Aug 042011

Yesterday’s post, Revising the plan, provoked a very interesting response from ValYouW.  I thought I’d reply in a new post so that others may benefit (hopefully).

I really enjoy different points of view.  This is a learning process for me and I learn both from myself and from others.  I don’t want to criticize anyone else’s approach nor do I want to say my approach is the only one.  I’m just presenting my approach so that others can decide if there is anything useful for them.

Here’s my point of view on sim:  If one cannot trade profitably on sim then one cannot trade profitably with real money.  So you’re losing 5 weeks in a row.  How long were you profitable on sim?  If you were profitable for months on sim, then there is a problem following your plan or your plan stopped working.  If you were not profitable on sim then you’re not likely to be profitable with real.  If the plan stopped working (quite possible with the new volaility) then working on a new plan on sim may be a good idea.  So let me know which is the case and then we can discuss it further.

It’s true that sim trade doesn’t have the same level of psychological involvement.  However, we learn by repetition.  By repeating a good behavior on sim, it becomes implanted in our brain.  So when we take the training wheels off (go from sim to real) the good habits are still there.  That makes it easier to deal with the new stress of real $ trading.

Trading without having passed the sim stage is like learning to ride a bike without training wheels.  Sure you can do it, but the training wheels make it easier.  You don’t get hurt, physically, emotionally, or financially.  Every week I ask my 4 year old if we can take off her training wheels.  She’s not ready yet so I don’t force her but there will be a time where they’ll have to come off.  With my first daughter we took them off and she was riding her bike without them the first day.  Those training wheels imprinted some good habits.  But when we took them off, she had to develop some new ones.  Better balance & increased speed to keep from falling down, for example.

Isn’t this the same as trading on sim?  When we take the training wheels off, we then have new issues to deal with, psychological issues of risking real money.  But having the foundation in place for following a trading plan makes it easier.

I always try to tackle one issue at a time.  It’s easier that way.  It’s like working your way up through a fighting competition.  If you jump in a Battle Royal you’re chances of winning are slim.  If you work your way up, one man at a time, you can rise to the top.

My specific problem is I’ve become very risk adverse.  I lost a lot of my account so I want to hold on to what I have left.  So I don’t want tight stops as that would give me more losers.  I don’t want to take a loss on a wide stop as that gives me a big loser.  I don’t want a profitable trade to turn into a loss so I scratch it as soon as it comes back to my entry (which it does the majority of the time).  These are all detrimental behaviors that I need to fix.

If I go back to sim, I take off the psychological pressure to avoid losing money.  I can focus on good habits.  I can use 6 tick stop and stop out 10 times and it won’t be that bad.  It would probably force me to better time my entries.  I find this much easier and less painful to experiment.  I’m talking about major experimenting.  If it were just a minor tweak I’d try it in my real trading.

Trading is my full time job and my only source of income.  My main focus is to manage risk so that I can stay in the game. Changing my trading plan involves a bit of risk.

My trading plan has evolved on the go and I’ve become looser and more risk seeking.  Which was fine when the markets were calm and rotational.  May was an outstanding month.  But now with the volatility, risk management is more important.

Yesterday I got on the bus with FlowTraderES looking for a new high.  It was finding sellers one tick before my target.  I was very tempted to just get out.  But I didn’t.  I believed in my setup which told me there was a high probability of a new high.  It hit my target and I got the full value (6.75 pts).  If I take taken a point less that would still be good at 5.75, but imagine I take a point less on every trade.  That’s going to add up.  The majority of the time I cut my winner short, it ends up going to my target after I’m out.

Trading SPY – I thought of that but commissions end up being more than ES and really how much psychology pressure will you have trading a very small position?  I find sim to be more effective but each person has to do what’s right for them.  My friends trade ES and if I trade SPY that changes levels and everything.  I thought of trading SPY as a proxy for ES – that is analyze ES but put the trade on SPY but I have no idea if that will work.

