Thoughts on "The A to Z of trading career - musings of a professional trader !!"

[Subhadip]

Honestly, i did not know who he was that time. Not even an iota of clue. John told me he had authored couple of famous books on trading psychology but i was cocky enough to not heed to that psychology BS that moment Later, when I read his 'Trading in the zone' and 'Disciplined trader' - it was a crazy eye-opener. Had i realised who he was when i met him, i would have definitely flown to trader's expo in Vegas with them (to get that extra chat time with Mark). Instead, i flew back to atlanta that weekend

Very down-to-earth and humble(to the core) guy. Most of the top level/accomplished folks are always humble. One wonders if they got this trait after going up to the top or they went up because of this trait. It's better to assume the latter as it seems to be a common trait among successful people in various walks of life

Rightly said sir.....

 

[ncube]

Hi ncube,

I m also in the similar lines as you, but with very less experience. So from how long you are doing this? Are u using options as well? Did you get any chance invest as per your method between 2008 and 2015(market not in uptrend)?

Raju

Sent from my MI 3W using Tapatalk

@raju.vzm, Nice to know that you trade similar to me. To answer your questions:

1. I think I was in and out of market from 2002/3, however started seriously from 2012 with proper tracking and record keeping.
2. Yes, these days whenever I get time, I day trade vertical spreads in options (Leg in/out) based on price action and do not use any Greeks. Spreads allow me to control the risk and also gives me flexibility to take it overnight if I want to.
3. I have records only from 2012 and in these last 6 years in terms of returns 2014 was best and 2016 worst. However between 2012-2015, I played around with few trend following systems with frequent tweaks and filter changes. However from 2015 I am consistently using the system without much changes.

 

[trump]

One can learn trading,perfect his method,entry,exits,stops etc on small capital but to live on trading income as full time trader one needs to be well capitalised.Dhirubhai Ambani started as a petrol pump assistant but every petrol pump assistant does not become Dhirubhai.Traders like Richard Dennis,Michel Marcus etc may have started with small capital like most traders do,they are gifted and rare breed of Traders.Under capitalised Traders always take larger percentage risk .Traders with larger capital trade with smaller risk % on each trade though they may be having several non correlated trades going at any given point of time..here we come to concept of diversification which Madan will surely deal with in future.

Proper capitalisation is very important factor in Traders’ long term survival .

Smart_trade

most confuse the real capital with leverage i guess, and add to it sloppy money management, execution etc, all create havoc in the traders account, until its too late to realise, some never

 

[trump]

No amount of coaching,softwares,colocation,system,psychology etc going to help unless one truly understands the market architecture. Because the real 'edge' would be built on that understanding, realtime screen experience is valuable, infact thats the only teacher i guess. Discipline also plays a very key factor, never second guess your own decision, losing is a part of the game, but how to lose small is the key, trust me trade execution is very very important, because entries on theory or softwares luk awesome, real time its not, slippage creates a big problem, and that includes exits too.Those traders who catch circuit breakers regularly would know what i am intending to say,
What creates a big problem for me is , frankly, revenge trading, jumping my own rules of the game, fear of being missed out i.e. either early entry or chasing the price ...what do you think abt these, how the market rewards these is anybody's guess , mkt says only one thing, not says, it echoes "Want some, come get some".
So choose carefully.
My own system hit rate is near 40%. Its not about the quantity, Quality always trumps quantity.
I remember one quote from the movie Matrix- "Still using everything except that matters!"
Phew...long post..pardon me
Cherrio!

 

[trump]

Interesting point, very important to understand for successful trading. Let me make it more interesting & complex by sharing some of my backtesting conclusions (I may be wrong..comments welcome...

1. Drawdown is directly proportional to Risk. I.e Higher Risk = Higer Return = Higher Drawdown and Lower risk = Lower Return = Lower Drawdown.
2. Drawdown is directly proportional to System Expectancy. I.e Higer System Expectancy = Higher Drawdown and vice versa
3. System Expectancy is inversely proportional to Trade Signal Frequency. I.e Higher System Expectancy = Lower Trade Signals
4. Drawdown Duration is inversely proportional to Trade Signal Frequency. I.e Higher Trade signals = Lower Drawdown Duration.

Now the challenge is to develop a robust system which gives smaller DD and at the same time balances the above 4 points...so how robust is your system..?

