1. Do i trade one setup on one market?
2. Do I trade multiple setups on one market?
3. Do I trade one setup on multiple markets?
4. Do I trade multiple setups on multiple markes?

I’ve switched back and forth over the years and for most of the time I’ve settled on the second one.  The first one is very difficult if you’re not scalping.  The last one is very difficult to manage.  I believed (and still do!) that context is most important and it’s really hard to have context on multiple markets.  If one focuses on one single market it’s much easier to know it well.  So #2 was my choice for a long time.

However ES has not been providing much in opportunity lately.  Last year I was quite happy to get 4-8 pts and sometimes 10 on some bigger setups like going for a gap fill.  This year I feel lucky to get 2 pts.  Going for 2 is what I’ve been doing lately but that distorts the R:R.  So for the past few weeks I’ve been watching the Euro & Bund.

In order to trade Euro & Bund, which are much more volatile than ES, I needed to adapt.  For example I need to use larger stops and to use larger stops I need larger targets and to get larger targets I need to focus on the bigger picture and trading with the bigger “move” (I avoid the “T” word). I also have to trade 1 lot because the Euro leverage is so high.

At first I just watched, then I started taking trades on sim.  And so far the results are encouraging.  I decided that I’d do this for 2 weeks and if the results are positive I’ll trade it with real money.  So the challenge is on.  I’ll report back on this as I go.

One unexpected advantage of this experiment is that I’m preoccupying myself and I do not get that urge to put on a trade that I get when I stare at ES all day.  As a result I’ve taken on average 1-2 ES trades per day and I’m averaging around 2pts for 1 contract per day.  Which is my goal and is better than I did the last two weeks of January.

All this is experimental and it’s very challenging but I’m enjoying it.  And even if I trade Euro on sim forever, if it helps improve my ES trading then that’s a good thing.

• Trading 2 lots made me more risk averse since my size was bigger
• I started getting lazy with entry timing by entering half position and planning to add on to it at a better price
• I scaled my first lot early in several cases which effectively “cut winners short”
• In a couple trades, I neglected to keep the tight stops I’d been using due to overconfidence in my read

The last point was the biggest factor.  When we broke out of the multi-day trading range to the upside, I expected follow through and bought pullbacks and give it plenty of room and added to my position.  This is my old method of trading.  It’s not compatible with my new plan.  Had we had continuation I would have had a major win and done great.  But it didn’t.  And I took a big loss.  Then then the next day we broke to the downside and since we failed on the breakout higher I expected us to break down to 1297.  I shorted pullbacks, scaling in to build a large short position that I eventually capitulated.  Double whammy.

This was good punishment for reverting back to my old methods and gives me more confidence in my new plan.  Had I followed the new plan I would still have had 2 losing days, but the losses would have been minimal.

At this point I don’t want to go to 1 lot again because I think trading multiple lots gives a better edge (can stay in longer).  So I will take the best setups with real money, ideally 1-2 per day and the rest on sim.  Two losses per day will limit my daily loss to around $250 and I can live with that.  So I shouldn’t have fear right?  I’m sure I still will.  But I hope it’s manageable.

For the sim part, I’ve been abusing sim lately, using it to control my urges of wanting to put on risky trades.  I need to curb that.  I need to treat sim as real money and be very selective.  So my focus for the next two weeks are to have profit results sim & real.  I need to learn to be patient and sit out when there is no edge.

So a bit frustrating the last two weeks but I’m still confident in my approach.

But that’s not what this post is supposed to be about.  In my opinion the market is not behaving normally.  I see that many other traders are not doing well.  But profits & losses aside, it’s just frustrating.

So I start wondering.  What if some traders know something we don’t.  What if they drove price up in order to unload?  What will happen if some bad news comes out?  There is so much volume up here that if bad news does come out, we could get a very powerful move back down.  And if the bad news doesn’t pan out, we could get a very powerful move up.

I read yesterday that the COT report showed the largest net short position on the Euro in a long time.  And then the Euro rallied.  That could have played a role in ES moving up.  But those Euro shorts could be hedging against a real disaster and if that disaster comes the hedgers will be protected and the speculators will have huge losses.

