I received man-sized losses today, as IÂ am long [[TWM]], [[DXD]], and [[MZZ]] And not just regular long either, but positions that were as much as 2x my regular position size for this strategy. I am still in the trades, and may add to TWM tomorrow.
The system is generating two new entries for tomorrow, and both would be counter-trend.
Taking the trades tomorrow will feel like I’m getting back on the same big ass bull that just bucked me, except now I’ve got my tailbone shattered, my chest gored, and hands rope-burned.
But what else can I do? If I do not take the trades, then I may miss a crucial turning point. Or not. They may just generate more losses. In fact, if all 5 trades stop out, they will erase all of my gains from the last 2 months.
The point is, one doesn’t trade a system if he can see the future, or if he can accurately predict market turns. One trades a system because it provides an edge that is assumed to be better than what can be offered from his mental faculties.
In other words, when one overrides a system, a variable is introduced which has typically not been tested. To make matters worse, this variable is more likely to introduce error and chaos, due to the fact that it is usually discretionary, a byproduct of one’s psychology, biases, etc. Remember, one would not be trading a system in the first place if he was programmed mentally to trade with an edge. What I have found is that intervention seems to capture the worse elements of the system, and magnify them.
What makes system trading hard for me is that it is very difficult to reject the urge to intervene. I’m not sure why I’m having a problem with it. It may be that I’m relatively new to the concept and just have not gotten used to being completely mechanical.
Amen.
Which system is this, the RSI(2)?
See the robot, be the robot. For us ‘working fools’, who cannot live the market 24/7, a system is a must.
System trading is tough, but you’re doing the right thing by sticking with your guns. This ignore bad news, bad earnings, bad guidance and overall fucked economy phase will pass soon enough and some sense of reality will return to the market place.
Wood, you seem to have a pretty good mental read on the mkts so why not try to trade based on what you are seeing?
Wood, I too have problems keeping to my system. I either wait for a better entry and miss the move completly or I build the position too quickly and don’t make as much as if I had followed my rules.
I do have an intermediate term buy that says SPX will be higher on Aug. 18th than it was on July 18th and a short term sell that triggered on Tuesday based on an overbought NYSE McClellan Osc.
2 posts ago you said you expect ‘heavy resistance’ at Dow 11,750 and put up a nice chart.
So why are you already in DXD and TWM and getting ripped up before your own signal?
I don’t know what system you are using but there’s is very little to suggest this bullshit rally is over, especially with oil good and crushed.
Top sector this month is trucking. Followed by regional banks and soon retail. I’d hate to be heavily short with trucking leading the way.
Bullshitter, I do trade a portion of my capital on primarily discretionary signals (what I’m seeing). That portion of capital is mostly cash, with one position, CVD. My goal is to eventually not trade at all from discretionary signals, as I think the mechanical systems are better than me.
Apollo, I agree that the SPX is likely higher 8/18. I just didn’t expect it to go straight up there with no pullbacks 😉
Sir Douche, trading trends based on resistance and intermediate overbought/oversold conditions is an entirely different strategy, with a separate amount of capital alloted to it. Right now, that capital is in cash.
I also trade a breakout system that will have me enter 5 positions tomorrow, of which one is a trucker, and one a bank.
So what you should picture is a very short term mean reversion strategy (which I wrote about in tonight’s post), a breakout/trend following strategy, a discretionary allotment, and one where I seek to catch the indexes at support and resistance, and catch the moves with options.
Ideally, they are not correlated. Unfortunately, I let the signal for the mean reversion strategy affect my other positions, and so I sold off my long trending stocks, on Friday, as I was expecting a little pullback. That was dumb, as I had extremely little upside potential to mitigate the losses on the diETFs.
nice post. Taking losses in system trading is like folding in poker. It doesn’t make one a loser and it doesn’t mean one made a mistake. It is just a part of the game.
Excellent point on correlation as well. Backtesting and experience shows trading multiple, non-correlated systems simultaneously almost always helps smooth out equity curves and reduces drawdowns. I think this is particularly true with mean reversion and long term trend following
How many systems are you following?
Sounds like you are juggling a lot of balls at the same time and instead of giving yourself an edge — it winds up spreading your focus over too many moving parts.
Wood: you said “So what you should picture is a very short term mean reversion strategy (which I wrote about in tonight’s post),” but, I didn’t see the post?
You’re making good gains this year but fwiw: it seems your system is a group of systems. How do you keep that sorted out?
Sir Douche, in general, systems traders do not just trade one system. At any point in time, the system may lose its edge, may experience a drawdown larger than expected, etc. So what you want is several or more systems that are not correlated. For example, my mean reversion system has me short the indexes right now while I’m buying breakouts. Sure, they could both be wrong, at the same time, or right, or one wrong, other right, etc. The idea though is that drawdowns are minimized and if one quits working or experience a string of losers, your others pick up the slack.
Cuervo, I’ve never thought about it as a group of systems, but sure, that’s one way to look at it.
Woody,
Here’s a newsletter with some of the charts and graphs and lines and math and stuff that you like.
The “bottom line” is that they suggest “the market” is “going up.”
http://www.pring.com/pdfs/ptgletter.pdf
“So why are you already in DXD and TWM and getting ripped up before your own signal?
I don’t know what system you are using but there’s is very little to suggest this bullshit rally is over, especially with oil good and crushed.”
He was in DXD and TWM because the system told him to be in them. And, I might point out, it was correct.