Setting Objectives Continued
The final set of questions Tharp presents are specifically related to how a trader will go about the business of trading. Once again, I'll answer the questions as best I can.
What kind of markets do you want to trade? Is it appropriate to specialize? Do you want to trade only liquid markets or are there some illiquid markets you'd like to trade?
Primarily I want to trade the Forex market. It is extremely volatile and gives a number of opportunities to trade. I also like equities, but they take much more time to research I think. Eventually I'd like to do them both, but for now I want to focus on Forex.
To be even more specific, I want to start with the GBP/USD pair. From the beginning I wanted to trade this pair, probably because the GBP's exchange rate (1.6002) is larger than other pairs, meaning to take a position forces me to be more cautious.
Being a beginner, I'm only interested in liquid markets, so I won't be dabbling in exotic pairs or crosses. I'll leave those to the professionals.
What belief do you have about entering the markets? How important do you believe entry to be?
One of the ideas I love about trading in general is that the markets are composed of the hopes and fears of all of its participants, and with this collective psyche you attempt to connect. Your connection with the market allows you to be tuned in to its movements, to understand what it might be thinking, where it might be going. When you participate in trading or investing you are a part of the market.
I believe one can be successful in the endeavor of trading, but that the success will be hard-earned. I don't believe the market is necessarily an adversary to be contended with. I do believe that trading can be a key to self-awareness and discovery.
Entries are important, but having read Trade Your Way... already, I also know that having a high-percentage entry does not guarantee trading success. Some entries with a 40% success rate can be enormously profitable. Psychological resiliency is most important to help one stay objective and proper money management will ensure that one continues to have an opportunity to play the game.
Given your goals in terms of returns and drawdowns, what kind of initial risk stop do you want? If it's close, will you be able to get right back in the market so that you will not miss a move?
Part of the general canon of trader wisdom suggests that one always have a stop when a trade is on. Recently, however, I have come across some knowledge regarding Forex that makes me a bit leery to actually set a stop in a given trading platform.
A phenomenon known as "stop hunting" or "stop loss hunting" is the intentional movement of market prices by brokers to levels where a great deal of stops are placed (brokers know where your stops are when you put it on your trade) in order to close traders' positions. Forcing all of the stops generates revenue for brokers because they are trading against the traders' positions and forcing trader losses mean gains for them.
A Google search produces a litany of results, a lot of which express skepticism that the practice exists. Some feel their profitable positions are ruined because of stop hunting, others think unprofitable traders simply need a scapegoat for their poor performance and the brokers are to blame. Some acknowledge stop hunting but think its effect can be mitigated by placing stops away from the more likely levels. There are still other traders who use software plug-ins to mask their stops, or who trade on ECNs and thus avoid brokers altogether. Finally there is the group I think I may belong to, who believe that by not putting stops into a broker's platform, the broker doesn't know where your stop is, and therefore can't hunt it.
So when it comes to a question of initial risk stop, I will probably be using some kind of range indicator, but I won't be putting it into a platform.
How do you plan to take profits? Reversal stops? Trailing stops? Technical stops? Price objectives?
My initial thought is that I'll most likely be using some kind of trend trading system, so a reversal stop will be the most likely tool. While "you won't go broke taking a profit", you also won't realize the full potential of a winner. That's part of the trade-off of using a trend trading system; you won't get the confidence (i.e. "I was right") boost of lots of small victories, but you will hit the really big win on occasion, enough to hopefully dwarf the many little small losses sustained along the way.
What do you do in terms of money management (which I call "position sizing" in this book)?
I think I will most likely limit my exposure to a fixed percentage of equity, something like maybe 1%. I've also thought about maybe doing a fixed amount that represents a fixed percentage of my original capital, like $1 if I'm starting with $100. I'm sure as I get more into Way of the Turtle, I'll have a better idea of what I would like to do.
Next time I'll get into Chapter 4 of Trade Your Way..., which is about Tharp's 12 steps to developing a system.
