ETMA_The Evolution

Short Articles to Jump Start Your Understanding of Systems

What Can We Expect from a Trading System?
by D. R. Barton, Jr.

I really enjoy small sayings that capture the essence of issues. During one of our trading courses, we were discussing various trading systems and execution platforms. One of the attendees summed up the essence of where the responsibility for performance lies by saying, Its the dancer, not the floor. And so it is with trading systems. They are important tools, but they are not the only part of the equation that goes into making a successful trader.
Lets look at some of the most common issues around system trading and see if we can lend some clarity using the good old pro and con format:

1. If I can find a trading system that works, then I can be a successful trader.

Pro: Every trader needs a strategy or system to form a framework for their trading. Without a repeatable way to identify and execute trades, one can never be a consistent performer. A good system or strategy also gives a trader the confidence to act decisively. Its difficult to underestimate the importance of having full confidence in your trading, especially after going through a drawdown. In addition, a good system, when executed with discipline, can produce good returns, especially when used in the right market conditions.

Con: There have been studies done where groups of people have been given proven trading systems and still not made money with them. This is because your trading system or strategy is only one part of the package that makes a successful trader. While a trading system can support your trading discipline (as mentioned above), it cannot take the place of developing your trading psychology. And there are other parts of your tradecraft that you must develop business and trading plans, execution skills, adapting to changing markets, etc.

Summary: Your trading system (or systems) is an important foundation of your trading. But it is not the only important element. Spend serious time on strategy and system development. It is one of your primary tasks. But it is not the only task! There are many folks out there who are obsessed with system development and never seem to find time to trade (the Internet bulletin boards are full of them!). In addition to your strategy development, spend significant time on the other key areas of trading including your psychology and your tradecraft.

2. The best systems should work in trending and sideways markets.

Pro: Multiple market conditions are a fact of life. Studies show that markets actually trend as little as 20 30 percent of the time. So even the trendiest markets have significant amounts of time when they are going sideways. A system that can work in both trending and sideways markets is truly valuable. Most systems that endeavor to tackle both types of market conditions usually do so by first identifying whether or not the market is in a trend and then picking one trading algorithm or another. Others address the problem by trading less in one type of market or the other.

Con: Products that try to be all things to all people usually do a mediocre job for everyone. Consumer Reports magazine once did a study of laundry detergents and fabric softeners and also of products that combined the two. They found some excellent detergents, some excellent fabric softeners and some combinations that were acceptable at both tasks but excelled at neither. Designing a one size fits all system for trading is a difficult proposition and is likely to end up giving results, which much like combination laundry products, fail to excel in any market condition.

Summary: Understanding the current market conditions is a key task for any trading strategy. As traders, we need to know what types of market best fit each of our systems. Trying to design a trading system that navigates all market conditions is a daunting task that has challenged even the best system designers. A more useful approach, especially for those who are just starting out, is to design different systems that work really well in one type of market condition and then determine a way to switch between systems or scale into and out of the different systems.

3. Systems designed to produce a high winning percentage are best.

Pro: Systems that produce higher winning percentages are certainly easier to trade from a psychological perspective. Losing streaks are shorter, and winning streaks are longer. Systems that get fewer, but bigger winners can seem like death by a thousand cuts during periods of extended losing streaks. And because long losing streaks are less likely, high percentage trading systems can typically use more aggressive position sizing.

Con: Almost all systems with high winning percentages have low reward-to-risk ratios. So even during times of extended winning streaks, they may be adding to your equity curve slowly. Systems with big reward-to-risk ratios tend to catch the really big trends. These are the moves that provide truly outsized returns that can change a good year into an incredible year.

Summary: First of all, there really is no best in the world of trading. With that said, there most likely is one best for your individual situation. There are only two meaningful parameters for deciding whether you should design for a high percentage of winners or a high reward-to-risk ratio. The first is your own personality and trading psychology. The second is the combined expectancy and frequency-of-trade for each system. If you compare two systems on the basis of expected profit per month, quarter, or year, it can be quite an eye-opener. But great theoretical results really wont matter if you cant trade that type of system well. Results generated by a long-term system that has significant drawdowns wont work for you if you're a very impatient person who likes lots of positive reinforcement. The system has to fit you if you are going to trade it well.

Strategies and systems are at the core of what we do as traders. But they are most useful when we understand their inner workings and
how they fit into our whole trading plan. When you integrate a system that fits you and matches the market conditions into your trading
plan, it can be a real thing of beauty. All the best in your trading!

Tharp's Thoughts: Oct_13_2004​

Exits - Are Your Money Management Stops Too Large or Too Small?

by Chuck LeBeau and Terence Tan

It seems that Money Management stops are either too close and subject to frequent whipsaws or too far away and expose our capital to large losses. From the results of our testing, we have concluded that most systems would benefit from the inclusion of relatively large money management stops.

At first thought it would seem that the closer the stops and the smaller the losses, the lower the expected drawdown. However, this seemingly logical assumption does not hold up in testing. In almost all cases the wider stops result in a higher winning percentage and a lower drawdown. Smaller stops appear to be psychologically attractive, but may actually deteriorate system performance because they are susceptible to frequent "whipsaws" caused by random and insignificant price movements. On the other hand, large stops may also be psychologically attractive because they are activated less frequently, and systems with large stops generally tend to have a higher percentage of winning trades. However, the down side is that large stops force the trader to occasionally suffer rather large losses which, although infrequent, can be psychologically difficult to accept as well. Is there a compromise solution to this problem?

We believe there is. An interesting phenomenon we have observed from our research is that it is often possible to tighten the money management stop a short period after the initial trade entry. It has been our preference to allow the trade some latitude to work out in the beginning and this is best accomplished with a relatively large money management stop during the first few days of the trade. However, after a specific number of days the money management stop can often be reduced to a much smaller amount. For instance, if we have a $5,000 stop upon entering a trade on the S&P 500 futures market, and this is an uncomfortably large loss to take, it may be possible to leave the $5,000 stop in place only for the first few days, and then tighten the stop to $2,500 for the remainder of the trade. The chances of being stopped out late in the trade with a $5,000 loss have been reduced, although it is always possible that a large adverse price movement in the first few days could still stop us out with the maximum loss. The exact stop amounts and the time of implementation would have to be determined by computer and statistical analysis of the system's characteristics. In some trend-following systems, we have found that we can benefit substantially by implementing a larger stop in the beginning of a trade, and then reducing the original stop by 50% or more once the trade is underway.

