business like that either.

The virtues of it are very similar though. Like you stated the amount of frontend work you have to put in it, the discipline at certain points, good dose of reality, stamina etc in a very special way that is very different from a dayjob is exactly the same in both.

Even your poker player kind of guy actually treats it just like a business. Call it a obsession to succeed / win / make it.
  • #70
  • Jul 21, 2012 9:47am Jul 21, 2012 9:47am
Quoting Aldente
Perfectly stated. All the crap you are getting right now is from losers who haven't solved that nagging problem.
I'm fairly immune to abusive/emotional rubbish you get on forums like this, but I have been surprised at the desperate need to map trading (which is one kind of activity) onto business (which is another kind of activity). Why people need to make that mapping I really don't know, other than feeling there is some form of kudos associated with it. Business sucks - it's full of nasty little people who crawl over the others to make their little piles. The reason I came into trading was cos I was tired of business - at least in trading you can't bullshit your way to the top - you either know how to do it or you don't.
Anyway thanks for the support - no doubt this post will generate some more abusive comment (probably from business types who have just realised that projections on a spreadsheet mean absolutely nothing).
Irregular
  • #71
  • Jul 21, 2012 3:54pm Jul 21, 2012 3:54pm
Whatever way we look at it, profitable trading comes down to finding a robust edge, and then systematically and consistently exploiting it.

For me personally, I see that as a R&D project; followed by a solitary, unsocial exercise in executing the strategy, and dealing with any personal demons in the process. Whereas with a (retail, for example) business, you are constantly dealing with customers, staff, inventory, extensive paperwork, marketing logistics, negotiating with your bank manager, etc etc ......... all of which is very different to trading. In fact, the very allure of trading is that it frees one from all of these seemingly problematic and time consuming activities.

Successful businesspeople don't necessarily make profitable traders. As has been pointed out already, managing a business involves asserting and maintaining a measure of control over one's environment, which is not necessarily a desirable personality trait when it comes to trading. IMO it could be reasonably argued that a very different mindset, and skill set, is required.

But (and to state the obvious) "business" is going to mean different things to different people, so discussions like these are ultimately a (pointless?) exercise in semantics.
  • #72
  • Jul 21, 2012 6:29pm Jul 21, 2012 6:29pm
Gambling can be business, business can be gambling.
H.D
  • #73
  • Jul 22, 2012 3:30am Jul 22, 2012 3:30am
Quoting hanover
But (and to state the obvious) "business" is going to mean different things to different people, so discussions like these are ultimately a (pointless?) exercise in semantics.
I take your point about the semantics - and it's the thing most people get heated about. My central point here has always been that positive expectation is almost everything - all the rest is math and management (which can be got from books). I've never seen positive expectation(worth trading) given away in a book or training course.
I take great exception to the peddlers of 'treat your trading as a business' books and training courses who have not addressed the problem of expectancy - it's all pointless until you have done that. At which point I think this thread has probably served its purpose.
Irregular
  • #74
  • Jul 22, 2012 3:57am Jul 22, 2012 3:57am
Quote
6. Money management - pompous name for a simple idea. Risk about 2% of your account on any trade. It does get a lot fancier than this, but is generally meaningless in the real-world. Without a positive expectation trading strategy money management is mostly useless anyway.
best part of the post
Keep Simple...!
  • #75
  • Jul 22, 2012 4:23am Jul 22, 2012 4:23am
The ironic is that Money Management is actually your positive expectancy.

A system with positive expectancy? What do you mean positive expectancy? It looks like you are talking about a signal system, when this cross this, then sell, when it's oversold, then buy etc?

How about discretionary system when you need to use your brain to enter trades?

I tell you what, most systems yield positive expectancy, however in order to yield positive expectancy, it depends on your trade management and patience.

After so many years, you are still looking for an EA with past positive expectancy?
  • #76
  • Jul 22, 2012 5:15am Jul 22, 2012 5:15am
Quoting duyk20
The ironic is that Money Management is actually your positive expectancy.

A system with positive expectancy? What do you mean positive expectancy? It looks like you are talking about a signal system, when this cross this, then sell, when it's oversold, then buy etc?

How about discretionary system when you need to use your brain to enter trades?

I tell you what, most systems yield positive expectancy, however in order to yield positive expectancy, it depends on your trade management and patience.

After so many years, you are still looking...
Trade expectancy is determined only by entries and exits.

It can be easily shown mathematically that position sizing and method (fixed frac, fixed ratio, optimal-f, martingale, whatever) have no bearing on trade expectancy.

MM is a somewhat ambiguous term. For me, "system" includes both entries and exits (both ultimately amount to vehicles to adjust your net position); while MM = position sizing and method.

However many folk include exits ("trade management") as part of MM, and that's where a lot of the confusion apparently occurs.
  • #77
  • Jul 22, 2012 7:15am Jul 22, 2012 7:15am
Quoting duyk20
The ironic is that Money Management is actually your positive expectancy.

A system with positive expectancy? What do you mean positive expectancy? It looks like you are talking about a signal system, when this cross this, then sell, when it's oversold, then buy etc?

How about discretionary system when you need to use your brain to enter trades?

I tell you what, most systems yield positive expectancy, however in order to yield positive expectancy, it depends on your trade management and patience.

After so many years, you are still looking...
I think some of these issues have been explained in the previous reply.
A discretionary trader should have a record of trades - above 30 and he/she can start to make some estimate of what their expectancy is (ie the average money made per trade). If you have positive expectancy then you can be more confident of future trades - and do some fancy money management if you want. Confidence will also help with discipline and patience.
I don't use EAs - I would personally never allow a trade to execute automatically - but that is just a personal preference. I'm not actually looking for anything - just trying to pass on some hard earned experience. I've been fortunate enough to happen upon a method that works for me - it's taken me over five years after listening to most of the rubbish published in books and in training seminars. It's been very expensive and I have abandoned the effort on more than one occasion. I wish you the best of luck duyk20 and hope your trading is profitable.
Irregular
  • #78
  • Jul 22, 2012 9:23am Jul 22, 2012 9:23am
Quoting Patience
Wow, that's huge but kudos to you if you can get it. We generally worked on 20-30% margins. Sometimes more, sometimes less depending on the client (housing trust/council/insurance/private). But I was told a couple of times by different blokes that there were similar sized businesses working on 10-15% margins. I don't know how they survived on those margins .... or even if they still exist today ....
Anywhere from 10% right upto 200%, but overall average ranging between 40%-60%.

One of my friends works for a huge multinational, believe it or not their margins range around 5% gross profit. Of course, they turn over millions per day so they counteract it with volume. Downside is, any hickups in their factories and they lose a huge amount of profits. One day delay costs them aprox. 500k - 2Mio.
  • #79
  • Jul 22, 2012 3:22pm Jul 22, 2012 3:22pm
When you wrote this...

Quoting bigblue
6. Money management - pompous name for a simple idea. Risk about 2% of your account on any trade. It does get a lot fancier than this, but is generally meaningless in the real-world. Without a positive expectation trading strategy money management is mostly useless anyway.[/url]
All I could think of was this

Quoting bigblue
6. Acceleration - pompous name for a simple idea. Drive at around 30MPH everywhere, car parks, residential roads, autobahns. It does get a lot fancier than this, but is generally meaningless on the roads. Without knowing which direction you're travelling in, speed is mostly useless anyway.[/url]
  • #80
  • Jul 22, 2012 4:15pm Jul 22, 2012 4:15pm
Quoting triphop
When you wrote this...



All I could think of was this
Memories caught in time but never forgotten
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