ETMA_The Evolution

CL is at $30 already, now what ?

Worth Sharing : http://www.trendfollowing.com/2015/1...cast-episodes/

RISK IN TRADING AND INVESTING
AUGUST 4, 2014 IGOR MARINKOVIC

We must discuss much further the stop concept, i need to know what ecxatly he means by this.

Hi Bass

My understanding from the podcast is that he is of the opinion that position size is what matters as opposed to entry technique. He uses (like most of us) the fixed fractional position sizing mechanism to risk a set amount of trade risk% of equity. Let's assume it is 0.5%. He then (like most of us) defines a market exit as a stop that has a logical basis as opposed to a random position for it's selection. For example just under a recent swing low/high etc. This therefore defines R and with the trade risk % defines the associated position size to not exceed that level of trade risk.

From this he then makes an evaluation as to whether the trade has a greater or lesser position size for the same amount of risk and only takes those trades where position size is greater than average. Obviously he is then discarding those valid trade entries where distance to stop is large and hence have a diluted performance impact due to their lower position size. This therefore reduces trades to a reduced subset of eligible trades.

What this means is that his trade frequency decreases but of the trades he selects, they are far more potentially powerful than alternatives and can significantly accelerate performance. He can then also increase diversification to make up for the lower trade frequency and in effect he is therefore ensuring that each trade taken has maximum power potential. Obviously this is how he significantly accelerates returns and on the surface, seems to be a good idea....without having to use more mathematical approaches such as Kelly Criterion or Optimal F. etc.

Not a bad idea and worthwhile thinking about.

Many traders filter their trades based on relative strength measures or optimal entry conditions and he suggests that from his research this is a pointless exercise as more often than not it is the trades he wouldn't have defined as being 'perfect' that turn out to be the better trades. He suggests that the logic you should use to filter your trade selections is simply the potential performance attributed to the relative size of bet for the same amount of risk that is key to strong performance and what he uses to win his tournaments.

C

Enter the world of cheap oil, both Brent and Crude are under $30 and most important to mention that the major support on both has been broken which turn them to a major Resistance area in the case of a pullback up, $33.56 on CL and $36.20 on Brent.

Ok, i'm doing the same taking volatility as a benchmark to decide on the PS (Position Sizing) of each Asset, he is using a fixed fractional PS and disregarding Market structure (Support, Resistance) wherever this 0.5% be will be even if in between the Levels.


OK so he don't take these trades that have less than average PS, disregarding the large stops and the small PS trades and taking only the large PS Trades with small stops trades , so he is weeding out his weak or small PS Trades (Which maybe have a high probability) and take only the Bigger PS Trades.


So basically he is cutting his losses in not taking all his signals, only the ones with the large profit potential and small stops = Big R:R or expectancy.

Thanks C.

Expectancy

One of the real secrets of trading success is to think in terms of risk-to-reward ratios every time you take a trade.

Ask yourself, before you take a trade, “what’s the risk on this trade, and is the potential reward worth the potential risk?

What can I expect my trading system to do for me in the long term?

Expectancy

What is Expectancy?

A trading system can be characterized as a distribution of the R-multiples it generates. Expectancy is simply the mean, or average, R-multiple generated.
But what does that mean, exactly?

A Brief Overview of Risk and R-Multiples

If you've read any of Dr. Tharp's books, you know by now that it is much more efficient to think of the profits and losses of your trades as a ratio of the initial risk taken (R).
Lets just go over it again briefly, though:

One of the real secrets of trading success is to think in terms of risk-to-reward ratios every time you take a trade. Ask yourself, before you take a trade, whats the risk on this trade? Is the potential reward worth the potential risk?

So how do you determine the potential risk on a trade? Well, at the time you enter any trade, you should pre-determine some point at which youll get out of the trade to preserve your capital. That exit point is the risk you have in the trade, or your expected loss. For example, if you buy a $40 stock and decide to get out if it falls to $30, then your risk is $10.