This technique of tightening stops after a few days in the trade has a sound basis: we know that the predictiveness of a trade entry indicator declines as the trade moves out into the future. In most cases an entry indicator has a better chance of predicting the price movement in the next 2 days than in the next 2 weeks. Starting off a trade with a large money management stop allows the trade sufficient room to work in the right direction, since it corresponds to a period of high confidence in the entry indication. As the trade moves out into the future, the confidence of the entry indication declines, so we tighten up the stop to reflect decreasing confidence in the trade.

Other possibilities for dealing with the problem of large stops also exist. Stops such as breakeven stops or profit protection stops that over-ride the money management stop can easily be implemented in later stages of the trade. Once these stops are activated, the possibility of taking the large original stop loss is substantially reduced or eliminated. These and other techniques will be fully discussed in subsequent chapters.

Conclusion

Proper understanding and implementation of the money management stop is vital to a trader's survival. The stop effectively limits the maximum loss that may be sustained in a trade, which in turn contributes to the all-important goal of preservation of capital. Trading without a money management stop is to allow for a high chance of catastrophic loss in your account.

The importance of the Money Management stop is aptly summed up by Jack Schwager with this statement from his book, The New Market Wizards: "If you can't take a small loss, sooner or later you will take the mother of all losses."

Why Use Multiple Exits?
by Chuck LeBeau

A recent message from one of our members questioned our use of multiple exits and the fact that the exits in a particular system were very complex and would sometimes move closer to the prices and then suddenly move farther away. The member questioned whether the exits were working properly and wondered about the logic of having so many different exit strategies operating within one system. I sent the member a brief reply and promised to write a Bulletin that explained our philosophy and procedures about the use of multiple exits in more detail.

When we develop trading systems the entry is usually just a few lines of code but the exit strategies and coding are often very complex. We may have a system with only one very simple entry method and that system may have a dozen or more exit strategies. The reason for devoting so much effort and attention to achieving accurate exits is that over our many years of trading we have come to appreciate both the importance and the difficulty of accurate exits.

Entries are easy. Before we enter any trade we know exactly what has occurred up to that point and if those conditions and events are satisfactory according to the rules of our system we can generate a valid entry signal. Entries are easy because we are able to set all the conditions and the market must conform to our rules or nothing happens. However, once we have entered a trade anything can happen. Now that we are in the market the possible scenarios for what might happen to our open position are endless. It would be extremely na?ve to expect to hope to efficiently deal with all possible trading events with only one or two simple exit strategies. However, that seems to be the common practice and, in fact, many popular trading systems simply reverse the entry rules to generate their exits.

We believe that good exits require a great deal of planning and foresight and that simple exits will not be nearly as efficient as a series of well planned exits that allow for a multitude of possibilities. Our exit strategies need to accomplish a series of critical tasks. We want to protect our capital against any catastrophic losses so we need a dependable money management exit that limits the size of our loss without getting whipsawed. Then if the trade is working in our favor we would like to move the exit closer so that the risk to our capital is reduced or eliminated. As soon as possible we need to have a "breakeven" exit in place that prevents our profitable trade from turning into a loss.

In most of our systems, our goal is to maximize the size of our profit on each trade so we do not simply take a small profit once we see it. This goal means that we need to implement an exit strategy that protects a portion of our small profit while allowing the trade to have the opportunity to become a much bigger profit. If the trade went in our favor every day the exits could be greatly simplified but unfortunately that is not the way markets typically trade. We have to allow room for some minor fluctuations on a day to day basis. In order to facilitate our objective of maximizing the profit of each trade, in some cases we may decide to move our exit point farther away to avoid getting stopped out prematurely. For example, lets look at our Yo Yo exit that is based on the theory that we never want to stay in a position after a severe one-day move against us. (See Bulletin number 14 for an explanation of the Yo Yo exit.)

This highly efficient exit is based on measuring the amount of price movement from the previous day's close. For example we may want to exit immediately if the adverse price movement reaches one and a half Average True Ranges from the previous close. This volatility-based exit will move away indefinitely as the result of a series of adverse closing prices caused by days where the price moved against us but our volatility trigger was never quite reached. Obviously an exit that can move away from prices indefinitely is no use at all in limiting the size of our losses so the Yo Yo exit must always be used in conjunction with other exit strategies that do not move away. Now that we have implemented the Yo Yo exit to protect our trade from a severe one-day reversal in direction, we have still not addressed the question of taking profits. So far, we have exits in place to protect from large losses, to lock in a break-even point and to get us out on a sudden trend reversal but we still have not addressed the important issue of taking some profits on the trade.

We like to shoot for big profits and the bigger the profits become the closer we like to protect them. This strategy calls for multiple profit-taking exits. If we have a $1,000 profit we might want to protect 50% of it and be willing to give back $500 of our open profit. We can place an exit at $500 above our entry price. This will allow us to hold the position in the hope that the profit will grow. However if we have a $10,000 open profit I'm sure we wouldn't want to give back 50% of that. Also, let's hope that our exit stop is not still sitting back there at $500 above our entry price. For best results our exits need to adjust at various levels of profitability.

Many traders have asked us about the robustness of a system that has a many exit rules. The general perception is that a system with fewer rules is likely to be more robust. However I would disagree with applying that common belief without careful thought. Look at the exits in these two over-simplified systems:

System A:
Use a $1500 money management stop. (Limits loss to $1500.)
When profit reaches $5,000, exit with a stop at entry plus $4500.

System B:
Use a $1500 money management stop. (Limits loss to $1500.00)
When profit reaches $1,000, exit with a stop at entry price.
When profit reaches $2,000, exit with a stop at entry plus $1,250.
When profit reaches $3,500, exit with a stop at entry plus $2,500.
When profit reaches $5,000, exit with a stop at entry plus $4500.
When profit is greater than $7,500 exit with a stop at the previous day's low.

Some system traders might argue that since system A has fewer rules it should be more robust (most likely to work in the future.) We would suggest that system B is much more likely to work in the future even though it has more rules. System A is not going to make any money at all if the open profit never reaches $5,000. Once the profit exceeds $5,000 the only exit is at the $4,500 level. System A is very limited in what it is prepared for. It either makes $4,500 or it loses $1500.

As you can see, system B is obviously prepared for many more possibilities. It is conceivable (but not likely) that system A may somehow produce better test results on a historical basis because of an accidental (or intentional) curve fit. However, we would much rather trade our real money with system B. Simpler is not always better when it comes to exit planning.

OCTOBER 2015: TREND FOLLOWING DOWN -9.19%, YTD: +3.36%

A strong downward move at the beginning of the month weighed heavily on the index, which did not recover and went on to post its worst return of the year. Despite this, the YTD performance is still in the black.

