A lot has been going on for me lately and I thought I’d update the blog with the news.
The big news is that I’ve decided to take a partial break from trading and do some consulting. There are two reasons for this: The first is that I’ve been out of my profession for a bit too long and I’m afraid I’ll forget my skills. If trading doesn’t work, I must be able to go back to my consulting work (IT Architect / Developer). Technology changes at a very fast pace and I must keep up to date in the latest technologies.
The second reason is that I’ve not been able to make a consistent substantial income from trading. I typically have a profitable month or two and then a few weeks or a month of break even or small losses. The result is my trading income is not adequate for the quality of life we desire. In June I netted just $200 and that doesn’t include commissions. With commissions I was around zero. And this is a problem.
Here’s my June performance:
There are a few things to point out. The profit factor (top box) is barely above 1. To have a margin of error, it should be above 1.5 and ideally 2.0. The average trade (second box) is $3.65 and again, that’s without commissions. I’ve succeeded in beating a monkey throwing darts by only a few dollars.
I had plenty of mistakes in June that accounted for some of the disappointment, but also I felt that June was very tricky. I know one week were I lost money many other traders told me they lost that week as well. So it wasn’t just me. And that’s the unpredictable part of not having a steady income. In order to make up for those bad weeks or months, one must do really well in the others. And that’s just not the case for me.
Also interesting is the fact that while I won 71% of my trades, my average win was lower than my average loss. That’s due to taking a couple large losses and cutting a few winners short. That’s just plain bad trading on my part. If I lost the month by having a low win rate and losers smaller than winners, then it wouldn’t be so bad. But to barely win the month but doing it with bad trading, well that needs to change.
I feel that a lot of the issues has to do with the psychological pressure of trying to derive an income from trading. I feel pressured not to lose and so I do just that. It’s very hard to overcome. This year has been up and down, with a couple bad months followed by a couple good months followed by mediocre month. I feel I just have not demonstrated consistent profitability with tight risk control.
All this has led me to come up with 3 main goals:
- Strengthen backup plan & remove psychological pressure of trading for an income
- Fix issues in my day trading
- Use less leverage, remove noise, and focus on one setup (pullbacks)
My plan to accomplish these goals are as follows:
1. Strengthen backup plan & remove psychological pressure of trading for an income:
I will work full time to provide a steady risk-free income and get up to date on the latest in information technology. I must stay sharp in this area because this is my backup plan and my family’s future depends on it.
2. Fix issues in my day trading:
I will trade the last 90 minutes of the ES RTH session, which is 8:30-10:00pm. Ideally i’d get one good trade and stop trading because I don’t like to trade in the last 30 minutes. I feel if you’re not in the right trade by then, you’re done. So really I’m looking to trade 1 hour from 8:30-9:30 (2:30-3:30 NY time).
Since I will not have any pressure to earn an income from trading, and no deadlines, I will go back on sim and work on my problems. After a month of consistent results on sim, I’ll go back to real money and if I do not trade well I’ll go back on sim. I hate doing sim, but I really feel the best way for me to fix my issues is to first remove the psychological aspects and focus on smart trading. And when my trading is smart and consistent, then I can work on the psychological aspects. I think having a steady full time income will greatly help in this area.
I’ve changed my trading slightly. I’ve simplified things, removed some charts, and I’m focusing more on order flow to help confirm & time entries as well as use a smaller stop. Several people either do, or have suggested on the blog, to scale at +2 pts. That wasn’t logical for me if my stop is 2 pts (and sometimes 2.5 or even 3). However, if I can use a stop less than 2 pts and hopefully trail it, then scaling at +2 or +3 makes a lot of sense. Since I have an issue taking large stops, I think taking smaller stops will be easier.
3. Use less leverage, remove noise, and focus on one setup (pullbacks)
When trading two ES contracts we have a $133k position! I’d never put on a $133k position in equities but somehow in futures it’s very easy to do. With a 2 pt stop that puts the risk at $200/trade. $200/$133k = 0.15%. When trading ES we’re trading 0.15% moves. I never thought of it like this before, but it sounds crazy when markets move 1-2% or more per day. Is it even possible to make money trading such microscopic fluctuations? Think about it – a 0.15% fluctuation can stop me out.
This brings up an important point: I’m not sure it’s possible. As several people have commented in the blog, no one knows anyone who has succeeded in being a consistently profitable retail trader trading good size. I don’t know anyone who’s done it. Sure there are people on Twitter and blogs who appear to be doing it, but we don’t know. Rob & FT come to mind, I don’t doubt their success, but they’ve been doing this 10+ years and we don’t know their whole story. So it’s quite possible that it’s impossible to day trade ES without 10 years experience and a large account. In fact with 2 success stories and thousands who are struggling to do it, the evidence says it’s not realistic (probability less than 0.2%).
While I don’t know any profitable retail traders, I do know profitable retail stock investors/traders and they all have one thing in common: they focus on the big picture and long term. My father is one of them. So rather than chase something that I don’t know is possible, why not chase something that I do know is possible?
I’m going to try swing trading stocks again. First paper trading and then with very small size. Trading stocks worked OK for me in 2008, well until the market crashed and like an idiot I was fully invested at the top. I’m a lot smarter now.. ok well maybe just a little bit, but I think I can avoid being full invested at the top. So I’d like to try it again. I will place my orders before I go to work and I will do all analysis when the market is closed. There is often a lot of noise intraday in ES (0.15% fluctuations) and we’re trying to adapt to all possible market conditions and trade them all, a midst all the noise. Trading stocks on a daily or even weekly level will remove the noise and the leverage, and filtering for strongly trending stocks and buying pullbacks will allow me to focus on one single setup. In other words, instead of applying multiple setups & patterns to one market, I want to apply one setup to multiple markets.
I plan to continue work on my order flow algorithms but I have stopped offering the signal service. The signals have been less effective over the past few months, which was a real surprise to me because the core algorithm hasn’t changed in a year. I guess it may have to do with the uncertainty and volatility that we’re seeing. So I’m putting them away and will take another look a month or two into the future. I am using some of the components that went into the signals, and I’m considering making these available in the future. But that’s a low priority item on the list.
I’m not sure where the blog is going to go. Working full time and trading part time will take up all my free time. So I doubt I’ll have time to post updates on a daily basis. And if I do post on a daily basis, I’d like my trading to be going well otherwise what’s the point. So I’ll post occasional updates on all this as I make progress towards my goals. And perhaps talk about trading stocks if there is interest.
Thanks to all the people reading and commenting on the blog, especially those who have given me feedback & support. I hope this post has given you some things to think about and if you would like to share your point of view feel free to leave a comment or if it’s private, send me an email via the contact page. I try to respond to all emails.
Good luck everyone on your journey.