Are You Suited to Trend Following

Discussions about personal psychology for the individual trader.

Trend Followers Profile

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Total votes: 88

george chahine
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System can address that

Post by george chahine » Thu Oct 28, 2004 12:34 pm

I don't think being high on N and O is a hinderance to trading or trend-following as long as the trader is aware of these tendencies and designs his system around them. For example, a successful trader who is high on N&O might be trading a long-term system and spending his time / energy on developing new trading strategies and sharpening his edge rather than day-trading with bet sizes of 5% each.
GC

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Post by Kiwi » Thu Oct 28, 2004 6:54 pm

George,

I am responding because I think you are maligning day traders by comparing us with gunslingers. I will have you know that I never bet more than 4.5% on any position 8)

More seriously. How would you like to be able to make 2% of your equity most days and almost never have a losing day. With bet size 0.5% of equity? Herein lies the potential of day trading (not day system trading). The tough thing is that its much harder to repeatedly do the right thing when you are operating on minute by minute decisions.

Also seriously. I dont think anyone should underestimate the danger of a high N score. When one is experiencing ones second big drawdown in 2 years and then it gets worse than the last one it takes a lot to keep pulling the trigger correctly. I suspect that a high N trendfollower will need to work very hard on this area of his or her personality unless they can find some truly holy grail systems.

Kiwi

TC
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Post by TC » Fri Oct 29, 2004 12:08 am

Kiwi wrote:.....How would you like to be able to make 2% of your equity most days and almost never have a losing day. With bet size 0.5% of equity?
Kiwi

With numbers like that I'd be better off collecting just 10% of the profit you'd make trading my money and letting YOU keep the other 90% :D

2% a DAY, I'm happy to make 2% a month, no wonder I couldn't find the Holy Grail, it's on the other side of the world :lol:

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Post by George » Fri Oct 29, 2004 9:14 am

When trading intra day, 2% return a day net of commissions does not require a holy grail system.

Do your homework and research. If you choose to listen to the authors and unsuccessful traders that tell you making 2%+ a day is impossible then that is a decision you make. If you choose to make 2%+ a day on your account and watch your account grow to the point that you have problems with liquidity in most markets, then that is a decision you make.

Best decision I ever made in business was to learn to trade intra day, and automate my systems on markets that I don't watch during the day.

Good Luck!

-George

TC
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Post by TC » Fri Oct 29, 2004 10:22 am

George

Are you referring to equity as a trader's total available capital or just the capital deposited as margin ?

If you are suggesting intraday trades can return 2% daily on a trader's total available capital that would turn a $10,000 stake into:

$1.4m after 1 year
$199m after 2 years
$28bn after 3 years

I dont think the market is so inefficient that it would allow such large profits to be extracted so fast and so consistently.

If a trader uses optimal F, like Larry Williams in a trading competition as an example, and is lucky then I grant that such performance is possible in the short run.

George, what is the probability of success vs the risk of ruin when attempting to daytrade for 2% a day ?

Many impressionable neophytes may be sent down a dangerous path without being fully cognizant of the risks.

Thanks

Tom

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Post by Kiwi » Fri Oct 29, 2004 10:54 am

George is far closer to the truth in my opinion Tom.

Note his statement about liquidity and the lack of any assumption about compounding forever. Optimal F and such like very rarely enter into the effective day traders thinking and usually only enter a system traders thinking a little while before their downfall. Most good discretionary traders seem to have more of a good living attitude than an exponential expansion of riches attitude.

If you risk 1/2 percent per trade (of some sum, where liquidity permits such a risk reasonably efficiently) and have an average win rate of 70% (quite achieveable but feel free to reduce it to 60%) then what ratio of win to loss do you require to return 2% if you have an average of 6 trading opportunities per day?

Despite this - I will happily bet that most people will fail faster in this environment than in end of day system trading. But that is a different story. :evil:

George
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Post by George » Fri Oct 29, 2004 11:13 am

Tom,

In my previous statement, I am referring to capital deposited as margin, but that really does not matter.

Think betting opportunities Tom, not betting high % of equity. My betsize usually stays well under 1%.

Of course, having a quality method or system is very important.

The market is just an inefficient as it has ever been. Programmers have not changed the nature of markets. People look for a scapegoat when they lose. Financial markets behave in the same repeating patterns every day, so my suggestion is to devise a method that takes advantage of these patterns. These patterns are not overly complex, but do take some thought and screen time to see.

The hardest part is belief. Relieving yourself of judgements against trading intra day and the notion that one cannot possibly capture 2 x the daily range are no easy task.


George

TC
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Post by TC » Fri Oct 29, 2004 12:55 pm

George wrote: In my previous statement, I am referring to capital deposited as margin, but that really does not matter.
OK, I thought so, but the distinction is important. An equity trader would regard his account as all of his capital available for trading whereas the futures trader might only consider his account as the actual margin deposited with his broker.
George wrote: Think betting opportunities Tom, not betting high % of equity. My betsize usually stays well under 1%.
An interesting distinction here.

