Should You Consider Re-Entering Trades That Have Stopped Out?

January 25th, 2010

There are many ways that trading can frustrate you, but one of the most frustrating situations is when you get stopped out of a trade only to see it continue in your direction. It could have been a very profitable trade but you were stuck with a loss. Here’s a trade I took in CRM that shows this exact situation. I was stopped out by a few pennies only to see the stock continue down:

Trade in CRM

A lot of traders will take a stock completely off of their radar after they’ve had a loss in it – that’s understandable. What’s the only thing that’s more frustrating than taking a loss in a trade? Taking two losses in the same stock. 😉

That said, it could make sense to keep those stocks on your radar to trade again. The problem is determining whether it makes sense to take the trade if a setup occurs after you’ve been stopped out already. When you re-enter trades, you’ll undoubtedly be stopped out a second time periodically. This can be psychologically difficult to endure and this situation often weighs more heavily in your mind (“Why didn’t I learn my lesson the first time I was stopped out?”).

The StockTickr Trading Journal provides a great way to keep track of this using tags (a.k.a. categories). Tagging your trades in your trading log lets you track and analyze subsets of your trades. When I started re-entering trades that I was stopped out of, I would assign those trades the tag “ReEnter”. This allowed me to compare how these “ReEnter” trades were performing compared to my trading system overall.

After accumulating several of these trades over time, it turns out that these ReEnter trades were outperforming the system overall – in fact, they were significantly better than average. These results were telling me that for this particular system that I trade, re-entering trades made a lot of sense – even if it’s psychologically difficult. Having this type of data available to analyze certainly makes it easier to take trades where your fear is telling you not to.

Will you re-enter trades in your system? I’m interested in hearing what others have to say about this practice.

7 Ways to Improve Your Existing Trading Strategy

January 13th, 2010

Let’s say your trading is going pretty well – you’re trading a good strategy that you’re making consistent profits from and you’re comfortable with. Good traders never rest on their laurels, so you’re ready to take the next step. The existing strategy you trade never consumes all your buying power, so you’ve got some capacity for an additional strategy.

So what’s your next step? Research a completely new trading strategy, right? Not yet, I say. If you are already trading a profitable strategy, many times there are ways to improve, adapt, or add on to it to make more profits – sometimes a lot more. So before investing a lot of time in developing a completely new strategy which can be a long and arduous process, first look at the strategy you already trade.

This has a couple of obvious advantages – you’re already intimately familiar with how your system works and you already have a mountain of real, live trading data to test with which is always more valuable than pure backtesting with is 100% theoretical.

Here are some ways to look at your existing system to try to improve it:

  1. Use a Profit Target – Look for ways to add a target order or modify an existing one. Targets are great for a lot of strategies because they lock in profit and they free up capital sooner.
  2. Adjust Your Stops – Most traders use stops that are too tight. Look at your existing strategy and see if you can make more money by using a larger or smaller stop distance.
  3. Find More Opportunities – If you’ve already got a profitable strategy, it often pays to relax your filter rules to generate more entry signals. Even if you end up with a strategy that is slightly less profitable per trade, the increased opportunities could be well worth it.
  4. Look For Fewer, More Profitable Opportunities – This is the opposite of the previous item. It might make sense to trade fewer but more profitable opportunities by tightening your entry criteria a bit. Often times you’ll find that you can make the same amount of money with fewer trades (and therefore less risk). This can free up valuable buying power to allocate to other strategies.
  5. Automate your Strategy or Part of It – How are you spending your time when you trade your strategy? Are there aspects of that routine that could be streamlined or eliminated? Perhaps the strategy could be completely automated. Maybe the strategy can be modified slightly to be automated.
  6. Look For Cheaper Commissions – If you’re trading big enough, this could save thousands of dollars a month. Changing brokers can be a pain, so make sure the pay off is going to be worth it before going through the hassle of moving money, learning a new platform, etc.
  7. Backtest Losing Trades in the Opposite Direction – Let’s say you’re trading a long strategy and 40% of those trades end up stopping out. What would happen if you took those trades that stopped out and traded them short? Think about it – the trades that stop out have invalidated your long “thesis” with your original strategy. Maybe there’s an edge on the short side with those trades.

Have you found any of these to be fruitful in your own trading? Which was most valuable? Any other approach that you’ve found helpful?

Giving Talk at Las Vegas Traders Expo

October 28th, 2009

I’m scheduled to give another talk this year on automated trading at the Las Vegas Traders’ Expo. I’ve heard from a handful of users that they will be at the expo and we’ll be meeting up there. If you’ve never been to the expo, I’d highly recommend checking it out. There are a lot of speakers who you’d recognize giving talks on a whole variety of trading topics – definitely something for everyone.

