ETMA_The Evolution

I am happy as a pig in mud mate. Let's hope the vol continues. It is a gravy train at the moment. Picking up some good unrealised profit which hopefully will last *crosses fingers and toes* and assist performance for a few months for the start of the year. Still holding some good CAD pairs on longer timeframes and JPY and USD pairs doing well. Took some good profits off the indices yesterday.....and here I was thinking it would be the normal subdued start for the year with low liquidity and volatility.

Have a great one mate :-)

C

Hi Tash. I have been keeping an eye on your wanderings and you are nailing them. Great stuff mate. Long may this volatility last :-)

Thank you, C.
experimenting different trading methods. more less figured out the rhythm of the market, now the most difficult part is successfully applying the risk management. have been digging crazy pips lately but still need to maximize the profit with the right money management. also another important thing is sniffing the change in the market rhythm because soon the market may start playing a different symphony.
i hope you started to the new year with success

This saying "Let your profits run" simply finds you as professional trader - Congratulations my friend!

Thank you Bob, i really like to show by the numbers what does it mean to let your profits run while limiting your risk but i'm afraid i will come out as showing off so i will refrain to do so, by the way some of your trades are left without stops if you didn't notice.

May the Volatility be with you.

Thanks Bass for many trading knowledge you are posting here. I am learner and I am learning too from what you posted.

Trend Following Entry: The Philosophy
Posted on December 30, 2015 by Michael Covel

http://www.trendfollowing.com/wp-con...the-Dragon.jpg

Discipline

There are so many questions to ask yourself before entering a trade. The most critical question to ask is “How much risk are you willing to take”:
The question investors typically avoid at all costs is the question of money management. Money management is also called risk management, position sizing, or bet sizing, and it is the critical component to trend following success as Gibbons Burke observes:

“Money management is like sex: Everyone does it, one way or another, but not many like to talk about it and some do it better than others. When any trader makes a decision to buy or sell (short), they must also decide at that time how many shares or contracts to buy or sell—the order form on every brokerage page has a blank spot where the size of the order is specified. The essence of risk management is making a logical decision about how much to buy or sell when you fill in this blank. This decision determines the risk of the trade. Accept too much risk and you increase the odds that you will go bust; take too little risk and you will not be rewarded in sufficient quantity to beat the transaction costs and the overhead of your efforts. Good money management practice is about finding the sweet spot between these undesirable extremes.”

When you look at a trading strategy, you must ask, “I’ve only got a certain amount of money. How much do I trade?” If you have $100,000 and you want to trade Microsoft, well, how much of your $100,000 must you trade on Microsoft on your first trade? Must you trade all $100,000? What if you’re wrong? What if you’re wrong in a big way, and you lose your entire $100,000 on one bet?

How do you determine how much to bet or trade each time? Trend followers make small bet sizes initially. So, if you start at $100,000, and you’re going to risk 2 percent, that will be $2,000. You might say to yourself, “Oh my gosh, I’ve got $100,000, why am I only risking $2,000? I’ve got $100,000. $2,000 is nothing.” That’s not the point. You can’t predict where the trend is going to go. One trend follower presented a view on the initial risk decision:
“There are traders who are unwilling to risk more than 1 percent, but I would find it surprising to hear of any trader who risks more than 5 percent of assets per trade. Bear in mind that risking too little doesn’t give the market the opportunity to allow your profitable trade to occur.”

Think about money management as you would about getting into physical shape. Let’s say you’re a male athlete and you want to get into great shape. You weigh 185 pounds, and you’re six foot one. Well guess what? You can’t lift weights six times a day for 12 hours a day for 30 straight days without hurting yourself sometime during those 30 days. There’s an optimum amount of lifting that you can do in a day that gets you ahead without setting you back. You want to be at that optimal point just as you want to get to an optimal point with money management. There indeed is just such a number. Ed Seykota describes that optimal point with the concept of “heat”:
“Placing a trade with a predetermined stop-loss point can be compared to placing a bet: The more money risked, the larger the bet. Conservative betting produces conservative performance, while bold betting leads to spectacular ruin. A bold trader placing large bets feels pressure—or heat—from the volatility of the portfolio. A hot portfolio keeps more at risk than does a cold one. Portfolio heat seems to be associated with personality preference; bold traders prefer and are able to take more heat, while more conservative traders generally avoid the circumstances that give rise to heat. In portfolio management, we call the distributed bet size the heat of the portfolio. A diversified portfolio risking 2 percent on each of five instruments has a total heat of 10 percent, as does a portfolio risking 5 percent on each of two instruments.”