Below is the full State of Trend Following report as of last month.
Performance is hypothetical. Chart for October:

Individual System Contribution

The index is composed of several systems, each traded over different time horizons (short, medium and long) with a diversified portfolio of futures.
We can measure the contribution of each system variation by charting the evolution of their respective performance attribution over the last month:
And further below, the performance attribution of each system over the last 12 months, sorted by ranking.

Methodology

The index performance is simulated using Trading Blox and CSI data (back-adjusted contracts rolling on Open Interest). The performance of the index is directly derived from the performance of a Trading Blox simulation suite composed of each system component as a system part of that suite.
The simulation uses realistic trading friction parameters (slippage, commissions, interest as detailed aside).

The portfolio used in the simulation is a sample of the 300+ global markets accessible to Wisdom Trading clients. The portfolio selected for the index represents a diversified mix of over 40 global futures balanced across all sectors (check the exact portfolio here).

Nasdaq closed yesterday on all time high.

Deluge, this is what i call the calendar today, take a look, be aware of the volatility.

Trading Tip

System Performance

Part One
by D.R. Barton, Jr.

When I was losing, they called me nuts. When I was winning they called me eccentric." Al McGuire, college basketball coach
That system I bought stinks! The first three trades I made with it were all losers. I wasted a thousand bucks on that piece of junk! Ill never trade that thing again.
I have heard such tales over and over, whether the person is talking about a canned system they bought, newsletter recommendations or a system they developed themselves (although folks are usually less critical of things they develop themselves more on that later).
For our system development conference call last week, we took written questions over the Internet. Unfortunately, we didnt have time to cover all of them. One set of questions was along these lines: How do I choose between systems? How do I know if a system is broken? So to answer this line of questions, Id like to do a series of articles on system performance. Here are some topics well cover:

What are the key criteria to use when judging a systems performance?
How can I choose between two competing systems?
When does a string of losses get too long to call the system into question?
What are acceptable drawdown levels?
Should I look for a system with a high winning percentage or high R multiples?
Should I buy a system or spend the time to develop my own?

This will be a great lead-in to our upcoming Systems workshop the second weekend of November. I hope you can join Chuck LeBeau and me!
To respond to those folks who throw systems out after three losses: Unless your system wins 95 percent of the time, three losses in a row is rarely something to worry about.

System Performance, Part Two

This week well continue with our series on trading system performance by looking into the issue of system choice. How does one choose between two competing systems?

There are two significant areas to consider when choosing between trading systems. The first is matching the systems trading philosophy to your trading beliefs. The second area is the performance statistics of the systems. Most people spend 98 percent of their time crunching the numbers. The other two percent of system development time is spent preparing snacks. No one spends any time worrying about whether they will actually be able to trade the system they pick. So lets spend a balanced amount of time looking at the psychology of trading the system (this weeks article) and digging through the performance numbers that will compare two systems (next weeks article).

Yeah, I can trade that. Ive heard it hundreds of times, Just show me something that works, and Ill trade it. We all wish it was that easy. Trading takes a combination of skill and talents. And one of the most important skills is knowing what type of systems and strategies you can trade well, day-in and day-out. So the first thing a trader must determine when choosing between systems, is which one fits his or her trading style better. Here are some questions that should help you determine which system is more aligned with your trading beliefs:

1. What time frame does this system use (long term position trading? Intra-day trading? Something in between? Is this a time frame that I am very comfortable with?
2. Does this system trade predominantly with the trend or take mostly counter-trend trades?
3. How frequently does the system trade. Is that too much or too little for your activity level?
4. How much of your investment capital will each of the systems require? Is this an amount you are comfortable with?

Be very careful if you are tempted to fall into the I can trade it if it works trap. Because, if the system that seems to work well on paper loses too many in a row or has one or two losses that are too big for your tastes, then you will be more than likely to toss out a good system. Understand your market beliefs and your comfort zones and youll be well on your way to matching them to a useful trading strategy. Next week well look at how which performance measures should draw most of your attention.

System Performance, Part III

In our series on system performance, well look at some of the quantitative measures you can use to compare two systems that you may be considering. In Part II we looked at matching your market beliefs with those of your system or strategy. I cant overemphasize the importance of this aspect of your system selection! Lets look at some of the basic quantitative measures that you need to look at when comparing systems. There are enough of these important measures to cover this week and next week.

Winning percentage vs. High R-Multiple returns. Weve discussed this metric before and in most instances, these are inversely proportional items (meaning that as one increases, the other decreases). The holy grail would be a system with high average R-multiples that has a very high winning percentage. While Ive seen a few systems that do both, they invariably achieve this unusual combination by finding very infrequently occurring market conditions. These types of systems are the ones that have set-ups that come along only a few times per quarter or year. But be sure you know your ability to last through drawdowns and losing streaks. If you pick a system that generates big R-multiples, but has a winning percentage below 50, you have to have a patient demeanor. Remember to match your system with your personality and beliefs!

Average profit per trade. This is one of my personal favorite measures. It encompasses a lot of other system characteristics including expectancy, average loss size and average win size. When combined with frequency of trade, average profit per trade can tell you more about your system than most other individual measures. While this is one of my favorites, you really need to combine it with an understanding of the next item to make sure that you dont get fooled by one or two unusual results.

Outsized winners. As you review trading results, especially back-tested results, keep a close eye out for really huge returns that happen only once or twice in a data run. I have seen some long term trend following systems that put up great results because they caught a huge move in one stock or commodity. If you caught Qualcomm for a 200 point move in 1999, you could have a bunch of other average trades and still do well. What is wrong with having a big trade or two that reflect a letting your winners run mentality? The main thing is frequency. If these outsized winners are happening once every two or three years, it will be tough to trade your system while waiting for that next big score. Another potential problem is that the outsized gains were made when one-time events came along, like a system that was short for 9/11/2001 or when the Hunt Brothers tried to corner the silver market. The bottom line is that knowing the average returns is not enough, you have to know the individual trades that were used to generate those numbers.
Next issue well look at some of the aggregate measures that are useful in comparing systems.

System Performance, Part IV

Weve been reviewing system performance measures and last week we looked at some individual measures that are quite useful. Today well look at several ways that combine or aggregate data to provide a broader measure of system performance.

System expectancy multiplied by frequency. Van has been a great proponent of measuring a systems expected value and he has written about it extensively. Because of the bias humans have for being right, many (if not most) people judge systems based on the percent of time the system wins without giving the ratio of the average winner versus the loser equal consideration. There are many good places to read up on expectancy including all three of Vans books, but conceptually it measures the average expected profitability of a given system in terms of dollars won per dollar risked. To make a performance metric that is truly applicable across all instruments and timeframes, you can multiply expectancy times the frequency of the trade or investment. This will give you a dollars per month, year, etc. figure that you can use to compare any system. With this combination of expectancy and frequency, you can answer the question Does that day trading system for S&P e-minis, that long term stock trading system, or that real estate strategy that flips properties a few times a year look better?

