Tuesday, 18 January 2011

Trading Every Day to Make a Living: Part 4

OK, we have all the ideas in Parts 1 to 3. Now how do you make at least $250 a day?

It's all based on your win rate.

As a rule of thumb, the closer the target of your trade, the higher the win rate. I want a win rate of at least 75%. In the design of the strategy, I also have to match the drop dead stop loss or use an optimised or logic based stop (eg ATR stop or MOMDOT Stop or EMA stop, etc) to the strategy. The type and design of the stop loss is also dependent upon whether I want to trade by HT or completely automated.

OK, my target is $250 per day or 5 ES points or, better still in today's markets, 20 Euro futures ticks.

After building, back testing and forward walking (SIM) my HT system, I arrive at, say, the following stats, for the Euro in this example (real example from my trading):

Win rate 80%
Average win/Contract: $112.50
Average loss/Contract: $212.50

For every 10 trades I make 8 x $112.50 = $900
For every 10 trades I lose 2 x $212.50   = $425
I pay brokerage                                    = $60
Net Profit                                              = $415

There is an average of 12 trades a day during the hours I would trade, so my $250/ day is doable on the maths. My testing is confined to my trading hours. If the number of trades are fewer, or the net profit less, then I would have to adjust the number of contracts traded so that my expected profitability is more than the $250 plus the buffer, as I explain below.

As I have a 20% loss rate, I take my daily profit requirement and add 20% to it to make it $300.

I now implement my strategy. I KNOW my trader's profile because it has been tested. I trade every day until I make $300. The extra $50 will pay for any losing days. If I want to make $500/day, I double the number of contracts. I don't trade longer hours unless the TP has been revised and tested as before.

When creating a trading algo for both fully automated trading and HT, there are a number of DON'T DOs, which include:
1. Don't create a strategy based on curve fitting rather than fitting the strategy to the market. Curve fitting shows a mythical profitability as there is  No real "edge". The methodology I use is all described in this blog. The DVD training sets out the trading pictures in detail and show, live, how I trade them. Incorporating these into HT is an extra programming step but many of you will have already done that as part of your back testing. You can use any alternative strategy that you find suits you and have tested correctly.
2. Don't leave out testing properly and Don't forget the importance of forward walking. Unless the traders profile is known, #3 will kill this idea because of this "don't".
3. Don't cherry pick trades. Not sticking to the strategy because the trader has not done the work to KNOW their trade profile and thus not having the confidence to follow his own rules is a definite way to find it hard to trade successfully.

I firmly believe that no matter what anyone says, the high win rate is a critical psychological component of CP. Most of us find it hard to put on a trade that may have a significant financial impact if our statistics show that there is, say,  a 60% chance of it being a loser. That's one of the reasons I have my students trade the most minuscule size possible when they start so that no matter what, the financial impact is the least possible. It's just easier to maintain discipline.

Below is the chart of this morning's (London time) Euro trading. As you can see, there were 5 trades, 4 winners and 1 loser. The winners each made 14 ticks per contract and the loser lost 14 ticks- all on a fully automated basis. As HT, I ran the 4 winners as is, but managed to cut the loss on the loser to 11 ticks. The net result was $475 as fully auto and just over $500 on an HT basis, all per contract. After the 5th trade, I turned Flo off, as I was finished for the morning.

This morning I tweeted, London time:
$ES_F Looking for resistance for the Gap trade at 1293/94 area. Blast past 94 invalidates. Jan. 18 at 11:05 AM

Price touched the 1293.00 and was easy to see the short at 1292.25 - a great trade down to 1286.75 where I covered at my Fib number. These Gap trades are high win rate trades and are very black and white to do and you can easily see when you are wrong.


  1. Thanks for the detail. I do have a question. When you list $112.50 average win/contract, is that calculated based upon the profit of all contracts with your current multiple contract trading, or is it actually the average made upon your first contract sold (to match what someone trading only one contract would make)?

    Thanks in advance. I've recently becoming a trader, and I'm current working toward CP. Your writings have certainly helped, as I derive my own trading strategies.

  2. Hi EL, A question if I may. Please dont take this as 'doubt'. It isn't, just a question(dream?) that passes through the minds of many:
    ES is a very scalable market i.e. you can trade 1 lot just as easily as 500 lots during RTH. Given your profitability, and considering margin requirements to trade 1 contract, what do you see as stopping you, over time, to simply building position size to 500+ lots, and being one of the richest men in Europe (maybe you are??)?



  3. Hi EL,
    I notice you draw your fib lines quite often but I can't seem to get an idea of where to draw them on the Euro/6E...could you give us more info on that? Thanks so much for your sharing so much great info!!

  4. Hi EL

    I notice you have changed some of the periodicities on your charts? 6E from 5 to 6 and ES from 5 to 3 ticks respectively. Is this just due to the fact that the 6E has been moving a lot more and vice versa with the ES? What makes you adjust this?

  5. Awesome serious of posts, very helpful.


  6. Jeff, that's the first scale out point.
    Nick, Haha, I wish. We each have a finite threshhold of "pain" that reduces as we get older, I think. Just as "speed kills", "size kills". I am continually working on my discipline an increasing size, just like everyone else. Focus and discipline is something we all have to work on every day.
    SpiBok, I change range bar size depending on how fast or slow the markets are and how fast or slow I want to trade. I use 3 ticks more to scalp or when the markets slows down. It's all about not seeing noise but seeing the flow.

  7. I agree with Ross: very useful post.

    I'm asking myself a question: when you stop a losing day? I mean, if you catch the target of 300$/day you stop your trading for the day. But how many $ you have to lose to recognize that you are in a losing day?

    And in the 80% win rate in these example included the context or just the back testing of setups?

    I'm also thinking to old post where you talking about importance of sizing the trade with the trade location and the context.
    how match these two aspects?

    Thank you

  8. Daniele, how much to lose before you quite can also be back tested. How you do this depends also on the opportunities in a particular market. The Euro currently has about 40 oppotunites a day. A losing day usually occurs when there is chop during much of your session. The 80% was without context but at the cost of low profitability. I then rely on HT to provide the profitability I need but use Flo to catch all the entries. As far as sizing goes, if I have a bad trade location from Flo I may immediately scratch part of the trade to reduce size, especially when the mkt stalls. HT is to make sure i catch all the opportunities in a uniform way. It pushes me to trade as the position appears and i have to deal with it. Very different to pure auto trading but has many benefits.

  9. Thanks EL. Any plans for post going forward specifically on execution ie getting in at as favourable a trade location as possible? I know you wrote a few posts on how range bars help you with this. I often find my self "right" but poor entry = heat = sweat/stress for me. The worry is giving me wrinkles before my time and I need my looks to pull in the ladies! Many thanks.

  10. Hey EL, great posts, thanks!

    A question though if I may please:
    How do you arrive at those ES 117 and 127 fibs specifically?

  11. ES Trdr, The fib is 127.2 and the second line is about 10% less. It's GOLD.

  12. okay, thanks!

    Now what swing H/L do I use to set them up? On what TF?

  13. ES Trdr, I look at every major swing hi/ swing lo. You decide what's major.TF is the chart you're trading.