News is coming out about Greece and it’s not good.  Now Merkel is not so enthusiastic.   Soros expects Greece to exit the Euro.  I think it’s about to hit the fan.  And with ES extended so far up I think it’s not going to be pretty.

Now I’m not swing trading so really that was all just curiosity on my part, so what does it mean for day trading?  All I know there is my trading isn’t working the past few weeks, partly because the setups haven’t panned out and partly because I’ve made mistakes.  So I’m cutting back and being very careful, even just watching.  I think the best bet here is to wait until ES makes its move and then go with it.  As we got faked out twice we have to be patient and wait for the real move.  Which should be obvious.

So if you’re not doing well lately don’t fret it.  Just relax a bit, the markets will be there next week.  If my kids weren’t in school we’d take a vacation right now, but that’s not possible.  So maybe a mental vacation.

Ironically, the very same morning that he asked about that, I got zinged twice by the Bund for trailing my stop too closely.

I try to trail them 1-2 ticks beyond the last pullback high/low.  On the first Bund trade it didn’t hit my hard stop but it did hit my mental stop and I bailed.  Which was the right thing to do.  But it still sucks.

On the second, I try to get to no risk ASAP.  Since no risk was 1 tick beyond the last pullback high, it was a logical spot.. for a lot of other people.  The Bund poked up, hit the stops, and kept on truckin’ with me sittin’ on the sidelines.  I watched in horror as it went on to hit my original target.  That incident had a psychological impact that lasted the rest of the day.

What I find is that ES often respects levels to the tick.  Bund and other markets with more volatility do not.  So from now on I’ll trail my Bund stop 3 ticks beyond and see if that doesn’t work better.

I will also say that last week I was stopped by a tick or two in ES trades several times.  So far I think that’s my fault for not keeping them beyond key levels.  So I’m paying attention to that as well.  But overall I think tight stops on ES has saved me more than it has cost.

Yesterday I took a short that would have worked had Euro news not come out which caused it to spike up.  In this case I was glad to have a tight stop as I only lost 6 ticks.

Personally I have found the past 6 days very frustrating and I’m not making money.  So I’m slowing down a bit, being more selective, and hoping things will pick up soon.

But then.. starting February Velocity has $30/month and requires 25 round turns.  That’s a bit more steep especially for someone who is starting out and/or trading a lot on sim.

These fees are probably designed to stop people from “freeloading” by getting free data and trading on sim, as any not-yet-profitable trader should be doing.  But the worse is once a fee like this appears, it tends to grow.  Think ATM fees.  They started at $0.50 then $1.00 and then $1.50 and some are now over $3.50.  Soon all brokers will have these fees and then they’ll raise them.  I can see them at $50/month and 50 round turns minimum, etc.

While I trade enough to meet the minimums, I do have two broker accounts so I have to make sure I do the minimum on every one each month.  And if I go on vacation for a month I’ll get socked with the fee.. twice!

If you’re trading on sim watch out for this fee and choose your broker accordingly.  I wouldn’t necessarily switch brokers because of this because I think they’ll all have it soon.

We can show our displeasure with these fees by complaining about them and choosing brokers without them, at least until they all have them.  That’s about all we can do.  So I won’t recommend Velocity for new traders any more unless you’re ok with a $30/month fee.

If one starts with a $10k account and uses 2 pt stop, the max risk one would take is 2.22% and if the average loss is $62.50 due to trailing the stop, the avg loss would be max 1.39%.  This comes on week 7 trading 4 contracts.  After that the % risk decreases, meaning one could increase their size by more than 1 lot if they wan to, but I like the idea of having my risk < 1%.

Once one is up to 10 contracts, the monthly income would be $21k which is $251k annually.  After that the numbers go ballistic and get rather unbelievable. By 20 contracts the yearly income would be $500k.

There are a few observations here:

This doesn’t include any kind of drawdown simulation.  Losing weeks may happen.  If so you’re looking at your avg loss times the number of losses you will accept per day (your daily stop limit) times a few days, whatever gets to your weekly loss limit.  If we say 3 stop outs per day and 3 losing days a week that could be 9*1.39% = 10% of your account.  So that’s something to pay attention to.  That would have a big impact on psychology.

