Trading Tips

Gauging trading performance

There’s a recent post from the SMB blog that brings up an issue a lot of traders have – or at least think they have. Namely, they want to know how they are doing with their trading in terms of when they’ve reached a degrees of success. Here’s the main part of the query that came in from the trader asking the question:

I have been profitable every month since and including August of this year. Month to date December I am profitable as well. Before that I saw trickles of black but was always losing on balance and never had two consecutive profitable months until recently. I would greatly appreciate if you could shed some perspective on how I am doing based on my results. I am taking the money up every month so the only way to assess my results is based on percentage gains for a given month based on the account size traded that month. 2011 is my 4th year as a developing trader. For August through December (MTD) I sat down to trade 76 days and took 118 trades averaging 1.55 trades per day. My win ratio is 55.78% excluding scratches. My winners are 43% larger than my losers on average. I am in my winners 2.68:1 longer than my losers. My average risk per trade is 1.02% of the account size for a given month. The max risk I took on a trade was 1.65% of the account size. Nothing crazy risk wise. I always have a hard stop in the machine -always…and I never ever cancel it. For the 4 months August through November (2011), I have an average gain of 2.32% of the account total for that month. (6.7% the best/August -3.3% worst/September)

There are a few things that can be extracted from this:

  1. This trader has been going at it for several years and only now is finding his feet as a profitable trader. This is very common because the majority of folks who start trading really have no idea where they are going or what they need to do to get there. Figuring that out (usually through trial and error) often takes literally years.
  2. The trader had spells of profits, but was generally losing until the last few months. This is the standard pattern because consistency is lacking and developing traders often don’t know why they are struggling. And even when they figure it out, they still have to consistently implement the required change to get things sorted out.
  3. The trader understands the value of keeping track of his performance statistics, which too few traders do. The step he’s lacking here is the objective benchmark against which to measure his performance – at least so far as he’s communicated.

What this person is looking for from evaluators is whether he’s making enough from the markets – and also whether his performance has reached a level of predictability to suggest that it’s OK to add money to his account (that’s a separate part of the email). The numbers certainly look good. The problem is, though. we don’t have any way to tell him whether his results are good in the context of his trading method/system and repeatable or not.

Just as a start, we don’t know whether he’s trading a consistent system or multiple different ones. We also don’t know whether he’s being consistent in the application of his system or methodology. An additional question is why he’s only traded 70 days during the period in question. What’s the cause for not trading on the other days and does that have an implications for his performance?

I can also think of these other questions:

  • Do you ever have multiple positions on at a time?
  • If you’re risking about 1% per trade, why are only only making about 2.3%/mo given the number of trades done per month?
  • How much time is being put into the trading?
  • Given the numbers provided, the trade expectancy is about 0.355%. How does that compare to prior performance of the system/method employed, or to how the system should have been employed over the time period in question?
  • Can the system/method be used in a more frequent fashion to produce higher returns?

There’s a lot that has to go into actually judge trading performance. Just looking at the return figures isn’t going to be enough in a case like this. The best approach for any trader in this kind of condition is to try to figure out how they could/should have traded their system or methodology over the period in question and compare that to how they actually did. If the two are a close match, then you’re at least doing that part of it right. It then becomes a question of whether the system’s performance can be sustained and scaled up.

Trading Tips

Traders can do what athletes can’t

There’s a post on one of the BabyPips blogs which discusses the comparisons between elite athletes and successful traders. I will definitely not deny that there’s a lot in athletics which carries over well into trading. The aforementioned post mentions some of them:

  • Competitiveness
  • Solid “fundamentals”
  • Emotional toughness
  • Focus on continuous improvement

Here’s where the author comes up a bit short in his analysis, though.

