Thursday, August 30, 2007

Trade the Chart and Not the Dollars

Currently Reading an article written by the Market Wizard Linda Bradford Raschke

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I started reading an article that caught my eye when I went to visit Linda Bradford Raschke's (LBR) website.
One thing that I didn't know was that LBR has been in the trading business for 23 years.
Anyways, the article talks about the 3R's to a Positive Mental Approach to trading. But the 3R's were not the interesting part of the article. To me, what I found interesting was the beginning part of the article where she talks in detail about how to develop the positive attitude.

The first step is to know thyself, know thy style. Then focus on the process. She mentions that focusing on the process actually involves a degree of trust. This is similar to what the HET is saying in Habit6 - Confidence.
Some days, I forget about the HET. I must make it a habit to let the HET coach me and guide me to becoming more effective as a trader.

The next revelation was when LBR gave examples of negative self-talk. Her example was "I have to make X dollars per month." Her implied suggestion was to replace such negative self-talk to something more positive, like "I can make X dollars per month." The rationale is that the first sentence creates stress from demanding performance, whereas the second sentence focuses on HET's Habit #6 - trusting in your own ability to perform. Her next suggestion was to change your physical state to help refocus your mental state. This probably explains why many traders get up and go for a walk every so often. This simple exercise really does help to refocus your mental attitude. And sometimes, having that renewed focus provides the catalyst for a turnaround and create some positive momentum.

For myself, I have been creating undue stress recently, because I have imposed some dollar goals for myself. This has distracted me away from what is actually more important - to focus on the setups, and improve on spotting my setups in real-time. I used to have a "View Account" button on IB's bookTrader, but decided to remove it, as it became too distracting to look at my PnL every other second. I believe Zoomie is echoing a similar line of thinking when he says to trade the chart, and not the dollars. Trading the chart to me, is more associated to the win rate, the edge that you have. Trading the dollars, in my opinion, is more associated with position sizing. And in my opinion, win rate is more important than position sizing. Because in the end, if you don't have an edge, money management skills only means you bleed a slow death. You must have an edge, and exploit that edge to the fullest, and your win rate will confirm whether or not you have an edge. Yes, yes, you can still have positive expectancy without having an edge (ie. +50% win rate or better), but that implies that you are swinging for the fences in some of your trades, which also implies higher risk of a losing streak. That is not my style of trading, I much prefer having a high win rate, period.

Going forward, I must focus on my trading process. It is as follows:

Practice spotting my setups in real time. Practice letting go of some good trades and being at peace with it - I don't have to take every trade that comes along.

Focus on win rate first, as a win, no matter how small, adds to the foundation of confidence from which my motivation, desire for improvement, and hunger will be derived.
Once I have the win rate at a level to my satisfaction, then I can move to the next stage of my trading, which is to focus on improving the ratio of average win size to average loss size. This means working on not only to improve the size of each win, but also to reduce further the size of each loss.
Once I have the avg(WinSize)/avg(LossSize) ratio maximized, then I can work on expectancy by refining my position sizing.

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