The risk you have in a trade is called R. That should be easy to remember because R is short for risk. R can represent either your risk per unit, which, in the example, is $10 per share, or it can represent your total risk. If you bought 100 shares of stock with a risk of $10 per share, you would have a total risk of $1,000.

Remember to think in terms of risk-to-reward ratios. If you know that your total initial risk on a position is $1,000, you can express all of your profits and losses as a ratio of your initial risk. For example, if you make a profit of $2,000 (2 x $1000 or $20/share), your profit is 2R. If you make a profit of $10,000 (10 x $1000), your profit is 10R.

The same thing works for losses. If you lose $500, your loss is 0.5R. If you lose $2000, your loss is 2R.

"But wait," you may say. "How could I have a 2R loss if my total risk was $1000?"

Well, perhaps you didnt keep your word about taking a $1000 loss and failed to exit when you should have. Perhaps the market gapped down against you. Losses bigger than 1R happen all the time. Your goal as a trader (or as an investor) is to keep your losses at 1R or less. Warren Buffet, known to many as the worlds most successful investor, says the number one rule of investing is to not lose money. But that's not particularly helpful advice for those who are trying to create a meaningful risk framework for their trading. After all, even Warren Buffet experiences losses. A much better version of his rule would be, "keep your losses to 1R or less."

When you have a series of profits and losses expressed as risk-reward ratios, what you really have is what Van calls an R-multiple distribution. Consequently, any trading system can be characterized as an R-multiple distribution. In fact, youll find that thinking about trading system as R-multiple distributions really helps you understand your system and learn what you can expect from them in the future.

Tying it All Together

So what does all of this have to do with expectancy? Simple: the mean (the average value of a set of numbers) of a system's R-multiple distribution equals the systems expectancy.

Expectancy gives you the average R-value that you can expect from a system over many trades. Put another way, expectancy tells you how much you can expect to make on the average, per dollar risked, over a number of trades.
"At the heart of all trading is the simplest of all conceptsthat the bottom-line results must show a positive mathematical expectation in order for the trading method to be profitable."Chuck Branscomb
So when you have a distribution of trades to analyze, you can look at the profit or loss generated by each trade in terms of R (how much was profit and loss based on your initial risk) and determine whether the system is a profitable system.

Lets look at an example:
Take a look at the Table below.

This system has an expectancy of 2R, which means that, over the long term, you can expect it to make two times what you risk, based on the available data.

Please note that you can only get a good idea of your systems expectancy when you have a minimum of thirty trades to analyze. In order to really get a clear picture of the systems expectancy, you should actually have somewhere between 100 and 200.

So in the real world of investing or trading, expectancy tells you the net profit or loss you can expect over a large number of single-unit trades. If the total amount of money lost is greater than the total amount of money gained, you are a net loser and have a negative expectancy. If the total amount of money gained is greater than the total amount of money lost, you are a net winner and have a positive expectancy.

For example, you could have 99 losing trades, each costing you a dollar, for a total loss of $99. However, if you had one winning trade of $500, you would have a net payoff of $401 ($500 less $99), despite the fact that only one of your trades was a winner and 99% of your trades were losers.

Well end our definition of expectancy here because it's a subject that can become much more complex.

Van Tharp has written extensively on this topic; it's one of the core concepts that he teaches. As you become more and more familiar with R-Multiples, position sizing and system development, expectancy will become much easier to understand.

To safely master the art of trading or investing, it's best to learn and understand all of this material. It may seem complex at times, but we encourage you to persevere. When you truly grasp it and work toward mastering it, you will catapult your chances of real success in the markets.

Psychology of Trading

Perfectionism, gambling, unnecessary losses, not being able to pull the trigger…

These are just some of the issues that traders contend with in the markets every day. What motivates our decisions, and how can understanding what makes our own mind tick help us become better and more profitable traders?