Annual percent increase divided by worse case draw down. What the first measure (expectancy times frequency) wont tell you is how much pain (or draw down) you will have to suffer to generate those average gains. A ratio I like to use is the average annual percentage gain divided by the maximum draw down. This gives us a ratio of how much we make per year divided by how much we would be down at any time during the year. Or in simple terms: How much will I have to risk losing in order to generate my average returns? Any ratio of that is less than 2:1 is suspect (do you really want to risk a 50 percent draw down to make a 50% gain?).

Industry standard performance measures. Lets close by looking at two composite numbers that many money managers use to measure their performance:
1. Sharpe Ratio: (system rate of return risk free rate of return) / standard deviation of system returns .
The Sharp Ratio measures risk to reward by giving the returns of the system as a ratio to its standard deviation. If the system has very constant returns, it will have a high Sharpe Ratio. A system with returns that vary greatly period-to-period will have a lower Sharpe Ratio.
2. Sortino Ratio: One problem with the Sharpe Ratio is that it penalizes a system for a big up month or good volatility. The Sortino Ratio attempts to overcome this issue by dividing the same risk adjusted rate of return used in the Sharpe Ratio by only the negative deviation or bad volatility (the downside semi-variance).

The bottom line for measuring system performance is that you have to understand what criteria are important for your situation.And dont just base your decision on one measure of performance. With all of the tools at our disposal for measuring performance, it is prudent to put them into use as you choose, design and use a system.

A five minutes Read, but worth it.

THE MOST IMPORTANT QUESTION OF YOUR LIFE

November 6, 2013 - Mark Manson

Everybody wants what feels good. Everyone wants to live a carefree, happy and easy life, to fall in love and have amazing sex and relationships, to look perfect and make money and be popular and well-respected and admired and a total baller to the point that people part like the Red Sea when you walk into the room.
Everyone would like that its easy to like that.

If I ask you, What do you want out of life? and you say something like, I want to be happy and have a great family and a job I like, its so ubiquitous that it doesnt even mean anything.

A more interesting question, a question that perhaps youve never considered before, is what pain do you want in your life? What are you willing to struggle for? Because that seems to be a greater determinant of how our lives turn out.
Everybody wants to have an amazing job and financial independence but not everyone wants to suffer through 60-hour work weeks, long commutes, obnoxious paperwork, to navigate arbitrary corporate hierarchies and the blas confines of an infinite cubicle hell. People want to be rich without the risk, without the sacrifice, without the delayed gratification necessary to accumulate wealth.

Everybody wants to have great sex and an awesome relationship but not everyone is willing to go through the tough conversations, the awkward silences, the hurt feelings and the emotional psychodrama to get there. And so they settle. They settle and wonder What if? for years and years and until the question morphs from What if? into Was that it? And when the lawyers go home and the alimony check is in the mail they say, What was that for? if not for their lowered standards and expectations 20 years prior, then what for?
Because happiness requires struggle. The positive is the side effect of handling the negative. You can only avoid negative experiences for so long before they come roaring back to life.

At the core of all human behavior, our needs are more or less similar. Positive experience is easy to handle. Its negative experience that we all, by definition, struggle with. Therefore, what we get out of life is not determined by the good feelings we desire but by what bad feelings were willing and able to sustain to get us to those good feelings.

People want an amazing physique. But you dont end up with one unless you legitimately appreciate the pain and physical stress that comes with living inside a gym for hour upon hour, unless you love calculating and calibrating the food you eat, planning your life out in tiny plate-sized portions.

People want to start their own business or become financially independent. But you dont end up a successful entrepreneur unless you find a way to appreciate the risk, the uncertainty, the repeated failures, and working insane hours on something you have no idea whether will be successful or not.

People want a partner, a spouse. But you dont end up attracting someone amazing without appreciating the emotional turbulence that comes with weathering rejections, building the sexual tension that never gets released, and staring blankly at a phone that never rings. Its part of the game of love. You cant win if you dont play.

What determines your success isnt What do you want to enjoy? The question is, What pain do you want to sustain? The quality of your life is not determined by the quality of your positive experiences but the quality of your negative experiences. And to get good at dealing with negative experiences is to get good at dealing with life.

Theres a lot of crappy advice out there that says, Youve just got to want it enough!
Everybody wants something. And everybody wants something enough. They just arent aware of what it is they want, or rather, what they want enough.
Because if you want the benefits of something in life, you have to also want the costs. If you want the beach body, you have to want the sweat, the soreness, the early mornings, and the hunger pangs. If you want the yacht, you have to also want the late nights, the risky business moves, and the possibility of pissing off a person or ten thousand.

If you find yourself wanting something month after month, year after year, yet nothing happens and you never come any closer to it, then maybe what you actually want is a fantasy, an idealization, an image and a false promise. Maybe what you want isnt what you want, you just enjoy wanting. Maybe you dont actually want it at all.
Sometimes I ask people, How do you choose to suffer? These people tilt their heads and look at me like I have twelve noses. But I ask because that tells me far more about you than your desires and fantasies. Because you have to choose something. You cant have a pain-free life. It cant all be roses and unicorns. And ultimately thats the hard question that matters. Pleasure is an easy question. And pretty much all of us have similar answers. The more interesting question is the pain. What is the pain that you want to sustain?
That answer will actually get you somewhere. Its the question that can change your life. Its what makes me me and you you. Its what defines us and separates us and ultimately brings us together.

For most of my adolescence and young adulthood, I fantasized about being a musician a rock star, in particular. Any badass guitar song I heard, I would always close my eyes and envision myself up on stage playing it to the screams of the crowd, people absolutely losing their minds to my sweet finger-noodling. This fantasy could keep me occupied for hours on end. The fantasizing continued up through college, even after I dropped out of music school and stopped playing seriously. But even then it was never a question of if Id ever be up playing in front of screaming crowds, but when. I was biding my time before I could invest the proper amount of time and effort into getting out there and making it work. First, I needed to finish school. Then, I needed to make money. Then, I needed to find time. Then and then nothing.
Despite fantasizing about this for over half of my life, the reality never came. And it took me a long time and a lot of negative experiences to finally figure out why: I didnt actually want it.

