Gone 'till mid-April 2009

I'm taking a holiday from this blog until mid-April 2009.

Stress relieving holidays

...cont'd from yesterday...

Taking holidays away from trading is a way to release stress built up from trading. Therefore, I’m taking the next two weeks off from writing about trading and will return mid-April.

...back in mid-April...

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Copyright 2008 Raymond T. Lee. All rights reserved.
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Stress vaccine

...cont'd from yesterday...

Avoiding stressful events and circumstances is one way to avoid stress. But you still need a strategy to prevent your trading from being affected by those events and circumstances. One way is to take a daily does of antidote vaccine before facing the world. My favorite serum is the Sedona Method mentioned at my website.

...cont'd tomorrow...

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Stress indicators

...cont'd from yesterday...

If you’re allergic to taking tests to prove that you’re stressed out, you can use other indicators to arrive at the conclusion that you are too stressed out to trade.

Scientific studies show that the following events are among some of the most stressful events in one’s life:

Divorce
Marriage
Birth of a child
Death of a family member
Selling your house
Buying your house
Moving from your old house (or office) into your new house (or office)
Quitting (or getting fired from) a job
Starting a new job
Getting sued
Suing someone else

Your frame of mind under those stressful situations likely will disable you from trading properly. You are likely to do things like failing to enter trades that turn out profitable, staying in losing trades past your budgeted stop loss, failing to protect accrued profits, etc.

If the above-mentioned life circumstances appear in your life, then taking a holiday from trading until they clear out of your life would be beneficial.

...cont'd tomorrow...

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Copyright 2008 Raymond T. Lee. All rights reserved.
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Stress tests

...cont'd from yesterday...

How do you know if you’ve got stress? Other than a vague idea that you do have stress, you can take some psychological tests to prove you’re stressed. Try these websties

http://stress.about.com/library/symptoms/bl_stress_symptom_quiz.htm

http://lessonsforliving.com/stress_test.htm

...cont'd tomorrow...

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Copyright 2008 Raymond T. Lee. All rights reserved.
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Leisurely vs Stressful Cash Flow

This past weekend, I attended a seminar where I met several audience members who specialized in stress management. Coincidentally, there’s a page at my website on ”Stress” .

This week’s series of blogs will be about the relationship traders have with stress.

...cont'd tomorrow...

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Copyright 2008 Raymond T. Lee. All rights reserved.
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What's on TV?

...cont'd from yesterday...

Sometimes news moves the market, sometimes not. Here’s scheduled news, much like a TV guide so you know what’s going to be on TV.
http://bigcharts.marketwatch.com/advchart/frames/frames.asp?symb=ca%3Asxa&time=&freq=

...back next week....

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Copyright 2008 Raymond T. Lee. All rights reserved.
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Free trading videos

...cont'd from yesterday...

Tired of reading books about trading? Here’s a website that has videos
http://www.moneyshow.com/main.asp

...cont'd tomorrow...

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Good free intraday charts

...cont'd from yesterday...

Here’s a website where you can get stock prices in time frames from 1 minute up to monthly price bars. It loads quicker than trading platforms. Beware that the intraday prices are delayed and not up-to-the-minute. I find it very useful despite that.
http://bigcharts.marketwatch.com/advchart/frames/frames.asp?symb=ca%3Asxa&time=&freq=

Here’s another website that allows you to download prices in spreadsheet format. That’s useful if you use a spreadsheet to analyze prices.
=http://finance.yahoo.com/q/hp?s=%5EDJI

For example, you can use prices in spreadsheet format to apply the Jesse Livermore system described in his book How to Trade In Stocks. Just set up a spreadsheet to calculate entry and exit prices according to the Livermore Formula, then copy-paste the prices from yahoo. I find that very efficient.



...cont'd tomorrow...

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Copyright 2008 Raymond T. Lee. All rights reserved.
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Tracking grocery prices

...cont'd from yesterday...