Over the past 25 years, Van K. Tharp has modeled traders and the trading process, seeking answers to questions like, “why do some traders make fortunes while others lose their nest egg?” Dr. Tharp is a trading coach with a Ph.D. in psychology and an NLP modeler. To “model” effectively, you have to find out what behaviors and habits highly accomplished people have in common. Once you identify the common tasks that produce excellent behavior, you need to develop the beliefs, mental states and strategies that allow you to perform those tasks.

You do not trade the markets. You can only trade your beliefs about the markets.—Van K. Tharp


What does it mean to say we only trade our beliefs about the markets? Let’s look at some statements and see what you believe about them:

1. The market is a dangerous place to invest. (You are right.)
2. The market is a safe place to invest. (You are right.)
3. Wall Street controls the markets and it’s hard for the little guy. (You are right.)
4. You can easily make money in the markets. (You are right.)
5. It’s hard to make money in the markets. (You are right.)
6. You need to have lots of information before you can trade profitably. (You are right.)

Do you see the theme? Your opinion about each one of these statements is correct, whatever it happens to be. There is no real right or wrong answer. Some people will have the same beliefs as you and others won’t, but that's not important. What is important is that your beliefs about the markets will direct your thinking and your subsequent actions.

What Is a Belief?

Beliefs are a primary way to filter information from the world. Beliefs are judgments, categorizations, meanings or comparisons. They determine how we perceive reality and relationships in reality. What you expect (i.e. your reality) depends upon your beliefs and they are largely unconscious. Every sentence in this document represents one or two beliefs, including this one.

One of the beliefs that is most productive for good trading is the belief that you are totally responsible for your own results as a trader. When you adopt this belief, then you can learn from your mistakes. However, if you tend to blame someone else (your broker, your spouse, the person giving you tips) or even the market for the results that you get, then you will tend to repeat the same mistakes over and over again.

When traders “own their problems” and assume responsibility for the results produced, they then discover that their results come from some sort of mental state, which either allowed them to 1) follow their rules, 2) not follow their rules, or 3) trade without having any rules.

When traders take the time to write down all their beliefs (about themselves, the markets, money etc.), then they can establish a much better idea of what they want to trade, how they want to trade and they can also see flaws in their thinking much easier. It is valuable to know which beliefs support you as a trader and which ones hinder your progress.

What Is a Mental State?

Every task has an optimal mental state that will allow you to accomplish that task effortlessly. For example, to execute a trade you benefit from courage and total commitment. Fear, in contrast, is a big disadvantage as a mental state for executing trades.

Mental states are primarily what most people call discipline or emotional control. Examples include,: being impatient with the markets, being afraid of the markets or being too optimistic about the markets.

Controlling your mental states is just part of the answer, but when you can see that you are the creator of your own results as a trader, then you have come a long way and can really make progress.

What Is a Mental Strategy?

To understand mental strategies, you have to understand how people think. People think in their five sensory modalities, that is, in terms of visual images, sounds, feelings, taste and smell.

A mental strategy is the step- by -step way in which you use these modalities; it is the specific sequence of your thinking. For example, the most effective strategy for the action step of executing a trade is to 1) see the signal; 2) recognize internally that this is the signal you decided you should take; 3) feel good about it; and 4) take action. If you do anything else, you probably won’t be able to take action or you will be very slow to act.

The Psychology of Trading

Once you have a clear understanding of which beliefs, mental states and mental strategies are the core factors in top trading performance, you can then teach the same skills to others and have them perform well too. And when you can see this success duplicated in others, which we have been able to do in most aspects of trading, then you know you have a workable model.

The Key Psychological Traits of Top Traders are:

1. Personal Responsibility
2. Commitment
3. Their psychological “profile”
4. Working on personal issues (e.g., self sabotage)

Trading fundamentals include the Top Tasks of Trading

1. Daily Self Analysis
2. Daily Mental Rehearsal
3. Focus and Intention
4. Developing a Low-Risk Idea
5. Stalking
6. Action
7. Monitoring
8. Abort
9. Take Profits
10. Daily Debriefing
11. Be Grateful for What Went Right
12. Periodic Review

Traders need to be reminded of these tasks and to eliminate any self-sabotage that keeps them from following the tasks. Van teaches all of these steps in detail in his various products and workshops.

