Neil's Fixed Fraction Strategy

...continued from yesterday

World Cup trading contest winner Neil Peplinski uses a fixed fraction strategy. His formula for calculating how much money to use on his next trade during the competition was:

Number of contracts
= [40% x Account Equity not including open profits] / Margin per contract

continued tomorrow ...

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(David) Cash Risk

...continued from yesterday

The formula that David Cash used for calculating how much money to use on his next trade during the competition was:

Number of contracts = [% Risk x Account Equity] / [Trade Stop Dollar Value]

His recommendations for % Risk are as follows:

Beginners and conservative traders: 5 to 10%

Experienced traders: 10 to 20%

David says during the time he competed in the World Cup trading competition, he went as high as 25% for % Risk but recommends against doing that.

David also advises that you need to “trade a risk percentage large enough to generate strong equity growth” but not to put on such a large trade that the potential drawdown might wipe out your account. He says his research indicates that keeping the % Risk constant over a long series of trades is better than varying it over the course of the same number of trades.

continued tomorrow ...

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Second Most Important Factor In Trading Success

“You can double all of the money in your trading account many times, but lose it all only once”, says World Cup trading champion David Cash. He says that “next to trading discipline, money management is the single most important factor in determining your success as a trader”.

Math Next Week

...continued from yesterday

This week’s series of articles was about risk per contract traded. Next week I’ll write about how some of the World Cup trading competition winners calculated how much money to use on individual trades.

continued Next week on Monday ...

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Stop Loss For Overall Account & For Each Trade

John Mills won first place in the non-professional futures division of the World Cup trading competition in 1998.

John sets two stop loss points.

First, he sets an amount for his overall account. Initially, he is willing to tolerate up to, but not more than, a 25% loss of his original capital. If and when his account equity grows to 150% of original capital, then he widens his stops on individual trades.

Second, he sets a stop loss amount for each trade made. For any individual trade, he uses a fixed amount of money as his stop loss equal to his profit target. He says the amount varies by market and account size. His stop loss appears to be in the neighborhood of $150 per contract.

Neil's Fixed Sum Stops

...continued from yesterday

Neil Peplinski won the Robbins World Cup trading competition in 1998 with a 95% return (or 98% according to another source) in the non-professional futures division.

He managed risk with a fixed stop loss amount on each trade. The amount depended on the instrument traded: $2,500 for NYFE; $1,375 for bonds; and $1,500 for coffee.

continued tomorrow ...

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Cash Risks As Much As 25% Equity

...continued from yesterday

David Cash opened his first futures trading account in April of 1999 and lost all the money in it within six months! Two years later, he won the World Cup trading competition in the futures division with a 53% profit on his money!

He used Larry William’s money management formula to determine how much to bet on any one trade. The formula is

Contract Number = (Risk % x Account Equity)/Trade Stop Dollar Amount

For “Risk %”, he recommends risking between 5% to 10% of equity per trade for new traders and between 10% to 20% for experienced traders. He says he himself has traded beyond 25% of equity at times.

He risks more than ten times the 2% risk that most trading coaches I know of recommend! That's astonishing. Come to think of it, by risking 20% of equity on each trade, you only have to have 5 consecutive losers to wipe out your account (5 x 20% = 100%)! Even 2 consecutive losers will cause a 40% decrease in equity.

David Cash's advice is to “trade a risk percentage that is large enough to generate strong equity growth, but one that is not so large that the drawdown represents an unwieldy percentage of your equity”.

continued tomorrow ...

Copyright 2007 Raymond T. Lee. All rights reserved.
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Risking Loss to Win

This week’s series of blog articles looks at what some of the World Cup trading contest winners do by way of how much they are willing to lose in order to win.

John Holsinger won the contest in his division in 2002 taking both first and second place. His first place account came in at 608% and his second place account came in at 304%.

He says he used a fixed money management stop loss in his trading during the World Cup contest. That is, if any position he entered lost a fixed amount of money, he would exit that position for the fixed amount of money lost.

He did not say what the exact amount of the fixed stop loss was. My guess is that he used a fraction or multiple of the average daily price range because he says “I had made the decision to use a fixed money management stop loss by examining several series of trades to see how much rope I had to give the market before it hangs itself.”

He says he does use a trailing stop but only after the trade is profitable, not before that time. He says that his analysis has shown that using a trailing stop does not enhance the bottom line nor reduce drawdown. He says a trailing stop only takes pressure off, and that since trading is a mental game a trailing stop is beneficial.

continued tomorrow ...

Copyright 2007 Raymond T. Lee. All rights reserved.
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Friday Off

...continued from yesterday

skipping out today, Friday. Back Monday, January 22, 2007 ...

Copyright 2007 Raymond T. Lee. All rights reserved.
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Equity Graph As Traders' Treasure Map

...continued from yesterday

John Mills ran a chain of hair salons while competing in the World Cup trading competition. He won four Bull and Bear trophies between 1989 and 2000.

