Do Trading Systems Work?
I’m staying on the trading system subject today because I was reading a transcript of an interview performed yesterday between FXSTREET and Markus Heitkoetter, President of Rockwell Trading. The subject was "Trading Systems: Do They Really Work?"
Markus’ most important comments follow:
- - Like all other ventures, "having a plan" will give you an edge
- - A trading system consists of a set of rules; in it’s simpliest form a trading plan (or system) has entry and exit rules. More sophisticated trading plans include position sizing and money management
- - You MUST have a trading plan to succeed
- - At a minimum your trading plan should consist of entry and exit rules
- - The 2 types of exit rules are stops (to protect your capital) and profit targets to realize profits
- - The "lack of the trading plan" is the No. 1 reason why traders fail
- - The easiest way to follow a trading plan is to automate it
- - Trading with a system removes emotions from trading
- - If you’re looking for trading action, don’t choose a trend-following system.
Here are the top six reasons why traders fail:
1. Lack of a Trading Plan
2. Lack of Discipline to Follow the Plan
3. Failure to Control Emotions
4. Failure to Accept and Limit Losses
5. Lack of Commitment or stop trading using your system after the first loss
6. Over-Trading
Trading a system helps you overcome the top six mistakes
38 steps to becoming a trader
Brian mentions that this has been on the internet for years but it’s the first I’ve seen of it. It’s pretty good. I can and you should also be able to relate. Thanks for the info Brian.
38 steps to becoming a trader
They are as follows:
1. We accumulate information – buying books, going to seminars and
researching.
2. We begin to trade with our ‘new’ knowledge.
3. We consistently ‘donate’ and then realize we may need more knowledge or
information.
4. We accumulate more information.
5. We switch the commodities (products) we are currently following.
6. We go back into the market and trade with our ‘updated’ knowledge.
7. We get ‘beat up’ again and begin to lose some of our confidence. Fear
starts setting in.
8. We start to listen to ‘outside news’ and to other traders.
9. We go back into the market and continue to ‘donate’.
10. We switch commodities (products) again.
11. We search for more information.
12. We go back into the market and start to see a little progress.
13. We get ‘over-confident’ and the market humbles us.
14. We start to understand that trading successfully is going to take more
time and more knowledge than we anticipated.
MOST PEOPLE WILL GIVE UP AT THIS POINT,
AS THEY REALIZE WORK IS INVOLVED.
15. We get serious and start concentrating on learning a ‘real’ methodology.
16. We trade our methodology with some success, but realize that something
is missing.
17. We begin to understand the need for having rules to apply our
methodology.
18. We take a sabbatical from trading to develop and research our trading
rules.
19. We start trading again, this time with rules and find some success, but
over all we still hesitate when it comes time to execute.
20. We add, subtract and modify rules as we see a need to be more proficient
with our rules.
21. We feel we are very close to crossing that threshold of successful
trading.
22. We start to take responsibility for our trading results as we understand
that our success is in us, not the methodology.
23. We continue to trade and become more proficient with our methodology and
our rules.
24. As we trade we still have a tendency to violate our rules and our
results are still erratic.
25. We know we are close.
26. We go back and research our rules.
27. We build the confidence in our rules and go back into the market and
trade.
28. Our trading results are getting better, but we are still hesitating in
executing our rules.
29. We now see the importance of following our rules as we see the results
of our trades when we don’t follow the rules.
30. We begin to see that our lack of success is within us (a lack of
discipline in following the rules because of some kind of fear) and we begin
to work on knowing ourselves better.
31. We continue to trade and the market teaches us more and more about
ourselves.
32. We master our methodology and our trading rules.
33. We begin to consistently make money.
34. We get a little over-confident and the market humbles us.
35. We continue to learn our lessons.
36. We stop thinking and allow our rules to trade for us (trading becomes
boring, but successful)
and our trading account continues to grow as we increase our contract size.
37. We are making more money than we ever dreamed possible.
38. We go on with our lives and accomplish many of the goals we had always
dreamed of.
Most traders will identify with this list and should be able to place
themselves within these steps. Keep in mind that very few people progress
through these steps in an orderly fashion. Developing your trading skills is
an iterative process. For example, you may reach Step 13., find that
although you were making money, your basic premise for trading was flawed
(you might have been benefitting from the bull market, rather than your own
trading prowess and then have been rudely awakened when the market entered a
bear phase) and you may drop back to Step 4. and start ‘climbing’ the steps
again. Having the proper mindset, attitude and psychological makeup becomes
increasingly important as you progress through the steps. The focus of the
earlier steps is on external issues, i.e. developing proficiency in the
mechanics of trading while the focus of the latter steps (particularly from
Step 30, on) is on internal issues, i.e. improving ourselves mentally and
psychologically, maturing as traders.
Designing a Profitable System
Thanks to Greg for a great post. Read this.
I believe anyone can design a profitable system, as long as one understands market principles, what goes up, must come down faster. Twice as long to go up and half as much time to come down. I believe that if I am short the market, I need to trail my stops tighter to lock in profit than when I am in a long position. As for as my original stop, all my systems risk the same amount — small. I use to believe that the 3% rule was nonsense with a $10k account. But in the S&P and currencies, I daytrade with less than 2%. I simply cannot get wiped out that way and my profits are at least twice as much the risk in the S&P when trading one contract.
How much am I going to make? I am asked that repeatedly. I can always tell how much experience a trader has by that question. It is not what you make that is important, but what one does not lose. After I have a profit of so many pips in a daytrade, the most important ingredient to my trading takes place, the break-even stop. I have not read any books giving much attention to this concept. What a stressless (for the most part) feeling it is after I am at break-even.