If one starts with a larger account size, the % risk would be considerably smaller.  Starting with 20k would put the max risk at 1.58% and max avg risk at 1%.  That extra $10k to start with makes a big difference in your risk.

If one uses a stop larger than 2 pts or an average loss greater than 1.25 pts, then the % risk would be much higher and you’d want to start with more money or increase size more slowly (like once a month instead of every 2 weeks).  For example with a 4 pt stop and starting with $20k your max risk goes over 3%.

If one makes only 1 pt/day, it’s all still possible it just cuts the profits in half (obviously).  The % risk goes up to 3% so one would want to increase size more slowly.

The hardest part is becoming consistently profitable with 1 contract with a well-defined risk.  It doesn’t matter if you average 1 pt a day or 2 or 3.  It doesn’t matter if your stop is 2 pts or 3 or 4.  All that matters is that you’re consistently profitable.  Even a little bit.  Now the consistently part is key because a few weeks or a month isn’t enough to know.  For example in my case I’ve done well so far this year but the market has been relatively quiet.  What will happen when the market gets more volatile?  I expect the winners will be bigger but I may stop out more often (which is the case with the Bund on sim, I was stopped out of many winning trades due to the volatility).  So to know you’re consistent takes a long time.  The last thing you want is to increase size quickly and the market changes and you go into a drawdown.  Drawdowns are really damaging psychologically.  Which is one reason for my rule where if I loose money I will take off at least 1 contract.  In my case I was consistent last year with wider stops so that increases my confidence that I’ll continue being profitable even when volatility picks up.  But it’s not sure.

The next hardest part is getting up to 8 contracts.  After that the % risk continues going down and the 1 contract increase gets proportionally smaller.  With 8 contracts you have a lot of scale opportunities and can keep 1 or 2 on for the major targets.  Everyone agrees you can make more per contract trading 4 or more than you can trading 1.  So theoretically the avg profit/contract will increase as size is added, but to keep it simple I didn’t include that in my simulation.

The final question is this:  After one is trading 8 it gets easier and easier as risk goes down and profits compound and grow exponentially.  What’s the limit?  When does it become hard to get filled?  When is the psychological pressure of risking several thousand on each trade too high?  And does one even need to push the limits this far?  Theoretically, according to this spreadsheet FT & Rob could be trading 200 lots.  But I’m sure there are other factors that will come into play when one gets to trading large size.

I find this simulation very motivating.  Even if my results don’t play out as well as the spreadsheet, I’m confident that the basic ideas of slowly increasing size are correct and it may take longer but in the long run it will work.  I’m positive of it.

Here is the excel file so you can do your own simulation.  Feel free to share your results and your plan.  If you’re not yet consistently profitable, I hope this post has motivated you to achieve this goal.  If you need help, let me know.  I am not an expert at this and my results pale in comparison to many others, but I’ve struggled for a long time and so I know what it’s like and may be able to help.

Excel file: Position Sizing

Trading 1 lot was very difficult.  I’ve been trading 2 for over a year and it was hard to adapt to 1.  I think that was more a consequence of the slow low-volatility we’ve seen so far this year.  Many times I had 2 pts open profit and stopped out breakeven.  Many times I wanted to scale but I knew if I did I would be out.  I think it’s very hard to be profitable trading 1 lot.  It’s a bit more like rolling the dice.  You put your stop & target and roll’em.  With 2 lots you can be more active.  You can scale if you need to.  The converse of this is true too:   With 2 lots it’s much easier to cut winners short in the name of scaling or hedging.  so trading 1 lot is a good exercise for this because with 1 lot your R:R must be there.  I plan to continue trading that first lot the same way, whether I have 1, 2 or more total.  I want a minimum 2:1 on first scale but if I see absorption or weakness I will take the scale sooner.  I hope that makes sense, it’s hard to describe.  But I will say I’m very glad to have passed the 1 lot trial period.

