Newbie to Candobie: 2 year target

THE POST THAT ATE TOKYO

Summary: TL;DR. Read only if extremely bored.

I started writing this to explain what I’m doing to an imaginary friend. I’ve always found this to be a good way to settle and define what it is I actually believe or what I’m actually doing. But what the hell, there have been a few similar posts lately, so I’ve tidied it up a bit to post here. Still a blurge, though. Sorry.

So here’s what I’m thinking about while getting started – until now I’ve only been pissing about at the edges, but I’ve seen enough to make me want to put some serious effort in. Maybe new folk haven’t thought of some of this, and it’ll help them. Maybe old folk will see something I haven’t thought of, and will help me. Everyone else may be entertained by my flailing about. Sorry this is long. I suck at Concise.

The 1st of February is the day I get serious – the kids go to full time childcare, and I’m a shift worker, so I’ll have about half my weekdays uninterrupted, in addition to whatever evenings I can scrape up. Call it 18 hours a week. I get a couple of hours most days at work to read if nothing is happening, so that’s another 6-or-so hours of study. I’ll have a couple of periods of leave toward the end to properly test expected income on a full time commitment.

I’ll update this thread, but it’ll be slow. My plan is to have myself trading profitably in a year, and look at quitting my salaried job by Feb 2012. That’s two years exactly, though I’ll be taking leave-on-half-pay for as long as I can after that to supplement my early income, and I can always continue where I am if I make a hash of it. Feb 2012 is when my eldest boy goes into school, and I’d like to be in a position to be home when he is (so looking at trading times in the morning – early afternoon our time, and / or perhaps the evening (London open?) or wee-hours (NY open?)).

(brb: dear god I write a lot of words...)

Global settings:
Target income: 50kpa - I am comfortable with a final income of 50% of my current income, which is 100k. That is, 50k pa pre-tax (ie. more than 50% of my current take-home). I want to be able to make that on less-than-full-time, to make room for illness / holidays. So (hand waving): for 200 days work, that’s $250 a day pre-tax. More is better. Welcome to earth.

MaxDD: 25% - I am comfortable with a maxDD of 50%, and honestly can quite reasonably blow the whole starter fund without divorce, but that’s really a cop out. Although I could live with 50% down, I’d have to think I was royally screwing up long before that, so we’ll call it 25% as a “WTF are you doing?” trigger. I’ve been down 10% or more a couple of times before and haven’t broken sweat or a stop loss, so I’m confident I can deal with more if I have confidence in my long term profitability. Working that out will be a big part of what I’m doing for the next 2 years…

Risk per trade: 2-3% – for now I’m sticking to 2%, but will move up to 3% as I get more confident of my systems for the high expectancy stuff (soon), and as I get more solid expectancies for the newer stuff (later). With my tolerance for loss so high, I think 3% is reasonable for my situation.

But not with the day trading: 2% per *day* – …and that’s only nominal for now. That is, I’m going to be pure-paper trading the new stuff for 6 months at least. Honestly would be surprised if I can see solid enough expectancies this year to get real money on. The 2% per day limit is from TH’s frequent advice, btw. It makes a lot of sense to me.

Capital: 50k now, 150k come crunch-time
• I have 50k being invested reasonably successfully now, and another 30k that I can free up in the next few months.
• We’re putting aside 2.5k a month to add to the pool, and will do that for the full 24 months. Also compounding everything I make from now on.
• A couple of little investment properties can be used to add capital towards the end of the period if needed.
• …so I think I am cutting it pretty close with starting capital, but on my 2012 target I should have something in the order of 150k, which I hope will work (strongly dependant on what happens with draw downs until then, but I really should have been profitable for a good long period by 2012 if I expect to go solo. Having less than 150k by then is a good indicator that I need to do more work – perhaps different work).

To achieve my equity : income requirements I’m going to look at high frequency day trading. That’s good, because so far I enjoy it. But my plan in the next few months is to get as broad an education as I can. I’m going to dabble in a lot of stuff to get a sense of how it all works. No sense being a one-trick-pony, even if I plan to specialise the crap out of something down the line.

Step 1: study and set up
I have no access to anyone who knows anything, and between kids and my job (shiftwork), any regular arrangement (class, part time job, etc) is pretty much impossible. So I’m learnin’ from books and the intertubes. I keenly feel my ignorance at the moment.

