Basics of Trading Futures

General discussions about futures.
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PPNbrmr
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Basics of Trading Futures

Post by PPNbrmr » Fri Feb 03, 2012 1:05 pm

Would you please kindly let me know of any errors in my understanding of trading

Here is what i understood about trading:

Trading in its most basic form is dealing with Probabilities.

Expectancy determines the profits accrued in trading.
Expectancy is derived from the Probability of Wins and Win Loss Ratio, which are not static. Reasonable estimates of Probability of Wins & Win Loss Ratio over a series of trades can be obtained. The range of those estimates is preferable. None of these can be controlled by the trader as they are determined by the market at any given time. Positive expectancy is a must.
(To determine favorable reward to risk opportunities discretionary traders use technical analysis, fundamental analysis or a combination of both – which basically is an effort to increase expectancy)

A discretionary trader based on his judgment of favorable risk reward opportunities can vary his position size, but a systematic trader has to invariably adapt a fixed fraction that should be less than a discretionary trader.

Risk- the only aspect a trader can exert some control (he can determine how much to risk but cannot be sure that's exactly the amount he looses - as gaps, limit up/down may occur). Position size is to be determined on the basis of risk using a fixed or fixed fraction of Equity (thoughfixed fractional seems superior as it offers better prospects for sizing)

Expectancy & Risk % are used for a single trade
Geometric expectancy for a series of trades (N=100, which is the average / 50 percentile) can be obtained from the estimated expectancy and Risk%. This is further determined by the frequency of the trades. ( As trade frequency increases occurrences of long sequence of either wins W or losses L increases, it’s still possible that a sequence of 6 or 7 losing trades out 10 may occur,but the probability is low “ Outliers Occurâ€

Toosday
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Post by Toosday » Sat Feb 04, 2012 1:41 pm

First off, welcome to the board. It is a great group here and there is some wisdom to be gleaned.

You post was obviously the result of some research and thought on trading so please take my comments in the most positive light possible.

I had a hard time figuring out what exactly you were trying to get out of your post. Like I said you are obviously well informed about certain trading jargon and system dynamics but the idea of commenting on your understanding trading which was encapsulated in a few paragraphs just feels a bit odd. I do not see any glaring errors in your statements although I do not agree with the one you make about bet size differences between discretionary and systemic.

So to get to my point . . I do not see errors in the statements you have made but asking if you understand trading based on your post, I would say that trading is much bigger than one post. Your post almost feels as if you are writing a newspaper article on trading.

If I could make a suggestion, it would be to post a more specific goal and/or question.

You get there when you ask about how to define Total Equity. My answer to that would be "it depends" (like so many things in trading" It depends on the purpose of the equity. Many different traders use this term differently but ones who are regulated must use the definitions promulgated by the relevant entity.

I realize that this may not get you want you want but I think if you can be more specific, the responses will be much more helpful.

Paul King
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Post by Paul King » Sat Feb 04, 2012 4:39 pm

It's important to think of trading as a complex rather than a trivial exercise. I know at the basic level all you can do is one of 4 things:
  • 1 Put money into an account
    2 Take money out of an account
    3 Buy something
    4 Sell something
So it is actually quite simple as far as the rules of the game go. However, imagine how your post would be received on a chess forum if you wrote everything you knew about chess in a few paragraphs and basically asked "Where are my errors?" or "Why is E2-E4 a good opening move?".

Alternatively you could consider the difficulty of responding if you posted on a medical forum, here's what I know about medical diagnosis and then asking "Am I correct?". Trading, as any expert system, can't simply be reduced to a small set of sound principles or correct answers.

I suggest you read this entire forum, test your own trading ideas, see how actual implementation of those ideas differs from your testing results, and then come back and ask some more specific questions.

Hope this helps

Paul

PPNbrmr
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Basics of Trading

Post by PPNbrmr » Sun Feb 05, 2012 1:44 am

To give you a better understanding of where i come from, i am liberal arts grad. I've studied economics & finance a bit and during 2007 observing the housing bubble and boom in materials I've invested some money in oil futures in 2007 and selling them in 2008 when it crossed $120 I've bought out of the money put options on both S&P 500 & Oil Futures. Then in early 2009 using moving averages and understanding oil prices cannot be at $ 35 for long bought oil futures & S&P 500 futures.
Due to all this i thought i was good at trading and started trading and lost most of my profits in late 2009 & 2010. Thank god i had the sense to stop my trading before i lost all my profits though i did loose 50% of profits.
During all this time I've no idea about expectancy, position sizing, money management & risk management. I did not even know that what I did was trend following and swing trading.

Toosday,

Thank you.

My objective is to understand what trading is i.e the general principles of trading though techniques & tools used vary on personal preferences. I want to design a system based on that understanding and my personal preferences, which can be back tested & automated using trading blox.

Paul King,

Thank You,

I've been reading a lot of books on trading like reminisces by edwin lefvere, trading systems by perry kauffman, essentials of trading by rob rotella, apart from reading various blogs on trading and by various traders and most of the forums on trading blox for a while. Before i embark on my trading journey i want to make sure whether i understood it properly and any advice on how to go about it.

Toosday
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Post by Toosday » Sun Feb 05, 2012 10:07 am

OK, I understand your situation better now. To second Paul's suggestion. I suggest reading this entire site. I have done so and many parts I have gone through dozens of times. Many of the people who are here or have been here are professionals and you can glean some information from the dialogue.

I would make one other suggestion. That is go to Seykota's site and complete some of the exercises in the Trading Systems Project. It is very basic stuff but it will teach you a lot. I would do it in a simple programming language like excel, visual basic or python even if you are planning on using a third party system. It will give you insights into the tedious decisions traders must make. Once you understand the calculations and the process they represent you can begin to understand and interpret the statistics you mentioned in your initial email. Spend as much time as you need to get this step correct and it will increase your knowledge and save you time later on. You will be amazed how many of the questions you asked become answered by you. Unfortunately you will have many many more questions . . .that is what this board is for.

In terms of your liberal arts background, do not worry about that. I would focus on increasing your knowledge of statistics. There are plenty of books out there that can help you not only calculate stats you see in the trading books but come up with some of you own. Also some portfolio mathematics would be helpful to construct a system of methods, contracts etc.

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