Financial Targets – Show me the money

Financial Targets – Show me the money

On the 19th April 2017, Tom Dante, tweeted a poll on whether traders had monthly, quarter or annual financial targets.

The responses were interesting, and seemed to be along the lines that setting these sorts of goals could do the following

Limit Potential Growth or returns from trading.

Add pressure to the trader.

Give the wrong mindset.

Pressure the trader into taking trades not in the plan just to meet target.

Cannot manage returns only risk.

All of these are valid responses and to certain extent I agree with them.

I feel that financial targets do have a place as a tool to improve a trader’s performance.

And I mean using financial targets as a tool to improve a trader’s performance rather than target or end game to hit.

Therefore, I think they should be used as goals to help drive the behaviours and focus needed to be improve.

As with all tools, they need to be used appropriately.

Here is a list of when I think financial goals are a waste of time.

Trader has no edge.

The target / goal here should be to find an edge. At this stage, the trade does not even know what they are potentially capable of, and it is bit like saying that I want to win the Formula 1 Championship when I have never even seen a car.

Whilst that might be a dream it is not a relevant goal at this stage and would do nothing to improve the traders lot.

The primary goal here should be to find an edge.

Trader has an edge but not applying it consistently over time.

Primary goal in this situation is to be applying the edge. Financial goals will do nothing but add more pressure to the already hard task of applying the edge consistently.

Trader has an edge, applying it consistently but still makes mistakes in applying the edge.

Primary goal, should be working on reducing the mistakes down to acceptable level, as close to 0-10% as possible.

Financial goals in this situation will do nothing to improve a trader’s lot. It will just add pressure to the situation and increase the error rate.

Where a financial goal could help, would be to track the financial cost of these mistakes, to help drive behaviours that will reduce the error rate.

When financial goals can be beneficial.

Trader has an edge, applying it consistently, mistakes are rare. They are at stage 4 and above of the competency curve.

Stage I – Unconscious incompetence – the person is blissfully unaware of their ignorance

Stage II – Conscious incompetence – the person aware of their skills shortage

Stage III – Conscious competence – the person is able to demonstrate their competence with a high level of concentration or focus

Stage IV – Unconscious competence – the person is able to demonstrate their competence with a low level of concentration or focus

Stage V – Shared competence – the person is able to teach others by explaining not only how but also the the why’s to achieve a level of competency

What does a trader do then to help drive behaviours that will improve the performance over time, when they are at stage 4 and better.

All the low hanging fruit in terms of goals have been done.

I feel that having a long term financial goal can help drive the trader to view their trading and what they should be doing on a day to day basis in a different light or at least give them a structure.

A trader at this level, will have an understanding of their risk profile and the typical returns of the system including the variance based on market and seasonal cycles.

One question, traders / everyone should ask is where do I want to be in the next five years?

By using a financial goal, this then can be broken down into performance goals and what needs to be done.

I always use the following process to help me decide what I need to do to meet my goals. This process can be used for any type of goal.

Outcome goal

What is my goal?

What results I need to do to achieve this goal?

Process goal

What process do I need in place to do achieve the outcome goal?

What skills do I need to achieve these processes?

What do I need to practice / learn to have these skills?

Performance Goals

What benchmarks and standards that I need to hit to ensure that I am following my process goals?

As we can only control entries and risk, by setting a long term financial goal, this can then be reverse engineered backwards to see what sort of risk we should be taking and whether realistically, our trading system is potentially capable of giving us this sort of return, bearing in mind variance.

Example

Trader A is at Stage 4

He has built his account up to 15000 USD.

His previous performance shows that the system has 50% win rate and the win to loss ratio is 2 to 1, and averages 3 trades a day.

His goal is to turn his 15,000 into 1,000,000 over a five year period.

Using quarters as the primary measuring device to avoid the focus being on the short term performance.

Trader A needs to return of 23.5% every quarter compounding, to turn this 15,000 into 1 million in 5 years.

Trades taken per quarter.

4 days a week, to allow for days off and unforeseen circumstances,

11 weeks to a quarter, again to allow for holidays and unforeseen circumstances.

