Why I hate Mondays…and you should too
I typically trade about 10 days per month to a schedule laid out as much as 6 or even 12 months in advance. Some friends asked me recently how I decide upon my trading schedule. What is the formula? How did I arrive at it?
So I agreed to write an article explaining all of the ins and outs of a subject which is more important than many traders realise. Here it is, the answer, the formula and the logic underlying it…
The premise
We can’t physically trade every hour that the markets are open, so we need to decide how much of the available market time we are actually going to trade. We also shouldn’t want to trade every available hour. Aside from being intensive work that is tiring, the reason we are in this business is to provide flexibility for a better work / life balance. It is all too easy to lose sight of that fact!
So we need to set a plan that suits our personal needs as well as having us concentrate on the most productive trading days as far as possible, or at least those days that are most likely to be the best trading days over the long run.
My answer
First I will give you my own answer to this riddle and then work back through how this is arrived at. My conclusion is to trade no more than 12 days per month and no fewer than 8. These days must be selected and planned well in advance and not just drifted into based on how you feel when you wake up each morning!
That is why I know my trading schedule months in advance. I then stick to that schedule with cast iron discipline. There is no point having a well thought out plan if you don’t then stick to it, is there? The only deviations, which are extremely rare, are due to unexpected events.
As an example, here is my own schedule…click here
The formula
There are three items that go into this formula each of which results in eliminating certain days from the annual calendar and what we are left with is our personal trading schedule for the year. The three items that lead to days being eliminated are as follows:
- The days of the year that are least likely to be productive in general
- The days which statistically are less reliable for our own trading strategy
- The need to take regular breaks from trading, to rest as well as to enjoy life
Step 1
So first we eliminate the days each year when the odds do not favour success, or at best when profits can be expected to be below average making these days poor use of our valuable time. These tend to be days when we know ahead of time that volume is likely to be light. This is the list I like to use:
- The day of and the day preceding: Martin Luther King Day, Presidents Day, Memorial Day, Labor Day.
- The day of: Good Friday, Easter Monday, Columbus Day, Veterans Day.
- The day of and the day after: Independence Day.
- The day of, the day preceding and the day after: Thanksgiving.
- The whole period between and including Christmas Eve and New Years Day.
Step 2
The second step is to examine our own trading strategy to see if there are any statistical tendencies that we should be aware of and hence respond to. Some years ago I analysed no less than 5 years worth of short-term trading results to look for clues, somewhere of the order of 1000 days of data. I discovered something interesting.
When I broke the profit over the 5 years down by days of the week I found that profits were distributed approximately as follows:
- Monday -10%
- Tuesday +35%
- Wednesday +30%
- Thursday +30%
- Friday +15%
There is some powerful ammunition here. Until I did the analysis I had no idea that Monday’s were so bad. There were plenty of great Monday’s in the sample, clearly enough of them to disguise the long-term reality from me! Guess what – I never trade on Monday’s today and haven’t done for several years!
Friday’s are still profitable, but far less productive in terms of “earnings per hour” than the remaining three days of the week. Therefore as a general rule I tend not to trade on Fridays either. This is not as absolute as my hatred of Monday’s and I do trade a few Fridays each year – usually the first Friday of the month (Payrolls Friday). Fridays for me are used primarily to backfill my calendar to ensure I am able to trade enough days during months that are shortened by other factors.
Interestingly Mondays and Fridays also tend to be the lower volume days of the week, hence the findings here were consistent with the same logic for eliminating the set of days in Step 1.
Step 3
The final factor to consider is the need to take regular short breaks from trading. Quite apart from the importance of having a family life outside of the very intensive career we choose, it is extremely important to switch off, relax and recharge the batteries at regular intervals. Trading is extraordinarily tiring compared to any other occupation that involves sitting at a desk, staring at computer screens and swearing at them occasionally!
If you don’t get regular rest from this you slowly but surely lose your effectiveness. You can prove this to yourself by literally taking a week off and seeing how much more alert and attentive you are on your first day back. So this isn’t being lazy. This is a critical element in a long term and successful trading career. Yet you would be surprised how many traders try desperately hard NOT to take time off! We are brought up to believe that the harder we work, the better we will succeed. Well in my experience quite the opposite is true when it comes to trading. You need a razor sharp mind, absolute concentration and unshakable discipline – all things that start to be eroded as you tire from working too many days without a decent rest.
