My trading system summary

[pavilion103]

I am new to trading, in fact I haven't traded my system in the live market because I know it has glaring faults and that it why I would like to get opinions as to what the biggest mistakes in my system are and if there are any positives about it that I should keep going forward.

In a nutshell these are the details of my system:
- Trading CFDs, leveraging 3-5%
- 1R = 2% of capital (so a risk of $400 per trade on a $20,000 account)
- Stop losses varying between 1.25% and 2.50% from current price
- Trailing stop: close below the low of the previous 2 days
- Aim to stay in a trade circa 3-10 trading days
- Technical analysis (on my chart is 15EMA, 30EMA, Volume, Volume 14 day EMA). These are used to confirm entry signals (support/resistance/patterns). I like price to be above EMA and volume above its EMA.

Glaring faults that I can see:
1. Putting a stop 1.25% below price will see me stopped out in one day and if the price gaps I could suffer a loss bigger than 1R
2. Trailing stop will exit me out of a position fairly quickly
3. Leverage of 3-5% maybe too high?

My thinking behind what I've got so far:
1. Aim for an expectancy of 35%, avg winner 1.75R, avg loser 0.75R (expectancy 0.125)
2. Get out of losing trades quickly and trail stops in a way that will exit at sign of weakness.
3. Hit a few really big wins if a company moves up 4-5 days in a row.


Now I know this system isn't the one I will use in the market. I am still learning and have very little idea about system development. Please feel free to tear this to shreds and help me get on the right track. I want to learn more, I am open, I am willing. I will take any advice constructively. I will but aside having to 'be right' and listen to the wisdom of more experienced and knowledable traders.

Thanks you very much,
Matt

 

[tech/a]

Matt

Havent the time right now but you need to be shown how to position size and use your risk managements.
I use .05% and hardly ever get stopped on the first day.
Have a look at fixed fractional position sizing and If someone doesn't beat me to it will mark up a chart tomorrow which will give you one of those Ahhh moments.

 

[gregraphic]

Matt

Havent the time right now but you need to be shown how to position size and use your risk managements.
I use .05% and hardly ever get stopped on the first day.
Have a look at fixed fractional position sizing and If someone doesn't beat me to it will mark up a chart tomorrow which will give you one of those Ahhh moments.

I look foward to that chart as well, thanks tech/a

 

[KurwaJegoMac]

I'm not as experienced as Tech/a, but here is my 2twocents:

- Trading CFDs, leveraging 3-5%

Make sure when using CFD's you use appropriate position sizing - often people open a CFD position using their total leveraged amount to determine their %/$ risk, instead of counting their initial, unleveraged capital base ($20,000 in your case).

- 1R = 2% of capital (so a risk of $400 per trade on a $20,000 account)

Nothing wrong with this, provided it's within your personal acceptable risk limits. Most people don't even think of this step so well done.

- Stop losses varying between 1.25% and 2.50% from current price

On what basis are the stop losses derived? I.e. under what conditions will you be using say 1.25%, 1.5%, 2%, etc. You need to be a bit clearer as to the reasons behind your stop loss (e.g. a straight 2%, 10% below yesterdays close, at the 50 day MA, etc) Otherwise it's hard to comment on.

- Trailing stop: close below the low of the previous 2 days

Given your trading timeframe (3-10 days) it seems reasonable. Hard to comment on without appropriate backtesting. Have you tested this method? Backtesting or paper trading?

- Technical analysis (on my chart is 15EMA, 30EMA, Volume, Volume 14 day EMA). These are used to confirm entry signals (support/resistance/patterns). I like price to be above EMA and volume above its EMA.

Once again, paper trade or back test to see if it works. If you're comfortable with the expectancy, R value, max drawdown and are able to make a relatively smooth equity curve then go for it!

Glaring faults that I can see:
1. Putting a stop 1.25% below price will see me stopped out in one day and if the price gaps I could suffer a loss bigger than 1R

As Tech/a mentioned, no reason why you will always be stopped out - that being said, in T/A you're either right or you're wrong. If the trade goes against you just cut your losses and move on. You can be right 30-40% of the time and make good money, provided your R is good.

Regarding price gaps, this is a fact of trading. If you're not comfortable with this then you may need to reduce your risked capital (e.g. to 1.5%) in case your trade gaps. That's a personal choice - see what your backtesting and paper trading comes up with.

