Monday, January 21, 2013

Preparing Profitable Trade Plans

The Proper Order for Trading Preparation . . . Among Other Things

Q: I am a subscriber to your weekly newsletter. I have also read and re-read each of the following books a number of times;

Trade Your Way;

Safe Strategies;

Super Trader; and

The Definitive Guide to Position Sizing

I recently downloaded and completed all 10 levels of the Position Sizing Game (albeit on the ‘easy’ mode). I did not go bankrupt once, and whilst I did not progress through each level on the first attempt my account was always profitable at the end of 100 trades, and on level 3 I progressed with a 500% gain. My account total at the end of level 10 was $38 Million. I was able to cascade through these levels reasonably quickly by applying the principals outlined within the Definitive Guide to Position Sizing as follows:

1. Using the SQN score for each level to establish the Maximum Portfolio Heat, as well as to limit the downside potential on my original capital (for each level), by using a small bet size.

2. When in a profitable position I used the portfolio heat to establish a maximum bet size on my winnings (i.e. markets money technique), and I combined this with my original capital small be size.

I have a history of failure in the real markets. I have tried stock and options trading in the past, however I realize that I never had a system and approached it with a gambling mentality. Through the Van Tharp products I have developed an understanding of the importance of issues surrounding exits, position sizing, R-Multiple distributions, starting capital, SQN scores for system evaluation, setting objectives, and my next goal is to be able to design and trade some of my own systems. I have read in some of your publications that it is fairly easy to design quality systems for each of the market types, however I still do not know how or where to start in this process of system design. This obviously means that I have more work to do, and I guess I am seeking some guidance from the Van Tharp Institute on what the next stage of my development in this area could/should encompass so that I can work towards achieving my next goal.

On a separate matter I read with interest Model 15: Scaling in Techniques (in Definitive Guide to Position Sizing). The reason this interested me is because it seems that if you have a few winning trades happening and you apply a form of scaling in at different levels, then this has the potential to substantially increase the expectancy and SQN of a system, without having to look elsewhere for great trading opportunities. i.e. you can create multiple great trading opportunities from just one initial trade, because your winnings will not just be based on your initial position, they will multiply. So for example on one trading stock instead of having a 4R gain (if you did not scale in), you may end up with a 10R gain (if you did scale in). Am I on the right track with my thinking on this?

I look forward to hearing from you in due course. Many thanks! — Kimai B., Australia

A: Thank you very much for your business and for your question. Can I answer for Van? This week, he has a publishing deadline for “Trading Beyond The Matrix”, his latest book.

Congratulations on your success in the position sizing game. You might consider playing many more times and altering your objectives for the game to learn how to effectively craft position sizing strategies for each—shoot for the moon, go very conservative, etc.

As for developing trading systems, you have a lot of good information already in the Trade Your Way book. Before you get to that step, however, there are a lot of considerations. Van stresses putting 50% of your time and effort of planning for a trading business into your objectives. What are you trying to accomplish? With great clarity and understanding, can you define it? Why do you want that goal? Are you worthy of it?

Then you have to consider other items as well—What kind of resources and knowledge do you have already? What are your strengths? Weaknesses? How much time do you have? How will you manage the gambler part of you? Besides the effects that the gambler part of you has on your trading, what other parts or biases do you have? How will you deal with those?

Just to give you a sense of what Van has the Super Traders do so you might see what he believes is the proper order for trading preparation:

1. Complete the Peak Performance Home Study Course,

2. Write a lengthy (>100 pages) business plan

3. Develop three non-correlated trading systems

4. Trade those three systems at a 95%+ efficiency level for >100 trades

Van believes unless a trader understands his psychology at a deep level, then trading may turn out to be an experience of self-sabotage and frustration. Van actually has most of the Super Trader candidates stop trading for the first three stages of the program so they can focus on their personal and business development. That’s quite a commitment but this group is very serious about trading well.

No one has to go through the ST program to trade well—but following through on the major steps of the program probably makes great sense given Van’s extensive research and experience helping traders. You can take all of the steps basically on your own at home. But we do have a few workshops (the two workshops in February for example) that would help as well.

As for your thinking on scaling in, you are on a correct track. Trend followers who catch a good move and scale in effectively can make great gains with one good trend. That also implies being patient and living with (the possible frustration of) long periods of time with many small losses and good drawdowns. Your psychology matters—some people can do this, many cannot.

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