Wednesday, June 4, 2008

Trading is Mental!-- IFCN Wk 26 -Wed- Equity: $757.20

First, note the new box on the upper right hand of the page about- "I am going to be this rich in the next 10 years." I found the site on a search about utility theory. It is a must-try site for burgeoning traders.

Answer just 15 questions and find out what kinds of choices can dictate huge changes in your future rewards. The result you see on the button is what I received my first try-- answering truthfully. I'm really not sure what it all means. Considering---

I believe “The Devil” answering the questions got $25,000.000. A guy I know who works for the government in social services who received -$1,300,000 for an answer. Really! I think he better keep his job.

It may just be in fun, but it's definitely something to think about.

Trading for InfiniteYield – Utility Theory and You!- is still available here for FREE. Click here....

We are fortunate to have some of the more intelligent readers in Cyberspace at this blog. That is good for you and me. For you, you get to see how other intelligent traders perceive risk and opportunity, and for me, I don't get irritated enough to quit the site. I've seen other trading sites and the comments that come from readers and shudder. I'm not as tolerant of idiots as I was years ago.

I got a great email from an eloquent reader of which I will print the pertinent issues below--- (It is so good and valuable, I can't edit it much)

Joel-

I was glad to read your piece on your blog today (Monday) regarding trailing stops. I had been demoing the account for last few months to understand the mechanics of the trading as well as back testing it myself as well in order to feel comfortable about the system. I am okay with the winning percentages and P&L per trade. Over the long term catching the trends seens to be beneficial for the system and its just a matter of really waiting for those to help trip the system into higher gear. I have no idea whether the system is for me or not and trading a demo account is a little like asking your sister to go to the movies with you because you are too scared to ask the girl you like. You never really will get the full effect of the emotional response to winning or losing money until it becomes real. I couldn't agree with that statement more. 3-4 weeks ago I decided to open an account with oanda and go ahead and start trading. I have definitely had a few missteps along the way but nothing that was untowardly painful. i did however, decide to try and utilize a trailing stop. I read in one of the hundred articles or books that I have studied somewhere that utilizing a trailing stop is good money management technique. In theory that is probably true, in practice, I am not so sure.

If this week was any indication, trailing stops, for this system, is not truly profitable but may be "safe". The euphoria I felt at having my account show an unrealized P&L 10% higher heading into Tuesday slowly diminished as each and every one of the trades hit my trailing stops. I was stopped out of most trades early with the exception of USD/JPY until today. Amazing. I was able to break even this week without any losses. I gather from your response in the blog that this is rather an anomaly to the system and 1 week does not make a trend in the statistics. I have been trying to create a backtesting systm utilizing trailing stops with this particular system but I haven't quite got it programmed properly yet. Once, i do I will share the results. I am sure you have already done this so please don't tell me what the resulting answer is as I want to figure it out for myself (yes, I am a masochist and like to do everything the hard way. That's why I play golf. I don't really like it but where else can you learn some humility?)
As an aside, in talking with the developers of oanda, they tell me they are developing an OCO for their platform. This will be good. no time frame given. Frankly, one of the reasons I didn't go with other platforms is i wanted to instill the discipline in myself to be prudent about trading and not make it so mechanical that I don't think about the ideas behind it and make sure I am diligently closing out the other trade in a pair after one order is placed.
Again, i have no idea if this system is for me yet. It takes discipline, that's for sure. The behavior is truly wanting to adjust something during the trade and I have to constantly remind myself to leave it alone. What is funny, is i am less worried about a significant drawdown then I am about missing a breakout. Maybe that will change with time. One of my biggest takeaways i have learned from your readings (i also purchased the disc from Tradersworld which has a plethora of articles) is to make any system you utilize simple and straightforward. There was a Harvard (i think it was harvard) study a few years back about the effects of variables on a betting system. They took succesful handicappers at the horse races who make a living betting on horses and studied them. They learned that these handicappers, for the most part, utilized about 5 variables to make their decisions on the horses in a race. They would typically win 55% - 60% of the time. Enough of a win to make a good living. The study went on to look at all the factors that could go into the decision making process and came up with a list of 20 - 30 for these same folks to utilize. The stats would show that this could improve their odds. In practice, these professional handicappers utilizing the new statistical model had a drop in their performance that after a few weeks of this they all went back to their 5 characteristics and went back to their winning percentages. Simplicity.
Thanks for creating this blog. It is a great resource for a beginner trader to hear the ups and downs of trading. I can certainly tell that my biggest challenge will be dealing with my own psychological dramas with respect to trading. Please continue to write. I am sure for many it is just like having a mentor to reinforce the basics.
Thanks.
Xxxx


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Dear Xxxx-

Your email was very welcome. You know how to accurately turn a phrase.

FirstStrike is a very decent sytem. Yes, as you mention, even though it is truly a “simple” system, it does take substantial discipline. I enjoyed your comment about deciding to stick with Oanda for order purposes because it would keep you move involved in the process, thereby training you even more.

You obviously "get it". Skillful trading is not a heartless affair. It has at its core an emotional readiness to do what must be done to get to the goal, whatever that may be for the trader. More of that kind of training is needed, not some automatic trading robot that magically churns out money. (If those Pandora's Boxes really worked, the marketers wouldn't be marketing them, but using them.)

Trailing stops can work on a -specific- system. Not all breakouts are the same, not all systems trail the same. Some not at all.

Good analogy with the horse racing methodology. Same with Blackjack counting.

Many know that besides my trading, I also played blackjack professionally when I was younger. Almost anyone can easily learn a single level +/- count, where some cards are considered +1 and others -1 as they are played, but the more accurate and very powerful counts, 2 and 3 level, where the values are +2, +3, +1, -2, -1, 0, etc., you can have twice the edge in playing but 5 times the complexity, needing to divide matrix numbers and keep side counts of Aces. It can be done-- but at a cost.

You can tire too easily, causing mistakes, and unless you play for very large stakes the potential benefit wanes. You are much better off playing a counting system that you can do effortlessly for 10 hours without a mistake than a more accurate powerful method that you can only maintain for 1.5 hours at a time, with the easy risk of making dangerous (read: expensive) errors.

Professional blackjack players today team-play using single level counts, and make substantially more than playing individually with a “super” system.

By the way, most people going to casinos won't play a simple counting system at Blackjack even though they know they should. And why Vegas continues to be able to pay its light bill and grow even further into the desert.

Trading is the same. You are better off trading a simpler method that has a good solid edge that you can definitely execute than a more complex and potentially more profitable method which you might not be able to trade as it needs to be. Compensate by taking bigger positions and more markets and you can multiply your edges almost infinitely.

Oh, that's right. Some hedge funds do that already don't they?

If everyone could get the grasp of what we're doing here, the world would be a different place. No worries, it will stay much the same. People don't change.

Thanks for the email. These are points that others need to know but do not have the elegant capacity to dictate as yourself.

I may use parts of these emails for the blog. As usual, your identification will remain anonymous.


Thanks again, Xxxx--


JR


I wish I could answer all the letters I get from traders, but I do what I can. Trading takes most of my mental energy. If I just traded one system, no problem. I like a little overall volatility in returns, so I spread the risk around.

Have a good week.

Joel Rensink
www.infiniteyield.com


PS: To receive the FREE! trading rules for the Infiniteyield Forex Challenge ($499 value) and the semi-monthly newsletter about this challenge, send an email to: newsletter@infiniteyield.com and tell me to which address you would like it sent. Please do not use AOL, Yahoo or Hotmail addresses. Nothing personal, but they've been known to filter out more good mail than actual spam. Try a Gmail address. It's free, simple and perfect for traders!


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