In sports the thing which tends to differentiate elite athletes from the rest is physical. The author uses basketball in his examples. Let’s face it, though. You can be the fiercest competitor, have rock solid fundamentals, be emotionally tough, and constantly work to improve your skills, but if you’re short with no jump and slow afoot you’re not going to make the NBA. Flipping that around, if you’re 7’+ you can get away with short-comings in many other areas and still have a good career.

I bring this up because the features noted above can be found in athletes at all levels. I certainly saw them in college volleyball players I coached, though none of them had the physical tools to be All Americans or National Teamers. That doesn’t mean they did not have enjoyable, satisfying careers, though. They just had to focus on getting the most out of what they had in the context of their limitations. In sports the mental stuff can separate an individual from others with comparable physical tools, just as superior physical abilities can separate an individual from peers with similar mental abilities.

This can apply to trading as well. We just need to replace the physical element with the financial one. After all, if you have a lot of money you’re able to make a lot of money from the markets, even if your rate of return isn’t very good. Flipping that around, if you’ve only got $1000 you’re not going to be able to make enough money to live on – at least not consistently or without being constantly on the edge of complete ruin.

Of course the difference in trading is that you can save up and use compounding to increase your account and maybe eventually become that 7-footer, though it takes a lot of time and effort is you’re only starting off as a 1-footer. 🙂

Trading Tips

The new trader system loop

A poster at Trade2win started a discussion recently which I think is very worth addressing here. It starts off with looking at the typical process of the unsuccessful trader:

1. Find or develop a system you think will work
2. Trade the system
3. Experience a few losers and discard the system

Sound familiar? Probably so. It’s a very common loop new traders get caught up in.

Why is this so? Why do new traders give up so easily, when successful traders follow through?

The suggestion is that this happens because of a lack of confidence. While I can understand the case to be made for that being a problem, I’d take it a step further and say that it starts much higher up than that with the fact that new traders totally fail in the vast majority of cases to think beyond the immediate and develop a proper frame for their trading.

To put it simply, if you don’t know what you’re working toward how can you have any confidence that what you’re doing will get you there?

That’s high level thinking, of course. At a more ground level view, I’d contend that most new traders never learn what the elements of a trading system really are and how they contribute to its performance in different market conditions. They just want to plug-and-play and have profits come spilling out. The markets tend to disavow them of that impression quite rapidly.

Trading Tips

Relaxing, not blowing up, and always learning

In this post I’m going to continue addressing points made by a new trader posting on the BabyPips forum recently, following along on yesterday’s post. After talking about looking to take the easy way out, the poster shifted to learning to develop patience.

Don’t worry if you miss a trade opportunity
In the beginning I was anxious to continually have trades open and I hated it when I saw big moves on the chart that I missed. Sometimes I would join trying to get a piece of the action but this was often a mistake. It took me a while, but I have now made peace with the fact that that missed opportunity isn’t the last.

Forex will continue to exist for the foreseeable future, and more opportunities will come.

The above has made a huge impact on my success, because I now am calm enough to not try to force setups when things don’t quite line up like I would like them to. I am now happy with not having a trade position open at all times, instead I simply try to find 1-3 good setups per week and try to make steady progress with almost guaranteed trades.

Furthermore, at the start I hated the higher time frames because I considered them so slow with few opportunities. With my new found patience I’ve come to really appreciate the 1D and 1W charts for how clean they are. I use the 4H a bit, but the trends are so much easier to see on the higher time frames, in my opinion.

This is a major developmental stage for this trader. Excitement is often a major driver of the actions of newer traders. They want the action and get frustrated when there’s nothing going on. This leads them to trade in shorter-term time frames that aren’t optimal, chase trades they have no business trading, and oftentimes trade either more positions or larger than is good for them.

All of this can be avoided by learning to relax and realize that there will always be opportunities in the markets.