So my personal recommendation is to take off a good 7 to 10 days at least once per quarter, but ideally more like every other month.
Discipline
This formula is simple enough, logical and makes sense. But another value to having a schedule to work to is that it brings another element of discipline into your work. Unlike following a trading plan, avoiding over trading etc. this is a discipline that is much easier to stick too. Discipline in everything improves the more you are able to be disciplined in a few things. It becomes more of a habit and slowly becomes easier to be more disciplined in general. So it is constructive to have a few plans to follow that are easy! Working to a well thought out schedule each year is a simple plan to follow as well as having real value in improving trading performance.
Is my plan the right one for you? Maybe, maybe not. If you like the logic and it sits well with your view of life and your personal circumstances, by all means copy it. If not modify it to better suit your own needs. But I do urge every trader to have his or her own plan and to follow it. This is a serious business and the days you choose to trade deserve more thought than just how you feel each morning when the alarm clock goes off!
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2012, all rights reserved
Happy New Year! (Let’s make it a great one too!)
Well what a year that was. I don’t know about you but I am so glad to be rid of 2011. From a trading perspective it was one of the harder years I can remember and I am not hearing from many people who had a great year. Errr I haven’t heard from anyone saying they had a great year in fact!
But I have heard a few horror stories. So if you generally held it together during 2011 then I think you deserve a pat on the back. Anything around breakeven on the year seems like a good outcome and certainly nothing to feel ashamed about.
Throw in the fiasco of the MF Global collapse and its immediate dampening effect on the markets and you actually complete the picture of a pretty ugly year all around.
The highlight
For me the highlight of the year was the Century of Trading seminar with my great friends George Kleinman and Jeff Quinto. We had a blast in Santa Monica and met such a great group of traders, many of whom have become good friends since the summer event.
You know, more than 9 out of every 10 people who attended have written saying how much they enjoyed and valued what was a very intensive learning experience. That is so rewarding for us to hear and makes all the hard work worthwhile. Who knows one day we might do another one, or maybe release the videos as a home study course. That is something for us to think about for 2012 anyway.
2012 will be a great year
I can just feel it! 2011 was sufficiently challenging that the cycle is overdue for change this year. When precisely that will be I don’t know, but I feel sure that 12 months from now we will be looking back on a really worthwhile year.
Fortunately we are entering 2012 from a solid position, despite the year just gone. Our daily swing trading strategy (S-I-R) is sitting here right at equity highs and the 5min strategy in the Trading Den is also right at equity highs. So not having a lot of ground to make up means we are in great shape to tackle the exciting year ahead.
But as I always say at this time of year – it doesn’t matter what happened last year, whether you were up, down or flat on the year, its time to wipe the slate clean and start all over again! Bank the profits if you made them. Forget the losses if you took them. Zero the clock and focus exclusively on leaving the starting line as constructively as you can. Which also means with a completely clear head and maximum discipline (New Year resolution perhaps?)
Projects for 2012
Every year I set myself the objective of tackling a number of projects. Every year I also overestimate my ability to do everything planned by a factor of 2 at least! Let’s see if this year I can get closer to delivering everything I hope to.
I plan to build upon our 3 out of 3 profitable years of running signal services by improving the existing services further as well as introducing 1, maybe even 2, new ones. These have proven to be great in helping traders through the inevitably long apprenticeship that trading success demands. I can’t make every member take every trade and similarly I make mistakes in my own execution at times just like everyone else. But having a consistently profitable strategy to start with is a critical foundation and this has really proved it can give many people the staying power that they otherwise might not have had.
More and more people ask me for training courses and/or simple strategies that they can learn and become experts in themselves. So in 2012 I will undertake to make more educational materials available than in the past. There are several suitable things in R&D at the moment that I know have the potential to help people improve their game significantly. So this will have more of my focus this year than in the past.
Finally this newsletter and several websites are due for a facelift and revamp which I think I can just about squeeze in too! I have loads of insights to share with you this year and you can expect articles to start flowing again more regularly in a couple of months time.
I am currently buried under a pile of admin, accounting system changes and a significant change of business model in the way I manage money for other people at the moment, hence more radio silence then usual in the last few weeks! This is my current priority and once it is all out for way I can set to work on some of these other projects for other people.
