Baseball players practice, why not traders?
Batting practice in baseball. Golf swings and
putting greens. Film study of opposing teams in the NFL. Free throws in the NBA.
Boot camp for U.S. soldiers.
What do traders have as practice tools? I’m so
glad you asked!
Simulated Stimulation
In my evolution as a trader I spent hundreds of hours reading all types of
market research, market forecasts and trading theories on every aspect
imaginable. That collective data mining has been helpful, to some degree.
Likewise, I’ve invested literally thousands of
hours dragging charts backward in time, mock trading them over & over & over
again. That ongoing practice has certainly done more for my measure of success
than any other aspect, bar none. Along the way I learned how to teach myself
whether a system or method has merit over the course of time, and how to tweak
it for personal preference to suit individual taste. Let’s spend our time
together here discussing the merits of this practice.
First of all, there’s only a mild comparison to
mock trading versus real time, real money experience. The same could be said for
human rescue drills versus real auto accidents. Soldiers firing range handling
of military weapons versus live fire in combat. Putting on the local golf course
versus a fifteen footer on the 18th hole at Augusta. Sometimes there is a very
large chasm between practice and reality, for sure.
No one will dispute the fact that practice is
necessary. Would you want to enter combat with a squad of soldiers who never
fired their weapons? How about EMTs who never practiced CPR at a multi-vehicle
collision? Firefighters who never handled a hose at all? No thank you!
See where I’m going? It’s absolutely laughable
to think any of these professionals where such serious consequence is on the
line would not perform significant and repeated drills. Right or right?
Why then do traders commonly and routinely
purchase methods of trading totally new to them and insist on trading real time
with real money before a moment’s practice of dry run? Does it really happen?
Much more often than not, I’d opine.
Sitting Ducks
As a provider of trading method info, it always amazes me how traders with
least experience and in many cases smallest trading accounts are usually in the
biggest hurry to trade real money without a stitch of practice or research.
Invariably, their results aren’t anywhere near expected and the method draws
direct blame for all that ails.
I’ve seen this happen with myriad trading
methods of all styles, complexity and price levels. Each week I get emails
expressing how said trader has x-number of years experience in the markets,
y-number of dollars spent on information and all of it was wasted. All that
other info doesn’t work, it was a waste (or rip-off) and now my stuff looks like
just the ticket for success.
What do you suppose the chances are that said
trader spent their due diligence learning the effective operation of those
methods? Can we thus assume said trader will spend equal time mastering any
method, ever? Perhaps that is one reason why the failure level is so high in our
industry. Literally 1,000s of ways to make money in trading, absolutely none of
them are easy or offer instant success without effort. Aspiring traders who fail
to invest enough time in practice will never be more than mere liquidity in the
markets… sitting ducks for the big pros to pluck. Simple as that.
Choices
The good news is, we all have choices. Eventual winners choose to spend
sufficient amounts of time in practice, mock trading under most realistic
scenarios possible. After all, what gain is there to be had from fudging the
data? We’re not playing for beers where use of a “foot wedge” every now & then
is harmless. Any hypothetical results we amass have our financial futures and
the futures of those around us at stake. The math better be close to right as
possible. Real-time trading will introduce enough unforeseen variables (none of
them good) to skew the data as it is. No gain is there to be had massaging data
or curve-fitting results to mask holes in an overall trading plan.
I believe it was Brett Steenbarger wrote an
excellent piece (as all of them are) on mandatory simulated practice for traders
he works with. Amen, end of story. Every single successful trader I know of has
done enough mock trading to make themselves weary of the process. For me it is
more habit now than anything else. I tend to steal bits of time wherever
possible spent mock trading various symbols and charts thru the method in
progress. It is amazing what patterns, nuances and “little things” there are to
be gleaned on a regular basis.
