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Here's my point: regardless of your style of trading, if you don't have a way(s) of entry and exit that over the long haul produces profit, nothing else matters - you will lose.
Too many people think journaling, or money management, or psychology, etc. is the key to making them profitable. Not true!
Think of it like roulette. Many people invent money management schemes, record past data, journal their thoughts on how to win, etc. And you know what? They still all lose in the long run. Why? Because they are playing a negative expectancy game - the odds are not in their favor.
That is why I put expectancy at the top of the list. If your trading method - whatever it is - does not have a long term positive expectancy, then all those other things do not matter. Having all those other things may help you lose money more slowly, but you will still lose money in the long run.
The ironic (and confusing) part of this is that even if you do have a long term positive expectancy method, bad/lack of money management, psychology, etc can still make you a loser. It is like this:
We all most definitely agree on the two components.
The only difference is that system/professional guys start the sentence with expectancy, and assume that psychology is a given, otherwise they would be in a different job; whereas any of us mere retail traders that have a decent amount of experience start the sentence with psychology, knowing that if we don't crack that we aren't going to find any expectancy anyway.
Anybody else starting out has to discover the hard way that both worlds are inhospitable places to live in.
I don't think you can consider capital in itself an edge, however, how you acquired your capital may potentially give you a solid foundation to be a trader. If you had a successful business, career, etc. You may have acquired skills that may help you in trading. Any success requires a certain level of struggle, persistence, setbacks, problem-solving skills, etc. Those who bring it to the trading world could potentially handle setbacks better, and every trader will face setbacks.
Thanks,
Matt Z
Optimus Futures
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I put the cart before the horse spending a lot of time reading books on trading psychology and a couple of home study courses. Very interesting and I don't regret any of it as I feel it has been very beneficial for me as a person. But I feel it is similar to performance coaching for a sportsman which is done to enhance results and is best worked on after the basic techniques and abilities have become almost subconcious. I spent too much time on 'increasing performance' with out having the foundation of a valid trading methodology to build upon.
And I agree about expectancy. After looking at expectancy formulas that all seemed to differ from Van Tharp's in varying degrees of complexity I also just use the average trade. If after 100 contracts/Round Turns traded I have made $1,000 I see my expectancy as $10/Round Turn.
Let me summarize why I think might be why there are different views of expectancy. If you trade a system, trades are generated based on a consistent set of rules and taken in a consistent way. As such, expectancy is used both as as the predictive statistic (an extrapolation of what the future will look like) and as a descriptive statistic of the past (what actually happened).
However, attempting to trade like a system for a discretionary trader would be both nearly impossible and also nonsensical because to do that you would need to generate your fixed set of rules and then you would need to trade them in exactly the same way with no variance. If you were to do both of those activities though, you are now just trading a system and there is no longer any discretionary component. As such, expectancy takes on a different meaning for the discretionary trader. The rules are no longer fixed: so it is not a validation of the rules but rather of the cognition of the trader. As many more factors can effect cognition, those other factors can become more relevant. However, market cognition is still probably a better place to invest your energies then in general psychology.
Mathematically, it is known that models with more variables are more likely to capture complex phenomena like markets exhibit. However, introducing more variables, into traditional systems most often results in two problems (1) inability to understand the model and (2) over-fitting. We know that the discretionary trader's model should be more complex. As such, if the discretionary trader sees a verifiable truth in markets (such as markets trend or markets trade in a range) then they assume that they are trading closer to reality. A method closer to reality is more likely to be robust. It is more likely to capture the truth of the markets. The cost for trading a more realistic method though, a more robust method, is that it becomes more difficult to bound the strategy at the extents. This translates into not knowing how much to bet and not having as much clarity into the model. Simplifying the model to produce a consistent set of rules, will produce a characterization of reality but the benefit is that we know exactly how the model behaved in the past. We can now gain insight into how the strategy is working and, at least, we can figure out under given scenarios the historical risks of betting varying amounts. Unfortunately, the cost is that because the model has been simplified, the model may not work as well going forward and while we know our historical estimates of risk: they could be wrong. Ironically, most discretionary traders focus on consistency but rationally we should expect both greater variance in discretionary trading and enhanced robustness. On the other hand, we should expect trading systems to exhibit greater consistency but higher rates of failure.
Another excellent post defining trading reality, clearly you have been to the mountain.
The nature of markets regularly change sometimes in minutes, but definately in hours and days, requiring constant adaption. Rigid systems are almost impossible to capture these constant changes effectively.
All that is required is to accurately define the nature of the market at any given moment and to be positioned in that direction. Pretty simple really.
I think in ranges to enter and changes in market bias to exit or reverse. I don't try to force my will onto the market with fixed stops, profit targets ect, I will just get run over. How much of my working capital do I risk, this depends on what I am seeing unfolding and sometimes just how confident I am feeling on the day, yes we all fluctuate, we are human not machines, why try to be what we are not, focus on being good at what you are. I view working capital as a float that I am prepared to lose in a worst case scenario (10-20% of my account) , that way I am not trading scared, it is already gone and is a bonus when I keep it, which is most of the time.
Trading is an art form not a science, to me systems trading is the equivalent of finger painting.
I have been in the game a long time, the only people that I know personally who have consistently made a living from trading generally have quite similar views. I don't personally know any Chartists/Technitians that have succeeded long term, perhaps there are some, but generally it seems to be the domain of the learner mug punter, don't worry we have all been there at one time or another, there is hope. Adapt or fail!
Don't be baffled by the b-llsh-t, get the basics right and the rest will follow.
Different (paint) strokes for different folks, I suppose.
I have the exact opposite experience - I know quite a few successful "finger painting" traders, but zero long term successful discretionary traders (I'm not saying they don't exist though, and I'd never put down what the successful ones do)...
Would you mind explaining the best way of calculating expectancy? avg trade/avg losing trade doesnt factor in how much was risked per trade and according to The Van Tharpe website this needs to be part of the calculation.