The results are quite good.  Trading real money I averaged 3 pts/day.  My sim trading was not so good.  I can give two reasons for that:  Any good setup was taken with real money, leaving the “risky” setups for sim.  I tried the Bund on sim.  I haven’t traded the Bund in a long time, when the interest rates where going crazy I switched Bund for Stoxx.  Over Christmas I mistakenly decided that if I look for specific setups I could watch Bund in addition to Stoxx & ES.  The sim results show that it’s not the case.  Maybe later when I have more experience I can try the bund again, but for now I think it’s best to focus on one market, or in the case of ES & Stoxx, two very correlated markets.  I do Stoxx in addition to ES for the European morning because sometimes Stoxx gives a more clear picture due to more liquidity and volume at that time.

Yesterday Dalton did a webinar on a new book that’s out called Thinking, Fast and Slow:

I haven’t seen the webinar but I did start reading the book.  So far it’s excellent.  I can appreciate just why things look so simple in hindsight but during the stress of trading they look complicated.  As I mentioned, I need to focus more.  I need to stop multi-tasking and really focus & concentrate.  The book cites many examples of how we can be distracted and make bad decisions as a result.  I just started the book but I’m really enjoying it so far and I highly recommend it.

My plan is to increase my size by 1 contract every 2 weeks as long as I’m profitable. This is a bit like the Al Brooks approach where he says to make 1 pt consistently and you can have a $100k/year income.  Last year I was going for big wins and would be proud whenever I got 10 pts in a single day (at 2 contracts that would be 5 pts/contract).  But I was taking a lot of risk to get that, and a few times lost 10 pts in a day, sometimes more.  That weighed pretty heavily on me psychologically.  By using small stops and accepting that I can be wrong 60% of the time and still do quite well, it’s much less stressful.

A criteria for increasing size will be to have a profit factor of 1.5 or greater over the past 2 weeks.  I want it to be obvious I’m profitable and not take chances.  If I loose money I will decrease my size by 1.  If my profit factor is between 1 & 1.5 then I’ll stay at the same size.  2 lots is enough to pay the bills so I’m not going to rush it.  But at the same time I really hope to do more than just pay the bills.  The good thing about this plan is that it allows me to use the profits from the week before to cushion the impact of adding a contract.  I’ve been wanting to do this for a while but I never had my risk under control.   I think I’ve made a lot of progress in this area and am much more willing to accept losses as a necessary thing.  And I think I’m finally ready.  But one step at a time.

So that’s how I did.  I hope you did well.  If you feel like sharing your performance & plan for 2012 please do.

Enjoy your long weekend.

The computer is no easy task.  I do not have a dedicated trading PC so my PC always ends up with software installed that I no longer used or remnants of software that I’ve installed and uninstalled.  So I reinstalled windows from scratch.  I haven’t done this in 2 years so I figured it was time.  I underestimated how much work it’d be.  Especially reconfiguring all my applications.  But I took advantage to upgrade some of the software I use to the latest versions.  A lot of work but if this holds me for 2 years it’ll be worth it.

I also reinstalled my charting applications from scratch.  Their databases were bloated and it’s best to start the new year with a clean install.  This means reconfiguring lots of things such as audio alerts and preferences so more work but worth it to have a lean machine.

The house has some small things that have been put off and a week without live trading is a good chance to catch up.  I say without “live trading” because I still have some studies I’m working on to backtest ideas and prepare for the new year.

And our lives.. it’s time for the New Year’s Resolutions.  Mine are always similar:  Spend more time with the family (until the kids drive me crazy enough that I spend less time).  Less time spent unproductively at the computer (surfing).  I remind myself to eat less sugar (cookies, cakes, etc.) see “Sugar the Bitter Truth” if you do not know how sugar is a toxin.  This video will motivate you to reduce your sugar intake.  I also remind myself to exercise regularly.  With the exception of the week before Christmas, I’ve been doing runs / hikes in the woods 4-5 times per week for several months now and it’s really great.  So I just need to continue now in the cold wet winter.

I enjoy this “downtime” and will be very refreshed for the first day of trading in January (the 3rd).

Happy Holidays!

Second, I did not trade well today.  I reviewed my trades with another trader and my entries were rushed.  My biggest weakness is being too quick.  My wife tells me the same thing.

Today I was not having discipline problems but rather just not seeing it properly.  Ok I think Trade 2 was partly a revenge trade but I really believed in a long there.

