Setting Objectives Continued
In this next section of questions, I will attempt to determine what my objectives are so I can better aim my efforts in developing a system.
What is your advantage or edge in trading? What is the particular concept that you are trading that gives you an advantage?
Later on in the book, Tharp gives a few examples of trading concepts. Trend following, fundamental analysis, seasonal tendencies, spreading, arbitrage, neural networks, and what he calls "there is an order to the universe" are the concepts he lists. I really think I will be engaging in some for of trend following, as it simply works. I'm also reading Way of the Turtle by Curtis Faith right now, so perhaps my eagerness to use trend following is a result of that reading. In his book, Faith describes his participation in an experiment in the early 1980s by 2 successful futures traders. In this experiment, Richard Dennis and Bill Eckhardt attempt to train a group of non-professional traders to use a proven trend following system. The results are surprising in that all the participants were taught the same system, but some failed and some prospered spectacularly. I haven't finished the book, but I think the reason for the disparity in performance is the psychological makeup of the participants. Some could work through the negative aspects of trend following and stay true to the system they were taught while others could not.
Anyhow, I'm sold on trend following right now as the way to trade. I'm also interested in contra-trend trading, but I'll need to do more research on that.
How much money do you have personally? How much of that money could you afford to lose? For example, most funds stop trading at 50%. How about you? How much risk can you afford to take on a given trade?
I'm not trading for a living so technically I can afford to lose all of my risk capital. I'd like to see what I can do starting off with $100 in my FX account. I don't want to risk any more than $1 on each trade. It would take 100 consecutive losses to put me out of the game. My idea is to find a system that can give me a positive expectancy with minimized drawdown, but with trend following, the drawdown can be psychologically devastating. One of the examples in Faith's book is of cocoa futures trades in 1999. A trend following system would have resulted in 17 consecutive small losses until encountering a big winner that would have put a trader in positive territory. I would really need to have faith in my system to handle that sort of losing streak.
How much money do you need to make each year? Do you need to live off that money? What if you don't make enough to live off? Can you make more than you need to life off so that your trading capital can grow? Can you stand regular withdrawals from your trading capital to pay your monthly bills?
Again, I'm not doing this to make a living. Its more of playing a game for me, one that, if I'm successful, I can scale up and use to really supplement my income. I have a full-time job and can stand to lose all my trading capital without any negative repercussions in my life.
Are you being realistic, or are you expecting to trade like the best trader in the world? For example, supposed you have a very good system that is right half the time and gives you profits that are twice as large as your losses. In that system, just be chance, you could still easily have 10 losses in a row. Your system is still working as expected, but you could easily have 10 losses in a row. Could you tolerate that?
I know from experience that I definitely will not be trading like the best in the world. In fact, I actually expect to lose, maybe even all the trading capital. This is an extremely difficult venture in which there are very few winners, and even those winners will experience disaster occasionally. I read Reminiscences of a Stock Operator about Jesse Livermore, one of the best traders to ever live. He went broke several times in his career, the last of which prompted him to commit suicide. I can only hope that I can tolerate 10 consecutive losses, but I won't know until I get there.
Do you have the time to trade short term?
Given that I work full time, I won't be able to sit in front of the computer and trade short-term. I may be able to create an automated system that trades for me, and so I could remotely engage in short-term trading. That's not necessarily my goal right now, but it could definitely become a goal.
How much social contact do you need?
I'm an introvert by nature, so I really don't need a great deal. I like having someone to talk about my ideas with, but I don't need to be with people to feel happy.
Can you work by yourself day after day? Do you need one or two other people around, or do you need a lot of other people around? How much do those other people influence you?
I could work by myself. I'd prefer to have a handful of other people to talk to about my ideas, but not anymore than maybe 4 or 5. I don't think they would have a tremendous amount of influence on me. I like to chart my course and stick with it until I determine I need to change it.
I imagine Tharp is asking these last 2 questions of someone who is intending to trade full-time. Of course, they don't directly apply to me right now in my current ambitions.
In summary, what do you expect to make each year as a percentage of your trading capital?
Given that I don't exactly know what I'm doing, I'd be happy to not lose money after a year of trading. Tom Basso, the trader that Tharp is interviewing, answered between 20 to 40%. Basso is a professional and I'm not, so my goal is to make 10%. Very low, but still ambitious for a rank amateur.
What risk level are you willing to tolerate in order to achieve that?
Basso answered with 20%, about half the potential gain. So I guess I'll say the same thing, half the potential gain, or 5%.
What is the largest peak-to-trough drawdown you are willing to tolerate?
Basso answered 25%, so I'll go with that as well. I feel kind of stupid mimicking his answers, but as a newbie, I don't know what the answer really is. Once I go through a live-fire experience I should have a much better idea of what my real answers are.
How will you know your plan is working, and how will you know when it's not working? What do you expect from your system in various kinds of markets? Trending? Consolidating? Highly volatile?
With a trend following system, it could be hard to tell when the system is working given the possibly of a successful system still generating a large number of losses. My plan will work when I execute trades precisely as the system specifies despite the results. If the system is well designed with positive expectancy, then in the long run it will work. A trending market will obviously be good for a trend following system. A consolidating market will probably result in a few small losses and a volatile market will lead to a lot of whipsawing and lots of small losses.
