Yes, I am progressing….
Ok, it seems like my trading continues to head in the right direction. Instrument Focus, Risk & Money Management, Trade Management Tactics, 95% Valid setup rate, psychological assessments.
However, there are some things that i am not happy about – largely things revolving around the questions I posted earlier this week. [I have now added in some thoughts/potential answers into that post]
Certainly on the technical front I am learning and progressing and I continue to get more screen time under my belt each week. Though I really think I could have been significantly more productive over the last two years. Yes – two years – that’s how long ago I resumed trading full-time, or should I say “studying trading full-time”? Why have I been so low on my productivity? Was it a lack of guidance? Was it a lack of personal discipline? Was it a bad personal attitude? I don’t know. I guess I have been quite fortunate that some other projects I have done in the past, such as software consulting, took off very quickly. I guess one can’t progress quickly every single time?
Secondly, on the psychological front I have also learned a tonne. I have summarized findings to April 2015 on this blog post, and since then I have posted another half dozen psychology-related blog posts. I believe that almost all of the points listed in those posts have the potential to improve my trading performance. However there is such a large number of specific pointers that’s it’s like trying to drink from a fire hydrant. I guess it would be difficult in any context to consciously attempt to apply a large number of points. So I am a bit stuck on that front.
… but my trading confidence is like a rollercoaster-ride!
In the last few days my confidence regarding trading has sunk quite a lot. In turn this has led to me staying out of the market during some of the sessions when there were good setups in the DAX and Cable, which in turn caused a lot of frustration for me. I had some chats with my trading office colleague and with my trading mentor about it. I always feel that their perception of my technical trading abilities is higher than my self-perception. Ironic!
I can definitely say that there is a strong correlation between my trading confidence and recent trading results. The existence of this correlation is working against me. I am working against myself by (i) creating this correlation in my brain and body and letting it influence my actions, thoughts and emotions and (ii) by letting it continue for days and weeks on end.
Picture a professional tennis player – who, for long time, developed
his physical durance and his technique – his backhands, his volleys, his serves, his forehand. He has carefully chosen his equipment – appropriate footwear, the right racket. Over time his skills are continuously improving and as such he is becoming a better player. However he has a habit of letting his confidence sink every time that he loses a match. He lets the defeat run over into his next match – his self-confidence falls – increasing the likelihood of further defeats. He forgets to focus on his existing skill set. Consequently, his results are far below what they could be. He is falling short of his potential. He is not in the right mindset when he steps onto the court to face his opponents.
There has been a suggestion that the difference among the elite of the world’s tennis players is found in mental toughness, rather than in physical or technical areas, with the two latter assumed to being about the same among the world’s top players.
Odd-shifting variables in trading are not as clear as in tennis
In tennis you know that working on your serve will make you a better player. You know that practicing your backhand shots will make you a better player. If you regularly work on your technique, and on your physical stamina, then there is a good chance that you will start to win against players at your club that previously beat you. It doesn’t mean that you will beat them every time, but the odds will start to tilt in your favor.
In trading there are certain things that are assumed to make you a better trader. For example, managing your risk carefully – trading when you are in good shape physically and mentally. Those things I accept and know will tilt the odds in my favor. However then there start to be a whole lot of fine technical details such as ‘don’t short into support’, ‘don’t buy into resistance’ (using some simple ones as examples). However it seems much more complicated than that. Where do I enter? Where do I place my stop? Where do I exit? Should I add to the position? When does the setup not apply – on Mondays? On days with no Tier-1 news? On days with flat Asian sessions? The permutations are endless.
It seems that in trading the steps for shifting the odds in your favor are not always as clear as they are in tennis.
Ability to model potential outcomes and expectancy
Assume a friend offers you a coin-toss game. He will pay you $1.10 if you win. You will lose $1 if you lose. This is a darn fine game. And your edge can be proved mathematically with certainty. You are not guaranteed to win every time but in the long-run you will on average make $0.05 on every toin coss. This is the underlying principle for casino operations – where the house always has the edge.
However in the trading arena, I have found that there are no equivalent mathematical models. It’s not possible to model the financial markets because it is not a closed model, as for example a casino game is. A cash poker game where players play against each other is a bit more akin to the financial markets. It’s not possible to model what every player at the table will do – every player can do as he or she likes. In the financial markets anything can happen.
