Trading/Daytrading for a living

tech/a · 21 May 2006

Re: Trading / Daytrading for a living

Porper.

Some wise words there.

PEOPLE AREN'T TAUGHT HOW TO TRADE WITH LEVERAGE

Two things I would like to offer up.

If people get margin calls particularly regularly then how they trade is clearly not profitable.

I've said many times before that most traders have no idea if their longterm trading methodolgy (Even if its for short term trading ) is profitable.
Without KNOWING this Trading Margin and in particular CFD's is tantimount to driving blind folded.

THIS is HOW it WORKS.

Setting margin in my veiw should be relative to initial drawdown---If you have no idea what that is likely to be and trade margin OR CFD's youve----- just stepped in front of a bus BLINDFOLDED

Lets say your average drawdown is 8% (which my longerterm systems are.)
Leveraged at 10x then you would have 80% of your equity lost is this occured,not only that but youd have only 20% equity to fight your way into profit,something that testing would not have or been able to consider---simply it wouldnt happen and youd face ruin.

Next is maximum string of Losses and risk.
Again mine is 1% risk and 12 the longest string.
Taking CFD's at 10x my risk becomes 10% and 12 straight then Im ruined.
Without this knowledge I could be trading a highly profitable method (Which it is) and going broke!! simply because I am not in the position to manage my business because I dont have CRITICAL INFORMATION.

For me margin is perfct and so could be CFD's at 3x leverage.
3x gives me max 24% on initial drawdown and 36% on maximum consecutive losses.
Ive NEVER been margin called in the 3 methods and the 3.5 yrs Ive traded them on margin.

Lastly once accumulated profits come into play Margin calls become just a figure of speech.
Compounding of profit and accumulated open profit lead rise to compounding opportunities which WHEN USED CORRECTLY turn average traders into
very profitable businessmen!

On margin loans if called no need topanick and sell the House,boat,car,or kids---simply sell some of your holdings to bring the account into line.
IE $5000 of shares.

LEVERAGE---wouldnt trade longterm without it!!

Ageo · 21 May 2006

Re: Trading / Daytrading for a living

Yep basically the key to using any leverage in my opinion is to cut your losses small (so you can lose many times if you need to and still be in the game) and let your wins ride (so 1 win can offset your loss plus make you a profit). I expect to lose more than i actually win but the only difference for me is that when i win it exceeds the losses which actually moves into profits. Van Tharp mentiones this a few times in his book "Trade you way into Financial Freedom". If the market moves against you and your position is in trouble then i think you will always find trouble down the track. I would prefer to cut the loss at a minimum and then try and find a wave to jump on (wether it be long or short).

Adrian

MichaelD · 21 May 2006

Re: Trading / Daytrading for a living

tech/a said:
Lets say your average drawdown is 8% (which my longerterm systems are.)
Leveraged at 10x then you would have 80% of your equity lost is this occured,not only that but youd have only 20% equity to fight your way into profit,something that testing would not have or been able to consider---simply it wouldnt happen and youd face ruin.

tech/a,

I agree with 99% of what you have said, but suggest that the above is not correct.

The reason I believe it is not correct is that if you lose 80% of your trading equity whilst trading on margin, you should still be position sizing on the total equity size, not on the amount in the margin account.

eg
Initial Capital $10,000
Maximum Drawdown of system is 8%
Trading on 10% margin, you are controlling $100,000 worth of equity initially.

If you hit maximum system drawdown, your margin account balance will be $2,000, but you should be position sizing on $92,000, which is hardly fatal so long as your psychology can accept the $10,000 to $2,000 drawdown in the margin account.

I do, however, completely concur with your assertion that at 1% position size with maximum run of losses >9 you would blow up the account. Indeed, all the long term systems I have seen have a maximum string of losses of 10-12 - perhaps this is why CFD providers offer margin at 10% - for anyone leveraging at the maximum possible according to the CFD provider their risk of ruin would surely be close to 1.

Michael D
ps very happy to be proven wrong on this (since this is where the money is made on the markets)

pharaoh · 21 May 2006

Re: Trading / Daytrading for a living

Hey all

Ok, I think ur right, margin loans or cfd's are not such a bad idea perhaps - my thinking was all like my grandfather's principle - never get into debt.

On the few posts above, I am v interested in what you guys are saying, but yu are losing me in the tech.