With books, I just want to get a basic grounding, and then enough specifics to refer to as I screw up. All I’ve read so far is some Tharp, but have enough awareness of stats and enough of an idea of what I want to do that I didn’t find it very useful. Good, even life-saving if you hadn’t already thought of that stuff, and it certainly helped get my head around terminology, but I kept saying “duh” most of the way through. From here I’m looking to get more material on specific approaches (see below for current reading).

For software, I’m terrifyingly ignorant about my platforms. The first thing to do on Monday is to see if I can stretch my options – I’ve been using basic functionality so long now that I’m worried I’ll get stuck with primitive methods out of habit (see below for my current software).

For actual trading methods, I’m having a harder time finding anything useful – which is to be expected, I guess. Charting methods are easy to find, since they appear to be mostly voodoo (not dissing it – it works (for some), and the old methods only continue to work because they’re fairly arbitrary voodoo). I’ve got some simple scalping entries (will detail below) which can give me something to do while I stare at price action, and I’ve got some ideas for some systematic / indicator stuff that will give me a base to work on – if only to see how to detect the stench of fail. My old seat-of-the-pants sorta-fundamental trading is still working out ok, and I’m improving it with some basic charting, but ultimately it’s not a path I want to stay on. So few trades (40 a year or so) with a discretionary system that’s not really a system at all = no fricking idea what the expectancy is. That makes it a constant worry, and I don’t really like worrying.

Documentation is the big change I need to make. Track my returns better, record my trades for review better, get real numbers for expectancy and break-even requirements and likely range and so on. The numbers I do have are all back of the envelope, which won’t cut it. Oh, and I need to get an accountant. I’m probably doing something dopey with tax.

Now reading:
1. Nick Radge, Adaptive Analysis, largely to get some idea of what the hell he’s talking about in his chart analysis (I’m subscribing to The Chartist). I am becoming more and more convinced that EW is mostly a dumbo-feather, but that it works anyway (I can expand on that if you like). Trading his power setups is absolutely the most relaxing trading I’ve ever done.

2. Howard Bandy, Quantitative Trading Systems, and loving it. I’ve had a few ideas about some trading systems (thus clearly making me one of an elite few : ), and getting across AmiBroker is going to be a high priority in the next month or two.

After that, I don’t really have any book plans. I’ve got an old (1999) Guppy to flip through, and I got a subscription to Intelligent Investor (they paid me $15 to subscribe, and I look at it mostly to sneer). Beyond that, I think I’ll only be looking at books to answer questions that I can’t otherwise work out. Specialised stuff.

Software / Brokers:
To go with Howard’s book, I need to get around AmiBroker. I don’t expect a magic bullet, but I do want – at the very least – to knock some bad ideas on the head.

I’m using IB for most stuff, and IGM for CFDs. Both platforms (the IB TWS especially) have a lot of unexplored functionality that I really need to play with.

Looking at getting MT4 / Go for the Forex side – I’ve been using IB, but not sure if I can make it more friendly for Forex trading (hate their Forex doodad). Possibly just need a better plug-in for IB. Anyway, will at least play with MT4 to see what I can get out of it.

Excel is getting dusted off, and my wife is digging up some ATO-friendly bookkeeping software.


Trading at the moment:
I need to get a pretty big return on capital – 30% or more after costs. Preferably more so I can compound to some degree. I intend to actively day trade, because that’s what I’ve enjoyed the most, and seems to suit the situation. I’d like something that will scale somewhat to the amount of time I put into it – something of a return on time and effort, rather than pure return on capital. But I don’t see any reason to stick with one thing if I can get positive expectancy on other stuff. Broad education.

I want to work human-like hours, preferably during school hours, though fairly short sessions late night or early morning is well possible (I don’t sleep much).

So here’s what I’m starting with:

1. Ye Olde half-arsed fundamental share trading, in which I try to detect which way the wind is blowing, and make money. I’ve found my subscription to Charlie Aitken’s newsletter, filtered through my own requirements, has been very useful. Also tooling around the nets for, well ok, for bull****. But sometimes even cows can eat nuggets of gold, and you can get them if you’re willing to go through the motions.

