Project One Million

Little Acorns

2010-04-10T08:10:00.000-07:00

'Bit of a landmark for me this week as my first customer subscribed to my GBPJPY Based trend-trading system, Yen Burst.

In fairness to myself, Yen Burst has generated a shade under 50% capital growth since going live in the beginning of March and is climbing nicely up Collective 2's performance tables, so it was clearly going to start attracting attention, but it is still thrilling to think that someone is willing to start paying for my trading advice.

Otherwise, last week's other development has been finalization of a capital recovery strategy for my single position, Swiss Franc based Counter-Trend trading strategy; I'm particularly pleased with the results which allow a trader to risk 5% of their account in an initial position, with a very high degree of confidence that they will emerge from the trade with profit, however price moves subsequently.

My intention is to market this strategy through Collective 2, also, and will let you know how it performs in live trading.

Finally, my Euro based, proprietary, day -trading strategy is taking shape nicely. The idea here is to create something 'trainable' that allows a trader to harvest a consistent, low-risk return, from about 3 hours focused market participation daily.

Basically, it's all-go for Joe !

March Review

2010-04-04T06:59:00.000-07:00

Well, March is over and I'm satisfied, generally, with how the Project is proceeding.

On the up-side, the account has grown by 50% (of it's starting balance) this month, which is great ( ... you will see I have posted this month's trading statement for completeness).

However, the system I trade had far greater potential, still, that I might have harvested. On reflection, the reason for this failure is timidity - argued on my personal, and clearly sub-optimal - reading of the market. Basically, there are occasions when, despite my rigorous testing, I have stayed out of the market when my system indicated a trade trigger, only to watch it mature profitably - just as my testing had indicated it would.

This, as you will appreciate, is self-defeating behavior which will kill me long term, if I let it.

So, how do I rectify it ? Well, there is only one way so far as I can see, and that is increased trading discipline.

... But how do I go about acquiring it ?

Well, at the moment, and based on backtesting, I risk 10% of the total account on each trade, in the hope of harvesting 5% profit for each winner.

This, admittedly audacious, risk profile is based on a very well tested probability ratio of 4 wins in every 5 trades. With compounding - which I have yet to implement - it is extremely profitable. Indeed, if you want to see just how profitable this proprietary system can be, just follow the link to view my first month's recorded stats.

However, as the cash sums grow, it is likely that my own psychological alter-ego is stepping in to spoil the party.

Hmm... Solutions ?

Well, the most obvious way ahead would be to reduce my trade size - perhaps half it - In order to wrestle my destructive sub-conscious back into its box.

- and I may well do this, but it would be a pity as the whole psychology of the thing is a lot of what Project One Million is about, so I'm going to give myself another month to straighten this discipline issue out, before I step in to clip my own wings.

Wish me luck...

Carl Von Clausewitz ... On Trading.

2010-03-11T12:45:00.001-08:00

Those of you who have met me, know that as a serving military officer I am a student of warfare.

I recently set about the study of Clauswitz's seminal work ... On War, expecting to find little of relevance to my other passion, that is the object of this blog. But I couldn't have been more wrong.

Indeed, such was the relevance that I am compelled to articulate some specific insights that will be of use to you in your trading.

By way of setting the scene I need first to argue the case for this relevance...

... I mean, what is trading if not war ? Whilst an Analyst studies the Market from distance, passing his observations on for action or otherwise, it is the Trader who - as a General - converts those observations to execution. And in doing so he or she takes on that most fearsome of foes, the Market, in an engagement that that will end in either victory or defeat.

The General, as the Trader, will only prevail if he possesses the coup d'oeil to see the chance, the boldness to take it and the conviction to see it through.

As Traders, it is our backtesting that gives us the insight to see this chance and our boldness to execute the trade, but how many of us close an ultimately successful trade before our goal is attained - or worse - we close at a loss ?

Clausewitz explains this frailty eloquently in his observations on the 'Fog of War'. As a General's meticulously laid plans are exposed and challenged at the onset of the engagement, so are ours at the instance a trade is executed.

From this moment the General's presumptions are challenged by the ebb and flow of the engagement or - in our case - Price, toward or away from our profit target. And this is where conviction plays so heavily.