As a long term trend follower (LTTF) also betting small (I agree with this approach wholeheartedly) I can only increase my betting oportunities by following more markets (which for futures requires me to look outside the US) whereas the daytrader, relative to the LTTF, is presented with many more opportunities to trade in a smaller number of markets.
George wrote: The market is just an inefficient as it has ever been. Programmers have not changed the nature of markets......Financial markets behave in the same repeating patterns every day......
Indeed, history is littered with examples of the enduring characteristics of human nature that give rise to the manias of tulip bulbs and dotcoms. Events centuries apart but both driven by the fear of losing and the fear of losing out (greed).
George wrote: The hardest part is belief. Relieving yourself of judgements against trading intra day and the notion that one cannot possibly capture 2 x the daily range are no easy task.
Yes, but how much of the daily range can you capture per trade ? :lol:


It is refreshing to challenge cherished opinions & beliefs and is why I enjoy reading and participating in this forum.

Thanks

Tom

TC
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Post by TC » Fri Oct 29, 2004 1:06 pm

Kiwi wrote:If you risk 1/2 percent per trade ...... and have an average win rate of 70% ...... then what ratio of win to loss do you require to return 2% if you have an average of 6 trading opportunities per day?

Despite this - I will happily bet that most people will fail faster in this environment than in end of day system trading. But that is a different story. :evil:
This points to one of the benefits of long term systems, the reduced incidence, per unit of time, of trader intervention in the execution of the plan ! :lol:

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Post by Kiwi » Fri Oct 29, 2004 6:46 pm

TC wrote:
George wrote: It is refreshing to challenge cherished opinions & beliefs and is why I enjoy reading and participating in this forum.
Interestingly for years I had a bias for the long term. As I suspect did George. Some find reality and frequently in an unexpected place.

On the incidence per unit time of intervention: that is not the issue.


-----------------------
The things people believe in are usually just what they instinctively feel is right; the justifications and arguments are the least important part of the belief.
That's why you can win the argument, prove them wrong, and still they believe what they did in the first place. You've attacked the wrong thing.
So what do you do? Agree to disagree. Or fight.
- C. Zakalwe.

George
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Post by George » Fri Oct 29, 2004 9:36 pm

Quite right Kiwi. The first four years of my trading were spent with a complete bias toward the long term.

Tom, I take what the market gives me in any individual trade. I have multiple targets, and prefer to leave some on to run. Different time frames have different avg. win sizes, but it matters not that I only get a 1 pt in a trade if I get that 1 pt 10 x a day.

George

george chahine
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Interesting conversation

Post by george chahine » Sat Oct 30, 2004 11:12 am

kiwi and George,

What you say is very interesting. But I am still biased toward Tom. I am still not able to see how you can make 2% per day. Can we go back to Kiwi's example about 6 trades a day with a 70% or 60% hit rate and a 0.5% bet size?

If I do some math, I get this [please help me where I am wrong]:
assume a $100K account.
6 trades a day at $10K each, bet size $500.
Reward/risk multiple of 1/1
This makes you $600 a day or 0.6% return on capital.

You need to get a risk/reward multiple of 1.8/1 before you make 2% ROC.

So you either have to reduce your trade frequency or to take on more risk and go on margin.

I am talking stocks not futures here. Am I missing something.

Kiwi,
regarding my comment on high N traders , I was not criticising day traders, I was saying that high N people will struggle as day traders, because they'll succumb to the action. Even trading long-term I tend to succumb to the action and to blow up about once a year, on average.

I appreciate your posts (Tom too). They help a lot.

GC

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Post by Kiwi » Sat Oct 30, 2004 11:01 pm

George,

Yes, agreed, any issues will be magnified by the short time frame of day trading. Decisions are much hotter and more emotional ... hence the opportunity to work on oneself. I just like to defend day trading from time to time because it has great potential as well as great difficulties.

To illustrate the potential let me finish the calculation I suggested at 1am the other morning (wasnt up to doing it myself at the time). I trade forex and futures so lack of leverage is never an issue. If you want to raise your size beyond certain limits then liquidity will be an issue at various times of day and can start to erode profits.

100,000 account. 6 trades a day. 70% win rate (I average over 70%). Also what if it was a 60% win rate.

I seem to remember that my question was "what win/loss size would be required to achieve 2% a day?"

Return = 6*0.5*( (winrate*x) - ((1-winrate)*1) )

At 70% the answer is the average win needs to be 2.3 times the average loss and at 60% the average win needs to be 2.9 times the average loss. I am not sure where the 1/1 ratio you quoted came from but the point of the equation is this:

Day trading offers you the opportunity to take more frequent smaller risks than eod trading. If you choose high win rate trades then it also has the potential to give you a good living with most days providing a profit. This is a pleasant contrast to long term trend following and provides a good diversification for ones funds.

I suspect that Neuroticism issues are excited (differently) by short term and long term trading. I currently seem to have a manageable balance :)

Kiwi

george chahine
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2.3 win/loss size

Post by george chahine » Sun Oct 31, 2004 9:42 am

Kiwi,
Thanks for your reply.