I do fairly well out of this – or rather, I have done fairly well. Buggered if I know if I can keep doing it, or when I might have stopped being able to do it. The only way to tell is when I’ve lost a lot of money. That’s why I don’t like it long term.

For now, I’m putting about 20k (40% of capital) into this, looking for about 10% stop losses and a 2% of total capital at risk (ie, I’m taking two 10k positions, sometimes three depending on where I can put that stop loss). I only use margin with this stuff when I’ve got an odd lot due to the specifics of the stop loss that’ll work for me – sometimes a good opportunity needs a bigger one, sometimes I can tighten it up.

I’m seeing if I can get a bit better at this stuff by being more thorough and applying what I’ve learned about charting. We’ll see. My equity curve looks pretty good with this so far, but I’m starting a new one now and we’ll see if it can justify itself.

2. The Two Weekers were my original steps into charting, but now days are more than 50% Nick Radge’s power setups (US and Aus). I’m using CFDs to extend the number of positions I can take, and I like to be careful to hold a couple of shorts and a couple of longs if I can swing it.

Charting when I’m doing it is simple: tops-bottoms-support-resistance and some basic trends, with the barest look at fundamentals. I’m studying EW, but I seriously doubt I’m going to be convinced that it’s any more than a way to roughly identify stocks that bounce around and are likely to move soon (I intend to sell my “Bing-a-Bing BOING” theory when my trading blows up and I need an income). That’s fine, of course, since movement is a good thing and I absolutely do not deny that it works, but I can’t see myself working every day on something I believe is basically superstition. Which is a shame, because it seems to me EW is a great way to get people to study charts long enough to internalise useful patterns (which is where I think EWers eventually make the good money). Apologies for this possibly insulting comment from a position of almost complete ignorance…

Anyway, I’m putting money on a bunch of these, and paper trading a lot of my own picks just to get some more figures and a feel for price action at this time frame – as with everything else I’ve played with, it seems the exits have a daunting amount of room to improve. I’m going to need hard numbers.

The Two Weekers are mostly breakouts, and use the rest of my real money (60%), with 20k in CFDs (ASX shares) and 10k in the IB account (for the US trades). 2-3% risk, and again looking at roughly 10% stop losses on most positions, though I’m often putting in some much tighter ones (which really makes me appreciate CFDs to let me extend position size – I’ve had a 2% stop / bounce-off-support trade that’s done well for me which I couldn’t have afforded to size correctly without the CFD). I push the margin pretty hard, but I keep a very close eye on things and I’m quite clear what to close on what triggers. I do need to sit down and have a better look at what my margin thresholds should be…




3. Scalping forex is the thing I’m enjoying most. I’ve been paper trading off IB, but I’m not enjoying the interface. It might just be a matter of playing with the application better, but I hate the Forex Trader, and Book Trader’s settings and hotkeys don’t seem to want to do what I want them to do. Anyway, looking hard at MT4 and Go. I’m not doing it yet, but down the track I like the idea of experimenting with some automated trading, or some slightly-more-complicated indicators once I have a better idea why they matter.

I’m playing with a few entries, but my main method for now is very simple, using a version of The (infamous) Rumpled One’s system. That is: on a 5 minute chart, wait for the price to be within 20 pips of the daily top or bottom. Entry is on green-red-red or red-green-green: that is, when you’ve had a green bar, followed by a red bar, you enter short the moment the next red bar drops past the close of the previous red bar. Vice versa for red-red-green. Then you “take what you can get”. Of course, the entire game is in that last part, which is why it’s going to take a few years and why it’s not really much of a system – it’ll give me something to focus on when I practice following price patterns. It’s apparently a fairly high win-rate entry (which is a good stat for someone practicing exits), but I want to check that more closely over the next few weeks.

So my exits are also following TRO’s roughly: 10 pip initial stop, if it goes to +5 and comes back hard then bail out at +3, widen the stop as it runs up (say 10 pips trailing at +20), but then tighten it up again as we reach the high end of a likely move, which he seems to suggest is at about 30. Don’t quote me on that, since I only skimmed his stuff a couple of weeks ago – and as I’ll mention below I really want to get more specific numbers on trading range to better inform my exits. But I recognise that a lot of it is going to be “feel”, and that means a heap of screen time. And I should point out that TRO posts hundreds of “results” charts that show winners (big winners pretty much every day) but fails to mention the multiple 10-pip losers he should have had on the same chart. So no, I don’t expect much from this, but it does give me something to play with while I get some hours under my belt and look for patterns.