Everyone must find out what works for them and go with it.  In my case I thought of a compromise – after one mistake I go to sim for rest of session (or day).  This way I can still trade real, be motivated to trade well, and if I don’t then I practice on sim.  The financial risk will be limited to one stop out (about $300 max).  I just did a real money trade and traded it perfectly and got 3 pts.  Had I cut it a point short, I would have gotten only 2.  That really makes a difference over time.  And I think this method of real until one mistake may be a good compromise.


  8 Responses to “Sim Training Wheels Analogy and Tweaking the Plan”

  1. Hey,

    First I want to say I didn’t mean to criticize as well, sorry if it looked like that…

    I traded for sim for too long, like 3 months, and was profitable, I know that the problem is in me.
    I trade support/resistance levels I define, on sim i had no problems taking it while on real money I hesitate and end up entering too late. This is something I’m working on.

    There is a full analysis of my July trades on my blog, needless to say that the big losers were not according to the plan, so this is another problem.

    If I reach my daily loss or loose 3 trades in a row I switch to sim as well.

    Trading spy is something I think of doing to simulate multiple contracts trading, the idea is to do EVERYTHING on the es just have spy on the dom, a friend of mine did that and said it was ok.
    If you think it’s bit enough risking money you can buy 500 or 1000 shares, this would be same capital exposure as 1 or 2 contracts. But also small capital exposure has its own psychological effects you Dont have on sim (see behavioral finance experiments on “free” and “almost free”).
    commissions shouldn’t be that different from the 3.8 round trip on es.
    I’m not there yet, but just thinknig on it as an option..


  2. Hey Michael,

    your last 2 posts hit the nail on the point. Those are also my main issues. Trading is really often doing what let you feel queasy in your stomach in order to win over the long run – you need a lot of confidence to do so. I think the last very profitable months have built this confidence for you.


  3. hi micheal, great reading and i check it out every night, love your ideas and commitment to it.

    I would personally say that you shouldn’t hit the sim after 1 mistake. The reason is if you have an edge then every set up must be taken otherwise you will miss trades and this will have a drastic affect on your performance long term. Just like a casino you should take every bet (set up) and look at the bigger picture. Equally by going sim after 1 mistake you will drive yourself crazy on the setups you know miss so you cannot win physocologically im afriad, i now first hand. Though i do agree that if you hit your systems worst case stop losses, mine is 3 then you must quit for the day.

    god bless.

  4. Jason – I agree with what you said, but I’m not going to go back to sim after one mistake. I need to work out my optimum stop loss and to do that I prefer to do it on sim. I’d like to try 4 ticks, 6, 8, etc. That would take time. And while doing that I’d be missing my income. So now I’m having second thoughts.

    Today I traded real, I took a 4 pt loss but I was fine with it as that was totally my plan and to compensate for the big stop loss I traded 1/2 size (1 contract). I ended up with 13.5 pts. I took a loss in the morning too. So I’m happy to know I can take a few decent losses and still end up with a great day! So maybe sim won’t be needed. But I’m definitely going to experiment with my stop loss and try to get my losses smaller.

    Thanks for your kind words, it makes it worth it. I wish you luck especially in these volatile times.

  5. Sim for me is a great tool and if used correctly will improve your live trading. Being more of a scalper my tendency is to overtrade.I have 2 domes up at the same time overlaping each other. The sim dome I use for trades that I consider higher risk or impulse trades and the live dome for setups with lower risk. As far as not being able to trade the same live and sim yes not having skin on the sim changes things so you need to subsittute it with something else. For example if trading only sim shoot for 80%(or what ever is appropiate) win rate for 4 straight weeks if you fall short one week you have to start over.

  6. dont be afraid of volatility, you can tame it by reducing your size and widen your targets and stops to compensate for it.

  7. Just an incidental correction- 500 shares of the SPY is only $5 per cent movement. You’d need 1250 shares to equal the value of one tick of movement using the ES futures. Assuming the ES moves a tick for every cent move with the SPY.

    That might effect the R:R due to commissions.

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