2. Trailing stop will exit me out of a position fairly quickly

What is this based on? If you feel that this is the case, consider a wider trailing stop, or basing your stop on a different parameter ( low of the past week, %fall from peak, % of monthly volatility, etc) lots of different choices. You need to mix and match and play around until you find what works for you. It may be that your trailing stop works just fine - have you tested this?

3. Leverage of 3-5% maybe too high?

This is really based on the individual. Some people don't like to use leverage at all and some never trade without leverage. So long as you ensure you have adequate risk, position and portfolio management there's no reason why you can't use leverage. Just ensure your position size is appropriate to ensure you only lose 1R or whatever ur risk is set at.

My thinking behind what I've got so far:
1. Aim for an expectancy of 35%, avg winner 1.75R, avg loser 0.75R (expectancy 0.125)
2. Get out of losing trades quickly and trail stops in a way that will exit at sign of weakness.
3. Hit a few really big wins if a company moves up 4-5 days in a row.

Regarding point 1 - I'm thinking that the 35% figure you quoted should be win % not expectancy? The 0.125 is your calculated expectancy? If that's the case, then that's fine - if your system has a positive expectancy it will make money in the long run.

Regarding point 2 - Cutting losses quickly is integral to trading effectively. Make sure you don't forget this when you go live - all too often people fall into the trap of "it'll recover" or "ill hang on until it reaches my entry and then get out".

Regarding point 3 - You'll find that with your trading a lot of your small losses will be offset by your small gains. It's the big gains of 3R, 4R, 5R, etc that make you profitable.

Now I know this system isn't the one I will use in the market. I am still learning and have very little idea about system development. Please feel free to tear this to shreds and help me get on the right track. I want to learn more, I am open, I am willing. I will take any advice constructively. I will but aside having to 'be right' and listen to the wisdom of more experienced and knowledable traders.

Thanks you very much,
Matt

Don't sell yourself short Matt - you're already ahead of so many other traders out there and I think you've made a VERY good start so well done. As Tech/a said, make sure you understand position sizing and risk management.

Keep it up Matt! Well done

 

[tech/a]

A lot to get through here.
Fortunately KurwaJegoMac
has touched on some good points.

Position sizing is very important and also the key issues of
(1)A trailing stop and
(2)an initial stop have been touched on.
Both are vastly different.

We keep hearing Cut losers short and let winners run.
So how do we design a method so this can occur.

The balance of allowing an initial purchase to move in our favor but arrest it if it doesn't (Quickly) is a key ingredient.

As Nick Radge once said "Nothing wrong with being wrong---Its how long you remain Wrong that matters!"

So we should buy with Momentum when we can say that clearly momentum is in our favor.
Momentum occurs at Support/Resistance so I find 2 things (For me) are imperative
(1) a trade must be initially involved in momentum (Breakout)
(2) a trade must prove to me it has moved from stability to momentum.

This way I can place a tight stop if a close area of support or explosive volume (Gap/Wide range) is around.

Quick note on VOLUME You MUST learn what is buying (Demand) selling (supply) volume --- I note one of your conditions is high volume---If supply rushes in then volume will be high and often you'll be stopped out---perplexed as high volume was evident! Breakouts on average or low volume can be powerful---NO SUPPLY!

HINT So stops should have a logic and strongest possible point of placement to avoid being stopped out.

OK so Ive made my buy (You can determine any entry criteria provided it CLEARLY shows Momentum in your direction).

HOW do we let profits run BUT keep profits we have.

Trailing stops

These are implemented to protect open profits ---there is a time they should be loose (During strong movement in your direction)

and times they should be tight (When price moves exponentially -- OR when price clearly shows signs of exhaustion (You'll have to educate yourself to identify both).

Exits
Often my trailing stop will be my exit.
But if it isn't--- A point where it is no longer clear in the life of the trend that it is going to continue.

So to the important Position sizing See charts below.



Here is an example of a trade ill be looking at Monday.
2% risk on my capital is $2000
As I classify this as a Risky short term trade Ill only risk .5% of my capital on it.

I Dont know if it will fly or reverse.
I have up to 20 trades in my portfolio.
Some fly and some are culled. Often if a trade is stagnant for a few days and analysis (VSA) doesn't indicate movement in my favor I will sell a position EVEN THOUGH it hasn't hit my stop.