Sorry, I have had no experience with cfd's, or leveraging etc...
I do know fcd's mean you can get exposure to say 100k of shares for 10% cap outlay for example, and I know more about margin loans - borrow money, invest in shares, interest only payments, tax deductible.

Can you give me lamens terms, in what you are saying?

i.e. if you only had a cap base of $5400, would you consider cfd or margin loan?

At this pace, it will take me forever to get to my $300,000 target in 18 months (ambitious or what)

1. Margin loans - seem a great idea, think the minimim is $20k - pay interest only which is almost all tax deductible I believe??
But, if there's a market correction, can be a bad thing....

*** I see a margin loan could be a very powerful tool to take out and invest on the turnaround of a correction - get great stocks like BHP, OXR etc at a discount. We know they will go up...

2. CFD's - seem like a great way to expose urself to a greater amount - but risky? With only $5,400 cap base, it could eat into my $ if the stocks I choose go backwards not forwards?

Thanks guys, sorry for the d-asse questions, but this would really help to clear things up
Cheers

Porper · 21 May 2006

Re: Trading / Daytrading for a living

tech/a said:
LEVERAGE---wouldnt trade longterm without it!!

Very interesting , your last line that is.

I think the psychological aspect of trading cfd's or shares on margin has a huge influence on profit here.

I do the opposite to you here Tech.I split my total funds between a standard account and cfd's.Two thirds to the standard.I use the standard account as medium term (a few months normally) as there is no interest to pay.Seems logical to me.I trade short term with my cfd's as to minimise interest charges.

My medium term portfolio is doing great, I have a system in place and have been profitable since I started.I don't trade a mechanical system, so to me, this is the nearest I have to a positive expectancy using my system.Tech I think will disagree with this.

Now to trading with leverage.I don't have a system in place and lost a small amount last year and very slightly up this year (2 wins and 7 losses).I have stopped trading this account until I can figure out where I am going wrong.

I am disclosing this information to hopefully stop others taking the plunge with leverage thinking that because you are profitable you will automatically be profitable with leverage. You won't !!

Also it can get quite scary when you see a spell like last week wipe out a very healthy profit.

Anybody know a good shrink

MichaelD · 21 May 2006

Re: Trading / Daytrading for a living

pharaoh said:
i.e. if you only had a cap base of $5400, would you consider cfd or margin loan?

Leverage is a fantastic way to get to the poorhouse quickly if you do not fully understand the risks involved. By fullly understand, this means you are trading a plan with a positive expectancy and you know its maximum drawdown. If you don't know these parameters of your system, then success will only be by blind luck, not skill.

The problem with leverage is that newer traders see it as a quick way to multiply profits, but that is not how the stockmarket works. The recent falls on the market will be hurting many, accustomed as they are to perpetually rising prices. To systems traders, it's just another day in the execution of their plan.

In a bull market, it is easy to get lucky and attribute this to skill, but to truly make money in the stockmarket you must first learn not to lose it.

A sobering read on what CFDs can do to a trading account of your size is here;
http://traderandy.blogspot.com/

tech/a · 21 May 2006

Re: Trading / Daytrading for a living

True but you have lost 80% of the 100K which leaves you with 20K to get it back or a 500% return.

If you have just lost 80% of your capital then a 500% return is highly unlikely.

if you only had a cap base of $5400, would you consider cfd or margin loan?

Pharaoh

If your total capital base is $5400 I'd say neither.
Please Please understand that with a base like this a 10% move against you and youve lost the lot!!

If thats all youve got and its taken you years of paper rounds or hard savings to get then it can and will be all gone in a day if you dont understand how to position size safely when trading leveraged instruments.

Dont think that "Andy" guy trades his 10x leverage figures dont add up.
He'd have been dead last week.

crackaton · 21 May 2006

Re: Trading / Daytrading for a living

Ageo said:
Can i ask for those people who make profits, do any of you actually compound (re-invest) your profits? or do you just spend it and start over again?

I think alot of people dont realise the power of delayed gratification, because even taking small profits whilst compounding over years will take your position into a whole different area.

Depends. With short trades, as in 1-3 days, I recoup what I invested and leave the rest in shares. For example earlier this year I bought $50k worth of EXt at .04. I sold out enough shares, can't remember the acutal figure, at .11. I got my $50K back and still have a truck load of EXT. This way Mr Taxman is happy and I am happy.

pharaoh · 21 May 2006

Re: Trading / Daytrading for a living

That $5400 I have made from $1800 over 12 weeks.
So, I don't want to lose it as I have done so well in such a short time.