Let’s get cracking
So those are my plans for the year, what are yours? Have you made your own plans and set your own goals? Trading is a hard enough business when you have clearly thought out plans. Without a plan to follow and to hold yourself accountable against is like trying to cross a busy road blindfolded. So make sure you know what you intend to achieve in 2012 and you’ll have a far greater chance of actually achieving it.
It’s going to be a great year for many people. I intend to be one of them and I hope you do too. So what are we waiting for? Let’s get cracking!
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2012, all rights reserved
Confucius was right…but forgot to factor in time!
“Feed a man a fish and you’ll feed him for a day. Teach a man to fish and you’ll feed him for a lifetime.”
We all know the Chinese proverb and we all know it to be true. But what if it takes a year to learn to fish? Or 3 years, or 5 years?
That’s the chink in the armour and the reality is that learning to trade successfully takes that sort of time. It’s not like a quick fishing lesson and hey presto you can feed yourself, despite what all of those classified ads would have us believe!
As a result so many would be and could be traders never quite make it. Before they reach the point where they can feed themselves, they run out of time or run out of money (sometimes both!).
The solution is simple of course – feed that man a fish each day until he develops into a competent fisherman!
Then time ceases to be his enemy. He can take as much time as he needs to learn to be not just any old fisherman but a fishing expert.
The Trading Den
For about 3 years people have been asking me to put together a service providing low risk, short term trades using my highly profitable, time proven strategy. Well now I can reveal that over the last year I have secretly been running such a service, quietly providing a fish a day to a dozen other traders.
Interestingly all of these great people are professionals, mainly career traders, successful in their own rights. They are already fishermen and fisherwomen (is that a real word or one I just invented?). But they have been enjoying the Trading Den trades in addition to their own trading as a means of boosting profits without increasing leverage. So even though the idea is to feed a man a fish to buy the time needed to become an expert fisherman, that doesn’t mean it can’t also benefit veterans seeking to increase their earnings without increasing risk!
During this year we have honed this service to the point it is now running like a Swiss timepiece. It is about as good now as we can ever hope to make it. So now I am ready to invite up to 10 newcomers into this secret little club to join us in landing typically around $7,000 per month trading only half time and with no overnight risk.
If that sounds like it would help you in your own trading evolution, novice or veteran, 1-lot trader or 10-lot trader, then you can read the whole story at…
What John thinks about it…
“I have been a member of Simon’s Trading Den since the inception and have witnessed first-hand, on a daily basis, Simon’s keen abilities trading the futures markets. The posted results are genuine, as is Simon himself. Finding someone with Simon’s skills and integrity in the trading arena is like finding a needle in a haystack, and I consider myself very fortunate indeed to have met him and to be trading with him.
Besides the trading profits, the other big benefit to the Trading Den is being able to watch Simon enter, manage and exit trades live. Every day trading in the Den is an enjoyable learning experience that adds greatly to my own trading skills.”
John, San Francisco
You can meet John and the rest of gang, in my private Trading Den this week. All you need to do is to read about the service, make sure it fits within your current trading portfolio and grab one of these 10 new seats. We look forward to seeing you next time we convene in the Den to wage war on the markets once again!
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2011, all rights reserved
This is what you asked me for…and its on its way!
For two and half years now I have been trading a strategy that has also been made available to a tiny group of professional traders. Many of these people have made big money in this time, where big means 6-figures for some of them – in addition to their own trading returns.
However, this has one particular limitation and that is the fact that the signals are taken off daily charts and actioned in the most part at the end of the day. This was deliberate as it made it ideal for more passive traders and investors who had lives outside of trading and who did not want to follow the markets during the day.
But daily charts by definition mean a relatively small number of trades and relatively large initial risk per trade. This is perfect for those more “passive types” but during this 2-3 year period many more active traders have asked me…
“Isn’t there a way to trade this intra-day, off smaller charts, with lower risk trades?”
There wasn’t.
A moment of madness!
But more and more people asked which got me thinking. Then one day, in the summer of 2010, I woke up one morning and decided to do something completely crazy. I decided to start trading the same strategy intra-day off much smaller charts.