I would rather take a very small loss and re set myself in a position which has more potential NOW. (Opportunity cost).
Here is a shot of my portfolio which as you can see is in various stages of holding


This is from a few weeks ago.

Has changed quite a bit from then but shows the various stages of trades in a portfolio being constantly managed.

 

[tech/a]

I still haven't covered position sizing clearly enough and I'm out of time again.
Ill do it tonight and answer any questions then if they appear.

 

[gregraphic]

thanks kurwajegomac and tech/a...very helpful.

 

[Mistagear]

Hi P,

It is pointless having a trading system which stipulates a stop loss in percentage terms. It will lead to increased fail rate simply because the stop is within the normal range of the stock, even on some occasions where the direction has been correctly identified.
A stop needs to relate to the current volatility of the particular stock and/or a likely level of support.
For this reason you need to work backwards, where you determine the best place to place your stop and then divide your maximum dollar loss by the tick difference between where you are about to enter and where you will place your stop.

eg; If you decide the best place for your stop is 10c from your entry and your maximum loss in your system is $500, then you place a buy for 5000 shares.
5000 x $0.10 = $500
This way, your risk is controlled by adjusting the size of position and your stop is outside the "noise" of that stock and suitably placed.

sure others will explain better than I have, but hope this helps.

Cheers, M

 

[pavilion103]

Thanks for the help guys. Some very long and informative posts.

I'm not sure if I explained myself clearly enough when I talked about the way I use my stops.

I will try to explain this. I'm not sure if it will make sense but if so can I get some opinions please.

So, I risk $400 per trade max.
I create a stop using technical analysis (support/resistance etc.)

If for example I enter at $8.67 and identify a support level at around $8.53. I give myself a bit of room and place a stop around $8.51. So the stop is 1.85% away from my entry price.
I decide on the number of CFDs I will trade using: $400(2%)/16 = 2,500 CFDs

Now that I leverage them by say 3% (and this is obviously larger than the 1.85% difference from current price to stop) it means that I have $650 of my own money in the trade, but my stop loss at $8.51 will exit me at a loss of $400(or 2%), rather than $650.


How does this sound? Have I misunderstood any of the above? Is this the correct way to go about it?

Secondly, a question for the guys who use support/resistance levels and other patterns/trend lines etc... how do you backtest your system? I am assuming it isn't possible to run an extensive backtest when it is discretion you are using to enter the trade rather than a mechanical entry (e.g. high of the last 30 days)?

Thanks,

Matt

 

[tech/a]

Hi P,

It is pointless having a trading system which stipulates a stop loss in percentage terms. It will lead to increased fail rate simply because the stop is within the normal range of the stock, even on some occasions where the direction has been correctly identified.
A stop needs to relate to the current volatility of the particular stock and/or a likely level of support.
For this reason you need to work backwards, where you determine the best place to place your stop and then divide your maximum dollar loss by the tick difference between where you are about to enter and where you will place your stop.

eg; If you decide the best place for your stop is 10c from your entry and your maximum loss in your system is $500, then you place a buy for 5000 shares.
5000 x $0.10 = $500
This way, your risk is controlled by adjusting the size of position and your stop is outside the "noise" of that stock and suitably placed.

sure others will explain better than I have, but hope this helps.

Cheers, M

Well yes that can be the case.
Techtrader has a stop of 10% of initial purchase price which is 1% risk! It can work and both testing and trading the method have proven so.

But I do agree with your points,on MOST occasions those traded in T/T were out of the ATR of the stock being traded at 10%---smaller stocks certainly wont!

But Your post leads me to the other charts I was going to post.
And explains to a degree what you are saying ---I think.

When looking at this chart and the various possible Stop placements think of
(1) Allocation of capital and how its affected by your choice of stop.
(2) Return on investment and how that is effected.R/R
(3) Possible time in the trade and Capital allocation with regard to opportunity cost.


All important factors in Initial stop placement

 

[tech/a]

Thanks for the help guys. Some very long and informative posts.

I'm not sure if I explained myself clearly enough when I talked about the way I use my stops.

I will try to explain this. I'm not sure if it will make sense but if so can I get some opinions please.

So, I risk $400 per trade max.
I create a stop using technical analysis (support/resistance etc.)

