Trader friend needs advice

A friend who day trades YM asked for some advice and I really don't know what to tell him.

The issue is he has good setups that have a 69-70% win rate with good positive expectancy, around $60-125 per trade per contract but he cannot allow the system to deliver those well backtested expectancies.

He cuts winners short, sometimes even short of 1:1 RR. Stops of course are always allowed to be hit.

All I could tell him was, "Just do it!"

Any other, more constructive advice I could pass along?

Thanks and Happy New Year to all.

Automate the strategy 100%, backtest 5+ years & 1,000+ trades, correctly assess the maximum forward drawdown allowable per contract, fund the account to that level plus the initial margin requirement, turn the system on & learn to sit & watch without interfering.

BTW, instead of watching it, start R&D for a 2nd system, etc.

I can develop the system for him (for a fee) if programming isn't his forte. See what my system can do in the Journals section (Dom's notes).

Depending on the size he's trading and his capital it might pay him to hire someone to trade for him. I know a trader in California that does just that. Someone comes around to his house each day and trades for him from another room in the house based on his rules.

Mike what you described is a very common habit traders struggle with. So first off your friend should not feel bad or take it personally, he is doing exactly the same thing almost all individual traders do. Some traders struggle with this problem for years and even decades, many never get past this hurdle. For many traders this hurdle can easily become a plateau where the trader's natural progression forward becomes stuck.

When I work with individual traders, they often produce outstanding performance results trading their method with a simulation trading account (not a live account). The individual can literally trade circles around me. When the trader makes the fateful step from sim to a live trading account however, their performance can drop by as much as 80%. Using the exact same method that produced thousands of simulated dollars, the individual struggles to just break-even live trading. The level of frustration when this 'new reality' is unexpectedly forced by the market onto the trader is understandably high.

One of my little sayings is: you have to learn to think like a trader. Thinking like a trader is not something that comes naturally for most people. One can have the best trading method ever invented, but if you don't instinctively think and react like a trader you will fail for any one of a variety of reasons. The consistently successful trader will tend to naturally make good decisions and exhibit good trading habits day in and day out. This trader will naturally do the right thing most of the time. This is the goal of all traders, to consistently make good trading decisions, to think clearly and rationally, and to instinctively react and behave in beneficial ways.

In your friends specific circumstance, he has a habit I like to call "short circuiting" a winning trade. He has a bad reactive habit that surfaces under pressure. The way to overcome this specific problem is to replace this reactive behavior with a better more desirable rational behavior, to literally develop a new habit. The process of replacing a bad habit with a better habit, takes time. It will take patience and persistence.

One of the problems with sim trading is a trader doesn't feel the same internal pressure and emotional stress that is felt in live trading. Thus, the trader has never had to develop the correct instinctive behavior while feeling the high level of emotional stress / pressure associated with live trading. As our stress level rises, our behavior becomes more reactive and less rational. The sim trader never develops the required skills to trade a live trading account. Lacking this skill, the trader fails to successfully make the transition to live trading.

Most new traders try to make too big of a step from sim to live, often with an underfunded account, creating more internal stress than the trader is capable of handling which then leads directly to these undesirable reactive behavior problems. One easy trick which will help in this case is to live trade the associated index ETF in a stock trading account. In your friend's case the YM trader would trade 50 or 100 shares of the DIA ETF. Reducing the leverage and risk associated with a live trade allows the trader more emotional breathing room in making the initial step from sim to live. This technique allows time for the trader to become comfortable trading a live account at a much lower initial level of stress. Once successful with the lowest possible number of shares at risk, the trader then can slowly increase their risk exposure up to around 300 shares per trade. At this point, the trader is prepared (sufficiently conditioned if you will) to make the transition to trade 1 YM contract in the futures market.

I also suggest using the '10 day rule', which requires the individual to maintain the desired trader performance level for at least 10 trading days before increasing risk ( trade size ). Now to clarify, when I say "trader performance level', I am referring specifically to following the trading plan and trader performance (desired correct behavior and actions), how the trader thinks and behaves while live trading. I am not referring to anything related to method performance ( i.e. $$$ won or lost, win %....ect.) In this transition phase we are focused on the trader's behavior under pressure. Each new trader needs to prove to themselves they can handle the heat at one risk level before moving up (turning up the heat) to the next level of risk. The 10 day rule gives us a reliable and proven way to accomplish this.

If during this transition phase, the trader encounters the behavior problem, then the individual needs to drop back down to a lower risk level. Stay at this lower risk level for a reasonable period of time, then attempt to move to the next level. Each of us has our own risk tolerance progression curve, some of us are naturally more risk tolerant than others. There is no right or wrong level of risk tolerance. We need to give ourselves as much time and breathing space as we need at one level before we become sufficiently conditioned to move to the next level. Over time each of us will find our "sweet spot" of risk tolerance, that level where we can consistently perform well and beyond which our behavior is compromised. For one person the sweet spot might be 100 lots, for another it might be 10 lots and for another it might be 3. If your natural risk tolerance is that of a 5 lotter, meaning you do great trading 5 lots and completely fall apart at 10 lots, make peace with it and be content in yourself.

Thanks for all the great posts and PM responses. I never considered that his problem is so pervasive. I hope the info passed along will help.

It almost does appears to be either you can do it or not.

Happy New Year,

Mike

Originally posted by Big Mike


It almost does appears to be either you can do it or not.

Although some people are born with a temperament that makes risk taking more natural for them, for the rest of us, I think risk taking in the financial markets is a learned skill.

Your friend must be exposed to the experience of live trading, in as psychologically safe a way as possible. He needs to slowly develop his tolerance for market risk. My post above provides one way to systematically gain that essential experience.

Originally posted by dom993


Automate the strategy 100%, backtest 5+ years & 1,000+ trades, correctly assess the maximum forward drawdown allowable per contract, fund the account to that level plus the initial margin requirement, turn the system on & learn to sit & watch without interfering.

BTW, instead of watching it, start R&D for a 2nd system, etc.

I can develop the system for him (for a fee) if programming isn't his forte. See what my system can do in the Journals section (Dom's notes).

IMO 5 years isn't really useful data. Anyone who trades automated systems knows that the market changes rapidly, and what worked even 1 year ago doesn't necessarily work today. I would backtest 6 months, and start thinking about what it can do better...

@dannyson2525: IMO 5 years is great data. Yes the markets change with cycles so strategies will stop working and start working month-to-month over that time period but it's impossible to detect when a "style" of market has ended and another started. Therefore you want to test over a long period to ensure that your strategy (1) doesn't have massive draw-downs during unfavorable market conditions, (2) provides you with some sort of protection against your capital during these periods and (3) if really smart and adaptable is able to automatically adapt to market volatility to weather these periods.