Slow action on the markets today, so this is a good time to look at some lesser frequented features of remek.ca. Many of the concepts below will be well-known to many of you, but it never hurts to recap the foundations of successful trading!
How about our calculators?
Trading is all about numbers. Math. We, all of us, who want to be successful in this business, had better accept this. Numbers are, must be, our friends. Let’s jump right in at the deep end:
Successful trading is a business. To run a business, you have to keep accurate records. Money in, money out. Track every penny. (Surely, nothing new there.) So you’ll want to keep track of
your overhead (recurring costs, which will vary little on a month-to-month basis, e.g. your internet fee, office, rent, phone, datafeed, muzak, coffee, etc.)
your variable costs (e.g. commissions on your trades, hardware, software costs, education, etc.)
You also have to record your trades so you can track your account’s (or accounts’) performance. This is what the Remek! Trade Register is for. Note that this is a template, feel free to customize it to your needs (you can save your own copy with Save As…). The main thing is: you must keep accurate records of your every interaction with the market.
Say, you made a few hundred trades in SIM and you have measured your performance. You have data. Enter that data into the yellow fields, and a number of important metrics will be calculated for you automatically. These are:
The expectancy of your system (the system being the result of a) your trading rules b) your disciplined following of your trading rules).
The longest expected losing streak your account must be able to withstand, as calculated based on your data, to keep the Risk of Ruin as close to zero as possible. (Warning: this number may surprise you.)
The largest expected drawdown (in monetary terms).
The minimum recommended account size to trade your system.
And finally, a 6 month plan to increase your contract size incrementally while keeping your risk constant (aka the capital accumulation plan).
Many traders tend to focus on ‘accuracy’ (i.e. the number of winners) of a given system, forgetting that the expectancy of any system is a result of both the accuracy (i.e. what percent of all trades are winners and losers), and the win/loss ratio (i.e. the size of the average win compared to the size of the average loss).
Yes, the number of winners matters. And so does their size. (Think 100 ants vs 10 elephants). Remember, it’s not about how many times you win and how many times you lose. It’s how much you win when you win vs. how much you lose when you lose.
This tool is especially useful when you want to compare two systems, with different accuracy and win/loss ratios.
Markets, better get used to it, are, mostly, random and unpredictable. (Visit your local library for details, you’ll find a full shelf on this.) Most of what you see on the chart is meaningless noise. And trading noise, it being random, is meaningless. Thus, our success in trading will depend on our ability to restrict our interactions with the market to those times when the market is not completely random, for the simple reason that that’s where our edge is.
Remember: on this randomly generated chart, everything is random. Meaningless. No predictive value. Random! What does that mean? It means that all those beautiful looking “support” and “resistance” areas, all those wonderful “wedges”, and “double bottoms” and whatnots, are nothing. Noise. Products of meaningless random data, there by chance, with no predictive value. (Note: random data is also able to “trend” very convincingly, just by chance.)
Bottom line, in a random environment you, we, simply can’t make money! That’s what random means.
May this be your wakeup call next time you look at a chart. Since much of market action is random, chances are that beautiful formation you are looking at on that chart right now, is
either not even there due to your cognitive bias (see jpg on the right: those lines are parallels)
or if it’s there, it could be just random, meaningless (however good-looking) noise
or, sometimes, could be the result of an actual market force (momentum, buying or selling pressure) on the market. Now this, this last one, is what you want to trade. But of course, the problem is: there is no way to separate this third category from the first two. And that, in my opinion, is the main reason trading is hard.
By the way, we, as technically motivated directional traders, we couldn’t care less what causes that buying or selling pressure. Whether it’s a GDP number, the phase of the moon, or yet another tweet, or a news bite, or another talking head on the TV screen, or any combination thereof and a million other things, we don’t really care. We don’t need to. We’re driven by price. Everything we need, to do what we do, is on the chart.
What we do care about, though, is to carry out a set of well-defined rules in a largely random environment with utmost discipline, and face the wind, so that our edge has a frickin’ chance to surface.
Or better: has no chance not to surface!
Finally, here’s 6E today, an example of those less-than-random environments that we aim to trade:
Mindful trading, y’all!