If for example I enter at $8.67 and identify a support level at around $8.53. I give myself a bit of room and place a stop around $8.51. So the stop is 1.85% away from my entry price.
I decide on the number of CFDs I will trade using: $400(2%)/16 = 2,500 CFDs

Now that I leverage them by say 3% (and this is obviously larger than the 1.85% difference from current price to stop) it means that I have $650 of my own money in the trade, but my stop loss at $8.51 will exit me at a loss of $400(or 2%), rather than $650.


How does this sound? Have I misunderstood any of the above? Is this the correct way to go about it?

Secondly, a question for the guys who use support/resistance levels and other patterns/trend lines etc... how do you backtest your system? I am assuming it isn't possible to run an extensive backtest when it is discretion you are using to enter the trade rather than a mechanical entry (e.g. high of the last 30 days)?

Thanks,

Matt

Matt why are you leveraging?
You cant back test a support resistance method with any software I'm aware of.
Either increase your position size or Decrease your risk.

So the stop is 1.85% away from my entry price.

Irrelevant.

 

[pavilion103]

Matt why are you leveraging?
You cant back test a support resistance method with any software I'm aware of.
Either increase your position size or Decrease your risk.


Irrelevant.

I am looking to trade CFDs. Wouldn't it make sense for me to leverage with such a small starting capital base? I just assumed that I would be leveraging.

I'm really confused right now. In the above example that I used if I am buying 2500 CFDs at $8.67 then that works out to $21,675 in total. If my account is $20,000 then I can't use that much per trade without leverage.

I am obviously missing something here. Please pardon my ignorance.

 

[tech/a]

No you can leverage if you want.
Just asked why.

You can certainly do as you say risk is still $400.

 

[skc]

Thanks for the help guys. Some very long and informative posts.

I'm not sure if I explained myself clearly enough when I talked about the way I use my stops.

I will try to explain this. I'm not sure if it will make sense but if so can I get some opinions please.

So, I risk $400 per trade max.
I create a stop using technical analysis (support/resistance etc.)

If for example I enter at $8.67 and identify a support level at around $8.53. I give myself a bit of room and place a stop around $8.51. So the stop is 1.85% away from my entry price.
I decide on the number of CFDs I will trade using: $400(2%)/16 = 2,500 CFDs

Now that I leverage them by say 3% (and this is obviously larger than the 1.85% difference from current price to stop) it means that I have $650 of my own money in the trade, but my stop loss at $8.51 will exit me at a loss of $400(or 2%), rather than $650.


How does this sound? Have I misunderstood any of the above? Is this the correct way to go about it?

Secondly, a question for the guys who use support/resistance levels and other patterns/trend lines etc... how do you backtest your system? I am assuming it isn't possible to run an extensive backtest when it is discretion you are using to enter the trade rather than a mechanical entry (e.g. high of the last 30 days)?

Thanks,

Matt

Shares can regularly gap 10, 15, 20% in a day, even in the ASX200 universe. Using your above example, if the stock gaps down 20%, you have just lost $4,300. Can you handle that ? Will you be able to keep trading psychologically? Don't give the market a chance to ruin you.

Use leverage all you want but don't leverage to the point where something goes wrong and you can't trade anymore. If you trade long enough a gap like that will happen on the wrong side eventually. You can use leverage to trade more positions, rather than larger positions.

To avoid getting killed by poor position sizing - you have to keep your total position size in check.

Look at Tech/A's example. He's assuming a $100K account and his position size was 70,000 shares at 4c = $2,800. Or 2.8% of his account size.

With $20K, I would look at may be 40% of my account as a maximum. So $8K.

 

[pavilion103]

Shares can regularly gap 10, 15, 20% in a day, even in the ASX200 universe. Using your above example, if the stock gaps down 20%, you have just lost $4,300. Can you handle that ? Will you be able to keep trading psychologically? Don't give the market a chance to ruin you.

Use leverage all you want but don't leverage to the point where something goes wrong and you can't trade anymore. If you trade long enough a gap like that will happen on the wrong side eventually. You can use leverage to trade more positions, rather than larger positions.

To avoid getting killed by poor position sizing - you have to keep your total position size in check.

Look at Tech/A's example. He's assuming a $100K account and his position size was 70,000 shares at 4c = $2,800. Or 2.8% of his account size.

With $20K, I would look at may be 40% of my account as a maximum. So $8K.

This is a very good point that I overlooked in the development of my system.

I have a couple of questions.