Here’s a link to free charts on futures instruments. I like to look at these weekly to anticipate grocery prices such as rice, orange juice, and bacon (pork bellies) so I can stock up in advance if it looks like prices are rising. It's also useful for tracking currency exchange rates if you are planning to travel abroad. It's even useful for futures traders!
http://futures.tradingcharts.com/menu.html

...cont'd tomorrow...

Big picture overview

There’s lots of free stuff on the internet that’s related to trading. This week, I’ll be writing about some of the websites I frequently use that are free.

I want to keep an eye on the environment in which I trade. Therefore, I look at information about financial instruments other than the ones I trade. A good place for that is at Stockcharts.com in the Market Summary page

http://stockcharts.com/def/servlet/Favorites.CServlet?obj=msummary&cmd=show,iday[Y]&disp=SXA

...cont'd tomorrow...

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Copyright 2008 Raymond T. Lee. All rights reserved.
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Is it you or the system?

...cont'd from yesterday...

Go back to the article earlier this week about Total Risk-Unit Multiples. Calculate that number for the entire week. This will reveal how much income you can expect to generate each week with your method.

Then compare the number from your data of papertraded results with the number you got for your real time trading. Observe if it's your system that's preventing you from making more money or whether it's you yourself who's preventing you from performing up to the Ideal Papertraded Model.

...back next week...

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Copyright 2008 Raymond T. Lee. All rights reserved.
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Comparing systems

...cont'd from yesterday...

Size of Average Winner and Size of Average Loser. This tells you how much you win when you win. You’ll need to have huge gigantic winning trades if the percentage of winning trades in your method is low. For example, if your method of trading usually results in 30% wins, then you’ll need larger wins to get the same net profits as another method that usually results in 60% wins.

A combination of %Win, %Loss, Average Winner, Average Loser and Number of Trades produces a number that you can use to compare different Trading Methods in a valid way. That is, in a way where you are comparing apples with apples instead of apples with bananas.

Sometimes, that information is called “Expectancy”. Be aware that there are different ways of calculating “Expectancy”, all with differing results. The following is the one I like to use.

[(Average Winner x %Win) – (Average Loser x %Loss)] / [Number of Trades in sample]
= Expectancy

...cont'd tomorrow...

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A better way of using %Win

...cont'd from yesterday...

Here’s a statistic that’s porminent in financial newsletter advertisements. Percentage Wins and Percentage Losses, aka respectively %Win and %Loss.

These numbers are easily calculated and well known. They merely tell you what proportion of your trades can be reasonably expected to be winners (or losers). Financial newsletters use this ratio to attract customers. But here’s a better way to use this information.

A better way to use this information is for deciding if you want to continue using your method of trading. If you hate losing, you need a high winning percentage method. It’s well known that low winning percentage methods can be profitable. But if you can’t stand losing, then you should not be using such a system and instead work on changing your system until it shows a higher %Win.

...cont'd tomorrow...

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Copyright 2008 Raymond T. Lee. All rights reserved.
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Risk-Unit Multiples

...cont'd from yesterday...

What is the Reward to Risk Ratio of your method of trading?

The Reward portion of the Reward/Risk Ratio is straightforward. It’s the profit you make per trade.

What about the Risk portion? How do you calculate that? One way is to express it in terms of how much money you would lose if your Initial Stop Loss price is hit. With that concept, you can calculate the Reward-Risk Ratio without regard to how much capital you are using. That’s helpful because it allows you to compare trading methods across different capital amounts.

This idea leads to the measurement called Risk-Unit Multiples, sometimes called “R Multiples”.

Risk-Unit Multiple
=(Actual Profit or Loss on a trade) / (Dollars per share you lose if your stop loss is hit in that trade)

You can use that formula to calculate the Total Risk-Unit Multiples for each hour of the day. That will reveal what time of day, if any, that your method works and how well it works in that hour. You can use this information to decide what your trading hours will be when trading intraday.

...cont'd tomorrow...

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Copyright 2008 Raymond T. Lee. All rights reserved.
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Go figure

What kind of results can you expect from your trading each week? Do you know?