He starts with a decision as to how much he wants to make each year. Dividing that one year profit by the number of weeks in a year, he gets a rough idea of how much he should be making each week to reach that goal.

He uses his weekly profit sub-goal as both a profit guideline and a stop-loss amount on each position. Furthermore, he sets a floor amount for his total drawdown, the maximum amount lost below his starting capital at which point he will quit trading. If and when profits accumulate, he raises the floor amount. For example (this is not exact), once he accumulates 50% profits, he moves his quitting point to breakeven and changes it from a “quitting point” to a “conservative trading” point. Then when he accumulates 100% profits, he moves his “conservative trading” point to starting equity plus 50%.

Due to his hair salon duties, he created a system whereby he only has to be in front of his computer on an intra-day basis on select days. On most days, he only has to look at end-of-day price data. Here’s how he selects days on which to do intra-day trading:

1. Start with a weekly bar chart. Locate the last weekly pivot high and last weekly pivot low.
2. If price goes above the last pivot high or last pivot low, he waits at least two more days.
3. If step 2 is satisfied, he further waits until (in the case of price rising above the last weekly pivot high) price on a daily bar chart makes two lower highs or (in the case of price falling below the last weekly pivot low) price on a daily bar chart makes two higher lows.
4. If step 3 is satisfied, he will sit in front of a computer on an intra-day basis. Intra-day, he will wait for price to rise above yesterday’s high (in the case of price rising above the last weekly pivot high in step 3) or fall below yesterday’s low (in the case of price falling below the last weekly pivot low in step 3).
5. If step 4 is satisfied, he waits for price to retreat either the breakout up or breakout down by an amount equal to his weekly profit goal.
6. If step 5 is satisfied, he will enter on stop when price resumes the intra-day breakout past yesterday’s high (in the case of price rising above the last weekly pivot high in step 3) or yesterday’s low (in the case of price falling below the last weekly pivot low in step 3).
7. If a position is entered, he uses his weekly profit goal amount as his stop loss exit and also as a guideline for taking profits. He tries to grab as much profit above his weekly profit goal as he can before they disappear.

John says he uses a graph to track his trading equity. On that graph, he compares his actual trading equity to his profit goals. He says he found using a graph to compare his actual equity to his desired equity to be invaluable during the World Cup trading competition and that he continues to use it today.

continued tomorrow ...

Copyright 2007 Raymond T. Lee. All rights reserved.
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Trading Champions Crunch Numbers For Breakfast

...continued from yesterday

Kurt Sakaeda’s 595% profits won him first place in the World Cup trading competition (futures division) in the year 2002.

His system involves a huge amount of number crunching to set up.

For any given futures instrument in which he is interested, he calculates both the average and the mean closing price for each calendar day of the year going back as many years as he can get data.

Then for each date on the calendar, he compares the profit/loss that would result from opening a position on one of those days and then closing it on each of the other days of the calendar. That’s 365 x 364 = 132,860 combinations !!!

Additionally, he calculates the standard deviation of the profit/loss in his data set.

He keeps these crunched numbers in hardcopy in a “Blue Book”.

The foregoing is the background number crunching involved before addressing today’s price data. With today’s price data, he buys only if all the following conditions are satisfied:
1. Current price is at or below the average closing price from his prior calculations (unless the instrument is an index or interest rate instrument, in which case this does not apply);
2. Median profit must be greater than zero;
3. Standard deviation must be less than 5 times average profit;
4. Instrument must be trading below the historical high.

Vice versa for short sales.

Kurt says he has been using the above mentioned price comparison method since 1995. Three years later, in 1998, he entered the Robbins Trading competition and finished second place with a 71% return! He placed within the top 10 finishers in his division in 5 out of the next 6 years. In 2002 he turned $16,828 into $100,080 in twelve months, a 595% return, winning him first place in the futures division.

Rush out to your local stationery store and get yourself a Blue Book!

continued tomorrow ...

Copyright 2007 Raymond T. Lee. All rights reserved.
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World Cup Trading Championship

The Robbins Trading Company has been hosting the World Cup Championship since 1984. It’s a competition in which traders compete against one another in various categories, each trading his own money, and each free to use any method of trading whatsoever.

In this week’s series of articles, I will be examining the advice about trading from some of the winners of that competition.

The advice I will be examining come from trading championship winners who won with annual profits of "as little as" 53% to over 11,000% !!!

continued tomorrow ...

Copyright 2007 Raymond T. Lee. All rights reserved.
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Back January 16, 2007

Gone until January 16, 2007, after the Monday holiday.

Thin-slice Trading

...continued from yesterday

Research on thin-slicing on the topic of racial prejudice has implications for trading profitably.

Published research evidence shows that people are subjected to societal conditioning into subtle and not-so subtle unconscious behaviors in race relations.

Try the Implicit Association Test (“IAT”) and see for yourself. It’s at https://implicit.harvard.edu/implicit/

Did you surprise yourself? Were you more racist than you thought?

