I went over my performance for the month of January this morning and I was rather impressed. I’m sure people outperformed me, but I turned in a healthy 4.8% for the month. It was a simple month to make money long, but that by no means makes it easy.
I started digging into the data for my future trading strategy too. This project has been on the back burner for months as I completed a major overhaul of a business process but with the pesky business tasks and IRS requirements wrapping up it’s time to push my algo over the finish line and get her live.
Whether superstition or numerology or pure voodoo, I find much success in life when I use the number three. Teams of three, three dips from the well, three sacrificial chickens, and well you get the point. The environment I trade stocks in isn’t quite as structured as I plan to trade futures because I like to give stocks time to work and this can take days to months. But with how I intend to trade futures, there will be multiple trades per day with the book going 100% cash at the end of each day.
Given the higher frequency of trades, a mistake is amplified and much quicker to damage my wealth. Therefore I’m developing a very structured environment that will give me quicker feedback. Part of that feedback is the rule of three. These rules are put in place to prevent me from blowing up yet another futures account:
Three losing trades: paper trade the rest of the session and review plan and market context
Three losing days: paper trade the rest of the week and review plan and market context
Three losing weeks: rebuild the plan and algorithm
This will be my first attempt at automated trading. My prior attempts at trading futures have been purely discretionary. The key to being a successful (read consistently profitable) future trader is to TRADE ONLY. That means no running a business and no having a day job. I like to diversify my income sources and I have big plans outside of this market. An algorithm solves this dilemma by only allowing me participation in the market when my edge is present. I will get an alert when a trade is initiated and I can then turn my attention to managing the trade if I want. Otherwise I can let the algorithm handle the exit too. I like handling the exit so far in testing because I can’t program market profile context into my robot.
http://youtu.be/1mdgLn5BFRQ
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Great article, good strategy, which seems simple (rule of three) yet should be efficient and effective.
I like how you mention using a robot to help you implement your trading plan. The best thing about robots is they don’t have the emotion that can cloud our judgement. However, if the robot’s programming is flawed then it’s actions will work against the overall strategy.
But having a feedback loop in place to review performance allows all aspects of the plan to be adjusted, including the plans followed by the robot.
All this makes me think about my trading plan so far. I’m swing-trading at this point (mainly long), and have a good screener for stocks, but I’m bad about setting exit points, whether for winning or losing positions. I need to go back and re-evaluate my exit strategy, as so far this year I have missed some gains by selling one stock for a 12% gain, but the company kept going up another 8% afterwards, so I was too quick to exit.
I need to rethink how I exit.
Scale thirds at logical scale points. Using a fixed T1 allows for backtesting.