What kind of markets do you want to trade? Is it appropriate to specialize? Do you want to trade only liquid markets or are there some illiquid markets you'd like to trade?
Primarily I want to trade the Forex market. It is extremely volatile and gives a number of opportunities to trade. I also like equities, but they take much more time to research I think. Eventually I'd like to do them both, but for now I want to focus on Forex.
To be even more specific, I want to start with the GBP/USD pair. From the beginning I wanted to trade this pair, probably because the GBP's exchange rate (1.6002) is larger than other pairs, meaning to take a position forces me to be more cautious.
Being a beginner, I'm only interested in liquid markets, so I won't be dabbling in exotic pairs or crosses. I'll leave those to the professionals.
What belief do you have about entering the markets? How important do you believe entry to be?
One of the ideas I love about trading in general is that the markets are composed of the hopes and fears of all of its participants, and with this collective psyche you attempt to connect. Your connection with the market allows you to be tuned in to its movements, to understand what it might be thinking, where it might be going. When you participate in trading or investing you are a part of the market.
I believe one can be successful in the endeavor of trading, but that the success will be hard-earned. I don't believe the market is necessarily an adversary to be contended with. I do believe that trading can be a key to self-awareness and discovery.
Entries are important, but having read Trade Your Way... already, I also know that having a high-percentage entry does not guarantee trading success. Some entries with a 40% success rate can be enormously profitable. Psychological resiliency is most important to help one stay objective and proper money management will ensure that one continues to have an opportunity to play the game.
Given your goals in terms of returns and drawdowns, what kind of initial risk stop do you want? If it's close, will you be able to get right back in the market so that you will not miss a move?
Part of the general canon of trader wisdom suggests that one always have a stop when a trade is on. Recently, however, I have come across some knowledge regarding Forex that makes me a bit leery to actually set a stop in a given trading platform.
A phenomenon known as "stop hunting" or "stop loss hunting" is the intentional movement of market prices by brokers to levels where a great deal of stops are placed (brokers know where your stops are when you put it on your trade) in order to close traders' positions. Forcing all of the stops generates revenue for brokers because they are trading against the traders' positions and forcing trader losses mean gains for them.
A Google search produces a litany of results, a lot of which express skepticism that the practice exists. Some feel their profitable positions are ruined because of stop hunting, others think unprofitable traders simply need a scapegoat for their poor performance and the brokers are to blame. Some acknowledge stop hunting but think its effect can be mitigated by placing stops away from the more likely levels. There are still other traders who use software plug-ins to mask their stops, or who trade on ECNs and thus avoid brokers altogether. Finally there is the group I think I may belong to, who believe that by not putting stops into a broker's platform, the broker doesn't know where your stop is, and therefore can't hunt it.
So when it comes to a question of initial risk stop, I will probably be using some kind of range indicator, but I won't be putting it into a platform.
How do you plan to take profits? Reversal stops? Trailing stops? Technical stops? Price objectives?
My initial thought is that I'll most likely be using some kind of trend trading system, so a reversal stop will be the most likely tool. While "you won't go broke taking a profit", you also won't realize the full potential of a winner. That's part of the trade-off of using a trend trading system; you won't get the confidence (i.e. "I was right") boost of lots of small victories, but you will hit the really big win on occasion, enough to hopefully dwarf the many little small losses sustained along the way.
What do you do in terms of money management (which I call "position sizing" in this book)?
I think I will most likely limit my exposure to a fixed percentage of equity, something like maybe 1%. I've also thought about maybe doing a fixed amount that represents a fixed percentage of my original capital, like $1 if I'm starting with $100. I'm sure as I get more into Way of the Turtle, I'll have a better idea of what I would like to do.
Next time I'll get into Chapter 4 of Trade Your Way..., which is about Tharp's 12 steps to developing a system.
posted by Young Pip at 1:55 PM
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