Van Tharp believes that everything revolves around your beliefs, mental states and mental strategies, so with that in mind, everything about trading is 100% psychological, including why and how you trade or which system you will follow or build.

Many traders have a hard time “believing” this and it is almost the antithesis of what people learn in academic finance. So only you can decide whether it is worth the time to learn more about yourself and the psychological aspects of trading.

If you would like to learn more (this is one of Dr Tharp’s specialties), then we can certainly guide you in the right direction. You just might be surprised at the results!

People get exactly what they want out of the markets. Most people are afraid of success or failure. As a result, they tend to resist change and continue to follow their natural biases and lose in the markets. When you get rid of the fear, you tend to get rid of the biases.—Van K. Tharp, Ph.D.

System Development

When it comes to trading systems, everyone seems to be looking for the "holy grail." How do you find the ideal trading system, the stock that is going to take off, or that one big winner with your name on it?

There are hundreds, if not thousands, of trading systems that work, but most people, after purchasing a system, will not follow its rules or trade it exactly as it was intended. Why not?

System Development

When I first entered the business of coaching traders, most people thought that a trading system was an indicator.—Van K. Tharp
There are folks out there who are obsessed with:

1. Finding the stock that will make them a fortune, as though there is some magic way one can actually do that.
2. Developing a trading system to the point of perfection, without ever getting around to actually trading.
3. Finding the ideal “system.”
4. Just looking for someone to tell them what to do.

Do you relate to any of these examples?

Every trader needs a strategy or system to form a framework for their trading. Without a repeatable way to identify and execute trades, you can never be a consistent performer. Basically, your system is a roadmap that guides your trading and keeps you from making decisions when you are least able to do so. Trading can be stressful. It's easy to get distracted. Life goes on regardless of what the market is doing. If you hear news about the market changing, or you're running late for your next appointment, you are not likely to make good decisions about your trades.

But you can't trade just any system. Many people make the mistake of believing that a trading system is something you can just “buy in a box,” something that other people with specific technical skills or secret knowledge of the markets can create for you. It isn’t.

There are hundreds, if not thousands, of trading systems that work, but after purchasing one, the typical trader will not follow it or trade it exactly as it was intended. Why not? Because the system didn’t fit them and their style of trading.

One of the biggest secrets of successful trading is finding a trading system that fits you personally. Developing your own system allows compatibility with your own beliefs, objectives, personality, and edges.

Why You Should Develop Your Own System

You might be thinking, "why should I develop my own system? Isn’t it easier to just go buy a system with proven results?" When someone else develops a system for you, you don't know what biases they might have. Most system development software is designed because people want to know the perfect answer to the markets. They want to be able to predict the markets perfectly. You can buy software now for a few hundred dollars that will allow you to overlay numerous studies over past market data. Within a few minutes, you can begin to think that the markets are perfectly predictable—a dangerous belief that will stay with you until you attempt to trade the real market instead of the historically optimized market. Many trading accounts have ended up plummeting because of this very thinking. One “sure-thing” trade placed without proper position sizing can wipe some traders completely out of the game.

And what if the person peddling the system is just a great marketer who makes money from selling systems instead of actual trading? How would you know?

In Van’s experience, very few people have really good systems, and one of his jobs is to teach traders what it takes to develop a complete system for themselves. It isn’t rocket science; it just takes commitment and the right knowledge.

You Don't Need Computer or Math Skills

The idea that you need computer or math skills to develop your own system is one of the biggest misconceptions out there.

Even if you find computers, math or anything mechanical terrifying, you can still determine how and what you want to trade, which is the basis behind developing your own system. In fact, you’re the ONLY person who really knows what will work for you.