As you said though, it is easy to make money in a bull market

I guess I am trying to figure out if cfd's or margin loans are a good ption now, or not.

I think cfd's will be too risky for me, as you said, I could lose all the hard earned/invested profit of the last 12 weeks in one or two bad ones.

I am not to sure - I am swaying more towards a margin loan, to take out when the market turns back up.

i.e. buying quality stocks at a bargain - when the market starts going back up again, and investors return, I have picked up these stocks at a discount and my margin loan has helped me to capitalise properly, increase my exposure and my interest payments are tax deductible.

tech/a · 21 May 2006

Re: Trading / Daytrading for a living

Sorry Michael.
My reply is totally incorrect gotta fly will continue later.

Pologies.Durrrr.

Ageo · 21 May 2006

Re: Trading / Daytrading for a living

MichaelD said:
In a bull market, it is easy to get lucky and attribute this to skill, but to truly make money in the stockmarket you must first learn not to lose it.

Perhaps i miss-understood this, are you saying that you should try and develop a system that makes you win more than you lose? (win more i mean the trades that you place win vs loss trades).

If you say yes to that then please share your system hehe because i know that losing is easier than winning in the sharemarket so instead of trying to outsmart it i will embrace it and develop a system that allows me to lose at least 5 times more than i win, but when i win it obviously out weighs the loss and leads to a profit.

Now whether the system is trading shares (1 x leverage) or CFD's (90+ x leverage) the same principal applies, if you position size yourself well and know how much you can lose with x amount of trades then i believe you have a much stable system instead of always trying to pick winners (might aswell goto the TAB).

pharaoh · 21 May 2006

Re: Trading / Daytrading for a living

Ageo, on my situation, making $1800 into $5400, what would you do now.
Margin loan, cfd's or try to keep picking winners (as i've been lucky with so far - eng, imp)

cheers

bullmarket · 21 May 2006

Re: Trading / Daytrading for a living

Hi Ageo

Ageo said:
Perhaps i miss-understood this, are you saying that you should try and develop a system that makes you win more than you lose? (win more i mean the trades that you place win vs loss trades).

If you say yes to that then please share your system hehe because i know that losing is easier than winning in the sharemarket so instead of trying to outsmart it i will embrace it and develop a system that allows me to lose at least 5 times more than i win, but when i win it obviously out weighs the loss and leads to a profit..................................

I can see what you are getting at and so obviously to develop a system that still keeps you in profit overall with an average 1 winning trade in 6 trades then it is even more important to have part of your trading plan that says....'keep your losses small' because otherwise that 1 winner will have to be a real 'doozy' just to break even on the 5 losses.

I have friends who over the years average about 2 winning trades out of 3 (so they tell me anyway ). What they did is paper trade a trading plan until they consistantly returned 66% winning trades. I'm sure they had other criteria that had to be met as well. But what they found was that most of their trades resulted in either small losses or small wins, thus cancelling each other out and every so often they would enter a trade that did really well and it is these 1 in 3 trades that generate the vast majority of their profits.

I am not a 'trader' but I would think that most, if not all traders, would aim for at least a 50% win:loss ratio.

Anyway, just food for thought

cheers

bullmarket

Porper · 21 May 2006

Re: Trading / Daytrading for a living

bullmarket said:
I am not a 'trader' but I would think that most, if not all traders, would aim for at least a 50% win:loss ratio.

Anyway, just food for thought

cheers

bullmarket

I think a very important point is not to worry about your win percentage.If I could achieve a 50% win rate and keep my win/loss ratio as it is I would not be going to work everyday.

Maybe I am misunderstanding your point Bullmarket, but the win percentage is not the win/loss ratio.You can win 80% of the time and still be a marginal winner or loser.The win/loss ratio is measured by dividing your average winning amount by your average losing amount.This together with your win percentage gives you your expectancy.

If we spent all our time trying to avoid losing we would be in a mental home.
All that matters is how much you lose when you lose and how much you win when you win.

Should be easy really.That's what I keep telling myself anyway.

MichaelD · 21 May 2006

Re: Trading / Daytrading for a living

Ageo said:
Perhaps i miss-understood this, are you saying that you should try and develop a system that makes you win more than you lose? (win more i mean the trades that you place win vs loss trades).

You need a system with a positive expectancy. i.e. In the long term, you will come out ahead regardless of market conditions.