And I was also unlucky.  I had two stop losses that were 2 ticks off the high/low of the move!  That usually doesn’t happen twice like that.  Could be bad luck or holiday trading who knows.

But what I wanted to share is this:  Even though I traded badly, misread the market, was early, and was unlucky, I still finished positive!

How?

Because one winner made up for the 3 losses!

This is exactly how I want to trade.  Well I don’t really want to start every day with 3 losses, but I do want losses to be so small I don’t care that much and I want winners to make up for them.  Instead of the other way around.

I’m quite happy with my day today because it gives me confidence that I’m on the right track with this Risk/Reward idea.

This is very familiar to me because this is how I’ve been trading for the past couple years.  I typically used a 6 pt stop and have even taken 10 pt losses (about $500/contract).

This can “work”, but is it optimal?  I have been trading 2 contracts for 2 years now because I was not comfortable increasing size knowing that at $500/contract, a $2k loss could happen any time.  And what if I had two $2k losses?  It’s bound to happen.  So that fear kept me at 2 contracts.

Even trading 2 contracts, I’m still scared because a $1k loss could be around the corner.  So every time I put on a trade I know this could cost me $1k.  This is a bit stressful.  The result is I’d scratch trades that came back to my entry, and I scratched a lot of winners that way.  And I’m convinced that this isn’t the best way for me.

Lately I’ve been learning a lot from RomaTrader & GoldTrader740 on Twitter and how they use small stops, 2 pts on average.  RomaTrader will aggressively trail his stop so I’d say his average loss is probably much less, I’d guess around 1 pt. He’s not fearful, when he sees a good opportunity he takes it.  There is a lot to learn from these guys.

RomaTrader has made a very strong case for tight stops and says you can just re-enter if you want so best to just get out.  So why wouldn’t one just stop out at -2 and look for another entry?

Commissions is one reason.  Every time one does that it costs $3.80/contract (or more depending on your broker).  So that weighs in the decision making, at least subconsciously.   When I’ve tried using “tight” stops, it was usually 4 pts.  And when I stop out -4 and re-enter, I usually re-enter at a worse price than my stop out, meaning it would have been better not to stop out.  So I had a delima and that’s how stops got to be more flexible and quite large.

What I learned from these two traders is that my timing was off.  I knew I was always too early.  GoldTrader says to watch and see how it trades there.  You might miss a few but you are less likely to be early.  Entering early requires a bigger stop.  If one enters late, one can use the recent high/low for the stop.  So one advantage is smaller stops.  The disadvantage is missing a few.  There’s no perfect answer here so everyone has to find out what works best for them.

For the past month I’ve been trying my best to use 2 pt stops and trail aggressively.  It hasn’t been easy and my performance has decreased a bit.  But I really feel like I’m on the right track.  When I know a trade will cost me at most $250 for 2 contracts, I have less fear to take it.  As soon as it moves my way I trail my stop and then my risk becomes $100 or even $0.  When a loss is on average $100 and winners are $300-$500, I really don’t care about taking losses.

At least in theory.  In reality I really hate losing and I hate being wrong.  But I am making progress in accepting this reality.  And once in a while a really good R:R comes up where I can risk 3-4 ticks with a potential reward of 4 pts.  These types of trades don’t have to win often to be profitable.  So I feel I must take these.  One winner will make up for several losers.

Lately I compute the R:R for every trade and if I can’t get 2:1 on the first scale I will pass on the trade.  As a result I’m taking less trades, but so far the results are encouraging.  My results are improving each week.

I’m rewriting my trading plan again, it’s a never-ending process.  But with input from RomaTrader & GoldTrader, I really think I have a plan that will work well.  I’ll trade this plan in January without any fear.  My max loss will be 2.5 pts/contract and I’ll have loss limits for each session, day,  & week.  I’ll keep detailed records on every trade so I can track my progress of each setup.  I’ll have a written plan before the start of each session and I’ll only trade my setups. I’ll review my trades every day.

I’m really excited about this and I can’t wait for January 2.  In the mean time I’m working on my plan, practicing on sim, working on some programming projects, and just enjoying some time off.