As the best Generals possess the conviction necessary to weather 'the noise' of the engagement, confident that their plans will - in the final analysis - secure the victory sought, so we must embody the same quality to endure the noise of the Market.

Generals with this rare combination of coup d'oeil, boldness and conviction are bestowed the accolade of genius; genius being a highly developed mental aptitude for a particular occupation.

Is this not the degree of mastery that we seek - that we must seek - as Traders ?

... How else are we to prevail with consistency against the Market ?

So now to the juice as for me this is all about that last, vital, quality of conviction.

The only way that we - as Traders - can achieve the degree of conviction required, is to complete our backtesting and bolt down our money management. Any weakness here will play on our conviction and unseat us in the fog of our engagements with the Market.

I say all of this with a recent trading experience at the forefront of my mind. I entered a trade to a high probability price point accurately identified, only to close it at break even when it didn't achieve profit in the time-scale I had anticipated.

Now you may say that, at least, I survived in-tact to fight another day; but this is to ignore the lesson of Clauswitz. My system probability, profitability, money management and all, is based on taking every opportunity that the Market presents.

When price eventually - this morning actually - reached the profit target I had originally identified it represented defeat, not survival, because tactical stalemate has taken me one step closer to, an inevitable, tactical defeat without recording the success that I was due.

So to conclude; we as Traders need to attain the status of genius to succeed, consistently, against the Market. If we attend to our backtesting and money management, we arm ourselves with coup d'oeil to see the chance, the boldness to take it and the conviction to withstand the 'fog' of the trade.

If we fail to do this, then we will ultimately fail. It is that simple.

I clearly need to do better, but I know that I am not alone.

Analyzing Results...

2010-03-09T14:55:00.000-08:00

A friend asked, last week, how I go about analyzing backtest results.

After mulling the question over for a bit I think my brief answer would be that' it depends', but allow me to try and be a little more insightful...

If the system I am testing is 'fire and forget' in nature I am less interested in time of trade entry but very keen to know how many come in, what the draw-down on successful trades is, how long each will expose my capital for and what the underlying technicals (aside my trigger) were, on trade entry.

This all goes into a bespoke spreadsheet which I design to make post test analysis as easy as possible.

In that analysis I have 3 specific aims. I want to...

1. Spot and eliminate any outliers that stand apart from the norm in whatever respect.

2. Optimize stop placement.

3. Identify how I might best leverage the trading system to maximize profitability.

Basically, I want to cut out as many bad trade setups as possible and then optimize the risk / return equation for those that are left.

It may be, for example, that cutting out the high draw-down trades allows me to trade the fewer profitable ones at a higher lot size.

In all this, I keep in mind my own trading psychology, appetite for risk and need for affirmation.

I know from experience that any system returning below 70% probability, will have me doubting the integrity of what I have designed as the bad trades start to roll in.

Further, whilst I know this is sacrilege for some, this is why I have moved away from stacked trading; I am not good at managing such a high powered trading mechanism, objectively, in the vinegar strokes, and I simply cannot cope with the reality that one losing trade munches the profits of 4 winners...

... But I do salute those of you who can.

Testing and analysis of real-time, conventional, day-trading systems differs in that here I am acutely interested to know when each of these trades fire because I need to understand how many of them I'd have been able to take - and how this affects percentage profitability.

I'm also, for the psychological reasons stated above, prepared to tolerate far lower 'in-trade' drawdowns as I don't want to be tempting myself to take potential winners off the table just because I fire up my trade station at the wrong moment and get spooked by what I see.

To understand how such a system will feel like to trade the only option is to advance the testing software bar by bar and hone one's ability to spot set ups, enter at the correct trigger and manage the trade objectively once it is in-play.

In all of this I am guided by the philosophy of only attempting to pick up the very easiest pips and minimizing exposure of my capital to the market for the absolute minimum time necessary to achieve that aim.

In such a volatile market-place this is, perhaps, my most important guiding principle.

Where Next ?

2010-03-09T06:31:00.000-08:00

Yen Burst took out another break of support this morning for a further 5% gain on account. Hurrah...