The best way to trade is to find something simple, that works most everywhere and then become very consistent in your approach. Develop your own system, test it, then stick with it. Other people’s systems may work well for them, but probably will not be compatible with your psychological make-up."
* * *
From Successful Anonymous Trader:
You simply cannot have any confidence if you do not have a method or way of identifying trades along with money management guidelines. You’re lost in the woods, so so speak. I was there for many years. What did I do? This may help a lot of you:
I threw out 99% of all the crap I learned about oscillators, divergences, Elliott Wave, cycles, timing, seasonals, Gann, pitchforks, volume, Fractals, RSI, stochastics, overbought/oversold (this is a good one–the stock indexes, currencies and cotton for example everyone said were overbought and topping in February and March this year). Look at what they did. Needless to say, I don’t pay any attention to this anymore either, etc., etc. The list goes on to infinity almost. I went back to the basics. I went back to simple chart patterns, (a simple moving average and trendline now and then for a visual aid.)
I came up with a low risk money management plan and put it together with trading with the trend and, presto, an effective and time tested trading plan. The plan is simple and has worked since trading began and will last me a lifetime. What a relief not to have to spend countless hours every night trying to find a ndw way to trade. I am sick and tired of that after 7-years.
I believe at becoming an expert at one market nd its behavior and then putting all your skills and energy to work in a concern(traded) manner. Get good at that market and trade the heck out of it. Increase your size over time and you’ll make more money with less effort. There are lots of professionals that do this. Look at some floor traders or locals that stay in the pit for many years trading one market exclusively.
One thing that I have learned this year, is that I am trying to cut back on the number of trades I take and be more selective and not trade in congestion as much as I did before. I miss some good trades out of congestion, but I save myself a lot of mental energy, buy myself some more free time during the day, and get better and more profitable trades.
My attitude is changing now to one or two good trades, and that is all I need to make my week ( a triple or a home run, so to speak). There are plenty of them during any given week.
Trading is fun. Once you have a method and money management in place, it allows you to concentrate on trading and not on searching and researching. That gets old and frustrating. Make it your goal to find a simple method for next year. One thing that you can hang your hat on will last you a lifetime. Trading is simple. Remember that it’s the Execution or Implementation of your trading plan that is the bigger challenge.
Most people make finding the method a big challenge. That is because there is so much junk thrown at traders. They feel like a child in a candy store and have to try every doodad in the place. When they are done, they are sick and never want to see another candy store (trading gizmo) again. They could have had the palin piece of milk chocolate at the front of the store (simple method price patterns) which would have done everything they desired and fulfilled all their needs.
I wish to all a great new year. I hope some will be able to end their journey in search of the holy grail or indicator that will turn their life around. Search for simplicity. You will be surprised what has been right under your nose all the time, right there in front of you on the chart or price bars. Pay attention to what they say they will will tell you everything. You need to listen and get to know them. It can be that simple.
Commodity Traders Club News (1997)
Rob Booker Analysis Tuesday
From fxcmtr.com:
1 Hour Chart
I really like this one. The trade would come on a close below the redline. The profit target is all the way down at 1.3020, or perhaps 1.3060 for more conservative traders. I would like to just use a 30 pip trailing stop on the trade.
; "Rob Booker")
Don’t Move Your Stops
Here is a quick lesson from Sam Shenker about moving stops which I’m sure we have all been guilty of.
As a trader one of the lessons I learned the hard way is to never move my stops against the position. One of the most common mistakes made by the novice traders is to move the stop against the position once the trade start going against him or her. As the trade keeps going against the trader and once again approaches the stop, what do most of traders do, they move the stop again, thus increasing an unrealized loss, but unrealized loss is still a loss and a real one at that. In order to become successful, a trader must learn that the initial stop most of the time is a correct stop, because if the stop is triggered it usually means that the trader is on the wrong side of the market and by moving the stop he or she only increases the loss. The reason why traders move stops is hope that the market turns around and goes in the direction of the trade, but hope has no place in the market, protective stops do. Remember: NEVER MOVE THE STOP AGAINST THE POSITION, BECAUSE BY MOVING STOPS AGAINST YOUR POSITION YOU ONLY INCREASE THE SIZE OF YOUR LOSS.
Understanding Market Structure
There is another decent article in Stock & Commodities magazine regarding market structures.
Sometimes I neglect to identify the underlying market structure before entering a trade. I’m hoping this post will help you and I.
This article identifies 4 market states:
1. High directionality – low volatility : prices moving steadily up/down with no or little reaction or correction. Trend following systems work fine in this scenario and oscillators will continuously give false signals.
2. High directionality – high volatility : trend is well-defined and corrections are deep and volatile. This scenario favors swing traders and counter-trend traders.
3. Low directionality – low volatility : no or little direction and moderate volatility. This is a very difficult environment to trade in and traders should wait for a new trend to ultimately emerge.
4. Low directionality – high volatility : no or little direction but deep swings. This market state favors swing, counter-trend, and short-term traders.
Click Read More to Continue reading.
March Issue of Stocks & Commodities
I picked up a copy of the March Issue of Stocks & Commodities magazine this weekend.
There is an article that explains the use of candlesticks and moving average crossover as a strategy. This is yet another setup strategy that I like for its simplicity. As long as you can chart 2 moving averages and identify candlestick patterns, you can use it.
The simple idea is that as moving averages crossover, the candlestick that forms during that crossover can be used to identify the possible direction of the market.
You can read a snippet of the article at http://www.traders.com/Documentation/FEEDbk_docs/ForexFocus/FOREXfocus.html
To read the full article, you need to buy the latest issue of Stocks & Commodities.