Here’s a free signup link if you’re interested in attending.

My talk is called Automated Trading with the Odds In Your Favor and will be bright and early on Saturday, November 21 at 8AM. It will be a modified version of the talk I gave last year, so even if you saw it last time there will be some new stuff to see.

If you are attending and would like to meet up, definitely drop me a line and let me know.

Interview with Scott Andrews from Master The Gap

August 12th, 2009

For the next interview in the StockTickr Interview Series (RSS feed), I spoke with Scott Andrews from Master The Gap. Scott trades the e-minis using a unique style that he devised on his own through years of backtesting and trading experience.

Read on for a great interview and learn more about how Scott trades, the types of setups he’s looking for, and how he got started trading.

Read the rest of this entry »

Is Your Trading Streaky? You Might Be Able To Profit From It

March 12th, 2009

I’d bet that if you asked every trader if their trading was “streaky” – the vast majority would say yes. Every trader goes through dry spells and periods of nice profits. But if your trading is TRULY streaky you would be able to improve your system by modifying it slightly to skip trades or at least modify your commitment to certain trades (reduce position size).

Let’s say you have profitable and losing trades that tend to occur in streaks. If you could determine that the streakiness was statistically significant, then during a string of losing trades you could back off your position size or pass on trades until you see one that would have been profitable. Once you encounter a profitable skipped trade you could start trading again.

If the trades in your system are negatively correlated (that is, losing trades tend to be followed by winning trades and vice versa) you could potentially set up a rule to do the opposite.

I’ve recently added a streakiness report in StockTickr that will calculate this correlation statistic for you based on anything you choose to filter on (tag, date range, dozens of other filters).

It turns out that there are fewer systems that are streaky enough to profit from than you might imagine. At least in my experience, there were only a couple out of the dozen or so systems that I’ve traded that showed any promise at all for this streakiness.

I’d be interested to hear if anyone out there has implemented a rule such as this to try to improve their trading system. How did it turn out?

Interview with TraderAM

February 2nd, 2009

For the next interview in the StockTickr Interview Series (RSS feed), I spoke with TraderAM. TraderAM is an independant day trader who has an interesting style of trading and posts all his trades on his blog. Feel free to ask him questions in the comments section below.

Read on for a great interview and learn more about how Amarjit trades, the types of setups he’s looking for, and how he got started trading.

Read the rest of this entry »

Introducing Automation into your Manual Trading System

January 30th, 2009

heavy load

When a lot of traders think of automated trading, they envision going from completely manual trading to completely automated trading. They mistakenly view this as a loss of control – they are used to being in complete control of their trading making every decision. It’s unsettling for a lot of people to lose this control and offload more work to their computer.

What most don’t realize is that automated trading IS complete control. The factors and inputs are completely designed and controlled by the trader and the computer doesn’t stray from the strategy it’s been assigned. This is just the opposite of lack of control.

A good way to think about switching to automated trading is to introduce automation into your manual trading system. Think of it as a continuum like in the image above. It’s not all or nothing – you can slowly integrate automation into your manual trading system so that over time you’ll do less trading grunt work and become more and more comfortable with automated trading as you move to the right on the continuum.

Here are some ways to start offloading manual work from your trading system:

  1. Use a product like Trade-Ideas to systematically gather stocks that fit your trading system.
  2. Explore using multiple monitors to save you time and effort and miss fewer trades.
  3. Use tools to automatically calculate your position size, saving time and preventing mistakes.
  4. Streamline your trading routine to cut the fat and become a more efficient trader.
  5. Use the StockTickr Trading Bot to get you into trades and then you can manually manage all aspects of the exit.
  6. Use the StockTickr Trading Bot to get you into trades with a time stop and then optionally manage an exit before the time stop expires.

There are lots of ways to become familiar with automation without going all in. Are there other ways you can think of to move towards automation on the continuum?

Should You Trade with Multiple Monitors? Here’s How To Tell

January 6th, 2009

buncha monitors

OK, I don’t think anyone on the planet needs a 24 monitor setup like the one above, but it makes a lot of sense to trade with more than one monitor. I trade with the 4 monitor setup pictured below and I would never go back. It’s not cheap, but it was a simple decision to me once I thought about it. (See the end of the post for links to the specific components I bought).

trading monitors

First off, there are a lot of benefits to having multiple monitors. Some are pretty obvious but others I didn’t realize until I used my setup for a while.