However, its lack of follow-through, so far today leads me to wonder if support at 134 as withstood the assalt for the time being. Here is the chart...

If this is the case, and it can manage to break through near term descending resistance, there is a fairly big magnet at 136.30 going into tomorrow, concurrent with longer term descending resistance.

On the other hand, if support at 134 gets taken out, 132.50 is looking like an entirely reasonable short target.

Just thinking out loud...

Acceleration...

2010-03-08T08:23:00.000-08:00

A nice trade to start the week...

Trading the Plan

2010-03-06T04:39:00.000-08:00

I had grave reservations about whether to switch my trading system off or not in advance of the NFP figure hitting the market yesterday.

As I have said, I trade technically and don't, therefore, enjoy the out-sized impact that this key piece of fundamental news can have on prevailing market sentiment - especially when I'm trading it !

Specifically, price was getting close to a trade trigger point on my favorite (but volatile) pair and my fear that was that if it did open, my normal trade size wouldn't leave sufficient room for the violent price swings that this announcement often generates.

In the event - and thanks largely to the pointed advice of a trading friend - I stayed with it and I'm glad the I did, as my trade opened and raced to its target within 3 minutes for a shade under 8% gain on account.

Initially - and perhaps surprisingly - I had mixed feelings with respect to this result. On the one hand I had stuck to my original plan, but on the other, I was assisted by a very favorable NFP figure. Bad news would likely have cost me at least as as much as I made - and in a similarly short time-frame.

The reduction of a hard earned 12 % weekly gain to small change in the space of a few minutes would have been... err disappointing.

In the end, though, it was Rob Booker who laid to rest my post-trade concerns with this simple observation;

"You didn't give a f**k about NFP in your backtesting so why should it affect your trading decisions now ?"

... and you can't really argue with that !

So, the first week in March has been another 20 percent'er and the Project One Million equity curve is starting to look handsome...

In the meantime I've re-learned 2 priceless lessons:

1. Plan the trade & trade the plan.

2. Rob Booker is still 'the man'.

Breakout !

2010-03-04T06:43:00.000-08:00

Having ranged for three days GBPJPY breaks out of its range. Yen burst is there to cash in.

What I Mean About Confidence...

2010-03-02T06:19:00.000-08:00

The following chart is of a trade that has just completed...

As you can see, some meaningful 'heat' was taken on the first position but focused back-testing gave me the confidence to add a second position, at the right support level, then hold my nerve as the pair double bottomed, finally taking the 'easy pips' for profit at a resistance level that my testing has determined is as close to a statistical certainty as one gets.

I'm not saying that it wasn't difficult to stay with it and I don't blog this to brag, I do so simply to illustrate the power of confidence.

Had I bottled it when the pair double-bottomed I'd have worn a 9% loss. By trusting my testing I booked a 12% profit on the trade.

The question is, "would you have hung in there ?"

And if the answer is even possibly "no", then get stuck back in to your back testing !

How Do I Test ... ?

2010-02-26T10:02:00.000-08:00

I write this post in a particularly good mood, having grown the account by 20% this week.

Admittedly, the markets have been on the move - but then that is what my trading system is designed to capitalize on - so I reckon I've earned the right to profit.

But this seems like insane growth, right ? I mean, if you can profit this much in a week, you can lose as much or more, right ?

... Well yes, this is absolutely, true - so what gives anyone the confidence, or faith, to trade this way ?

The answer is simple. Backtesting. The painstaking analysis of years worth of price data; hours and hours at your tradestation, building spreadsheets, analyzing them, tinkering with the variables of your system, then starting the process again and again until you are sure your system is optimized to its potential.

In my experience, this is the level of commitment it takes to trade this way.

... there is no short cut.

So, how do I do it ?

Well the whole process starts (and ends) in psychology. You have to understand yourself well enough to nail down what your appetite for risk is, how you want enter trades and how you will react once they are placed.

For me, my risk appetite is relatively high, but I don't have the time or inclination to chart watch. Indeed, when I do I have an annoying (and destructive) habit of attempting to second guess the price action, which risks derailing my own system if I let it.