I was in love with the result the image of me on stage, people cheering, me rocking out, pouring my heart into what Im playing but I wasnt in love with the process. And because of that, I failed at it. Repeatedly. Hell, I didnt even try hard enough to fail at it. I hardly tried at all.
The daily drudgery of practicing, the logistics of finding a group and rehearsing, the pain of finding gigs and actually getting people to show up and give a shit. The broken strings, the blown tube amp, hauling 40 pounds of gear to and from rehearsals with no car. Its a mountain of a dream and a mile-high climb to the top. And what it took me a long time to discover is that I didnt like to climb much. I just liked to imagine the top.

Our culture would tell me that Ive somehow failed myself, that Im a quitter or a loser. Self-help would say that I either wasnt courageous enough, determined enough or I didnt believe in myself enough. The entrepreneurial/start up crowd would tell me that I chickened out on my dream and gave in to my conventional social conditioning. Id be told to do affirmations or join a mastermind group or manifest or something.

But the truth is far less interesting than that: I thought I wanted something, but it turns out I didnt. End of story.
I wanted the reward and not the struggle. I wanted the result and not the process. I was in love not with the fight but only the victory. And life doesnt work that way.
Who you are is defined by the values you are willing to struggle for. People who enjoy the struggles of a gym are the ones who get in good shape. People who enjoy long workweeks and the politics of the corporate ladder are the ones who move up it. People who enjoy the stresses and uncertainty of the starving artist lifestyle are ultimately the ones who live it and make it.

This is not a call for willpower or grit. This is not another admonishment of no pain, no gain.

This is the most simple and basic component of life: our struggles determine our successes. So choose your struggles wisely, my friend.

Self evolution, enjoy, i know i did.
B.R.

The Greatest Trading Strategy Of All Time (Part I)

BY SCOTT WELSH ON OCTOBER 21, 2015

I've always been a huge fan of the Turtles.
If you don't know, the Turtles are the subjects of arguably the most famous trading story of all time.
Back in the 1980s, two millionaire traders, Richard Dennis and William Eckhardt, got into an argument about whether traders are made or born.
They wondered if its possible to take people off the street, teach them to trade, and make them into millionaires. Or, as Eckhardt believed, is trading prowess something you're born with and cannot be taught ?

Like any other mad geniuses, they decided to risk millions of their own money to find out.

Dennis and Eckhardt then put an ad in the newspaper, did some interviews, and eventually settled on eleven candidates. These candidates ended up being called Turtles, which came from an experience Dennis had watching a Turtle-breeding farm in Singapore. We are going to grow traders just like they grow turtles in Singapore, Dennis reportedly said.

Once the eleven had been chosen, those original Turtles were given a mere two weeks of training, and then each was given one million dollars to trade. Was the experiment successful?

Although exact numbers cant ever be known, public records show that the Turtles routinely returned 150-200% per year in the four years the Turtle program existed, and total profits from the Turtles have been estimated at $181 million. Staggering.

What might even be more staggering are the implications.

One, the Turtles proved that anyone can be a great trader, and that you don't even need that much training. Eight hours a day for two weeks is apparently all that's necessary.

Two, the Turtle system was 100% mechanical.
There was no discretionary trading allowed. Richard Dennis, who had legendarily borrowed $1,600 and turned it into $200 million in ten years, believed that some trading tenets were timeless. The system he traded was based on principles he believed would never fall out of favor, and then he did exhaustive testing on those principles. Because he believed in his fundamentals and his testing so strongly, the Turtles were never allowed to make any decisions on their own. Their only job was to follow the rules exactly.
And they made millions.
After the experiment ended, the Turtles remained quiet for years as confidentiality agreements forced them to hold their tongues. But that time has long passed and now all the secrets are out.
The question now is:

Do the Turtles trading methods still work?

Its been thirty years since they traded the markets. Is anything they did still relevant?

To answer that question, all you have to do is look at Jerry Parker. Parker was one of the original eleven, and he is generally considered the most successful Turtle of all time. After finishing his four-year stint in the Turtle Program, Parker then founded a trading fund in 1988 which he named Chesapeake Capital.

Parker was a devout follower of Dennis and Eckhardts methods and vowed to continue trading in the same manner for his clients.

Has it worked? How much money did Jerry Parker make?

From 1988 through today (Oct. 21, 2015), Chesapeake Capital has averaged12% per year and has $230 million of assets under management (AUM).

Chesapeake is currently ranked as the 24th-best CTA in the world.

But thats not the end of it. Other Turtles have gone on to manage money very successfully and are still doing it today. Here are the Turtles currently ranked in the top 40 CTAs in the world:

1. #8 Abraham Trading Company; 16.4% return per year since 1988; $250 million AUM
2. #18 Eckhardt Trading Company; 13.7% return per year since 91; $307 million AUM
3. #23 Chesapeake Trading Company; 12.0% return per year since 88; $230 million AUM
4. #26 Rabar Market Research Inc.; 11.08% return per year since 89; $116 million AUM

All told, members of the Turtle program are currently trading over 900 million dollars.

As you can see, the Turtles have been trading basically the same system for thirty years. Even William Eckhardt himself, the original founder, is still trading using Turtle principles and has been operating a fund since 1991.

Now, you could argue that other traders have done better than the Turtles. You could say that Peter Lynch did this or Paul Tudor Jones did that.
You could say that George Soros has had some monster years or even that John Paulson may have had the best trade ever.
And, of course, you could say that Warren Buffett has beaten the Turtles averages over time.
But, Buffett aside, no one person (or group of people) have traded so well for so long using basically the same system the entire time.
No one has traded a system so mechanical, and so repeatable, and has been so successful for such an extended period.
And lets be honest, were never going to know what Warren Buffett has really been up to all this time. Following Buffetts methods is a pipe dream. Following the Turtle methods is just a matter of following their simple rules.
In short, its extremely difficult, if not impossible, to find a trading system that has put up numbers like the Turtles have for three decades.

The Turtles taught us that anyone can do it. If you take fundamental principles and trade them in a rigidly mechanical fashion (many Turtle-like traders are completely automated, in fact), you can be successful.

So, after reading every book I could find on the Turtles and listening to tons of podcasts on Turtle traders (or those who follow their methods), I recently had one of their original strategies programmed and then did a boatload of testing.

Where every Fed member stands on raising interest rates.

Janet Yellen and other Fed officials point to December

The Greatest Trading Strategy Of All Time (Part II The Results)

Is trend-following the greatest strategy of all time?

I made a case for that in last weeks post (you can find it here).

Trend-followers were wildly successful in the 1970s and 80s, and, according to the public numbers, theyre still successful today. In fact the most famous trend-followers, the Turtles, are still managing almost one billion dollars of investor money.

So what is trend-following? What does that really mean?

It means you believe that trends are eternal. You believe that, as long as there are public markets, there will be trends. And all you have to do as a trend-follower is get yourself in position to trade those trends. Its that simple.

