Monday, January 27, 2014

Midir's Stock Market Challenge: Day 2



Results For Today

Trades: 1
Total Contracts: 1
Winners: 1
Scratch: 0
Losers: 0
Profit: $44.16 after commission
Gross: $50
Missed Profit from Taken Trades:  $0
Missed Trades: N/A Half-Day
Mistake of the day: Half-Day

Half-Day, Deep Thoughts, And a Quick $50 bucks

Sadly, I missed another great trading day because I was suck at work until mid-afternoon. Luckily, I managed to log in right on-top of a quick second entry long on a pull back to the EMA and trend-line. The trade worked out for a quick $50 bucks, but that got me thinking. One of the variables in my trading plan has been whether or not to buy in with one or two contracts. I've always looked at this as a subjective thing; something about the setup just seemed to look better then the others, but that got me thinking even more.

If I thought a trade had a chance of not working out, then why would I take a trade in the first place? I mean if I could find one set up that had 100% accuracy, I could just sit around and wait all day for that one trade. Even if it happened once a week, I could just trade that one set up with 10 contracts and make a fortune. Sadly, no system will ever be close to 100% accuracy, and traders never take a trade because they think they are going to lose.  A trade takes a trade because they think that something about their system is giving them an edge, that the odds are in their favor.

So here's the question of the day: Is it possible to even be able to judge a set up based on how "good" it is? And more importantly, does it matter? 

An Argument for Non-Discretionary Trade Management

Before I get to answering the question of the day, let me throw around a few definitions for anyone whose new to trading. Discretionary Trade Management is simply opening and closing a trade because you feel like it.  Non-Discretionary Trade Management is always managing a trade in the same way, for example every trade you take you set a 1 point target with a 1 point stop.  A lot of people say that you should always use a one to one profit and stop ratio, but that's a subject for another time.

There are a lot of befits to using for using a fixed trade management system.  For one, it becomes really easy to tell whether or not your trading system is even working.  Since most people use discretionary entries on their trades; it makes it really hard to tell if your system is working.  One of the many issues traders face on the markets is the fact that we are overwhelmed with variables.

The more of these variables that we can turn into constants, the more consistent we can be at turning a profit.  The key to any trading system is simply discipline and eliminating as many variables as possible. Once you find a trading system that works out in your favor more then fifty percent of the time, and you have the discipline as a trade to follow that system to the letter then it simply becomes a math equation so see how much money you make.

Adjusting My System


I've always been a big proponent of using a fix trade management system to eliminate variables, but then I realized why am I not always trading with two contracts?  I can really skew the results of my trading by adding just one contract.  For example, what if I am just a terrible judge of when a trade setup is better then others? I could end up with a winning loss to win ratio, but I could still lose money because I threw more money at my losers.

Instead, I decided to adjust my strategy slightly. One of the things that I've always noticed when reviewing my past trades is the fact that I don't always get the best entry.  I intend to use my second contract to improve my entries by getting a lower average cost.  I will use a stop limit order to catch the trades that really just take off, but I will use my second contract as a realistic limit order.  The idea is to lower the amount of money I lose per losing trade by having a lower cost average.  The majority of my trades will have a opportunity to get a lower average cost, but a significant amount of trades will simply run the second my stop limit is hit. This gives me the best of both worlds.

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