Chauncy DiLaura, a student of Seykota’s, adds to the explanation, “There has to be some governor so I don’t end up with a whole lot of risk. The size of the bet is small around 2 percent.” Seykota calls his risk-adjusted equity “core equity” and the risk tolerance percentage “heat.” Heat can be turned up or down to suit the trader’s pain tolerance—as the heat gets higher, so do the gains, but only up to a point. Past that point, more heat starts to reduce the gain. The trader must be able to select a heat level where he is comfortable.

Also critical is how you handle your capital as it grows or shrinks. Do you trade the same with $100,000 as you would $200,000? What if your $100,000 goes to $75,000?

Trend follower Tom Basso knows traders usually begin trading small, say with one contract and as they get more confident they might increase to 10 contracts. Eventually they attain a comfort level of 100 or 1,000 contracts, where they may stay. Basso counsels against this. He stresses that the goal is to keep things on constant leverage. His method of calculating the number of contracts to trade keeps him trading the same way even as equity increases.

One of the reasons traders sometimes can’t keep trading proportional as capital increases is fear. Although it might feel comfortable when the math dictates that you trade a certain number of shares or contracts at $50,000, when the math dictates to trade a certain amount at $500,000, people might become risk averse. So instead of trading the optimal amount at whatever capital you have, people trade less. How can this be avoided? Create an abstract money world. Don’t think about what the money can buy, just look at the numbers like you would when playing a board game, such as Monopoly or Risk.

However, because capital is always changing, it’s critically important to keep trading consistent. A description of Dunn Capital’s trading echoes Basso’s view: “Part of [Dunn’s] approach is adjusting trading positions to the amount of equity under management. He says if his portfolio suffers a major drawdown, he adjusts positions to the new equity level. Unfortunately, he says not enough traders follow this rather simple strategy.”19

If you start with $100,000 and you lose $25,000, you now have $75,000. You must make your trading decisions off $75,000, not $100,000. You don’t have $100,000 any more. However, Paul Mulvaney felt I was missing a critical final aspect of money management:

“Trend following is implicitly about dynamic rebalancing, which is why I think successful traders appear to be fearless. Many hedge fund methodologies make risk management a separate endeavor. In trend following it is part of the internal logic of the investment process.”

Hi Bass,

These days i like to visit this thread just to read many valuable knowledge shared by you.
I would like to ask your own opinion on this topic. Will you stick with let say 2% risk /bet when your account grows up or shrinks down. How do you think about scaling in or out? Sometime i feel that to make it very simple, just trade the same lotsize (maybe the smallest ) everytime, will that make sense?

This is the hard part of trading as the good risk management can keep our mind calm and clear all the time.

Thanks

Everyone should start with the least leverage and the smallest size possible until proven profitable and only then begin to experiment with other options, trading a portfolio of assets require us to position size depending on the volatility of the underlying asset to level off the dollar value risk.

My trading took a huge turn up when i discovered volatility, now my position sizing and stop value depends solely on the underlying asset volatility, the bigger the volatility the smaller my PS (Position Sizing) and vice versa taking in consideration the tick or pip size and value of the asset (For example i hate the Dax, Crude Light and the Bonds for even with the smallest position sizing they will eat u up in a case of a loss) talking about Futures here.

Taking these in consideration my position size is rarely more than 1% and sometimes 0.4 - 0.6%, the ATR plays a big role in my trading since i use a volatility trailing stop to exit my trades, i believe firmly that this is the most dynamic way to adapt to the market and way better than the fixed percentage or market structure stops.

Go here and read all about it especially the 2 Rules which deals with stops (Cut your losses short), scaling in and trailing your position (Let your profits run).
Phantom of the Pits.

There is a ton of materials regarding these topics on and off the net and here in FF also look it up, van tharp have a huge work done on this also.

Best,
B.R.

Exactly when you asked me about scaling in and out of a position i got this email in my inbox : How Edgewonk Reveals How Effective Your Multiple Entries And Exits Really Are.

thanks for this article.

Wii Hoo, the post FOMC Crash.

Its my Parking Garage this thread and i'm free to park anything i want, right ...

Well here is something that i want to read later when i'm away from work, the markets and having my Hot Mocha at Starbucks :

10 Recommendations For The New Year

Happy New Year!
This week I wanted to take a break from Robot Talk and instead offer a few ideas that can make your life better in 2016.
Here are my New Year's recommendations:

1. Get a Fitbit. This is not another silly gadget. This thing is a game-changer. Our metabolism doesn't slow down as we get older, we just start sitting down too much as we get older. They say that sitting is the new smoking, and a Fitbit device fixes all that. In fact, a Fitbit changes everything.
I'm not a doctor or a nutritionist, but I've trained elite athletes for over two decades, and I can also manipulate my weight down to the pound anytime I want to. And one of the keys to being fit is moving at least 10,000 steps a day. It's magical.
Just find a way to move 10,000 steps every day, and you'll change your body permanently. But that's not all. Here's what happens when you become addicted to taking 10,000 steps:

1. Your perspective changes. For example, you're pulling into the supermarket and someone cuts you off, taking the prime spot close to the door. Instead of getting into a fistfight, you smile. You smile because you realize you get more steps in if you park farther away.
2. You stop getting annoyed all the time. Oh, the elevator's broken? Great, now I get more steps! Forgot something that's all the way on the opposite side of Costco? Great, now I get more steps! Long walk from the parking garage to the theater? Great, now I get more steps!
3. You get accidental benefits. You take a longer path when you're walking downtown (to get more steps) and end up finding your new favorite restaurant. You start taking walks in the woods to help get to 10,000 steps and find yourself getting more peaceful. You go to Vegas for a couple of days and end up walking almost 40 miles on the Strip, allowing you to eat anything you want and hardly gain any weight (true story).

It's my #1 recommendation for the New Year. If you do nothing else, do this.

2. Eat better. If you should decide to add better eating habits to your 10,000 steps a day? Oh my goodness! You're going to see amazing results. But the question is: How do we eat better? Everyone seems to have a different solution for eating healthy. Here's a solution. Read Food Rules: An Eater's Manual. It's the best book I've found on what to eat.

3. Read good stuff. If you really want to think deeply on important, poignant subjects, check out Brainpickings.org. If you want to someone with an interesting perspective, check out Derek Sivers' blog. My good friend Rob Booker turned me on to this site not too long ago, and it's awesome.

4. Listen to good stuff. I'm almost entirely off of television now. Why watch TV and get dumber when you can listen to a podcast and get smarter? Find a subject you like and listen to a podcast on it. As a starting point, you can't go wrong listening to Tim Ferriss. Of course I also listen to The Traders Podcast(because I love trading and because I've been a guest-host on it and because it's good!).

5. Get rid of toxic things in your life. This is great advice, and you've probably heard it before. Guess what? It works. And do it in your trading, too. If a financial instrument is giving you grief, get rid of it! No time for anything else.

6. Do what you like. Stop doing what you're "supposed" to do. Read what you like. Talk to who you like. Listen to who you like. Work where you like. And trade what you like. If you don't like being in a trade, don't be in that trade! Make this the year you figure out what you like and stick to that.

7. Wear MeUndies. This is a sponsor of Tim Ferriss' podcast, and it's kind of annoying how he talks about it before nearly episode. But my mom sent me some MeUndies pajamas as a present--and they are amazing! I wear them any chance I get. It's hard to even leave the house now. It's worth a try, that's all I'm saying.

8. Read fiction before going to sleep. I've had a hard time getting to sleep in the past, but reading fiction has cured that. If you read something factual and important late at night, it can get you thinking and keep you up. But having something fun to look forward to makes going to sleep enjoyable, and a fake story helps your mind relax. I like the Jack Reacher novels, but you can try anything as long as it's fun and fictional.

9. Stand up without using your hands. I know, this sounds ridiculous. But have you ever paid attention to how much you use your hands when getting up from a sitting position? For me, it was a lot! By simply never allowing myself any help from my hands, my legs have gotten stronger and my knee pain has pretty much gone away. Your legs get a little stronger, your core gets a little stronger, and you generally feel much more stable. Don't mock it till you've tried it!

10. Define success. Success is a funny word. Everyone thinks they know what it means until they have to define it. What is success anyway? Is it money? Happiness? Helping others? How do you know you're successful? What does successful look like? What does it feel like? To be successful, you must first answer these questions.

In a new video coming out this week, I'm going to answer this question in detail (specifically in regard to trading for a living). The data I've found is pretty fascinating.
Let me know what you're doing to make 2016 a great year. And look out for my video on success coming tomorrow.

Talk soon,
Scott
Copyright 2016 TFL, All rights reserved.

From the Legend Trader Peter Brandt on Twitter.

The 5 money management and position sizing secrets of the Turtle Traders
Rolf - Tradeciety.com Academy - Risk and money management

The Turtle traders were a legendary group of traders coached by two successful traders, Richard Dennis and William Eckhardt. They selected 10 people (turtles) with little to no prior trading experience and turned them into winning traders by providing them with a set of very precise trading rules.
The building block of the turtle traders success was their advanced risk and money management and their position sizing approach. The following 5 principles explain the most important risk and management principles of the turtle traders strategy.

1. Volatility based stop loss orders of the turtle traders
The turtle traders used a volatility based stop loss order, which means that they determined the size of their stop loss based on the average ATR indicator (Average True Range). This also means that for every trade, they used a different stop loss size to react to changing market conditions.

The charts below show why this stop method is so powerful. Both charts show a breakout scenario with very different price dynamics. Whereas the left chart has very small candlesticks and a low ATR (low volatility), the right chart shows larger candlesticks and a higher ATR value (high volatility). How much sense would it really make to use the same stop loss technique on both breakout trades? Correct, it wouldnt make any sense. A trader should use a small stop loss for the trade on the left chart and a wider stop loss on the right chart to maximize his reward:risk ratio and to minimize the chances of getting stopped out during insignificant retracements.