Furthermore, most trend-followers are mechanical in their execution. When you read about trend-followers or hear them talk, almost every single one of them gets into a trend in a rigidly systematic way.

Remember, the Turtles themselves were 100% mechanical. They followed strict rules to try to get into trends, and that was the end of it.
Trend-followers believe in trends, not discretionary thinking, therefore, their systems are easy to understand and easy to follow.
In short:

Anyone can be a trend-follower if he/she believes in the immortality of trending markets, and can then doggedly follow a strict set of rules.

In the past few weeks, I took the elements of the Original Turtle Strategy, which is available online, and tested it to see if the strategy still works today. Furthermore, I wanted to really see if a trend-following method was something anyone could do.

Here are the trend-following rules I adhered to and also the benchmark of what I was hoping to achieve with my testing:

1. The systems had to be 100% mechanical. No human discretion.
2. The systems had to be long-term. As Jerry Parker said in an interview from 2014, I think trend following is broken if you trade too short-term. It stopped working in the late 90sthe shorter term approach. But the longer term approach continues to do very well. Since hes the most successful Turtle of all time, I followed his advice. All of my testing for this study was done on 240-minute charts.
3. I wanted a trend-following system based solely on price action. No indicators. So I used the Original Turtle strategy as a starting template.
4. The portfolio had to be diversified. The Turtles traded at least 20 different markets. Some trend-following managers trade up to 100 markets. I wanted at least 6 different markets in my portfolio to start (with more to be added in time).
5. I tested Forex spot market currencies and stocks, however, I only used currencies in this portfolio. The Turtles traded a wide range of markets, but I wanted to keep it simple.
6. The current Turtles are doing very well with their multi-million dollar funds, averaging 13.3% per year as a group. I then compared the results of my portfolio to that benchmark number.

Heres how it turned out.

First, the currency pairs I used for this portfolio were:

1. AUDJPY, EURUSD, EURAUD, USDJPY, GBPUSD, GBPJPY

I simply picked currency pairs Ive traded for a long time. Im familiar with how they trade, and I am familiar with their spreads, so its easier for me to build in the correct amount of slippage for accurate testing.

The Turtle Rules I used were:

1. Buy when price breaks out above the previous high of x number of bars. The Turtles used a breakout above the high of the past 20 bars, for example. I optimized each currency pair individually, so each had a different breakout number. [Note: The reverse is true for short trades. The Robots sell when price breaks below a low from x amount of days.] The Turtles, however, used the same breakout number for every market.
2. Risk a fixed amount of the account each time. This ranged in my testing from 1% per trade to 6% per trade.
3. Calculate the stop loss amount using volatility. The Turtles liked Average True Range, so thats what I used. The Robots calculated that for me and bet the appropriate amount automatically for each trade.
4. Exit when a trade stops out or when price breaks below the low for x amount of bars. For example, if you were in profit in a long trade, but then price broke below the low of the past ten bars, the trade was closed. The reverse was true for a short trade (in profit first, and then an exit when price breaks above the high of x amount of days).
5. Last, some currency pairs used a time stop in my testing, exiting after a certain number of bars. The original Turtles didnt do that, but many current trend-followers use a time exit, so I added that in.

Below are the statistics on the Turtle Trend-Following Portfolio.
From January 1, 2007-October 27, 2015 (using a hypothetical $10,000 account):

1. Total profit: $42,311
2. Average profit per month since 2007: $399
3. Percent of months that ended profitably: 60.4% (106 total months)
4. Max drawdown (on an end-of-month basis): -$3,438
5. Max drawdown period: January-June, 2014 (no winning months in that time)
6. Average Annual Return: 20.8% per year (over an 8.75 year period)

Here is the profit by year (no compounding; this assumes we never change the trade size):

1. 2007: $9,092
2. 2008: $8,148
3. 2009: $6,566
4. 2010: $884
5. 2011: $1,303
6. 2012: $6,793
7. 2013: $6,062
8. 2014: $1,702
9. 2015: $1,761

As you can see, there were no losing years. Thats pretty amazing for a trend-following system. Markets dont trend all the time, and when the trend goes away the systems dont perform. Thats why the best trend-followers go through tough periods.

No losing years doesnt mean trading this trend-following system would have been a breeze, though. If you look at the max drawdown period, you would have lived through a 34% drawdown in 2014 and would have lost money for six straight months.

Again, thats very typical. Every trend-follower, including the Turtles, goes through multiple losing months.

The interesting thing is, even after losing for six consecutive months, 2014 still ended up being a profitable year. This is also typical of trend-following: Just when you think the system is broken, the trends show up in a big way.

In summary, theres a reason the Turtles are still profitable today. The reason is that trend-following works. It worked several decades ago, and it works today. Thats why it might be the greatest trading strategy of all time. And the systematic rules make it accessible to anyone.

But a crucial key to trend-following strategies is diversification. I plan to further diversify this portfolio to see if we can smooth out that drawdown.
And then Im going to add a little tweak of my own.

This is what will happen when the Fed raises rates

http://www.businessinsider.com/bulla...LIpfljksCpCelH

Taking Control, by Chuck LeBeau

In my mind, control is an important issue that has a great deal to do with understanding the process of trading and doing it successfully. There many parts of the trading process where exercising control is relatively easy and other parts of the process where control is much more difficult. For example, the entry into a trade is a point where we are very much in control. We set the conditions and the market must meet our conditions or we will simply refuse to participate. This is clearly the point in the trading process where we can exercise maximum control.

I can recall attending some lectures many years ago by George Lane (of stochastic indicator fame) when he revealed to the audience a list of items that he wanted to see before he entered a trade. His pre-entry checklist had twenty-seven conditions on it. Being a skeptic of complex trading strategies I don't recall what any of these twenty seven items were except I'm sure at least one of them was the stochastic indicator. At the point of carefully reviewing his checklist George was very much in control of the situation and if the market didn't do exactly what he wanted he didn't trade.

As I often point out in my lectures, entries are the easy part of trading. This is because each of us has maximum control at this point. We can exercise as much or as little control as we like. George Lane can require every one of his twenty-seven criteria and I can require my usual two setups and a trigger condition. However the control situation changes drastically once we enter the trade. Our ability to control all the elements of the trade now becomes much more difficult and far from absolute. Once we enter a futures trade we know that we must exit that trade within a limited period of time or we are going to be in trouble because the contract will expire. Even stock traders who don't need to be concerned about expiring contracts must exit their positions correctly if they wish to maximize their profits. Exits are much more difficult than entries because we can not simply reverse the entry process and require that the market do thus and such. Once we are in the trade George Lane and I can both throw our lists out the window because we can no longer dictate our terms to the market. The market is now in control and we must be prepared to react to whatever the market does. The market can do anything it wants once we have entered our trade and we can be assured that the market doesn't care what conditions might be on our list or what our preferences might be. Once we enter the trade we are at the mercy of the market the market operates according to its own list and that list of possibilities is much larger than George Lane's meager list of twenty-seven items. The market's options are limitless. It can do anything it wants whenever it wants and somehow we must be prepared to deal with it. Where is our control now?