I’m not using any of TRO’s indicators, but there are a bunch I want to set up for myself: I’m thinking of a simple momentum indicator that’ll tell me the aggregate action from related pairs, perhaps just an arrow and a number to show how price action elsewhere is expected to push the pair I’m watching. I also want to know the expected range – not sure if it’s possible, but to have a percentage plonked beside pip ranges based on an automated trading system that roughly mirrors the way I’m doing things seems to be a useful thing.

Eg:
• Make a simple back-testing system that always buys on the entry above, and then runs a 10 pip trailing stop and records how high the price got in winning trades before falling at least 10 (not what it sold at).
• A line each for the last week, month, year.
• For each line display the average range, and a list of percentages at target levels: so something like 5 pips: 80%, 10 pips 67%, 15 pips 53%, 20 pips 12%, and so on (or, alternatively, maybe the other way around: 80% chance of 5 pips, 60% chance of 11 pips, 40% chance of 14 pips, 20% chance of 23 pips). Different figures for Year / Month / Week would show changes in volatility. That wouldn’t substitute for screen time to get the patterns, but it could help advise when you’re being too optimistic / pessimistic for the market.

Anyway, I don’t know squat about forex at the moment. I enjoy poking about, but I haven’t even started with it, really. So while I’m practicing for short periods, I’ll be off to refer to the materials online to get a better feel for why things are happening. My non-book education for the next month or two is going to be getting my head around the fundamentals of forex (Babypips is where I’m starting). The price action has so far been… slightly readable. My paper trading treads water, which is promising for an ignorant scrub. But I’m going to need to know a lot more about it to avoid getting squished.

Not even close to being able to put money into this yet. Seriously doubt there’s anything much in this “system” anyway, but it gives me something to practice until I can get some experience.



4. Fading gaps – another strategy that TRO talks about that seems reasonable: find stocks that tend to gap and then fill the gap at a high rate. Trade that stock looking for the fill and then again as it leaves a tight range. He’s got indicators to look for well behaved stock, though I’d want to adapt them for non-US markets if I can get it to work. Trading US open + 4 hours is doable, but I’d rather get something working in this time-zone or perhaps the London open. I’m not sure it’s worth it in Oz, though, because the brokerage is too painful…

Anyway, it’s something to play around with. The issue being that it’s the exits that make the money, and that comes down to screen time.

Also not anywhere near putting money in.




5. Quantitative trading systems as per Howard Bandy’s stuff. I’ve got a few ideas running around about patterns I think I’ve seen. I’m pretty keen to see if any will fly, but I’m almost as happy to just put them to rest if they turn out to be crap. This stuff seems a good way to disabuse yourself of stupid beliefs. And if something works, the idea of having good solid expectancy right there in front of you appeals to me a great deal. I can put up with all sorts of crazy equity curves if I’m confident of my expectancy.

Not really anything to write in this space yet, since I’ve barely started.



Near term: I’ll give myself another few weeks to get more comfortable with my software and set up before I work on some preliminary numbers – particularly some cost vs profit figures to see where my expectancy targets are. I’m going to be paper trading like crazy, but honestly can’t give much significance to results over the next month – maybe I should start some “trying” paper accounts to differentiate results from the “mucking about” accounts… Anyway, I’ll start tracking equity curves for the paper accounts in March. I also want to get some basic testing up and running – I think I can improve my exits (not just in Forex) if I have a better idea about average results for simple trailing stops. And I’m printing charts at exit time, and again a bit later, to see if I can find where I could have done better, and what might have shown me at the time I took the exit that I could have done better. Not really getting much more than vague hints of the beginnings of ideas out of this yet, but I’ve hardly spent any time looking yet either. I didn’t learn to read much in the first year I tried that. :

Further out: I’m not wedded to Forex and sares, but it seems (from where I’m standing, down a deep hole looking up) they’re a bit more accessible (simpler, easier to set trade, cheaper to start with) than Futures or whatever. However, I’m really thinking of my present activity as the equivalent of reading “See Jack Run” books. I don’t really know what genre I’ll get into down the track, and I’m keeping an open mind.

…just trying not to keep an empty mind…