The absence of mathematical models in the financial markets (Black-Scholes and algos aside) is something that I find difficult to deal with. And it has led me to looking to the most recent trades to tell myself whether a trading strategy is working or not.
The next best thing to mathematical models of certainty are to have large amounts of data from which to make decisions and to draw conclusions.
Amassing more data to make up for lack of models – and getting it done efficiently!
The more trades/setups that i take, the more data I am collecting as to what works and what doesn’t work. In other words what actions are likely to increase my profitability.
In terms of K7, I have taken nearly 500 trades in the last six months. That’s a decent number of trades. During this time I have refined how I enter, what setups I take, how I manage the positions, and what instruments I trade. I BELIEVE (but I can’t be sure) that my trading style now is better than it was six months ago. However this did not make me money. I was down about 5R after all these trades.
However in order to increase my confidence in my trading strategy I need to take more trades. And I need to be reasonably consistent in my entries, my management, and my exits. (I did a discipline exercise two years ago – I can do it again!) I could take another 500 trades in the next six months, and continue to have my emotions riding the rollercoaster.
The next step: Or I could bite the dust and do now what I should have done a long time ago – stop putting on live trades and instead demo trade. But rather than demo trade, I can accumulate the same number of trades much more quickly using a testing environment such as ForexTester2. I can upload all my DAX and Cable data into it and trade it. I am sure that most people that I have had the pleasure of working with over the last twenty years would not only say that this is a good idea – but they would be surprised that I have not already done exactly that.
How long would it take me to execute 500 trades in a testing environment? Could I do that by the end of October if I was able to spend a great majority of my time on it (bear in mind that I will be engaging in some futures trading in the UK afternoons on a regular basis)?
This step in fact seems so obvious as the right one to do. It will help me further to identify whether the strategy is in fact profitable, and it will help me to develop an EV model. I consider that pursuing this course of action will help me to use my time more effectively and shorten my progress curve.
[I got to remember to remind myself that I am in a very fortunate position – I have a decent amount of trading capital, a fair amount of market experience, a trading office, no dependents or financial constraints and the only thing that I am “lacking” is a proven trading strategy. Many other retail traders have far bigger obstacles to overcome than I have. If the trading strategy is the only thing I got to get done, then surely I can muster the determination and focus to do that!!]
What could be the result of this?
I can see several outcomes with this plan:
- (1) I get 500 done in the space of a month and figure out that the strategy produces profits on a consistent basis and it helps me refine the trading technique. [In order to claim that the strategy is consistently profitable I would expect an absolute minimum edge of 5%, meaning a return of 25R over 500 trades, or approx 1R every 20 trades]. I then recommence live trading using the same risk levels as I have been using right now (between £200-£250 per trade). I am more confident, more focused and I am able to produce consistent returns week to week. This would be a good outcome.
- (2) As in (1) I finish the testing. However I find that I am not able to produce convincing return (i.e. anything less than 25R). This implies that the K7 strategy is actually not profitable enough. In that scenario, I could either try to refine the strategy further (although I really have already given it plenty of time to develop) and/or I pursue another strategy on my pipeline list. This would definitely test my persistence and I would likely question whether I should give up on becoming a trader.
- (3) Whilst the K7 testing is progressing, I make amazing progress with the futures trading on TY and ES and decide that I won’t bother with K7 for now and instead focus on the trading aspects that are working and producing profits. This would also be a favorable outcome.
- (4) Futures trading aside, I find that I don’t have the persistence to complete the K7 testing and set some other goals or actions to pursue – and just get myself back to the live trading scene where I continue to battle with the same psychological issues with varying levels of confidence. Either I somehow end up making it work, or I end up in the same spot six months from now (i.e. without having progressed a lot) or I try to pursue some other strategy.
Simulated trading required for EVERY strategy
My gut feel is that regardless what strategies I pursue, the testing should always form an integral part of the strategy development. I know that I should always known that. The thing is that i did know that but I have always been to keen and eager to trade live, to get experience under my belt, and to make my money. It’s my own fault and yes you can say “I told you so!”.
What do I want to become?
A professional tennis player continues to:
- Work on his physical stamina
- Sharpens and develops his technical skills
- Engages in mental exercises
- Reviews his games and studies his opponents
- Uses a coach
- Steps onto the tennis court with the right mindset
This is what I need to do if I want to become a profitable professional trader!!