The next section in Setting Objectives is working through Trading Ideas. I'll get to that next time.
What is your advantage or edge in trading? What is the particular concept that you are trading that gives you an advantage?
Later on in the book, Tharp gives a few examples of trading concepts. Trend following, fundamental analysis, seasonal tendencies, spreading, arbitrage, neural networks, and what he calls "there is an order to the universe" are the concepts he lists. I really think I will be engaging in some for of trend following, as it simply works. I'm also reading Way of the Turtle by Curtis Faith right now, so perhaps my eagerness to use trend following is a result of that reading. In his book, Faith describes his participation in an experiment in the early 1980s by 2 successful futures traders. In this experiment, Richard Dennis and Bill Eckhardt attempt to train a group of non-professional traders to use a proven trend following system. The results are surprising in that all the participants were taught the same system, but some failed and some prospered spectacularly. I haven't finished the book, but I think the reason for the disparity in performance is the psychological makeup of the participants. Some could work through the negative aspects of trend following and stay true to the system they were taught while others could not.
Anyhow, I'm sold on trend following right now as the way to trade. I'm also interested in contra-trend trading, but I'll need to do more research on that.
How much money do you have personally? How much of that money could you afford to lose? For example, most funds stop trading at 50%. How about you? How much risk can you afford to take on a given trade?
I'm not trading for a living so technically I can afford to lose all of my risk capital. I'd like to see what I can do starting off with $100 in my FX account. I don't want to risk any more than $1 on each trade. It would take 100 consecutive losses to put me out of the game. My idea is to find a system that can give me a positive expectancy with minimized drawdown, but with trend following, the drawdown can be psychologically devastating. One of the examples in Faith's book is of cocoa futures trades in 1999. A trend following system would have resulted in 17 consecutive small losses until encountering a big winner that would have put a trader in positive territory. I would really need to have faith in my system to handle that sort of losing streak.
How much money do you need to make each year? Do you need to live off that money? What if you don't make enough to live off? Can you make more than you need to life off so that your trading capital can grow? Can you stand regular withdrawals from your trading capital to pay your monthly bills?
Again, I'm not doing this to make a living. Its more of playing a game for me, one that, if I'm successful, I can scale up and use to really supplement my income. I have a full-time job and can stand to lose all my trading capital without any negative repercussions in my life.
Are you being realistic, or are you expecting to trade like the best trader in the world? For example, supposed you have a very good system that is right half the time and gives you profits that are twice as large as your losses. In that system, just be chance, you could still easily have 10 losses in a row. Your system is still working as expected, but you could easily have 10 losses in a row. Could you tolerate that?
I know from experience that I definitely will not be trading like the best in the world. In fact, I actually expect to lose, maybe even all the trading capital. This is an extremely difficult venture in which there are very few winners, and even those winners will experience disaster occasionally. I read Reminiscences of a Stock Operator about Jesse Livermore, one of the best traders to ever live. He went broke several times in his career, the last of which prompted him to commit suicide. I can only hope that I can tolerate 10 consecutive losses, but I won't know until I get there.
Do you have the time to trade short term?
Given that I work full time, I won't be able to sit in front of the computer and trade short-term. I may be able to create an automated system that trades for me, and so I could remotely engage in short-term trading. That's not necessarily my goal right now, but it could definitely become a goal.
How much social contact do you need?
I'm an introvert by nature, so I really don't need a great deal. I like having someone to talk about my ideas with, but I don't need to be with people to feel happy.
Can you work by yourself day after day? Do you need one or two other people around, or do you need a lot of other people around? How much do those other people influence you?
I could work by myself. I'd prefer to have a handful of other people to talk to about my ideas, but not anymore than maybe 4 or 5. I don't think they would have a tremendous amount of influence on me. I like to chart my course and stick with it until I determine I need to change it.
I imagine Tharp is asking these last 2 questions of someone who is intending to trade full-time. Of course, they don't directly apply to me right now in my current ambitions.
In summary, what do you expect to make each year as a percentage of your trading capital?
Given that I don't exactly know what I'm doing, I'd be happy to not lose money after a year of trading. Tom Basso, the trader that Tharp is interviewing, answered between 20 to 40%. Basso is a professional and I'm not, so my goal is to make 10%. Very low, but still ambitious for a rank amateur.
What risk level are you willing to tolerate in order to achieve that?
Basso answered with 20%, about half the potential gain. So I guess I'll say the same thing, half the potential gain, or 5%.
What is the largest peak-to-trough drawdown you are willing to tolerate?
Basso answered 25%, so I'll go with that as well. I feel kind of stupid mimicking his answers, but as a newbie, I don't know what the answer really is. Once I go through a live-fire experience I should have a much better idea of what my real answers are.
How will you know your plan is working, and how will you know when it's not working? What do you expect from your system in various kinds of markets? Trending? Consolidating? Highly volatile?
With a trend following system, it could be hard to tell when the system is working given the possibly of a successful system still generating a large number of losses. My plan will work when I execute trades precisely as the system specifies despite the results. If the system is well designed with positive expectancy, then in the long run it will work. A trending market will obviously be good for a trend following system. A consolidating market will probably result in a few small losses and a volatile market will lead to a lot of whipsawing and lots of small losses.
The next section in Setting Objectives is working through Trading Ideas. I'll get to that next time.
posted by Young Pip at 5:23 PM
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