This week, I’d like to write a series of articles about how to find out what to expect from the method you use for your trading.

The starting point in getting an idea about what to expect from your method of trading is to gather some data through papertrading. Last week’s series of blogs dealt with that. This week, I’m going to write about what to do with that data.

To easily assess your method of trading using the tools to be discussed in this week’s series of articles, you’ll need to input them into a spreadsheet format as described in last week’s articles.

Then crunch number on that data. Here’s some numbers I like to crunch so that I can get an idea about what to expect from my method of trading. Crunching numbers will enable you to carry through with your intention of continuing to use your trading method despite losing streaks. Otherwise, you’ll give up after a series of losing trades, usually just before your method turns profitable again and thereby causing you to miss out on enormous profits.

...cont'd tomorrow...

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Copyright 2008 Raymond T. Lee. All rights reserved.
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Papertrading services

...cont'd from yesterday...

You can papertrade using whatever charting service you use for live trading. Just scroll the chart so that you only see the next bar of data you need to decide on an entry. Then scroll one bar at a time, making a decision on entry or exit with each bar as you scroll through the data. Ensign software has a feature that lets you tell your computer how fast to scroll the bars across your screen as you papertrade

...back next week...

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Copyright 2008 Raymond T. Lee. All rights reserved.
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How often to papertrade

...cont'd from yesterday...

How often to papertrade depends on the time frame of the system you are trading. If trading intraday, then doing papertrading every day after hours would be appropriate. For longer time frames, doing papertrading weekly would seem adequate. You’ll need a week of data to work with if trading daily bars. And if trading weekly or monthly bars, then it’s still appropriate to do papertrading weekly just to stay in shape physically and mentally.

...cont'd tomorrow...

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Copyright 2008 Raymond T. Lee. All rights reserved.
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Papertrade records

...cont'd from yesterday...

Keeping a record of your papertrades is easy with a spreadsheet. Merely make columns for the following data:

Date
Instrument
Time of entry
Time of exit
Long/Short
Price Bought
Price Sold
Initial Stop Price
Maximum Favorable Excursion
System identification code
Risk per trade

Then you can use spreadsheet formulae to automatically calculate the following:
Quantity
R-multiple: how much profits your system captured
Maximum favorable excursion R-multiple: how much profits your system could have captured
Profits
Win
Breakeven
Loss
Quantity

Afterwards, you can analyze the data for the following:
% Win
% Loss
% Breakeven
Average Win
Average Loss
Win/Loss Ratio
Expectancy

...cont'd tomorrow...

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Copyright 2008 Raymond T. Lee. All rights reserved.
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Papertrade to get confidence

...cont'd from yesterday...

One of the major benefits of papertrading is to learn to trust you system to the point of having enough confidence in it that when you Entry Signal appears, you actually follow through in placing an order pursuant to the system. This is especially important if your system is only right part of the time, as is the case with almost all systems. If you haven’t learned to trust your system and have confidence in it, you won’t take the next trade after several consecutive losses with they system. But if you’ve papertraded it often and have noticed that several consecutive losses are followed by BIG wins, then you’ll likely take the next trade.

Another major benefit of papertrading is to establish a standard against which to compare your personal live trading. Are you getting the same, worse, or better results than the results you get from papertrading. Make the comparison and find out what you’re doing differently. That will enable you to fine tune your trading technique beyond merely using the results of your actual trading by itself.

...cont'd tomorrow...

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Copyright 2008 Raymond T. Lee. All rights reserved.
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Required homework -- papertrading

If you think papertrading is for novices, consider these observations. Maybe papertrading is something you should adopt as part of your daily routine.

Brett N. Steenbarger noticed that one salient difference between highly profitable traders and losing traders is that the highly profitable traders spend time doing simulated trading without real money. See

Van Tharp also reports that his research shows reveals that highly profitable traders distinguish themselves from losing traders by rehearsing their trading techniques (mentally) without using real money. See footnotes in

...cont'd tomorrow...

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