First, take the test on a “come as you are” basis for one round. Then re-take the test after priming yourself with exposure to positive information about different races. Expose yourself to “advertising” in which different races are portrayed in a positive manner. For example, to prime yourself with positive information about Afro-Americans, read the biography of Martin Luther King.

Research results demonstrate that it is possible to override and counter the effects of societal conditioning by priming yourself before taking the IAT.

Here’s the implications of this for profitable trading. Research data indicates that 90% of the people who attempt to trade lose all their money. That’s due to societal conditioning. Society portrays traders in a negative manner, thus making your “default settings” that of a losing trader.

What you need to do is override and counter the effects of societal conditioning by priming yourself every time before trading. Applying the knowledge about the IAT, you would prime yourself by reviewing your profitable trading plan before trading and by mentally reviewing how your trading is beneficial to society. Then your unconscious trading decisions would be more influenced by your own “advertising” than your prior society conditioning.

continued tomorrow ...

Copyright 2007 Raymond T. Lee. All rights reserved.
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Thin-slicing can be advantageous

...continued from yesterday

Thin-slicing by itself is neither good nor bad. Some applications of thin-slicing prove to be advantageous.

Thin-slicing proved to be advantageous in the Millenium Challenge, the most expensive war games in history. You can read more about it at http://en.wikipedia.org/wiki/Millennium_Challenge_2002.

The game pitted the Blue Team against the Red Team.

Blue Team was lavished with the best equipment, the best technology and the best access to information. Blue Team was run with a supercilious management style.

On the other side, Red Team was given basic equipment, inferior technology and inferior access to information. Red Team was run with an ad-hoc management style.

The Red Team quickly and decisively defeated the Blue Team. After that, the people in charge of the war game revised the rules so that Red Team was prohibited from doing what they had done to win. Naturally, with the game “fixed”, Blue Team won.

The point of round one where Red Team won is that having more information (thanks to ultra- sophisticated equipment, ultra-sophisticated management methods and ultra-sophisticated technology) actually hampered them in war-like situations, such as trading. It showed that primitive robust methods are actually superior.

Applying this to trading, the implication is that having more information (thanks to ultra- sophisticated equipment, ultra-sophisticated management methods and ultra-sophisticated technology) actually hampers your profitability. And that primitive robust methods are actually superior.

In trading, more information comes in the form of multiple fundamental reports, mutiple computer monitors, superfast order entry software, fancy price-volume indicators, and multiple news services and chat forums running during trading hours. The “information advantage” actually puts you at a disadvantage compared to using primitive robust methods, such as just viewing a simple bar chart with no indicators.

continued tomorrow ...

Copyright 2007 Raymond T. Lee. All rights reserved.
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Thin-sliced coaching

...continued from yesterday

Scientific studies involving thin-slicing include studies about how athletes make decisions during their game. The studies show that athletes often have inaccurate ideas of what their winning moves were. In other words, athletes consciously believe their winning moves were ABC whereas the actual winning moves were XYZ.

Vic Braden coached several superstar athletes. His clients included tennis superstar Andre Agassi. Braden video recorded Agassi’s games. One such video recording was a study of Agassi’s forehand swing.

According to Braden “Almost every pro in the world says that he uses his wrist to roll the racket over the ball when he hits a forehand…We can tell with digitized imaging whether a wrist turns an eigth of a degree. But players almost never move their wrist at all…Look how fixed it is. He doesn’t move his wrist until long after the ball is hit. He thinks he’s moving it at impact, but actually not moving it until long after impact. How can so many people be fooled? People are going to coaches and paying hundreds of dollars to be taught how to roll their wrist over the ball, and all that’s happening is that the nunber of injuries to the arm is exploding”.

So have you done that as a trader? Gone to a coach to get yourself trained to trade the way that a model profitable trader says he trades?

Maybe whatever the model profitable trader honestly believes about how he trades isn’t really how he does it. Based on research findings such as that of Braden, maybe the explanations of superior performance given by model profitable traders are inaccurate.

continued tomorrow ...

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Thin-slicing

Happy New Year everyone. I'm back!

This week’s series of articles looks at the implications of the phenomenon of "thin-slicing" in relation to profitable trading.

“Thin-slicing” is not (yet) widely discussed in trading literature.

Thin-slicing is not scalping, a method of trading that involves entering and exiting positions between very small price differences.

There is plenty of literature from the field of psychology and sociology on thin-slicing. It’s the phenomenon of arriving at conclusions based on very little evidence.

In academic circles, thin-slicing is disparaged. Bald assertions get no respect unless accompanied by ponderous reasoning and multiple footnotes referencing supporting materials.

Even in trading, laborious pondering gets more respect than thin-slicing. Imagine a commentator disucssing whether the markets will go up or down next week. Surely that commentator would get no credibility if he based his prediction on thin-slicing instead of ponderous reasoning.

Yet, thin-slicing can be more accurate and therefore more profitable in trading than laborious pondered reasoning.

continued tomorrow ...

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