BTW, as per my analysis the quickest and easiest way to compound/increase account size and reduce drawdown is by using dynamic risk allocation (risk based position sizing) and regular risk based portfolio rebalance (Only if you have a portfolio) . I.e increase the risk as your account size increases and reduce risk as account size reduces during drawdown.

nicely said, thats a big part in money management,many traders vouch for Kelly criterion, but yes the basic point is rebalancing depending on capital, risk etc

 

[Pradeep Narayan]

I view Risk differently.


Risk is what I am putting as a stake – maximum that I can lose – for a calculated return. For me, if I risk 10K, either I will lose the whole of it or will come out with 30K. Now, I will surely be splitting my 10K to smaller amounts each time I trade, and that is to have the probabilities of winning work in my favour.


The key point here is that the Risk is not linked to my trading capital. It is an amount at stake for a return needed. For example, for a 1000 rupees return; I would risk 300. That means I can buy 300 shares of a 100 rupee stock and have 1% as SL or buy 10 shares of a 1000 rupee stock and have 3% as SL. Either of these trades carry 300 as risk & 1000 as reward, but as a % of Trading Capital or Capital Invested, they differ in value.


For me, a low risk trade is one where I meet the expected returns with a risk that is lesser than what is assigned. A high risk trade is one where the risk is the maximum amount assigned to that trade. And, ever since I viewed Risk as an independent entity, my view on trading changed. The meaning of “Higher the Risk, Higher the Returns” became clearer!

 

[trump]

ncube,

Your post reminded me of my high school math teacher ...with all the 'directly/inversely' proportional pointers

Yes - basically, winning percentage and Reward:Risk decides the system DD w.r.t money and trade signal freq determine the time taken to come out of it. Higher the winning percentage + lower RR or lower winning percentage + Higher RR seems to be the combination. But, most of us, keep trying to get higher winning percentage + higher RR and the elusive search continues. We cant have the cake and eat it too, right ?

Having said all these things, i brought up the lower DD/compounding pointer to drive a point home. General parameter consensus falls along these lines - for intraday system, max DD : yearly return should be atleast 1:7 or something like (1:8, 1:9 or 1:10). For swing/positional systems, it should be atleast 1:5. For example, if one is doing intra in NF, if the max DD of their system is 200, atleast 1400 points should be the average yearly points. Please dont kill me for quoting this measly yearly return points. But, let me assure you a fact- the above-mentioned DD/return numbers can set you free in 3-4 years. We dont need 200-300 points in NF every month on an average. Even 100 points with this kind of low DD is more than what we can eat. Icing on the cake is that this kind of DD can be easily recoverable and also paves a nice way for compounding the account. So, next time when you see a new idea/system, think in those lines.

There are two ways of increasing account size - bringing in more money when you win (but most traders bring in more money after they lose) or compound the account(conservatively or aggressively). In my opinion, once a trader gets past the usual problems of trading, his energy should be largely focused on how to move onto the next level w.r.t trading size. After all, 20 percent return on 10 lacs is much different than 20 pct return on 5 crores.



lemondew,

Thanks for sharing your view

1. Not necessarily. It will just smooth out the equity curve if underlying principle of the systems are tangentially different or systems trade non-correlated instruments. Actually, it might reduce the average return. On the other hand, the anomaly months(outliers) will be reduced.
2. Yes - both are possible
3. Quite possible - but again depends on the underlying principle of the system or the instruments traded. Almost, all the hedge funds employ multiple systems(sometimes, more than 10) to smooth out the equity curve and improve Risk adjusted returns.

If you get to do cumulative analysis of multiple systems, please post the results here. It would be a great learning for us !!

so basically you are saying that the system drawdown should be less than 14% (approximately, 1/7) as I could make out or am I wrong?

 

[trump]

@ncube, buddy you seem to be serious about your trading, read all your posts in this thread, loved it, sounds practical, i use many of them in my own trading, keep us updated whenever new insights or grails shows up infront of your doors, cheers.hehe.
Price action is the key as you hv said, nice
Also you hv stopped system hopping and tinkering , nice.
You hv developed consistency with discipline and confidence, superb
Trading with context, great
Abhoring leverage
All those above key take aways from your posts here i guess, plz add more incase i missed some.Cherrios!

 

[ncube]

nicely said, thats a big part in money management,many traders vouch for Kelly criterion, but yes the basic point is rebalancing depending on capital, risk etc

Yes, Kelly's criterion help us identify the optimum bet (Risk) size and re-balancing helps us reduce the draw-down (At some cost of returns)

I view Risk differently.