The key thing to remember about system development is that the trading strategy is THOUGHT UP by you so that it fits your beliefs, wants, desires and needs. You can hire someone else to computerize your strategy if you can’t do that part yourself; there are plenty of programmers out there who will do it for you. Just remember that not all trading systems even have to be computerized in the first place! In fact, people have designed and tested successful trading systems for years by hand. Computers make things quicker, faster and more efficient, but they aren't absolutely necessary unless you find that you have to use one in order to feel confident about your trading (if you disagree with this assertion, you probably DO need computer testing to feel comfortable; perhaps you believe that when a computer generates numbers, it is more accurate).

If you truly understand what a trading system really is, this will all make sense. It isn’t complex unless you choose to make it so!

So What is a Trading System?

What most people think of as a trading system, Van would call a trading strategy that consists of seven parts:

1. Set-up conditions.
2. An entry signal.
3. A worst-case stop loss.
4. Re-entry when appropriate.
5. Profit-taking exits.
6. A position sizing algorithm.
7. Multiple systems for different market conditions (if needed).

The set-up conditions amount to your screening criteria. For example, if you trade stocks, there are 7,000-plus stocks that you might decide to invest in at any time. Most people employ a series of screening criteria to reduce that number down to 50 stocks or less. Perhaps they might look for stocks that are great “value,” or stocks that are making new all-time highs, or stocks that pay high dividends.

The entry signal would be a unique signal that meets your initial screen and that you’d use to determine when you might enter a position—either long or short. There are all sorts of signals that can be used for entry, but they typically involve some sort of move in direction that occurs after a particular set-up occurs.

The protective stop is the worst-case loss you would want to experience. Your stop might be some value that will keep you in the trade for a long time (i.e., a 25% drop in the price of the stock), or something that will get you out quickly if the market turns against you. Protective stops are absolutely essential. Markets don’t go up forever, and they don’t go down forever. You need stops to protect yourself.

A re-entry strategy. Quite often, when you get stopped out of a position, the stock will turn around in the direction that favors your old position. When this happens, you might have a perfect chance for profits that was not covered by your original set-up and entry conditions. Consequently, you need to think about re-entry criteria.

The exit strategy could be very simple. It is one factor in your trading over which you have total control. Your exits control whether or not you make money in the market or have small losses. You should spend a great deal of time and thought on your exit strategies, for one very good reason: you don't make money when you enter the market, you make money when you exit the market. Far too many people focus only on market entry, or what to buy, rather than on when to sell. If you approach trading with an exit strategy, it will benefit you right away.

Position sizing is that part of your system that controls how much you trade. It determines how many shares of stock you should buy or “how much” you should invest in any given trade. It is through position sizing that you will meet your objectives.

Finally, depending upon how robust your trading system is, you might need multiple trading systems for each type of market. At minimum, you might need one system for trending markets and another system for flat markets. Many professional traders have multiple systems that operate in multiple time frames over many markets to help offset the enormous portfolio dependence of a single trend-following system.

Your system should reflect your beliefs (i.e., who you are as a trader and as a person). Many people are just looking for “any system that works,” but if your trading system doesn’t match your beliefs about the markets, you will eventually find a way to sabotage your trading.

What's more, most people have never really taken the time to think through what they truly want from their trading in the first place. They don’t have specific objectives in mind. They think they do, but they really don’t. They just have a vague concept in their heads that they "want to make a lot of money," but objectives are 50% of designing a system that fits you.

Examples of possible objectives:

1. I want to become a full-time trader making 30% per year for my clients with potential losses no bigger than half of that.
2. I want to spend less than three hours a week on trading and get the maximum yield out of my system. While I’d like to minimize my downside, I’m willing to risk whatever it takes to get maximum returns, including losing it all.
3. I want to limit my drawdowns to no more than 20%. I’d like to make whatever I can, but minimizing the drawdowns is my primary objective.

No system is a money-making machine that can be turned on and print cash forever. Systems must be evaluated and revised to adapt to changing market conditions. And while there are ways to measure the quality of the system, you will never trade a system properly if you don’t feel comfortable trading it, just as you might have trouble following the advice of newsletters because you don’t feel comfortable taking certain trades that they recommend.