What’s crazy about that you might ask? Well nothing in principle. The bit that was a bit off the wall was doing the whole thing before a live audience!
Yeah that’s right, no quiet development in the basement late at night. Just straight in at the deep end in the live market with my most loyal and closest clients watching every damn trade in real time!
OK, lets be honest, I didn’t take that leap of faith without a pretty good idea that it would work. But it wasn’t perfect. It took a bit of refining and developing as we went along.
A little help from my friends?
We have been quietly trundling along making about $7,000 a month with this. Then last month with the help of some of the gang also watching out for the sort of things I look for on my charts, we increased our number of trades and our profit on the month exploded to $15,248!
I should point out that we are not scalping for a handful of ticks here and there, but seeking 2 to 3 high probability trades per day each worth a decent chunk of cash. Oh and we only trade 2 to 3 days per week too, so this is about as low key laid back day trading as you can find!
Well a year down the road, with a tidy old profit under our belts and having really found the groove in our weekly activities, I have decided to admit just 10 new members to this exclusive group. This is the chance for those who have been asking for such a service to finally receive exactly what they have been looking for.
Work is underway finalizing everything and I hope to release those 10 new spaces in early October. So if this sounds like your kinda thing, watch this space and I’ll let you know the moment those places become available.
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2011, all rights reserved
The power of the close…worth waiting for?
Most of my trading signals are triggered at the close of a bar. I have also noticed that the close is an important factor that many successful traders insist upon before entering a trade.
Yet for most of us there is a real temptation to want to jump is as quickly as possible when we see a setup forming. This seems like the natural thing to do. After all we have been waiting all day perhaps for this moment, so we don’t want to miss it and why wait to enter at what will probably be a less good price by the time the bar actually closes. So let’s just jump straight in!
But hold on a minute. If the bar close is the official trigger to enter the trade, that was probably selected for very good reason, wasn’t it? If so than we need to be patient and control our urge to just get in.
What’s the big deal?
Instinctively we know about the importance of the bar close after years of observation. So what is it about the close that is such a big deal?
Well there are several reasons to consider using the bar close as an entry trigger. These include – noise, stops and sometimes volume.
Markets are full of noise these days. Quick sharp spikes that spontaneously reverse as price gets straight back to where is was a few minutes earlier. These can be caused by all sorts of factors – big orders exceeding available liquidity, reactions to news or rumours etc.
Think of stops as food!
Markets also thrive on volume. That is what they are always hunting for. That is what the industry relies upon. Obvious areas where people place stops are therefore targets. If the market can probe such an area stops get triggered and, well, that creates volume doesn’t it? Volume is how the market feeds itself!
So when traders always say that “they” are gunning for our stops, there is a degree of truth in that statement! It is also a reason why in my trading own I try to (a) identify those areas where the market is likely to be stop hunting and (b) not to place my own stops in obvious locations!
Gaining another little edge
Now if trade rules require entry on the close of a bar rather than just at an entry price, to some degree it is possible to avoid getting trapped by such spikes. For example imagine a quick spike that lasts for say one minute. By entering on the close of a five minute bar, rather than at a price level, the risk of entering on a spike rather than a valid trade is reduced. It is not eliminated, but the chance is reduced from 100% to 20% in this example. Its not perfect but if the price of avoiding 4 out of 5 such traps is a little patience, that might be a virtue worth developing?
In the case of daily bars there is an additional factor to consider. If a market is able to hold onto a price level attained during the day, after the heaviest volume of the day has already been transacted, the likelihood that that price level is significant is greatly increased, and this is important information (whether most traders are aware of it or not!).
These are just a few of the reasons why professionals often utilise bar closes when developing trading strategies. It isn’t some earth shattering revelation, but just one of the many tricks a trader can use when seeking an edge in the markets. Ultimately in a business where there is no certainty, no right and no wrong, gaining an edge in any and every way we can is a route to better performance.
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2011, all rights reserved
The hidden power of writing…don’t underestimate it!
After my “Evolve or Die” webinar in March with Linda Raschke and FuturePath Trading, Linda mentioned something really interesting. She said that she often finds a real benefit of running such events is that it forces you (the speaker) to gather your thoughts and reinforces concepts for you personally as well as helping others with the insight provided.