These observations led me to conclude that I needed to develop a high probability, 'fire and forget' system, where trades can be entered at a specific time in the day - when the markets are quiet - and then be left to trigger and thence either mature at my profit target rapidly or blow up.

I absolutely don't want to follow them once they are in play. That is the discipline.

With this established I open up my testing software and download the most recent 3 years of data for the currency pair I have chosen. I simultaneously open my backtesting spreadsheet in Excel.

The Testing Process

What I am aiming to do with my spreadsheet is record, trade by trade, all the variables which might conceivably influence the probability of a particular trade maturing profitably.

For me this includes the following: trade type; time, day and date of trigger; time day and date of expiry; duration; maximum drawdown in-trade; profit in pips and $ and what the underlying market conditions were when the trade fired.

With respect to my testing software I bring up any indicators I have chosen to guide my trade decisions and start advancing the candles bar by bar.

Here I will only add that I am looking for a near mechanical trigger. I want the absolute minimum of discretionary input.

As trades fire and complete I go back to the spreadsheet, record the variables, then make notes on the chart screen and take a screen-shot. I basically record as much as data as I can think of.

I am not, on this first run through, interested in money management, or testing myself as to whether I would or wouldn't put at trade on when faced with a particular candle or condition.

I simply want to see what trades the system will generate and how they turn out.

When this first test run is complete I go back to Excel to slice and dice my data, looking for any artifacts or trends which merit a tweak in my entry criteria.

Only then do I go back for a second run, applying money management criteria based on probability of trade success.

Its worth pointing out that this stage generally warrants multiple iterations as I seek to match and optimize both probability and profitability.

Finally - and only when I think I have something special - do I commission the construction of an Expert Adviser (EA) that can be used to automatically backtest a far larger data sample.

This sounds exhaustive and it is, but at the end I have a system that I am truly ready to test and trade live...

... and absolutely crucially, the confidence to trust it.

Where do I Start ... ?

2010-02-23T16:31:00.000-08:00

For anyone starting out in trading, the options, choices, advice and complexities are daunting.

In consideration of the various technical manuals, indicators, fabled literature and gurus I remember feeling utterly overwhelmed.

Each of us start out on a quest for a holy grail trading system, manual in one hand and 'Reminiscences of a Stock Operator' in the other; desperately trying to internalize time wizened trading maxims as we bring chart after chart up on our chosen trading platform...

For me two specific experiences stand out as critical in helping to clear the fog. The first was locating a guru that I felt I could trust. The second was reading the books of Alexander Elder and Mark Douglas. If you haven't read them you should.

These texts made 2 things crystal clear to me;

Firstly, that I alone would have to build a trading methodology and system all of my own.

Secondly, that specialization, focus and discipline would be of paramount importance in the construction and execution of that system.

These 2 rules trip quickly off the tongue, don't they ? But it has taken me 3 long years to truly absorb and apply their meaning. They have been of singular importance in establishing the trading consistency that I now enjoy...

... but it you will permit me, I'd like to offer you a short cut.

System Development.

People are falling over themselves to sell you their trading system and there is nothing wrong with that - but if you don't make a system 'your own' before you trade it, you will have nothing against which to anchor your discipline when trades move against you - as they inevitably will. You will attempt to second guess the market and you will hemorrhage money as a result; which is utterly demoralizing !

So it is essential that you take personal responsibility for the development of your trading system.

... and you must do this with your personality, appetite for risk and wider lifestyle (around which trading must fit) firmly at the forefront of your mind.

Here's how I do it;

1. I focus on a single commodity, index or currency pair. One Only !

2. I specialize, studying it over time in an attempt to identify it's repeatable, idiosyncrasies. This may seem daunting but every trade-able instrument has its own personality. If you look hard enough you will find it.

3. I conduct this review 'naked' in the first instance. Then I add my own horizontal lines where I see areas Support and Resistance. Only then might I add a dynamic resistance indicator such as moving averages or other leading indicators

Throughout this process I am trying to home in on an identifiable artifact that precedes, or triggers, the repeatable behavior I have identified.

Remember - you are not trying to capture every pip of every move here... although many try in vain.

...What you are trying to do is limit your market exposure to the absolute minimum time necessary to pick up and bank the easiest pips available.