Risk is what I am putting as a stake – maximum that I can lose – for a calculated return. For me, if I risk 10K, either I will lose the whole of it or will come out with 30K. Now, I will surely be splitting my 10K to smaller amounts each time I trade, and that is to have the probabilities of winning work in my favour.


The key point here is that the Risk is not linked to my trading capital. It is an amount at stake for a return needed. For example, for a 1000 rupees return; I would risk 300. That means I can buy 300 shares of a 100 rupee stock and have 1% as SL or buy 10 shares of a 1000 rupee stock and have 3% as SL. Either of these trades carry 300 as risk & 1000 as reward, but as a % of Trading Capital or Capital Invested, they differ in value.


For me, a low risk trade is one where I meet the expected returns with a risk that is lesser than what is assigned. A high risk trade is one where the risk is the maximum amount assigned to that trade. And, ever since I viewed Risk as an independent entity, my view on trading changed. The meaning of “Higher the Risk, Higher the Returns” became clearer!

Rightly said, once we start looking at trading from the perspective of risks, it becomes much easier to manage the trades and our total risk exposure.

@ncube, buddy you seem to be serious about your trading, read all your posts in this thread, loved it, sounds practical, i use many of them in my own trading, keep us updated whenever new insights or grails shows up infront of your doors, cheers.hehe.
Price action is the key as you hv said, nice
Also you hv stopped system hopping and tinkering , nice.
You hv developed consistency with discipline and confidence, superb
Trading with context, great
Abhoring leverage
All those above key take aways from your posts here i guess, plz add more incase i missed some.Cherrios!

Thanks for your kind words!! To be frank, I am currently not serious about trading, but am serious about learning to analyze the markets and directly participating in it to get first hand experience. For me its more like solving puzzles and the gratification to see how my analysis is working by getting immediate feedback from the market. Of course at the same time making some money on the sideline for doing what you love is always an added bonus... This is the advantage of trading part time as I dont have the pressure to make money trading for my survival. However I will definitely be using my skills in future when I feel like quitting my job and trade fulltime however even then the objective will not be to sit in front of monitor the whole day like regular job but to enjoy participating in it.

Right now I am in this boring place on a business trip which is allowing me enough time to interact in the forum and hopefully I will be returning back next week. But surely whenever I get an opportunity I will share my thoughts and learning in the forum. Madan has been kind enough to agree and given me a go ahead to share my thoughts here in his thread.

 

[madank]

Wonderful conversation going on and do not want to disrupt the flow with another new post for the week. Will post it after couple of days. Thanks all for pariticipating in this risk/system topic.

Ok trying to get into specifics what are the key thing we need to follow to survive in the long run. Which period is defined as long-run? Should I set some monthly or yearly profit/loss targets or focus on short-term trading plan. You know the longer is stretch of time you try to include in the plan, the higher is factor of uncertainty that can spoil even immaculate trading strategy. Sometimes black swan events happen like it was with SNB currency peg removal and if you consider long-run there is higher chances to stumble upon such events where no money management works.

@stoch - in my opinion, long run is atleast a decade/multiple decades and we must be willing to see that long. Setting monthly/yearly profits is an individual choice but i believe, it is in the list of topics to discuss later.

Yes - black swan events can wreak havoc but they are not dime a dozen. A trader would see 1-2 black swan events in their career and that is one of the main reasons to keep reducing risk as we grow our account.

one of the best threads of TJ ....Nice ...

Thanks a lot sir ji...

Thanks Subhadip on behalf of all the participants here. These kind of discussions cannot be done without candid participation

However from 2015 I am consistently using the system without much changes.

Very nice to hear that @ncube - Keep it going and very inspiring to fellow traders !!

For me, a low risk trade is one where I meet the expected returns with a risk that is lesser than what is assigned. A high risk trade is one where the risk is the maximum amount assigned to that trade. And, ever since I viewed Risk as an independent entity, my view on trading changed. The meaning of “Higher the Risk, Higher the Returns” became clearer!

This is probably the only difficult 'technicality' in trading and you have understood it well. Great job !!

so basically you are saying that the system drawdown should be less than 14% (approximately, 1/7) as I could make out or am I wrong?

Trump - it is not w.r.t percentage but w.r.t points. Percentages are based on the risk we take. As it differes from person-person, i gave the example with points. So, 200 points DD with 1400 points avg points/year is pretty good in my opinion(the ratio comes to 1/7). These are just semantics (different ways of telling the same thing) but think about the idea behind that point