Something's Broken? Part 3

I have a roulette "system" that usually wins. Everybody says there is no such thing, but I can go to a casino and can usually walk away ahead. That's the key: "walk away ahead". I discovered that my methodology in roulette results in cyclical swings a lot of the time. I play for fun, not money, as there is no real edge. But how I win is that when the cyclical swing is in my favour and I'm ahead, I stop as a winner.

There are advocates of this "system" in trading. Every time I put a trade on, I assume risk. So if your stats show that you can usually get to a certain profit per contract a day, or if you need certainty of a daily profit, then maybe it's something to consider. The question then is, do you stop at a maximum loss for the day and if so, what multiple, if any, of the daily profit target should it be? Or if there is no profit target, should one use a daily loss limit?

One of the programs we have in Flo is exactly that. We can optimise what daily profit and loss targets give the "best" result. I have put "best" into quotes because "best" means something different to different people. Is it return on account size? Return on maximum drawdown, most absolute profit, etc?

The beginning point to answering all this is defining what is important to the trader and to his psychological requirements. If the most important thing is to make $500 per day, then the whole trading plan should be built around the achievement of this goal.

In designing a trading plan, it's not only setups and profits & losses, but the achievement of a business aim. Just saying "I want to earn as much as I can" without defining the numbers around this goal will often put a trader into the situation of having to make hard decisions in the heat of battle, without having the back tested results on which to base an intelligent decision.

The chart above shows a great example of managing trades that were entered automatically. As you can see, there was a short @ 1.3573. However, I saw the support from the Fibs below - context - and decided that support should hold and covered making a tick. I then had the option of re-instating the trade but at a better price at a better trade location, or, just waiting for the next trade to be auto traded. I chose re-instating it and carried the same dollar stop but at a better location, which allowed me to hold the trade and it became profitable.

Today's trading was a bit boring. I talk about how the markets' characteristics can change from one time zone to another and you need to adapt.