2. A maximum position of 2%
Although the stop loss size (in point distance) changed for every trade, the risked always stayed the same. The maximum allowed risk (position size) on any one trade was 2% of the current total account balance. The table below shows two examples of how the turtle traders would adjust their stop and position size based on volatility.

3. Correlations and risk
If the turtle traders want to enter two trades in different instruments, they had to look at the correlation between the two markets first.

A trader who enters two trades in the same direction (two buy or two sell trades) on positively correlated markets increases his risk because it is more likely that the two trades end up the same. A trader who enters two trades in different directions (one buy and one sell trade)in positively correlated instruments will probably (not guaranteed) not have the same result.

When trading positively correlated markets, your risk increases. When trading negatively correlated markets, you can lower your risk.
The turtle traders did not come up with this strategy, but it has been used by professionals as long as trading exists. It is the irrefutable law of how financial markets work and understanding correlations is of great importance.

4. Adding to a winner
The turtle traders usually did not enter the full position size on the first entry. Remember that they were allowed to use 2% per trade, but they usually split their order across multiple entries and added to a winner. Their first position would be 0.5% and after the trade has moved into profits, they would add another 0.5%. They would keep adding to their trade until they reached the maximum of 2%. At the same time, they moved their stop loss behind price to protect their position.
The advantages of adding to a winning trade:

1. You limit your losses. The turtle traders strategy was a breakout and trend-following strategy. On a false breakout, when price immediately reversed on them, they would usually only have a very small position and not yet have scaled in. Thus, the loss they take is only a small portion of the 2% maximum risk.
2. You can catch large winning trades and protect your position. You would only reach your full position size during high momentum breakouts and once you had reached the maximum exposure of 2%, the initial stop loss orders would already have locked in some profits.

You have to minimize your losses and try to preserve capital for those very few instances where you can make a lot in a very short period of time. What you cant afford to do is throw away your capital on suboptimal trades. Richard Dennis

5. Adjusting position size during losing streaks

Dennis and Eckhardt understood that the most important thing during a losing streak is not how fast you can recoup your losses, but the degree to which you can limit your losses. Their rule to limit drawdowns during losing streaks shows this principle:
If your account drops 10%, you then trade as if your account has lost 20%. If you lost $10,000 on a $100,000 account, you then trade as if your account only has left $80,0000.
This means that even though your account is now $90,000 and your 2% would be $1,800, you only trade as if your account is $80,000 with a maximum risk of $1,600. This strategy will greatly reduce the losses once a trader enters a significant losing streak and it takes away a lot of emotional pressure as well.

This sounds like a lot of rules for just money management and position sizing. Lets briefly compare that to the turtle traders rules for trade entries:

1. You enter a trade when price breaks above its 20-day range
2. You enter a trade when price breaks above its 55-day range

You are right, not a lot of trade entry rules, although there were small variations and exceptions to the rules. The point is that the professionals understand that entry rules only have very little importance and that the most important cornerstone of any trading strategy is position sizing and risk management. This is a major reason why so many amateur traders struggle; they focus all their energy and spend all their time on the least important factor.

Great stuff as always Bass. Many thanks. C :-)

Speak of the devil. Michael Cook has just been on Better Systems Trader. Some good ideas coming from this podcast. I like Michael's selective use of optimal position sizing based on distance to stop for a given level of trade risk allowing him to bet big for a given level of risk. That would certainly allow him to compound returns.

PS
Imagine signing up to this MasterClass.

Thank you for this, 037 Cesar Alvarez, " In this episode we’re discussing the results of a quantitative study on stop losses completed by Cesar Alvarez of Alvarez Quant Trading. Cesar was also a guest of the show way back in Episode 3. Cesar was director of research for Connors Research for almost 9 years, developing quantitative trading models for individuals, prop traders and hedge funds…."

Quotes :

here’s the presentation slides

it was a Mind and eye opener.

The wife is planning a business trip in the Spring to NY and LA, i would imagine doing it but for $9000 i would imagine NOT and i would pay 40% on a new Car instead since we need another one at home.

No probs B. It certainly challenged some views of mine.

By the way......I am seriously thinking of attending that Masterclass as it might be a once only opportunity with those guys. If I do....I am going to have to shuffle things around a bit....and go on a begging spree to Mrs Copernicus. Christ it is tempting.........decisions, decisions......I wouldn't mind going with a few trusted comrades to work on a few projects afterwards in earnest. Let me know by PM if it tickles your fancy......as there is an early bird rate of about $7.8K.....a lot I know but things could evolve from this.. :-)