Using my example of buying at $8.67 and stop loss of $8.51 with account size of $20,000
Position size = 400 (2%)/0.16 = 2,500 CFDs. Position size = $21,675

Obviously this is much too big. So I tried to figure out how to reduce this. One way is obviously use a wider stop, however I feel from a technical point of view this eliminates a good trading opportunity at a level of support. So my other alternative is reduce my position size to 1% per trade ($200). This produces a position size of roughly $10,300. This is much better (maybe not ideal). So factoring in a possible 20% gap against me I would lose $2,000 or 10% of my portfolio, rather than the 20% I would have lost risking 2% per trade.
Is this correct?

This leads me to the question. If the distance between the entry price and stop was double (32c instead of 16c), is it best to still trade the 1% ($200), or could I then go to 2% ($400)? I understand that it may vary with strategy but is it usually advisable to risk the same percentage (in this example 1%) per trade, or doesn't this really matter?

Thanks,
Matt

 

[tech/a]

This is a very good point that I overlooked in the development of my system.

I have a couple of questions.

Using my example of buying at $8.67 and stop loss of $8.51 with account size of $20,000
Position size = 400 (2%)/0.16 = 2,500 CFDs. Position size = $21,675

Obviously this is much too big. So I tried to figure out how to reduce this. One way is obviously use a wider stop, however I feel from a technical point of view this eliminates a good trading opportunity at a level of support. So my other alternative is reduce my position size to 1% per trade ($200). This produces a position size of roughly $10,300. This is much better (maybe not ideal). So factoring in a possible 20% gap against me I would lose $2,000 or 10% of my portfolio, rather than the 20% I would have lost risking 2% per trade.
Is this correct?

This leads me to the question. If the distance between the entry price and stop was double (32c instead of 16c), is it best to still trade the 1% ($200), or could I then go to 2% ($400)? I understand that it may vary with strategy but is it usually advisable to risk the same percentage (in this example 1%) per trade, or doesn't this really matter?

Thanks,
Matt

Risk my favorite topic.

Matt
There are times Ill put the House on 1 position.

A 20% gap down in a larger cap is pretty damned rare.
Personally I trade smaller risk capital on smaller caps with tight consolidations BUT in its place I will trade many positions.
I cant be sure how many of those trades will trigger and how many will go on with it.
But I do know that out of 20---4 or 5 will. Which ones I wont know till they do what the analysis says they should do.
With 20 positions I Dont want too much portfolio heat (If things go pear shaped and ALL positions Dive---whats my exposure---

What your doing is the CORRECT use of leverage.
Your taking a risk of $400 and trading the full 20K in one position.
That wouldn't bother me.
In fact Id set the trade and stops and away Id go.(I presume its CFD's)
Id then take a number of other positions.These will of course vary in capital drag depending on the trade and stop setting.
Provided your not increasing your risk with leverage then trade with it if confident.

So you could have 8 positions of $400 or so risk ($3200) and 50-60K of positions.
Normal Trading with leverage.

 

[pavilion103]

Quick note on VOLUME You MUST learn what is buying (Demand) selling (supply) volume --- I note one of your conditions is high volume---If supply rushes in then volume will be high and often you'll be stopped out---perplexed as high volume was evident! Breakouts on average or low volume can be powerful---NO SUPPLY!

Tech/a, I'd love to hear more about this. The reason I say this is because it is counter to things I have read in terms of buying on heavy volume. I understand exactly what you're saying and it makes perfect sense. Is there a key to identifying what is buying volume? How do you go about this? I haven't read this in any materials as yet (or maybe I have and it went over my head)
Thanks

 

[pavilion103]

Another one for Tech/a (by the way I appreciate your posting in this thread, very very helpful for me).

I noticed in your portfolio that you are trading a number of lower priced companies (compared to the big names: BHP, Banks etc). What is your reason for this. Is it based on volatility? Or a mixture of factors.

Would you advocate this approach for a beginner? Or do you think it's safer for me to have a play around with some of the more "popular" companies first while I am learning? Or does it make no difference at all in your opinion?

 

[tech/a]

Have a google around or join here

http://www.tradeguider.com/
and get a free copy of "Master the markets"

Its in their free download section.

 

[Julia]

Risk my favorite topic.

Matt
There are times Ill put the House on 1 position.

I'm glad you made this comment,Tech/a. The conventional wisdom is always to spread the risk to a very small proportion of available funds. But there are plenty of times when whacking a large amount on something you're pretty sure about will net as much in a short time as many months of stuffing about with small gains on small caps.