Improving your trading performance will not come from some indicator that better predicts the market. It comes from learning the art of trading and understanding how to create a trading system that fits your wants, needs, desires and lifestyle.

So ask yourself, how much time and money am I willing to lose trying to trade other people’s systems?

A great trader asked me once what I wanted my system to do, and I responded vaguely about outperforming the market. He pushed me for the performance statistics I was after, and I told him what they were, but I said that I needed to see what the system would do first. He basically told me that I had it backwards. He said very specifically to start with the performance I was expecting and design a system to that specification.—Frank Gallucci

I think that's it mate. You can apply a volatility adjuster to the process to dilute position size in accordance with say ATR and then apply the same principle if you were then wanting to adopt his approach...but the result will be that you will then naturally be biasing your preference to low volatility trades where position size is maximised. It would need to be tested but some of the great moves occur during high volatile times and I am not so sure I would like to avoid these periods with trend following.

......anyway, food for thought I s'pose and probably worthwhile testing out. :-)

I Will try to test something like that in my testers.

The Crossing, will it hold at the end of the week ? and will it retrace next week ?, speculation, always speculation, we always want to know what's ahead of us, predict the Future, just follow ur rules and u will be fine bass.

Yeah (not sarcasm), 11000% profits, here he is. 040 Algorithmic Forecasting with Larry Williams

One thing I learned Bass, is that you can lead a horse to water........

I personally have introduced people to Wilder's ADX system. Many cannot make it work. I always ask, did you do exactly what you were told? They always answer, yes, but, I did this one little thing, or that one little thing. I always reply, then you did not do exactly what you were told. Many people will ignore the ADXR rule, or they will ignore the SAR rule, or they will ignore the position sizing rule, and on and on.......they break rules without knowing why they broke them. They just did. This is pure ego. An egotistical trader will never win over the long term. That is just my view.

So here you have presented a the most complete turtle guide I have seen, and yet......many people will break rules. Just because they can.

I have come to believe that Van Tharp was dead on. Trading is a mental game. Most people lose because most people just cannot focus for any real length of time. It does not suit their personality. I am a true believer that systems cannot be passed on except in the rarest of cases. Everyone has to build their own system.

Hey Jim.. I have seen this in the forum over and over in the years Ive been here, human behavior seems very much geared too "doing it my way"
though the traders who aren't that logical and forward thinking (in market terms) will just be swallowed up by the traders that are..

JM., this is true in all aspect of life not just in trading, we as human being we lack a lot of qualities and traits to succeed, mainly patience, discipline and perseverance, we want it all and we want it now and that's exactly why we keep changing everything in our lives instead of focusing on one thing and make it work, we think short and not long term and we are also afraid of making mistakes, if a system doesn't work in the first 2- 5 trades then we try to change the rules or we ditch it all together, we don't have the patience to wait 10 - 20 trades to analyse the performance and see if its a profitable system or not.

I really don't blame the newbies,the business of trading have a high barrier to entry, they have their own mountain to climb and there is no shortcuts, like they say being there done that , only a handful are lucky enough to have a mentor which shorten the learning curve and even then only 5 - 10% will make it, while only those who have the above mentioned qualities will persevere enough to climb that mountain.

I would like to mention that i don't post to make followers, i use this thread as trading diary and journal where i collect my own research which i often consult and i have proved time after time that this system works, maybe with different settings in recent years but it works magnificently if we know how to use it and follow his simple rules.


And that is the ultimate truth my friend.

In short, let define your prefer R/R and use it as the filter for selection of trade.. say 3 to 1 then any trade setup that has total potential distance to targets less than 3 times of the distance to loss, should be ignored.

Definitely...if your system defines profit targets. If you let profits run however...then it is not so easy, the result being that you will naturally bias your trades towards lower volatility trades, which may not necessarily be optimal for trend traders.

I'm researching also Tom Basso Position Sizing, the one with the ATR 10 MA.