Most long term trend following systems have a win loss ratio of around 45%, so the majority of your trades are nett losers. The losers, however, are all small. The winners are also mostly small, but you eventually end up with occasional outsized winners which is where you make your money.

You cannot know in advance which of your trades will be the outsized winner (and I am constantly surprised by which ones do end up taking a run vs the "sure fire winners" which fail). It's not glamourous - it's treading water most of the time, but when the big winners come, they are really big.

Aiming to increase the win % usually results in the system making less money at the end of the day, since the great majority of entry "wisdom" is in fact provably unprofitable.

Michael D

ps Mods - not wanting to be pushy as a newbie poster, but perhaps this thread could be split since it's turning into a rather interesting leverage/system discussion.

bullmarket · 21 May 2006

Re: Trading / Daytrading for a living

Hi porper

The win:loss ratio I mentioned earlier is (number of trades resulting in a profit) divided by (the number of trades resulting in a loss).

I hope this clarifiers what I was saying

cheers

bullmarket

ps....I will be away this coming week so we can discuss further if you like the week after..

StockyBailx · 21 May 2006

Re: Trading / Daytrading for a living

The only differance with all that, as far as Im concerned. Is that with day trading you may be looking for something of a 40% price ratio and climbing. to co-inside with you analyse fundermendals, things such as momentum, volosity and volume must be of record highs. Your assets should be more then substantial to enable and exspect a reasonable return.
Penny stocks are the best example of this method, enabling the time of day to deside a selling piont or weather to hold?

Stocky.....

chemist · 21 May 2006

Re: Trading / Daytrading for a living

Ageo said:
Yep basically the key to using any leverage in my opinion is to cut your losses small (so you can lose many times if you need to and still be in the game) and let your wins ride (so 1 win can offset your loss plus make you a profit). I expect to lose more than i actually win but the only difference for me is that when i win it exceeds the losses which actually moves into profits....

If you've lost more than you've won, then you've lost.

"cut your losses small and let your wins ride" -- a worthless cliche. How do you know you were cutting a loss and not a win until after the event? how do you know your win is riding not about to crash, until after the event?

You should attend to reality, not cliches.

cheers,
Chemist

nizar · 21 May 2006

Re: Trading / Daytrading for a living

chemist said:
If you've lost more than you've won, then you've lost.

"cut your losses small and let your wins ride" -- a worthless cliche. How do you know you were cutting a loss and not a win until after the event? how do you know your win is riding not about to crash, until after the event?

You should attend to reality, not cliches.

cheers,
Chemist

Chemist those words were actually said by Peter Lynch in his book One up on Wall St

And i think it goes without saying that hes more pro than EVEN YOU

He said that most people make the mistake of locking in profits quickly, ull never get ur 10-baggers that way (he got PLENTY in his time), and that they hold on to losers hoping for a recovery. You should be cutting the weeds and let the flowers grow - not the other way around

Ageo · 21 May 2006

Re: Trading / Daytrading for a living

chemist said:
If you've lost more than you've won, then you've lost.

"cut your losses small and let your wins ride" -- a worthless cliche. How do you know you were cutting a loss and not a win until after the event? how do you know your win is riding not about to crash, until after the event?

You should attend to reality, not cliches.

cheers,
Chemist

Chemist i have only been a member of this Forum for about 1 week now and i must say you are full of wise comments.

All im going to ask you is this, since your not contributing to any threads at all but just adding criticism to them are you at all a Millionaire? Are you in a position to be giving such advice?

You sound like my mechanic giving advice on what stocks to buy.

If you're not then im sorry but you're not in a position i want to be in. There are people here that are actually trying to increase there knowledge, not learn how to become a Mr "know all" but is dead broke and thinks they can give worthless advice to anybody.

As for Pharaoh mate im not in a position to give such advice but what i would recommend is find someone that is in the position you want to be in and ask them for some advice (perhaps even use them as a Mentor). Each person has to develop their own system that suits "them" not others.

Anywayz im off for a drink, cigar and some poker enjoy!

Trading/Daytrading for a living

tech/a

No Ordinary Duck

Ageo

MichaelD

Not fooled by randomness

pharaoh

Porper

Ralph Nelson Elliott

MichaelD

Not fooled by randomness

tech/a

No Ordinary Duck

crackaton

pharaoh

tech/a

No Ordinary Duck

Ageo

pharaoh

bullmarket

Porper

Ralph Nelson Elliott

MichaelD

Not fooled by randomness

bullmarket

StockyBailx

chemist

nizar

Ageo

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