I have long been a believer in writing things down, as I have always found this does exactly the same thing that Linda was alluding to. It forces you to think things through in a very structured and rigorous fashion. It also makes you think through the finer details very carefully of what you are trying to communicate and these can often contain surprising revelations. Finally, the act of writing things down somehow seems to help commit them to memory much more fully than not doing so.
So you could say I am a believer in committing things to paper as there are often much deeper benefits to be had as a result, over and above the obvious purpose of simply capturing information.
My Eureka moment
Well this week something startling happened that I had never anticipated. I was working on my slides for our summer seminar. In one of my sessions I will be revealing all 6 of the trades in my behind the chart strategy. Previously I taught just 2 of these setups.
Anyway there I was marking up some charts with the entry points, initial stops etc. Suddenly something amazing just hit me as I was drawing on those charts. For years I have followed these trades and simply never noticed it before. Yet the simple act of preparing some slides suddenly opened my eyes to something quite incredible.
What did I discover?
Well, have you ever noticed how you always seem have your biggest positions on losing trades and conversely never seem to have enough on the best winners? For many traders this is in fact the case. But even for others who use a fixed unit size – this still feels like it is true!
OK so how would you like to turn that on its head? How about having only half as much on the losing trades as you have on the winners? Wouldn’t that be quite something?
Impossible you say? I hear you. In most cases I would agree with you. However what I discovered quite by accident really does allow you to have twice as many contracts on the good trades as you have on the bad ones!
I shared this with Professor Quinto later that day. He was stunned.
I shared this with some of the traders in my chat room this week and they thought this was really cool. We watched a real trade unfold in real time as I talked them through the strategy. It was spectacular.
Just to be clear what this profit magnifying technique does is to provide 2 units of your chosen trade size on the best winning trades, yet never to lose more than 1 unit on the losing trades!
I am really excited by this as it makes a massive difference to the overall performance of any system. You only need 33% winners like this to breakeven and let’s be honest even the crappiest of strategies can do better than that. We will be teaching setups that often deliver 70% to 80% winners where this can be applied. The only drawback is that I can’t apply this trick to every setup in my toolkit. But you can be sure from now on I will be applying it to every trade where it can be used.
Join in the fun
If you would like to take my newly discovered profit magnifier and apply it to all the setups I will be teaching or to apply it to many of your own trade setups, then do join me at the Century Of Trading seminar on June 25th.
This profit magnifier was never planned for the seminar, so I am really excited to be adding yet another amazing technique to the already bursting agenda. I am really excited to be sharing all of this, period. I do hope you can join us for what will be a spectacular event – the first live appearance I have made in 4½ years!
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2011, all rights reserved
“Evolve or Die” – LBR webinar replay
I was swamped with feedback after the webinar I recently gave with Linda Raschke and have tried (!) to respond to everyone in the days since this took place. Thank you to everyone who took part and I’m delighted so many people found it so thought provoking.
If you missed the live event or would like to watch the replay, here is a link to the video archive. Just click on the picture below…
Enjoy it, let it percolate in your mind for a few days and see how you start to think differently about the markets and start to find ways to simplify what you yourself are doing each day!
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2011, all rights reserved
A Century of Trading – June 25th
Jeff Quinto, George Kleinman and Simon Townshend together have over 100 years of experience in the markets! That’s somewhat alarming to them but great news for you.
Call upon a century of experience and learn 6 trading techniques and money management strategies that these 3 traders use in the markets today.
At this one time, one day seminar in Los Angeles, Jeff, George and Simon will teach you techniques that have stood the test of time and that they personally use today. These are all straight forward, based upon sound logic and a century of experience in the markets.
Each of these 6 individual techniques can be used on its own and each one is more than capable of boosting your bottom line. Better still use them together as a powerful solution to long term trading success.
The 6 techniques you will learn are as follows (full details on the other 3 pages of this website):
- George’s Secret Indicator (and a complete strategy for using it)
- Behind the Chart (basic & advanced use in trend following and reversal trading)
- Don’t be Afraid of the Money (how professionals handle their capital)
- The Power of Natural Numbers (a breakthrough strategy for capturing profits)
- The Keys to the Kingdom (the much overlooked power of trade sizing)
- Overcoming Fear and Programming Confidence (turning a new trader into a survivor)
Best of all you can take any or all of these and start using them yourself straightaway on Monday morning.
