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485 posts
msg #51625
Ignore guru_trader
5/15/2007 10:38:26 PM


Designing a Profitable System
Monday, 13 March 2006
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)

Read or add comments about this item.
No. 1 :
Last nite's posting cont'd (Random Thoughts About Daytrading, etc.)

The stress and emotion of daytrading is much greater than that experienced by the long-term trader using daily bar charts. The "live" market confronting the daytrader is much more intimidating than the "sleeping" market the intermediate and long-term traders deal with. I recall the relaxed environment daily charts and longer-term trading afforded me. I would often call in my orders at 9 or 10 pm. Very quiet, calm and relaxed. Also, the long-term trader doesn't have to experience his losses while they happen! And, he doesn't have to take the next signal within the next few minutes. Big, Big difference.

The famous trader and author Larry Williams once expressed his definition of what a trader should be. He was called the good trader, "The Impeccable Warrior." Impeccable meaning his trading approach and psychology are viable and Warrior referring to the positive aggression effective trading requires.

I gave Dave a copy of a new form I made up. It's a sheet o f paper with the title, "Daily Signals." Date is to the right of this and numbers 1 through 7 follow below. After each number are the words, Took --- Missed, and then several spaces followed by the word, Why? It's my way of holding myself accountable for each and every signal that occurs throughout the trading day.

After just a few years of trading (and mostly losing, of course) I got smart enough to realize that it's essential to keep a journal of your trading, thoughts and reasons for entering a trade, thoughts along the way, and of course, how it all turned out. Perhaps the most instuctive book I've ever read is MMJ (My Market Journal).

When you've built up 20-years worth of scribbling, it's very instructive to go back and read what you were doing and thinking way back when. My early scribblings are about how the market or politics or whatever caused my losses -- but I finally figured out who the real culprit was. As Pogo said: We have met the enemy and it is us.

Sometimes, I wonder whether I've really learned anything in 40 years. I humbly admit that I held a long position in Gold just prior to the start of the desert storm operation. Now (in the strong light of hindsight) this was clearly dumb!

I'd like to say a few words about back-testing. I feel that only real-time trading where the market can (and does) react to your system has any meaning. Data mining and back-testing certainly have their uses as long as one doesn't get sucked into saying: "I could have made a million with this system between 1985 and now." Even walk forward testing is flawed in that it treats the market as static.

I don't think much of hypothetical results and feel that ads such as" "You could have made $300,000 trading this system last year" are extremely misleading.

Books: I agree with reader's selection of must have books (i.e., Schwager, Elder, Plummer, Koppel and Abell). I didn't see any mention of Gallacher's "Winner Takes All" which I personally think is a gem.

I highly recommend Grant Noble's "The Trader's Edge" (Probus 1995) and particularly his opinions on "the holy grail," the REAL costs of trading, and the importance of the open (which many ignore).

Stops: Although stops are a very effective money management tool, traders should not blindly place stops for the sake of using stops. For example, if the stop is positioned too close to the current market price, the trader will be whipsawed by the "noise" in the markets. The magnitude of the stop should be a function of volatility, the trader/investor's time horizon, and the characteristics of the trading system.

Important Question: Is It Trending Or In A trading Range? Look at the big picture if it's not trending.

If in a trading range, then trade the market accordingly. Step back and look at a bigger picture, maybe 6 to 9 months or long, 12 to 18 months, considering daily data. Look for the high and low price of that time frame, which become the boundaries of that time frame's trading range. Look at a daily chart, for example. You should be able to see a trading range, some time during that year. A trading range may last for many months, which may seem discouraging. Be patient, the market will soon break out of its trading range, given some fundamental reason. Yes, another basic concept. But one that has to be remembered and used with each trade. Ask, "Is this Market in a Trend or a Trading Range?"

I believe a trader is well on his or her way to success when most of the unexpected moves become the expected. Surprise is very much a part of the markets. Perhaps it's the primary thing that allows markets to survive and pro traders to prosper.

A flexible mind that can change its market mode of thinking, in a minute or two, is a very desirable thing to have when daytrading. Something I have always worked on.

I have been a real sucker for book publishers' hype. I have around 120 books about the markets and now value only about 6 of them (see above). I could do without all but two. Those two are the "Market Wizard" books by Jack Schwager. In these two books you meet the real pros who have proven they know what they are talking about. These two books inspire!

I was pleased to see the "keep it simple stupid" abbreviation alluded to several times in the Oct/Nov 95' issue. So true! I have messed with many of the indicators, moving averages and oscillators. I find them totally useless.

Trading Plan: Your trading plan will need to have an edge. In my years of experience, the plans that deliver an edge have the following common elements:

Trend Identification of moves of similar magnitudes. This includes tools to identify probable changes in trend. Once the trend is identified, we can determine the appropriate stategy.
Low risk entry. This includes: identifying appropriate support and resistance areas; setups or warnings that alert the trader to a low risk opportunity; entry and initial stop placement techniques.
Trade Management. Once in the trade, we need to be able to manage the trade. Trade management includes trailing stops and where to take profits.

Finally, the trading needs some tool to tell us when not to trade. For example, when there is an increase in volatility to the point that our previous experience is of no assistance.

Successful traders have identified a number of low risk opportunities and they have developed the ability to follow those signals without deviation.

