This Week’s Battle Plan

Well, we’re at the mid-season break of the softball season and guess
who is in first place? If you guessed Coach Mike’s team, you are very
correct, as the girls are now 7-1. Yesterday we won 15-0 and Coach
Mike was beaming after the game. He told the girls that in his many
years of coaching, he has never had a team play so well. What is
significant about this statement is that on Thursday night before the
game, he told them he has never had a team play so poorly for him so
late into the season. But in under 48 hours the girls have made a
miraculous transformation, at least in Coach Mike’s mind.

Two
weeks ago, we looked at some of the skills and traits needed to
become a professional trader. We talked about the need to specialize,
the psychological make-up needed to succeed and getting professional
training to help you achieve this goal. Today we’ll look at three more
factors that most, if not all professional traders have.

Strategies With An Edge

This one has been discussed by me many times, but it bears writing
about again. Few strategies have big edges. Some have small edges and
most have no edge. How do you know if your strategy (or strategies)
have an edge?  First, most can be tested. There is software out
there that can do that for you. Or, you can hand do the testing,
something I prefer to do first before sending it to the computer. This
way I get a better feel for the strategy and the various swings it may
go through. But, I must warn you here, you need to have enough of a
sample size and it must be looked at in many market time frames. The
other day I was reading one of the trading magazines and they were
showing a strategy that had a supposed edge. How many times did this
edge occur? Sixteen times in four years. That’s a joke (a bad joke)
and I wouldn’t trade it, even on paper. It’s a waste. First, 16
trades is insignificant. Second, it was done only over a 4-year
period.

You ideally want hundreds of examples of the strategy occurring and it
should be over at least a decade in time. I have published and traded
(and still do trade) strategies with a smaller sample size and shorter
period but it’s because the results are so extreme that I’m
comfortable implementing the strategy. But, you need to make sure
the strategy works in up markets, down markets and sideways markets.
And, you should make sure you understand the strategy’s draw down and
the significance of the percent it’s correct. Many traders cannot
stand taking numerous losses to get to that one big gain (I’m one of
them) but that’s the make-up of some of the best trend-following
systems out there. Know your strategy and know how you will
psychologically react to it. Otherwise you run the risk of changing
the rules mid-stream and that means changing the results too.

I’ve read in a number of places that having a strategy with an edge is
not as important as money management skills. I agree with that but the
money management and risk control skills are useless unless you have
something to work with first. And that something is a strategy that
has a big edge. Because when you have a strategy with a big edge, you
can make mistakes along the way and still potentially come out way
ahead because the edge will many times bail you out.

Money Management Skills

Professional traders know how to take profits. Otherwise, they’re
driving taxis. The big unknown is when to take those profits. We
all live with the same dilemma: take the profits too soon and you risk
leaving large amounts of money on the table. Wait too long and the
profits potentially disappear. EVERY TRADER IN THE WORLD HAS TO
DEAL WITH THIS! What’s the perfect solution? I don’t think it exists.
But, there are some solutions to think about:

First, the longer-term your strategy, the longer you will want to hold
positions. People trading an Intermediate-Term strategy as used by Tim
Truebenbach will not be (and should not be) locking in profits on 20
minute bars. On the other hand, day traders will not be using 7% stops
on their positions. The key here is to balance time with price. For
me, my positions are held from 1-4 days, which means we’re looking to
risk a point or two in order to make at least that amount or more.
But, we go a step further. We are locking in profits along the way
when they exist. That means as the position is moving in our favor, we
are locking in gains on a piece. And, the further into the trade we
go, meaning the further time passes, the more aggressive we become in
locking in these gains. There is no holy grail here. Just simple
profit-taking moves that hopefully keep our account growing on an
ongoing basis.

If you want to increase your results, and possibly increase them
significantly, focus your efforts here. This is definitely an area
that most traders can rapidly improve upon when they put their time
and effort to it. By putting together a plan to balance locking in
gains while letting profits run on a piece of your position, you will
go a long way to showing improved returns.

Portfolio Management Skills

Knowing how much to risk/position and how to adjust these levels to
various market situations is an art that can be learned. Few traders
do this well in my opinion. Knowing how much risk you should have both
intra-day and overnight and creating a portfolio around these risk
parameters on a daily basis is not easy. Too much risk taken and you
will likely get clocked. Too little risk taken and your returns will
likely suffer.

First, you must know yourself. You must know how much of a potential
draw down you can handle both daily and overnight. Our max. intra-day
risk was at 2%. We’re now going less than that. That’s our decision
based upon a multitude of factors. This number is neither right nor
wrong. It’s simply right for us. But guess what? As we lower this
number, our chances for 5 and 10% days (days that we have had before)
is greatly lessened. Risk vs. reward. It always comes to this
equation.

Do you have a maximum risk level you will assume each day? Do you have
an overnight risk level? Do you know when to adjust these levels? For
example, if you have a number of signals all screaming in the same
direction, do you increase your size during these times? It’s
certainly comes with more risk but it usually is the proper thing to
do. But, you need to know what the consequences will be if you are
wrong. The same goes for knowing when to lessen your exposure. In
March, as war became apparent and then a reality, lessening size and
risk was prudent. But, it came with the price of  missing a
significant up-move. Having a daily framework in place and then a plan
to adjust that framework is a must if you hope to succeed for years to
come.

Finale

As you can see, becoming a professional at trading is no different
than becoming a professional at anything else. It requires
plenty of skill, lots of dedication, and of course — experience.
It can be done, but those who do it successfully year after year have
mastered the six factors we’ve spoken about over the past few weeks
and they are always looking to improve upon those six factors.