To find out more, please visit: www.CenturyOfTrading.com
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2011, all rights reserved
“Greed is good”…except when is blows you out!
In Gordon Gekko’s universe greed may be good. Alas in my more modest little world greed is usually the end of many trading careers. Greed often manifests itself as trading with unrealistic size and that can be a time bomb!
One of the most frequent questions I get asked is “how much should I risk on each trade?” The irony here is that such an important question is one that I have to steer very clear of, as in my country that is a question I would need to be licenced to answer!!!
However that doesn’t stop me sharing my thoughts on the subject generally, nor does it prevent me revealing what I personally do, so let’s get on with it!
Mr 10%
First I want to tell you a quick story about a guy who has come to be known as “Mr 10%” among my circle of friends. I don’t know who he is, nor can I actually find him anymore. But Mr 10% was someone I found on the internet a few weeks ago who was urging traders “to risk no more than 10% of their capital on each trade”!
My guess is this is someone who has never traded in his life. Or if he has I am quite sure that just a few weeks on from seeing his ridiculous video, he is no longer trading. Risking 10% is an express ticket to the poor house and it is beyond my comprehension why anyone would be so foolish to even attempt such an idiotic thing.
Of course just to be clear throughout this article I am referring to trading capital and not just the balance in any particular brokerage account. Sure you can risk 10% of the $25k you have in an account if the other $250k of your trading capital is sitting the bank or in other accounts. I don’t have a problem with that at all. But if that $25k is your trading capital in its entirety…that is another matter altogether!
How about 0.1%?
At the other extreme, let’s say we are risking an incredibly small percentage of our capital on each trade, what then?
Well for most traders that would probably not be appropriate either as you are unlikely to make any money over the long run. So why bother?
There is however one situation where such a tiny stake would be the right answer and this is in a situation where the strategy being traded has a very low percentage of winning trades. This is not my scene at all, but I know of people who play for huge amounts on their successful trades at the expense of being paid regularly. Perhaps only 1 in 10 trades is a winner, but when they come around the winners are 20 or 30 times the size of the losers.
Even though I couldn’t live with those sorts of numbers, that is still a profitable strategy. But it will have huge losing runs! Huge! 50 to 100 losers on the trot are quite feasible in this scenario, so you would have to trade such an ugly system with tiny leverage in order to trade through the almost constant drawdowns.
The middle ground
Clearly in between these two fairly ludicrous extremes there lies a middle ground containing the right answer for most of us. What that right answer is depends on many different factors:
- Strategy winning percentage
- Relative size of average winners and average losers
- Capital preservation plan
- Personal risk tolerance
- Overall trading objectives
Every one of these factors varies between individuals, which is one of the reasons I cannot give a simple answer to this question I get asked so frequently, even if I was allowed to give personal advice.
Most of the professional traders I know regularly speak in terms of 0.5% to 2% being the “right” amount for them personally. Most of traders I know also work with similar sorts of statistics, i.e. 50%-75% winning trades and average winners being greater than or equal to average losers. So with a strategy with that sort of edge 0.5% to 2% seems to be a well-accepted order of magnitude.
Mr 1%
For me personally 1% is a comfortable place to be. I’ll never win trading competitions with this relatively conservative size, nor will I get blown out. It is a simple fact of life that if 2 out of 3 trades are winners and 1 out of 3 are losers, these will not materialise in a convenient win, win, lose, win, win, lose pattern. There will be long winning runs and clusters of losers. That is just how it is. So you have to be willing and able to trade through the drawdown periods. That means understanding the importance of your unit size and how dangerous greed in this area can be to your survival.
Any fool can make money during the easy times. But only those with commitment and sensible conservative leverage will survive the rough patches.
Yesterday I was doing some work with one of my partners on trade sizing. We have been slowly increasing our unit size and are still below this 1% level, but are homing in on that as the place we want to reach and then maintain.
We looked at the real time results since launch using a fixed but modest 1% risk per trade and a maximum loss per month capped at 5%. We can live with that and so can our investors. We can absorb a few losers here and there and not have to panic or worry about being blown out. This business is hard enough without having to endure stress that it completely avoidable.