It would be impossible to overemphasize the importance of this guiding principle.

4. Only when you are convinced you have something, is it time to break out your testing software and set about back-testing your new system to destruction.

And I'll come on to this when I've had an opportunity to order my thoughts on the subject !

What I Trade...

2010-02-16T06:12:00.000-08:00

I should start by saying that I'm more about 'people' than 'things'.

It follows, then, that I am happier with the notion that human psychology drives the financial markets than I am with the primacy of the underlying truth, or fundamentals.

I do not subscribe to the theory of 'perfect knowledge' and can there be any disciples of 'perfect market theory' left after the latest melt-down ?

I am not therefore, by nature, inclined to sift through balance sheets and prospectus', on the hunt for perfect knowledge that will give me an 'edge' in the market place. I do not have the time to do so or the bottomless resource to convince others that I am right even if I did. What counts, in my view, is what the market believes is the correct valuation of a given entity, commodity, instrument or currency.

I believe, therefore, in the primacy of price as the manifestation of that market consensus at any given moment.

So whilst I keep a weather eye on fundamentals, I am at heart a technician.

This established, it makes more sense to focus my attention on the most liquid markets, where mass psychology provides the most predictable influence on price, rather than bury myself in an endless quest for an undiscovered gem in one of the vast array of stock markets. I am not a prospector.

So whilst speculation in stock indicies was a viable option, I have settled on the currency markets. This, oft quoted, '3 trillion dollar a day' market place is the perfect vehicle for a psychologically biased trader, looking to find his edge in the technical predictability of highly liquid instruments.

For the same reasons I like the continuity of the foreign exchange market, with a continuum of movement that follows the sun. With no market closure providing an opportunity to withdraw and reflect from Sunday to Friday, Forex seems to provide the most perfect, unbroken, manifestation of group psychology (and the Greed and Fear that drives it) in existence.

Technical traders abound in Forex, the most liquid and volatile market on the planet.

So I know that I'm in the right ball-park, but narrowing the field this far still leaves the trader with 30 potential crosses to trade on my platform - and this is where many lose their way. They assume that a given indicator, approach or strategy can be applied across this vast market place, but the fact is that it cannot. Every currency cross, or pair, has its own distinct 'personality' which must be identified and accommodated if the technical approach to trading is to bear fruit.

It is vital, in my view, to specialize further still, focus on a specific pair and get to know it like an old friend. And there - simply put - is all the 'edge' you're going to need.

Why I Trade...

2010-02-14T14:37:00.000-08:00

A good question, but how many of us really ask it of ourselves ?

I have, after-all, a good career and a beautiful young family. Time is far more of an issue than money, so why bother with it at all ? Who, after all, would give the common man a chance against the cleverest money on the planet ? A fool's errand, right ?

But I think that's part of the allure. I mean, we all like the satisfaction of a challenge accepted and overcome, don't we ? And when you think about it, most of us live in a very structured society; a civilization that has developed along a path specifically designed to mitigate each and every risk. Is it any wonder that some of the challenge and adventure has evaporated along the way ?

Please don't misunderstand me, this is in large part, very good news indeed. I accept, totally, the superiority of a structured society over anarchy and am not about to throw off the trappings of progress to take on mother nature,single handed and armed with nothing more than my thongs and a grimace !

But yet, a life totally devoid of risk is... well, no life at all, really. So if, as I, you subscribe to the notion that you get, in life, what you give, then it follows that without any risk there can be no reward - and that amounts to an existence.

So this, in essence, is why I trade. Because when you enter this world there are no rules and no safety net. So long as you have the money in your account, you can buy or sell whatever you want, in whatever quantity you want. You can make massive profits in a few ticks, then lose the lot in the next. And you can do this because the market place is the essence of an anarchy; every man for himself and the survival of the fittest.

Negotiating this brutal environment requires focus, meticulous planning, decisive execution, self-discipline and not a little bravery. In trading you are, uniquely, responsible for your success or otherwise. In making a trade you embrace a calculated risk; you step into the ring; you assume the responsibility. And because of this the taste of victory is sweet.

So for me, at least, trading is the juice of life... and if you are still reading I'm guessing you share this view.

JT.