Practice Sessions
Whatever your method or approach to trading might be, it is critically
important to dry run it on a regular basis. Testing different time frames and/or
various symbols can make a world of difference. It took a lot of trial & error
for me to settle on the timeframe charts I prefer to trade myself. That would be
4min – 5min charts for the eminis intraday, 60min charts in swing trade
(overnight) fashion and 240min charts for the FX. All the smaller & bigger
charts work, no question about that. My own personal preference has to do with
nuances like trade signal frequency, speed of decision process, size of average
profit to loss, time spent in a trade, etc.
One thing to be aware of is false readings of
many different chart tools. Oscillators and moving averages will lie to you. In
real time, price action may not actually rise into or bounce from a moving
average line. Once time wears on, said moving average adjusts to touch the end(s)
of price bars that makes it look like a clean touch & reversal off the moving
average in question. Try to find the same signals in real time, and it obviously
won’t happen.
Likewise, all oscillators look much cleaner and
more crisp in hindsight than real time charting. I know this from too much
previous experience with both, and those who’ve spent the time studying realize
the difference. I personally do not use oscillators of any kind in my trading
and don’t expect that to ever change. One of the reasons for that is lack of
correlation between hindsight study and real-time signal confirmations.
Price action patterns do not change at all from
real time to back-testing. Pivot values, waves, retracements, volume, chart
patterns… all remain fixed from live action to recorded history. Trade methods
built around these price action studies are identical in all aspects on a chart.
Self honesty in research is critical, as we
said before. Really now, what good does it do to pretend or curve fit a method
or approach in practice? Who are we fooling = sabotaging here? Ourselves. Unless
one has a penchant for self destruction, complete honesty is paramount to
correct practice habits. Perfect practice makes perfect… shoddy practice only
leads to shoddy real-time performance in any field of pursuit.
Less Is More
For an excellent section on trading systems and self-honesty, look no
further than the latest piece by Chris Curran
here. The description of how a trader might “massage” a method =
approach is classic and artfully written as Chris always does. If you haven’t
read it yet, please do so. Heck, if you read it already, go ahead and read it
again!
Seriously, keeping a trade method simple is
vital. I used to search high & low for just one more key filter to add in my
approach. These days I constantly try to whittle things down just a bit further
instead. Less is more, for sure. Hindsight practice allows me to omit certain
parts of a method to see if it adds anything by inclusion or adds to the bottom
line by subtraction. You might be surprised how much stuff I’ve stripped away
from previous trade methods to the tight ship she is today. Then again, if
you’ve coursed the same minimalist path I have, you already know what I mean.
Almost Trading
Practice long enough and the lines between real time and down time begin to
blur. Sometimes I almost forget that it’s Thursday night and I’m just mock
trading my way thru a long ago time in the market. Might work my way thru a very
profitable day, only to wake up and realize it was just a dry run. Oh well…
makes for much better read & react decisions when live markets are firing price
action up & down.
Summation
I’ve heard many traders say that practice runs are a waste of time, that
nothing matches live fire in the markets. True enough, no dispute there. But
what is the bridge between absolute innocence and jaded market veteran? Tossing
one’s money in the market without sufficient and frequent practice is directly
akin to stepping into a war zone for urban assaults with nothing more than a few
squirrel hunts in the backwoods as a kid for firearms experience. The results of
either attempt would not be good… not good at all.
Perfect practice leads to almost perfect
execution. Take the time to hone your skills on a regular basis. Those future
drawdowns will shallow out and new equity highs will sharpen at their peaks for
the efforts in return.
Trade To Win
Austin P
(free pivot point calculator, much more inside)
P.S. Please feel free to join us in the website
Sunday night at 8:00pm EST for the weekend Market Outlook section inside
www.CoiledMarkets.com.
Austin Passamonte is a full-time
professional trader who specializes in E-mini stock index futures, equity
options and commodity markets.
Mr. Passamonte’s trading approach uses proprietary chart patterns found on an
intraday basis. Austin trades privately in the Finger Lakes region of New York.