Saturday, September 6, 2008

The Weekend Trader (Saturday Edition)

I did get some decent sleep last night, although as my body is still slightly aligned with Eurex hours, I find my self awake earlier than I'd like this morning. So it's time to post a few thoughts triggered by this week.

Blog Perspectives - I do continue to peek at the blog stats every now and then to get a feel for whether there's sustained interest in my constant babbling, and if data means anything, the interest level continues to grow at a rate similar to Friday's PM ES climb -- and merely from word of mouth which is how I'm going to keep this. If you've recently chosen to look over my shoulder in this manner, I strongly encourage you to check out my July 25 post, which addresses why I choose to narrate to actual dollar results, especially since doing so goes against the grain of what I've done in other forums and has seldom been done on the web.

Over the past decade, I've looked for ways to break new ground in this industry, whether it be developing trader teaching simulation tools, filming my trading live unedited for multiple days, or simply posting candid commentary in daily or monthly industry publications ... some of which made the editors apprehensive and for which I had to fight to get published without edits.

Yet those are past lives. This effort is simply another attempt to further strengthen and perhaps bond a group of interested traders where I (and you) can share anything and everything at any moment ... with the exception that my trading focus is dedicated 100% to just that -- trading -- during the day.

Comments remain highly welcome and encouraged.

Integrity & Accountability - At this end, I've discovered that the blog helps push me and keep me accountable to someone other than myself ... for we can easily deceive ourselves (been there). And speaking of accountability, a reader recently asked me if I'd be willing to have this year's narrated results validated by an independent party. This was my response:

No problem on verification. My books have always been open to my past publishers, and once the race is over and the books closed on 12/31, we’ll find the best way to make that happen. Industry and broker integrity references will also never be a problem which I can email upon request.

In the meantime, I HAVE to keep believing every day that the fund is down substantially and trade accordingly -- else all is for naught -- and won’t personally view the balance again until 12/31 [see the July 4 “
Cornerstone” post]. At that point, we'll all find out whether the tree is a Chinese Bamboo or Elm.

Simply put, I feel strongly this business should be 100% about integrity and accountability, and that those with a public voice -- even with a personal trading diary such as this -- should carry a much higher standard than others. Anyone can hide in a chatroom or blog behind a fictitious name and share only partial -- or even worse -- false information. I've seen those perils firsthand -- including highly destructive battles of egos as people who think they can read a chart or two attempt to self-promote themselves to "guru" status -- and the damage they've inflicted on thousands of traders has been unfortunate and distasteful. There's of course some good stuff out there, but it remains in the tiny minority.

As I said when I started this new journey, I'm not looking to sell anything or try to elevate myself to any status other than simply one who is aiming for personal peak performance. Ultimately, I will some day be fully accountable for my actions when life's journey is over. Talk about the good, bad, and ugly! Then, there will be nowhere to run, and no chatroom nickname to hide behind.

I've made more than my share of mistakes in this life and will continue to. Even in this business, I make at least one or two poor decisions every day and did so on Friday. One of my greatest pleasures is when a former student would say to me "I didn't realize I could make so many mistakes and still do well." Such is the danger where "chatroom speak" makes people believe no one has a loss, and that every trade is appropriate for every participant.

Maybe we need to change the overused "Make your winners run and cut your losses" to "Maximize the good, minimize the bad, and continually forgive yourself."

To err is human. In a business where results are based on probability, it's also a requirement.

Enjoy the weekend.


nocved said...

Hi Don

Quite frankly I don't think your P/L is anyone's business and you shouldn't feel compelled to reveal it. You have allowed us to "look over your shoulder" and I know it's helped me with my modest first year objectives.

With all the BS within the industry we are fortunate to see how a true "pro" operates on a daily basis.

Great Job

Ziad said...

Hi Don,

First of all I want to say that this is an excellent blog, and I've enjoyed reading it for the past few days. I heard about you through Dr. Steenbarger's blog and it's great to see that there is other great quality no BS stuff out there.

I do however have a suggestion I'd like to make. While I understand that this journal is mostly to help you become a better trader, I think most traders reading it would be greater served if you were to share some additional statistics other than your $ P&L. For me personally, I share a different view regarding your July 25th post where you stated "what good is 2 points if it's only on 10 contracts." In my view, the only way traders can compare apples to apples is to remove the effect of position sizing and look at statistical edge.

For example, say trader A trades 500 lot positions, and he has basically a break-even day netting a total of only 1 point. Well, that's basically flat performance, but in dollar terms he's actually up $25k. Now say trader B trades a similar style, but he only trades 10 lots. Say he has a great day that day, netting 20 points. Well, as good as that is it is only $10k. So looking purely at $ P&L one would assume that trader A had a better day, but in reality it was trader B that had the better day, but he simply was using much smaller position sizing (maybe because his account is not nearly as large as Trader A's yet).

My point is that what truly matters when we're looking at stats (especially if we're using someone else's stats as a healthy frame of reference to shoot for, or if we are analyzing our own stats for self-improvement), is the edge. And to know the edge what you need to know is % accuracy and the size of average winner vs. average loser. Once we have these we can combine them with trade frequency, as I'm sure you know, to come to the daily expected profit per contract traded. Now that doesn't mean that I think position sizing is immaterial. Far from it, it's probably the most important factor for determining final P&L. But I'm just saying that it's much better if it can be separated so we can know what is the actual trading edge derived from your entries and exits, and what is the money management aspect of it that is producing the ultimate dollar figures based on your risk tolerance, account size and conviction in any given trade.

So my suggestion is that if it is possible, it would be great if you could share the other stats each day. So instead of just saying I made $15k, you could say I made $15k, taking 8 trades, having 75% winners, with the average winner 1.1 times the average loser, and average size per trade of x contracts. Taking it a step further it would be very interesting to see how your stats differ among scalp trades and larger 'position' trades where you shoot for more points.