At 1% risk this is the P/L since the strategy went live. You can see it still makes decent returns at this nice safe level of leverage:
Now let’s consider these other two extremes we discussed. At 0.1% risk we would be looking at a total return of 9.1% compared to the 136% we see above. At something less than 5% per year this is simply not enough to make the exercise worthwhile.
At 10% the numbers would be huge, too silly to quote. However even with a strategy this consistent those tiny little dips would have more than halved the capital – not quite a blowout but very close indeed and not something that many traders would live through.
Conclusion
I hope this illustrates the importance of finding an answer to this question that so many people ask, yet to which there is no “one size fits all” solution.
What I do know from my experience is that it is easy to start too low and slowly work upwards, whereas starting too high is likely to be fatal. In fact I strongly recommend to all of my clients that they start so low that they are paper trading. Only with some experience and confidence should they then venture to trading a single contract. Then over time slowly build up to whatever percentage of capital they have decided is right for them.
This way time is on your side and everyone who has followed that advice has ultimately thanked me for it and told me they have learned how to ride both the financial and emotional dips without ever risking being blow out before hardly starting. Every one of those that followed that advice remain with me today and their confidence levels remain resolutely high when handed a fistful of losers. Whereas sadly there have been others who are gone at the first little set back. I don’t know, but would be willing to bet that in every case these folk have been using too much leverage.
So if in doubt about the trade size you should be using – make the most balanced judgement you can and then halve it!
As a final thought on this topic – no trade should matter to you. It is just one of a long series.
As one of my friends likes to say “It is just one of 10,000 trades you will be taking. We are the house, we have the edge. Its just our job to keep taking the trades.” So if the next trade matters to you, or the next 2, or next 3…you know you are trading too big, so you need to work on this area of your trading plan.
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Copyright © Simon Townshend Ltd 2011, all rights reserved
Perception is not always reality
…but can be a real risk to performance!
The last few weeks we have really been getting beaten up. At least that is how it feels. Many of my friends that trade the same strategy with me are feeling the same frustration as I am feeling. Few trades seem to be working and those that do just don’t deliver worthwhile profits.
At least that’s how bad it feels. Yet when we step back from the day to day activity and look at the facts, we see a rather different picture. Our daily strategy that usually has about 8 to 12 trades per month closed in November at all-time highs. December delivered a small loss equivalent to just 2 losing trades. January has been similar.
So in reality we are actually behind by about 4 losers. That’s all! Or put another way we are just 4 modest winning trades (or just a couple of decent winning trades) off of all-time highs!
That’s not exactly a bad situation is it? Yet we are hurting and I want to understand why?
The only conclusion I have been able to draw is that our perception is being benchmarked against recent history rather than what it is reasonable for us to expect. Psychologically we have become conditioned to expect to close every month at new equity highs, as that is exactly what we have been doing month after month for a long time. So relative to our benchmark and expectations we feel like we are really getting a good kicking.
However in reality, 4 losing trades is so immaterial traders wouldn’t normally even discuss it. So we are actually still in a good place, a place that many traders would be only too happy to have achieved.
So what’s the problem?
Well there actually is a very real problem. Our perception of doing badly takes us psychologically to a very dangerous place and we have to be very careful how we handle this. Feeling like we are doing badly is very destabilizing, even though it may not be true. This in turn can lead to irrational behaviour, to lack of concentration and to silly errors.
It can also create a feeling of desperation to get back on track quickly, which in turn can lead to cutting corners, to taking sub-optimal trades, to over trading and to sloppy trade management.
Together all of these things can easily conspire to create the poor performance that we are actually trying to avoid! This is why we have to be so careful about everything we do until this dangerous psychology is lifted.
So to counterbalance these risks we have to deliberately work to do the opposite – to minimise the number of trades we take, to double check we only take the best trades, to manage them strictly within the rules of our trading plan and to avoid impulsive, irrational decision making. In truth half of the battle is just being aware of these increased dangers we face at odd times like this. The other half is working on these opposites in order to achieve the balance that we are at risk of losing if we allow the false psychology to get in our way.
So watch out for this trap next time you feel you are going through a rough patch. Ask yourself from an objective standpoint “Am I really doing badly or is it just a perception?”. Then work hard to move the perception back into line with reality taking great care until the psychological trap has passed.
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2011, all rights reserved
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