My trading methodology, if I have one, is to have learned how to read a chart and to know which took to use and when to use it. Almost everything I do works, because I've learned how to trade. Anonymous Trader has been explaining that concept to the reader. Much of my trading is intuitive, judgmental, and based on what I see happening when I go to trade. The least part of my trading is involved with entry. It's what I do once I'm in the market that counts. That aspect of my trading is almost entirely subjective, and based upon long years of learning personal discipline. When I am trading, I know who I am, what I can do, and where I'm going. Trading is at least 80 percent personal discipline.

Do not expect the impossible in speculative markets: You may think an average of 1/2 point a day, or 3 points a week, is too small a profit to bother with. Yet, in 52 weeks it would amount to 156 points. Make speculation a business, not a gamble. Go into it to stay, not to gamble all on a few trades, lose and quit. Be patient. If you can double $1,000 the first year and keep doubling it for 10 years, you would have over a million dollars.

95% of all Futures, Currencies, Stock and Options traders are long term losers. The 5% that win will earn the money the 95% lose since trading is a zero sum game.

The more you daytrade, the more sophisticated your money-management discipline has to be. The less you trade (long-term positions based on fundamental analysis) the less sophisticated your money-management discipline can be.

You should classify any contemplated trade into one of the following five categories before putting on a position:

a: Entrance into congestion
b: A trade within a congestion
c: A breakout from a congestion area
d. A trend run
e. Trend reversal

The trader will have difficulty in formulating a successful and intelligent risk-reward (entry/exit) plan unless the trade is properly categorized before the trade is taken. The risk/reward parameters are different for each of the five types of trades.

Statistics of the pros. Let's look at four traders and their money made by trading:

A friend of Larry Williams having a $500,000 account made $4.5 million in less than one year. He made 4.5% week after week (on an average).

Joe Ross traded successfully one method he presented in his book "Trading is a Business," pg. 244. He ran a $5,000 account up to @28,000 in 5 months. He averaged 8.2% per week.

Larry Williams made in his 1987 Trading Championship Account 9.5% week after week. Although he turned $10,000 into $1.1 Million in one year, there are better examples.

Mark Weinstein opened a $100,000 account in an option trading contest and took out of the market $800,000 in just three months. Not only did he multiply his money nine-fold, but he had 100% winning trades. On an average: 18.4% per week and this without any pyramiding.

Again Larry Williams: He ran a $2,000 account up to $37,900 in just three months. 25% per week.

Now ask yourself: Do you have the right trading methods, the right mind set to trade like a pro?

Suppose you have a $4,000 account and you are able to make $400 per week trading Bonds. There are Bonds yielding 10%. You would run your account up to over $47,000 in just 6 months. After 10 months you will have over a $260,000 account. All you have to do is take one more contract every time you made another $2,700 to $4,000 (margin in Bonds is currently $2,700).

Final word:

My trading career of 46 years, 8 hours a day market research: Basic Rules: Trade with the trend. Always use Loss and Profit-taking methods. --James Geftakys

I will retire from trading. But I will continue researching the markets. I'm 75 years old and want to take it easy. I have been trading the market since 1950, when I was in Law School. I never liked working for anyone else and as of 1967, I became a full-time trader.

I believe one reason I have been successful is that I never tried to be a millionaire. All I tried to do is make a good living, better than average. When I made enough money to take care of my needs, and I lived well, I would stop.

It didn't matter if I made the money in 2 months or 6 months. I needed a certain amount of money and that was it. I lived in California and Hawaii and spent my time between them. Later I lived in southeast Asia for about 7 years.

I notice many people are having trouble with swings and trends. I would suggest that they study Donchian (?) with his A's and V's -- TOT TOB and the way W.D. Gann showed how to determine a Trend. (I'm not a "Gann fan." I knew him and wasn't impressed) but that's another story. In any event, I believe this is the simplest way to determine the trend.

For what it's worth, I use only my own methods developed after 46 years of hard work, 32 of those years, 8 hours a day in original research. For everything I found, I must have discarded at least 7-8,000 ways that didn't work.

I know practically all systems in the market and feel they are worthless. To me a system is only good if it has 90% winners and even then you can lose money (90% valid signals = 90% winners).

Actually, the market is basically simple and has not changed in 300 years.

I will give you some basic rules that are 95% plus accurate. Only take a position with a favorable trend. Cut your losses. Assure some profit. It is that simple!

Commodity Traders Club News (1997)

My system is mathematical and mchanical 90% of the time.

Submitted by Greg Wilson 2006-03-13 20:19:34

37 posts
msg #51634
Ignore danglin
5/16/2007 11:13:41 AM

Thank you for this. Cetainly puts things in a different perspective for me. I have been in a whirlwind looking at indicators, filters and other useless systems for too long.

745 posts
msg #51641
Ignore maxreturn
5/16/2007 5:05:43 PM

Thanks for sharing this Guru. One of the best posts I've run across.

19 posts
msg #51648
Ignore pops
5/16/2007 10:51:22 PM

Terrific thread. Thanks for the posts.

Bill Roberts

59 posts
msg #51650
Ignore slotmarket
5/17/2007 12:08:17 AM

Thanks Guru for the good read. Had some good positive reinforcements such as moving stop up to breakeven after clearing by a proper margin. And K.I.S.S. sometimes works best.

6,359 posts
msg #51689
Ignore TheRumpledOne
5/19/2007 2:12:17 AM

"Remember that it's the Execution or Implementation of your trading plan that is the bigger challenge."


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