The mystical ‘newbies always blow their first account’
So far I’ve been successful without blowing an account. I’ve even made 29% profit since I started live, but to be honest some trades were luck. I am still a beginner and am still learning trading psychology, but who knows, I might still succumb to poor trading behavior and end up blowing an account. But I think the ‘newbies always blow their first account’ is a bit of an overstatement. This goes back to what I wrote above about trading not being easy. Trading isn’t made for everyone, but I think anyone who is sufficiently educated to be able to think logically is capable of conducting proper technical and/or fundamental analysis and can be successful rather quickly.

I will certainly agree that there’s nothing that says new traders have to blow up their account. Yes, it happens a lot. It doesn’t have to though. As I noted yesterday, a major factor in this is simply approaching trading with a totally inappropriate state of mind – chasing the winners rather than viewing things from a much broader context.

Even putting mindset aside, the simple act of trading very small to start will go a long, long way toward protecting a new trader from themselves.

There is always more to learn
Again, after only 2 months of trading there is still clearly a lot for me to learn. I see it as a process which you slowly improve in. My trading method is price action without indicators. I’ve found good setups so far but there is plenty for me to learn, for example: being able to identify and become more aware of support and resistance levels; not closing trades to early because of fear that it’ll reverse even though the setup is good; and journaling my trade and progress better.

There’s no doubt about this. I’ve been trading myself for over 20 years and have followed the markets for even longer than that. I learn new stuff all the time, either about the markets our about myself and my trading. If you don’t have the mindset that you’re going to keep learning and developing over time you won’t be around for the long haul.

Trading Tips

Getting sucked in by easy, automated trading

A poster on the BabyPips forum decided to share some of their experience as a developing trader. There are some lessons in the post that I think are of broad value, so I’d like to share them here – with my own comments added, of course. 🙂

EA Robots
When I made the move to get into forex I was convinced that I could build an EA robot that would trade and make profit for me. In the first few months I spent my time learning to program in mql4, building robots, and testing them in the strategy tester. I learnt the following:

1 – The robots do marginally well, at best, and that is after a lot of tweaking
2 – Because so much tweaking is required, I believe it is impossible to make one that will work out of the box for multiple currency pairs
3 – Even if you get a robot doing well for you, it doesn’t mean it will make profit forever, you need to monitor and tweak it continually

Expert Advisers (EAs) are a major lure to especially new traders who see them as an easy way make money. For those readers who don’t know what they are, basically think of them as completely automated trading systems traders plug into their trading accounts and let run with little or no interaction. Thus the term “robot”. The system trades for you, so you can go about doing whatever it is you do and don’t have to worry about the markets and coming up with good trades yourself.

Sounds great, right? I mean who wouldn’t want to put their trading on autopilot?

The problem is point #3 above. Mechanical systems suffer from being rigid. They are not adaptable and the markets are incredibly dynamic, constantly shifting and changing. The chances of you finding or developing a single system that you’ll be able to apply automatically forever with good success is just about nil.

Trading isn’t easy
Just because of the fact that everyone has internet and that there are hundreds of brokers, doesn’t mean that forex is for everyone. It wouldn’t surprise me if most successful forex traders are well educated, but more often than not people who maybe aren’t suited to be traders are trapped thinking “That looks easy.”

I figured this out shortly after I stopped trying to make a robot. Although I quit trying to program the perfect machine I was still looking for the ‘set it and forget it’ holy grail. I was looking for the perfect combination of indicators that would give me great entry points frequently. I never traded live with any of these systems but I did backtest a few, but I quickly learnt that there was no guaranteed way to deal with whipsaws and incorrect signals.

You can easily substitute “forex” above with stocks, indices, commodities, or whatever market you like. They are all the same. The act of trading is very easy – just point and click. As everyone eventually figures out, though, trading successfully – no matter how you define that – takes effort and dedication.

Those who don’t go into trading with the right mindset can waste literally years and untold amounts of money chasing all kinds of quick fixes – systems, software, applications, courses, etc. Those who never get their heads screwed on right eventually flame out. It’s only those who eventually figure out how to properly frame their trading will have any shot at long-term success.