As we hold our trade we must be prepared for big moves against us and big moves in our favor. (Surprisingly the big moves against us are much easier to deal with than the moves in our favor. We will talk more about this in just a minute.) Among the market's limitless possibilities are gaps, reversals, limit moves, whipsaws, and perhaps worst of all, boring sideways action that makes us wish we were trading something else. The market may present us with inside days, outside days, reversal days, key reversal days, high volume days, low volume days, expanding ranges, contracting ranges, acceleration, and deceleration. We can be faced with days that are so big that the chart looks like a propeller on the end of a stick or days that are so small they just look like dots.

Because we have to be prepared for all this and more, it should be no wonder that our exit strategies are often much more complex than our entry strategies. We need to have solutions ready for any problem the market might send our way. As I mentioned earlier, the losses are rarely the problem because we can control those by simply setting a loss point and closing out the trade if the loss point is hit. Here again we are facing an issue of control and it is comforting to know that we do have a great deal of control over our losses. If we want to design a system where the average loss is $487.50 it wouldn't be difficult. We can absolutely control the size of our losses and we must be certain that we do.

All of our exit strategies have to be carefully planned to be certain that we control what can be controlled. First we must recognize and understand what can be controlled and then we must make certain that we exercise whatever control we have. It may be comforting to know that we can strictly control losses but it is extremely discomforting to realize that we have very little control of our profits. If we have a $500 profit, how do we make it become a $1000 profit? Unfortunately holding on to the trade longer gives us no assurance that we will eventually have a $1,000 profit.

In this instance we have very little control but let's see what we can do with the control that we do have. Although the amount of profits can not be controlled in the sense of our somehow forcing them to be larger, they can be controlled in the sense that we don't have to let them become smaller or turn into losses. Those of you who have purchased any of our systems will appreciate that locking in open profits at various levels is important to the success of our trading strategies. You will notice that in the "25 X 25" Bond System (free on the web site) we use a very tight channel to help lock in profits after twenty-five days or after five Average True Ranges of profit. We can't control the market and force it to give us five ATRs of profit, but if it does we can make sure that we keep most of it. Protecting our open profits is definitely within our control.

When conceptualizing a new trading system and when going through the design and testing routine, be alert to issues of control. Look for what you can control and make sure that you are controlling it to your benefit. Look at what you can not control and as a minimum have some plan that will minimize any possible damage. Thinking about control will make you a better trader and implementing control will make your systems trade better.

by Chuck LeBeau

Importance of Exits, by Chuck LeBeau

The outcome of every trade is dependent on the exit. If we enter in a timely fashion and then exit poorly, the trade is likely to be a loss. If our entry happens to be poor but our exit is good we might still salvage a profit. The exits, not the entries, determine the outcome of our trades. This lesson about exits is easily demonstrated. Take any entry strategy and begin combining it with different exit strategies. You will quickly see that we can change the results dramatically by making only minor adjustments to the exits. In fact it becomes nearly impossible to tell if an entry is any good because the results are so exit dependent. Bad exits can make a good entry look bad and good exits can make a bad entry look good.

When testing the validity of an entry method it is best to begin by simply exiting the trades after a number of bars. If you do anything more creative than this simple exit you will find that you are really testing your exits, not your entries. If you change the exits while attempting to test an entry strategy the results will vary so much depending on the exits selected that you will find that you can not make any valid assumptions about the reliability of the entry. When combined with the right exit the entry strategy looks great. When combined with the wrong exit the same entry looks terrible.

The purpose of an entry is to get the trade started in the right direction. To test the effectiveness of an entry we simply measure what percentage of the time it gets our trade started in the right direction. For example if we have entry "A" that has 60% winning trades after five days it is better than an entry "B" that has only 45% winners after five days.

You will notice that we made no comparison of risk or profitability in picking the best entry. What if entry "A" lost money and entry "B" made money? Is entry "A" still better? The answer is "Yes" because the purpose of an entry is merely to get the trade started in the right direction. After that everything else is dependent on the exits. Entry "B" just happened to make more money because of the particular exit we selected for the test. We can easily adjust our exits and we will find that entry "A" will consistently make more money than entry "B" because it gets the trades started in the right direction more often. To maximize our profit we need to combine the right entry with the right exit.

In our book, Computer Analysis of the Futures Market, we tell an amusing anecdote about a trader who seemed a bit loony because he used a Coke bottle with a broken radio antennae sticking out of it to receive trading advice from other planets. This advice, like most trading advice, was only related to the entries. When the voice from the Coke bottle told him to enter a trade he would come back to my desk and want to put the trade on right away saying something like: "They are buying soy beans on Mars, buy some beans for me".

The other traders sitting around the board room would overhear these frantic orders and became quite interested in this strange trading advice. Naturally they were quick to make fun of the trader when he was losing but they didn't have much to say when he was winning. The trader with the Coke bottle eventually learned that to avoid ridicule he had to take his losses quickly and hold on to his winners as long as possible. His trading steadily improved and he wound up being a surprisingly good trader. Obviously, his reliance on trading advice from other planets had nothing to do with his success. His entries were no better or worse than random but he had learned to be very good at his exits.

We should do the same.

Popular Exit Strategies.

http://www.mta.org/eweb/docs/pdfs/ch...eau-071410.pdf

Friday, November 13, 2015 - Courtesy of Trader Steve - thetrendfollower.com

The mathematical side of trading

When most people talk about how they approach the market, they refer solely to their style of trading.

In my own case, I follow price trends - I wait for a potential new trend to be signalled, and I will then 'hop on' for the ride.

However, there is another important factor you should consider, which is all to do with the mathematical side of trading.

Using a volatility based position sizing method can allow you to identify potential setups where volatility has contracted prior to entry. An example of this would be using a multiple of the average true range measurement. This can help you from a potential risk:reward aspect. Using such a stop would allow you to concentrate on those opportunities where price has to move a smaller distance in the direction you are trading to achieve the each unit of R of profit.

To show this, say you have two trades which are giving an entry signal at the same time, and we will assume they are both currently priced at $20, and we will risk the same amount of equity on each trade.

The 2ATR measurement on Trade A indicates an initial stop distance of $5. This is used to help calculate your position size. The wider the initial stop, the smaller the position size should be.