The only remaining question: Is it reasonable to expect a win size / loss size ratio of 2.3 on a daily basis? And can you get that signal as fequently as 6 times a day?

One way to do it is to have very tight stops, but then doesn't one whipsaw a lot and doesn't the hit rate drop?

As far as psychology and emotional control are concerned, you seem to be in good shape.

GC

George
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Post by George » Sun Oct 31, 2004 12:17 pm

George,

Kiwi makes some good points. I too was writing with regards to futures and forex.

The win / loss ratio is the result of your style of trading set ups or the system you designed. The same for stop loss size.

If you desire a trading methodology that utilizes tight stops (what is tight to you?) then you must develop a system where the stop is in harmony with the entire system. Many, many considerations here.

I would not tighten stops in order to manipulate a win / loss size ratio. Stops should be place in a logical place in which the purpose of the stop is to exit out of a failure in an individual trade and protect your capital from extremes in the market.

Again, keep in mind the number of betting opportunities. This is pivotal in success and robustness in my view.

Enjoying the discussion.

George

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Post by William » Mon Mar 07, 2005 12:57 pm

As of right now i would say sticking with a trend is a lot harder than i thought it would be. Near-sightedness being the main culprit...

Right now i am discretionary trading and trying to implement a near-term trend following system. The biggest challenge for me is ignoring to a larger extent the near-term wiggles in the market and allowing the a trade to wiggle around at the outset.

Probably the hardest thing i have had to deal with so far, is being psychologically willing to let a profit turn into a loss....or letting a profit turn into being stopped out for no gain or loss.

From what i recall, i believe c.f. stated this psychological hang up was one of the larger stumbling blocks for the Turtles and evidence that in the end, that trading could be taught to those who were psychogically capable/willing to follow rules "blindly"...

Curious if anybody had this struggle intially and what their solutions were. I have a feeling it comes down to just doing it and letting prices fall where they may, buts its always helpful to hear a new spin on and old theme..

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Post by sluggo » Tue Mar 08, 2005 9:03 am

Whereas if you had invested according to the "buy and hold" principle, purchasing in June 2003 and holding until today,
  • If you bought the S&P 500 tracking stock ("SPY"), your gain would be +25.9%
  • If you bought the Nasdaq 100 tracking stock ("QQQQ"), your gain would be +24.8%
[/color]On the other hand if you had invested in an incredibly diversified basket of Commodity Trading Advisors, as represented by the Barclay CTA index, your return from July 2003 through Feb 2005 would have been -0.02%.

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Post by Sam » Tue Mar 08, 2005 9:43 am

William wrote:
Probably the hardest thing i have had to deal with so far, is being psychologically willing to let a profit turn into a loss....or letting a profit turn into being stopped out for no gain or loss.

From what i recall, i believe c.f. stated this psychological hang up was one of the larger stumbling blocks for the Turtles and evidence that in the end, that trading could be taught to those who were psychogically capable/willing to follow rules "blindly"...
I was reading Ed Seykota's FAQ in which he mentions that to trade successfully you need a) a winning system and b) the ability to follow it. Assuming a system is a winning one, then presumably all you need to do now is to follow it in order to trade successfully. The odds are better that you will be able to do this if the system is suited to your personality. However, I think it is permissible to go further and even tweak rules if it means that you will increase these odds. Evidently, even a slight change in the rules should be checked to see what effect this will have on the system. However, a negative effect from a change in the rules doesn't necessarily mean that the change is wrong to implement.

For example the situation you mentioned above still annoys me to this day after years of trading. I trade short term systems where I only move the stop loss up to breakeven once the market is close to my profit target. I never used to do this but after witnessing a number of trades which went all the way to my profit target bar one quarter of an S&P point and then proceeded to reverse all the way to my stop loss point, I felt I had to do something. The pain I was feeling from this market behaviour was inhibiting my ability to follow the system. I came up with using a trailing stop. I did some backtesting and found that trailing a stop would be largely negative. However, moving my stop to the breakeven point when my profit target had almost been reached, whilst slightly negative overall for the system, did decrease drawdowns and did make following the system more psychologically easier for me.

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Post by Sam » Tue Mar 08, 2005 10:04 am

Kiwi,

An average of 2% (non compounding) a day equates to a return of 500% on the original capital (assuming 250 trading days a year)! Kiwi, are you generating this sort of return? If so, that's astounding!!

Sam

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Post by AFJ Garner » Tue Mar 08, 2005 10:35 am

Market timing Sluggo and with the benefit of hindsight. Buy and hold when linked to market timing also involves prediction. Look what the same investments in the SPDR or QQQ would have done since January 2000 by way of example. While relieved that I have at least performed no worse than the Barclays CTA Index, I am sure that had I traded a greater basket across different timeframes I would have had a good chance of doing better.

There again, I must not grumble: I have made decent money out of buy and hold hedge fund investments over the past couple of years and from discretionary IPO trading.

As is so often said, and so accurately, diversification is essential.

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