Anyhow, it's just a suggestion, but I really think it would make for a better learning and analyzing environment, not to mention a more standardized frame of reference for newbies and pros alike.

Thanks for your insights,


Don Miller said...

Hi Ziad.

First, I appreciate the kind words and well-thought post. When someone puts that much effort into a comment, it deserves a thorough response in return.

I generally agree with your comments that comparability is extremely difficult when simply talking dollars. And when I taught years ago, I did a great deal of measuring and discussing statistics such as win/loss ratios, etc. In addition, over the years I've also experimented with various trading software platforms that calculated many performance-based ratios based on actual trades.

Having said that, here's why at this stage in my trading I don't (and can't) focus on such stats.

First, much of my trading is simply providing market liquidity as a member of the CME. In doing so, I often have many trades sequences over the course of the day that include (1) simply buying the bid and selling the ask repeatedly to gain the spread, (2) entering to test the waters, immediately scratching to control risk, and then re-starting the process over again almost immediately (keep in mind as a member of the Merc, my transaction costs are minimal), and (3) a great deal of scaling in and out of trades (almost every sequence I trade). Picture a floor trader with paper flying all over the place all day long, and it's similar for me ... only electronic on a remote basis and for a single account.

You can probably see fairly quickly that measuring the success of such a complex variety of trades, depending on market conditions and how I feel, is almost impossible.

Second -- and this is simply how I'm wired personally -- I learned over the years that for me, focusing on intraday statistics made me overthink trading and get unnecessarily (again, for me) caught up in the micro-details such as trade-by-trade analysis, or even statistics for a given day. Simply put, it took my focus away from the larger and more important goal of performance over a long period of time.

As a result, I found that simplifying my focus to a single and very long-term performance target ... annual net income which is measured once a year, allowed me to show up for work and trade day after day, and quickly and completely forget about the last day to prepare for the next. And as I've said in the blog, the current target is $1M on an initial $700K base, or just under a 150% annual return. I purposely have no other daily, monthly, or annual stats.

I also believe that trading is more about the non-math factors of trading -- including how one feels on a given day -- than the math side. For example, I may not feel particulary focused on a given day, and simply make one or two trades regardless of true opportunity, etc. That can render stats virtually meaningless.

Lastly, I think as one progresses in his/her trading career, stats go from being an important foundation builder to more of an interesting after-the-fact anecdote, as the review and interpretation of stats early in one's career has become embedded in latter career instinct that one relies on. As Dr. Brett has said, seasoned scalpers and high volume traders often can't vocalize how they trade.

Again, this simply reflects what I've found works for me. I know many traders who rely more on the math aspect and dissecting their stats. On the other hand, I've worked with many former accountants, engineers, airline pilots, and people from other professions that focus far too much on the math and never develop the necessary "feel" for the market. Usually, they don't make it.

As with anything in life, perhaps the optimal answer is a balance. Ultimately, it may come down to whether one chooses to paint by numbers, or simply use that early experience to sketch freehand. There's of course no right path, and both pictures can turn out absolutely stunning.

Thanks much for the post and I hope this helps explain things a bit.

Take care.


Don Miller said...

One more thought on the statistics issue.

In the big picture and given my style and role in the market, I personally view the net result of each day's trading as a single trade, whether it reflects a compilation of 5 or 500 individual trades. So on a monthly and annual basis, I am interested in some stats such as win/loss % (defined as + days vs. - days) and daily win tally vs. loss tally to help me gauge if there's a performance trend requiring correction or deeper study.

So in a way, I do measure some stats ... it just happens at a much higher timeframe and in compilation only.


Ziad said...

Hi Don,

Thank you very much for your detailed reply. I actually hadn't realized from your posts that you were such an active scalper. In this case I totally agree with what you've said about it being almost impossible to keep the kind of stats I was talking about in any meaningful way. I guess the way you are going about it makes a lot of sense for your particular situation.

I also can relate to what you've said about statistics becoming a distraction in trading. To that end I continually remind myself that it's not about that particular day's results, but rather about a much longer-term process. Even then thinking about monthly results can get in the way so maybe I'll take your concept of focusing on a yearly number (something statistical for me) to keep my trading a truly longer-term process based activity. But in general for me it's definitely about developing the feel and making trading a true art; the numbers are just there to keep me on a well-defined path towards my ultimate goals.

I do have one question though. When you are scalping for your quick 2 pointers are you using hard stops (example 2 points) in case you can't scratch quickly, and if so how often would you say you take the full 2 point stop loss.

Thanks again, and I look forward to more great posts.


Don Miller said...

Ziad -

Most of my trade risk is actually managed via contract sizing ... which I'm constantly adjusting up or down as the market moves once I'm in a trade sequence (my definition for a flat-to-flat sequence). I do occasionally use hard stops, but it's rare and they're not hit too often as (1) I tend to scratch the trade if the market doesn't move in my direction fairly quickly; and (2) many of my liquidity-providing trades are fading extremes AFTER most stops have been hit, so the likelihood that the market has another excessive run (assuming my timing is half decent) before I cover for a wholesale profit -- even if small -- should be rare.

I frankly think use of stops is one of THE most misunderstood concepts and will do a brain dump about my feelings in the near future. I've seen more inaccurate material written about stops by people who don't trade (i.e. advisory and chatroom horse race callers as it seems a simple way to protect their backsides) than any other trading topic over the last decade.

In the meantime, suffice it to say that I believe proper RISK MANAGEMENT is essential ... but it goes far beyond stops which may be appropriate at times, but can also be hugely detrimental under certain circumstances. [To me, a stop is simply a temporary pause to reassess conditions.]