Over the next few months, the stock moves up to $60 (a 200% increase), before triggering an exit. So, on that trade you have made a profit of +8R.

On Trade B, the initial stop distance is only $1, following a recent contraction in volatility. In a few weeks, the stock moved up to $30 a 50% increase. Yet, in terms of R, the profit generated is +10R higher than that of Trade A and you have been in the trade a lot less time to boot. The tighter the initial stop, the more profit you have been able to generate.

Which is the better trade? Clearly, Trade B made a bigger profit when compared to the amount risked (when expressed in 'R'), yet the stock price movement, in percentage terms, was only a quarter of that of Trade A.

I like this concept of expressing risk and rewards in terms of 'R' - it normalizes performance and some of the associated metrics, irrespective of the equity base or the monetary or percentage risk per trade.

When looking at and quantifying a potential set up, looking for situations where there has been such a contraction in volatility is a key part of my trade selection process. Setups where there has been an expansion in volatility prior to an entry signal are avoided.

So that is the first stage. The next element that should be considered is that of trading opportunity.

Going back again to the basic mathematics, we will consider another example with two different systems:

System 1 generates an average profit per trade of say +0.5R, and you get 200 signals per year that you could act on. In theory then, that gives you a theoretical profit of +100R per year - nice.

System 2 generates a higher average profit per trade of say +1R, but you only get 50 signals in a year. That then gives you a theoretical yearly profit of +50R.

So in that example the first system would be the one to look at using, because of the increased level of trading opportunity you have and the higher potential overall returns.

A word of warning here - generally, the shorter your timeframe, the higher the number of potential trading opportunities you will get. But that brings its own issues are you able to focus sufficiently on the markets to catch those opportunities particularly if you are looking at very short-term or intra-day trading?

The shorter your timeframe, then other factors such as the impact on transaction costs need to be considered, along with the susceptibility to be whipsawed around or caught by price noise.

You should also consider what happens should there be a price gap which goes against you. If price gaps through your intended stop level, then the tighter the stop, the bigger the potential loss (in 'R') you would suffer. Risking only a small amount of your equity on each trade is the first stage in ensuring such an event won't destroy your equity.

Finally as part of this mathematical equation, you need to factor in the number of trading mistakes you make over the course of a year (which again you could keep track of and quantify in R). This can quickly draw up a picture of how effective you have been as a trader following your own rules. Identifying and tracking this profit 'leakage' is the first part in working on a plan to improve your performance.

CORE ELEMENTS OF TRADING

On this page, I briefly explained what I look for as a trend follower, and how I define entries and exits. However, you need to remember that, whatever method or timeframe you choose is only one element of successful trading, and the least important. Below is a summary of what I believe are the core elements of trading, which are applicable to any style or timeframe, and which should form part of your trading plan:

Risk control

Ideally you want to keep your losing trades as small as possible. Every method has losing trades, and therefore you need to factor those into your trading plan.

The simplest way to keep losses small is to risk only a small element of your trading equity on each trade. If you trade multiple positions at any one time, you should also consider your overall risk or portfolio heat.

You have to accept you will have a number of losing trades. I lose more than 60% of the time so I am used to it. Therefore, keeping my losses as small as possible is in my interests. This keeps my trading capital as high as possible within my risk parameters. Then, when a decent winning trade comes along, it will cover a whole bunch of the small losers and leave some profit left over.

You may have good risk controls in place, but if you override them, or don't heed exit signals when you should, you will lower your trading efficiency and performance. This is how you can turn a winning system into a losing one, or in extreme cases lead to major drawdowns or equity blow ups. This is where the traders' mindset comes into play...

Mind control

Fundamental to developing the correct mindset is accepting responsibility for your trading decisions. You cannot blame anyone else. It's you and you alone.

You need to accept that you have full control for your actions - you decide when to enter or exit a position. You decide how much equity you risk on a trade, through your position sizing method. Once you have placed the trade, however, you have lost almost all control. The market will do what it wants to do. The only thing you can control is when to exit the trade, whether by stop placement of the taking of profits. Sitting there all day watching and fretting over every tick or minor move won't help you.

You need to have confidence in what you are doing, and your method. That may mean taking a long position when everyone else is going short, or vice versa. You need to ensure that other traders, or the financial press or TV, do not influence you. You should avoid the opinions and predictions of others. Learn to have faith in your own decisions and method.

Every system has losing trades - you must accept that. If you can't you shouldn't be trading. Having the discipline not to override your stops, in the hope that a trade will go back in your favour, is all part of having the right mindset.

You need to have the confidence, discipline and commitment to stick to a method that works for you, through winning and losing periods. Overall market conditions may not be favourable to your chosen method. You need to learn to have the patience to wait for the market to come to you. Don't force it.

Review

You need to periodically review your performance as a trader. This is not only from pure monetary or performance metric terms, but also by looking at trading efficiency, and also your trading mindset.

Trading efficiency deals with the number of errors you make, which can make a major dent in your overall profitability. Errors can turn a profitable method into a losing one. Therefore, it makes sense to keep a record and quantify the errors made. This is all part of the evolution and continual self-improvement as a trader.

Some traders I work with keep a diary, noting their emotions when placing new trades, coping with losses, and also the issues keeping their mind under control when they have big winning trades. Keeping a diary like this, and referring back to it can work wonders in developing the required mind control.

You also need to review your actual performance and relevant metrics. After accounting for any trader errors, this can highlight any number of issues with the basic method used.

Finally, once you have identified any issues as part of your review, you need to identify a clear plan of action to eliminate any issues, and then follow your revise plan over a decent sample of trades, before again going through the review process.

The Holy Grail

As far as entries and exits go, there is no one system that will catch all turns in the markets. In that sense, there is no holy grail.

However, the points listed below may be viewed as a traders' holy grail:

1. To minimise trading errors or mistakes as far as possible;
2. To having the courage to let your profits run, and the discipline to cut your losses short;
3. To develop the required mindset which will allow to follow the above;
4. To identify any issues as part of your review process, and to implement the necessary changes to eliminate them;
5. To accept that you have never 'made it', and stay humble. There are always new lessons to learn, or old ones to re-learn. By practicing the points above, hopefully the 'tuition fees' (i.e. cost of those lessons) will be kept as small as possible.

If you can satisfy those points, you are ahead of 90% of the other traders.

Trading Music , 8tracks, stardust; Music for the Ambitious Soul; playlists.
The wisdom of Jesse Livermore.

http://8tracks.com/sgtandcap/s-t-a-r-d-u-s-t-2#
http://8tracks.com/mcgoods/music-for...mbitious-soul#