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Asher's Letters to Samech - Part 5
BS"D
Hello Samech, I don’t want to disagree with the "big boys", but I do!!! Here's some free advice for you, and any other Newbie: One of the best ways to ensure throwing your money away (“one of” seems a safe enough expression) is to hop from approach to approach, technique to technique, and to clutter your emotions and style with a mixture of approaches and indicators (which often counter-indicate one another in any event). Too much “best way to trade” input undermines your confidence and confuses you into painting yourself into lots of losing corners. Learn to walk before you start learning fancy dance steps. Study all you want, then: 1. Select the single (single, as in 1) trade approach, method, and technique that makes sense to you (For example: Buy-Sell straddle on a breakout from a triangle formation—only). BTW, this is how I'm using those terms:
2. Define your trade. Be specific. Spell out all the details (Techniques) for one simple trade, based on the approach you have selected. 3. Prepare your what-if “war plans”. Whatcha gonna do if...? Be sure to define the basis of your decision to enter a trade, and what you would consider to disprove/violate your assumption. Don't overlook designing an emergency exit plan in case things go dramatically and suddenly against you. (Trust me, they often will.) 4.
Watch your charts and paper trade your trade only. Find
examples of your ideal set up on your charts and paper-trade them.
The hardest part about paper trading is not to cheat. No fair changing your mind mid-trade about entering the trade. No fair going back and exiting earlier either. The system I personally found most effective was the buddy system. Using real data, as opposed to historical data, I used to place my orders with a trading partner, via ICQ. He then would advise me by return regarding my fills, just like a broker, but for free. This gave me a feel for the time lag between the price-action signal and order preparation and placement, as well as for the slippage caused by the market continuing to do its thing in the meantime. This system kept my paper trading honest. 5. Based on what you have learned about your trade from the experience gained from Step 4, revise and refine your "war plans". 6. Paper trade some more. Trade your trade over and over till you can execute all aspects of it successfully in your sleep. 7. Trade it for real, just like you practiced, with no embellishments.
Interesting Note =] ;-)>
8. Continue studying all you want. 9. Fine-tune your one simple trade (not to be confused with “clutter your one simple trade” - don’t fix what’s not broken). If you can stick to this plan you will become a successful part time trader. From this position of strength, you can now move toward mastering a second simple trade. You won’t make a living right away, but you will still have funds left to trade with once you actually have earned enough mastery to go it full time! No, you didn’t waste your money on any of the books and courses you ordered. Each one will teach you something more about the basics of trading. There are zillions of trading methods and even more techniques and indicators. Learn them all if you can afford it, but for real trading - KISS - Keep It Simple, Samech! Common $ense Commodites, for example, is a great place to start. It is basic, sound, uncluttered, and practical. Some people might want more “sophistication”, but wouldn’t you personally prefer more control and more profits? You want an approach that keeps you from overtrading and jumping the gun every time your imagination sees a signal. You want methods and attendant entry techniques that only put you in trades once the move is proven, and have you out before reversals and retracements can take back your gains. Master them. This is invaluable, even to option-trading purists, like us — LOL! Oh, and re-read "Phantom of the Pits"! About your next question, multiple contracts. Aren't we kinda getting ahead of ourselves here again? We're just completing the disclaimer stage of our discussion and we're already considering trading multiple contracts! First off, let me tell you that like most everything with trading, there's lots more to it than a simple yes or no. For now, toy with this example (learned it from SL, the guy I mentioned in an earlier letter when discussing account size): Trading three contracts, SL uses staggered protective stops, say one at 4 points, one at 5 points, and one at 6 points. That way, as the market proves him wrong his position gets smaller. On the other hand, he never takes his profits before his pre-calculated target price is hit. Then, he exits two contracts (remembering to cancel his protective stops!), moves his third stop up to just above breakeven, and lets the third contract ride to maximize profits. (I don't remember for sure, but after this, I think he uses some parabolic system to trail his protective stop to lock in profits.) I'm not necessarily recommending this approach, just pointing it out as a learning example. The combination of staggered stops and targeted-exit effectively cuts his losses and lets his profits ride. SL is a purely mechanical Tbond daytrader, so this method works great for him as long as his system is right more than 60% of the time. I've attached Trading Target Calculator screencaptures showing how this plays out at one trade per day, with all winning contracts (60% Average Percent of Wins) cashed at a preset profit target of 10 points. I assume you have downloaded your free copy of the Trading Target Calculator and have read the short instruction booklet. The screen elements are pretty self-explanatory, even if you haven't had a chance to read the manual. Remember: It is altogether possible that the 40% losers could come first, one right after another. For our three-contract example, that would potentially be equivalent to a drawdown of $930 (2 trades X 3 contracts each X 5 points average loss X $31 value per Point = $930). To further put this in perspective, that's $930 losses versus profits of $2,790 (3 trades X 3 contracts each X 10 points average win X $31 value per Point = $2,790), a 3:1 win:loss ratio, not including commissions and fees. Another way to view this is that by trading 3 contracts you would have the approximate equivalent of a 15% per week profit (see Net Yield on the Multiple Contract example) on a $10,000 trading account, and about 5% per week profit trading single contracts. It's the same success rate and work either way, if you discount the psychological strain aspect of the larger drawdown potential. When trading three contracts, even if one trade went completely awry and you lost an additional $750, you'd still have $735 in profits for the week. On the flip side, if one trade got away from you to the tune of an additional $750, you would have a net loss of $255 trading singles. Compare the single contract trade to the multiple contract trade and draw your own conclusions.
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Whoa! It's the middle of the night. I have to get up early tomorrow. Gotta run. Next letter, unless you intrigue me with more questions, I think we'll start digging into Options. Yummy!!! Be well. Love to all, Asher
Back to Asher's Letters to Samech, Part 4
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