1. Much more viewable area to have more windows open

Flipping through open windows is extremely time consuming and inefficient. You don’t realize just how much time you spend flipping through windows until you don’t have to. Let’s say you look at charts in multiple timeframes – the daily, hourly, and 5 minute charts. If there’s not room on your screen to have all three visible at the same time you’re going to spend a lot of time and energy changing between windows to take in the information on each chart. Since the data is changing constantly, you’ll be doing this routine several times just in the course of a few minutes. If you have enough desktop space to have all the charts visible on your screen at once you’ll be at a huge advantage.

2. You’ll miss fewer trades

If you’re not spending time flipping windows, you’ll have more time and more desktop area to find more setups, so you’ll miss fewer trades. Of course, if you have a tendency to over trade you’ll need to be very careful and keep that in check.

3. You’ll be far more productive doing your non-trading tasks

I really underestimated the affect multiple monitors would have on my non-trading tasks. It’s huge! Imagine doing some programming or intense writing and then having to refer to some documentation in a browser window. With one monitor, there’s really just not enough room to position both windows quickly and efficiently on one screen. With multiple monitors there’s plenty of room to place the windows side by side so they’re both visible. I can’t emphasize enough how much more efficient this is.

Making a “Business Case” to Your Wallet (or Spouse!)

Multiple monitors are not cheap. A reliable, supported video card that supports 4 monitors is at least $500, plus at least $180 or so per monitor and you’re closing in on $1400-$1500, which is more than even the computer itself in many cases. Plus you’ll need a mounting setup.

Does it make sense for you to spend that much for a multi-monitor setup for trading? It depends on your trading and how well you know your trading system and daily routine.

The questions I asked myself were:

  • Do I believe that I’d be able to find enough additional trades using the new monitors to recoup the cost?
  • Do you find yourself missing out on setups that have made your watchlist but you miss them because they’re hidden behind another window or minimized?
  • How regularly do you miss trades like this?
  • How many of these trades would it take to recover the cost of the monitors?

As you can see, the answers to some of these questions depend a lot on the frequency that you’re trading, the level of profit you make from your trades, how much size you use on your trades, and the nature of your trading system.

For me, it was a pretty easy decision. I knew my system well enough to realize that I was missing trades on a somewhat regular basis and it would just take a couple of good winning trades to cover the cost. Looking back on my results I figured the investment would easily pay for itself within a month. While at first the upgrade seemed a little decadent considering my normally cheap, bare-bones personality, when I thought about it in these terms I realized that there was really no argument at all and I pulled the trigger.

I bought these several months ago, but here are some equivalent components that I would get if I was making the purchase today – note that, of course, by the time you’re reading this these prices have probably changed:

Any suggestions on the setup? Would you make any changes?

Trading Goal Setting for 2009 – Here’s My Advice

December 31st, 2008

goal setting

Well, it’s that time of year. Everyone is reflecting back on 2008 and making trading plans for 2009. This trading goal post from Jack from rmultiples got me thinking again about some good advice on goal setting I heard from my track coach in college.

Instead of coming up with a single, succeed-or-fail goal it’s usually much better to come up with a range of goals. I come up with a conservative, reasonable, and radical number for whatever goals I’m setting.

This accomplishes a couple things – it gets you away from a feeling of failure if you fall short of your goal – it gives you some wiggle room. Also, say you reach your goal earlier in the year – if you have a single goal then you may feel subconsciously like your job is done. If you’ve got a range of goals then you can continue to take your goal seriously.

The more subtle thing this technique does is forces you to think more deeply about what your trying to accomplish and what is reasonable to expect from yourself and your situation. Everybody likes to shoot for the stars and come up with a lofty goal, but it actually takes a lot more thought and self-examination to come up with a conservative goal – something closer to the failure mark and a moderate goal – a number that’s acceptable.

Are there any suggestions you have for trading goal setting as we turn our calendars?

Crazy Trade in GW Yesterday

December 23rd, 2008

I took one manual trade in GW yesterday. It was gapping down and printed a nice inverted hammer on the 2nd 10 minute bar. It looked like it was on its way until 10:28AM or so. Luckily I was stopped out before trading was halted for over two hours. Apparently someone found out some news that initially the company had no idea about. They initially put out a release that said they had no idea why the stock price dropped. A little later they fessed up.

This is only the second stock I’ve been in where trading has been halted in over 2.5 years of trading this particular style. The previous one turned out really well. Here’s the chart:

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