Trader Resources

Where can I find a mentor?

I came across this post on one of the trading forums I frequent and thought it would be well worth sharing here because I talks about something I would like to address.

Hello all,

I’ve been training myself for the past few months on forex and stock trading, so far so good (especially for self taught). I’m well on my way and able to see the bigger picture, but my fine tuning needs some work. I’m beginning to get frustrated and down at this point as I have really high hopes for this (not unrealistic, just high) and am hoping to make a career out of trading.

I do not personally know anybody else who trades and therefore am on my own. The part about trading that I appreciate the most is that we work for ourselves and that our own hard work determines our success. Having said that, about 4-5 months ago, I was part of a mass “down sizing” where I worked. I’ve always wanted to work for myself and saw this lay off as a sign. I quickly took action, having spent countless number of hours daily training myself, staying up all night at times if I had to, stopped going out just to give myself more time learning. I know I’m close to getting my system down, but something is still a little off and my entries/exits arent quite right yet.

As I’m doing this alone, I cannot always see my own errors, only a 2nd pair of eyes can point out what I’m doing wrong.

I am in the Dallas / Fort Worth area and very optimistically searching for a mentor or anybody that can give me guidance. If you are willing to help, or know anybody who would, please PM me, I am available anytime of the day, night, weekends, ANYTIME, this is priority #1 in my life.

I thank you for having taken the time to read my post and thank you for any help you may be able to offer.

Happy trading to all!

Obviously, this poster is very eager to learn and develop as a trader. The fact that he’s looking to identify where he’s having problems is a very good sign. Finding a mentor for 1-on-1 work as an individual traders can be very hard, however, as I’ve written on this blog and in magazine and book articles previously.

But here’s a question.

How valuable, given your own situation, would you find a sort of group coaching session?

I’m thinking in terms of something like a weekly meeting of traders – either in person, via phone, or online – where a group could get together to talk about their trading, share their ups and downs, get help improving their performance, and maybe even collaborate on strategy. Do you think that sort of social/educational interaction would have a big impact on your trading experience?

Leave a comment below and let me know what you think – and where you’re currently at with your trading.

Reader Questions Answered

Vague requests for trading advice

I’m about to be a little bit mean, but it’s for a good cause.

You see, I got the following note via a private message on a trading forum the other day. In sports coaching you hear the term “teaching moment”, or something like it, in cases where an individual or team made a mistake which the coach uses as an opportunity to teach. That teaching isn’t always done in a warm and fuzzy fashion. I’m not going to scream and yell here, but I am going to use the note from this young would-be trader as my own teaching moment.

Here’s the note:

Hi John,

My name is David from Ireland, and I am currently a student. You responded to my question about college trading, and I was wondering if you could help me. I am fascinated with trading, particularly spread betting. I have an immense drive to beat the system. I am a novice, and have never really found a break in this tough game. I would love, to just be able to make maybe €100-150 a week for groceries. I have a bit of capital set aside for spread betting.

What I would truly, eternally appreciate, is some advice, from a knowledgeable, successful trader like yourself, and help would be so so greatly appreciated.. Its hard starting out in this game.

Just thought I’d chance a pm to you, thought it couldnt hurt….

Yours sincerely,

David H.

The big issue I have with David’s request is that it’s so vague. He’s asking for “some advice”. As I’ve written before about trading forums, they are good for asking very specific questions, to tap the accumulated knowledge and experience, and perhaps for entertainment value as well. Vague questions get vague responses.

This applies too to throwing questions at experienced folks like myself. I have a hard time being of much help without a bit more detail. The best I can do in a case like this is throw out something like “read my book” as a basic starting point.

Vague questions of this sort speak loudly to a major short-coming in the trading thought process – one I’ve got plans to address in the not-too-distant future.

As for …

…the wanting to “make maybe €100-150 a week for groceries”, wow! Groceries in Ireland are really expensive.