4 x 11 = 44 days. Which is under the typical 65 working days per quarter.

Average of 3 trades a day x 44 days = average of 132 trades per quarter.

A return of 23.5% of 15000 is 3525.

Therefore, a performance bench mark for the first quarter is 18525.

Running 100 simulations shows that the variance of this sort of system and gives us a minimum variance of 18,924.

In theory, we can see that it Trader A risks 1.5% of the initial account balance on every trade over the quarter.

This is gives Trader A the best opportunity of hitting his bench march without forcing anything different on to the trader, but just adjusting one of the things that we can control.

The risk.

This is a rough example of how to use financial goals to guide performance over the long term, but I believe they should not be used as targets and should only be used as a tool when appropriate.

@YTCtrading challenge completed

@YTCtrading challenge completed

Interesting tweet from Lance Beggs this week.

I thought I would do this challenge, the following is not in any order but as they come to me

1. I trade best when I have meditated

2. I trade best when I take regular breaks

3. I trade best when I focus on my core strategy

4. I trade best when I follow my routines and process

5. I trade best when I have a plan with clear trades in it

6. I trade best when I update this plan regularly during the session.

7. I trade best when I am focused on what the 15min context is

8. I trade best when I am unware of what my P&L is doing.

9. I trade best when I am aware of the 60min context

10. I trade best when I review before the session starts, what my A to C game looks like.

Interviewed By Chat with Traders

Interviewed By Chat with Traders

A couple of weeks ago, I had the pleasure of being interviewed By Aaron from Chat with Traders.  I discussed my journey, what I think new traders should focus on, as opposed to what the typical new trader does focus on and more. And we talk pirates. Arrr!

episode-95-adeyf-chat with traders

Chat with Traders is a great site with a lot of really interesting interviews.  Below is a list of some of my favourites.

EP 039: Tom Dante speaks to the competitiveness of trading and essential skill sets for profitability

EP 037: Understanding areas of acceptance, thinking in probabilities & creating a legacy w/ @FuturesTrader71

EP 061: A scientific trading perspective, process over outcome, and the law of large numbers w/ Ari Pine

EP 063: Strong determination, preserving mental capital, and professionally trading futures w/ Nicola Duke

EP 070: Specializing, automating, and using stats for high probability trade setups w/ Jeff Davis

EP 082: How to become the trader you wish you were w/ @FuturesTrader71

EP 093: What an order flow fanatic adapted from one of the “big boys” — Ben, @BLB_Capital

Good trading questions I have been asked by Carlton

On Friday, on my NFP trade plan post, I was asked some good trading questions by Carlton. I thought it would be of benefit to answer them here for everyone’s benefit including myself.

Q.1 How do you deal with ‘information overload’ in trading?

With so many resources online, twitter personalities, websites, books, blogs, news to follow, how do you choose which ones to focus and learn from and which to ignore. How to you make it manageable. Trading often creates a FOMO from an informational perspective as well as from actual trading. I often find my pursuit to learn more, creates cognitive dissonance and undermines my own trading decisions and confidence – but yet, you need resources to progress.

A.1 In the past, I found this has been a question that I have asked myself many times, as you rightly say there is so much information out there that overload is a not constant threat and battle. I have found myself trying to read and follow too much which has been detrimental to my trading progress.

A turning point for me on this was the book Thinking Fast and Slow by Daniel Kahneman, which I think should be essential reading for every trader. One of our bias is a thinking that more information can only be good, when all the studies should that the opposite is true. That quality is more important than quantity.

So when deciding what to read and what to follow, I look at the following

1. Does the information source cover an area I am working on or trying to improve? Whether is it is macro, mental, news or any part of my whole trading process from start to finish.

2. Does the source give me information that I can understand and is relevant to my trading style.

3. Can the information provided be turned into actionable tasks that will improve by trading.

4. Is this information source really providing similar information to other sources, I already follow. If so which is the btter source.

So the first step is to decide what information you need to supplement your trading and then decide what part of your trading that you are going to working on, then look at all the sources through that lens.

Be ruthless with who you follow and what your read. Less is more in this field, quality counts.

For example I have John Boyd’s book on the OODA decision making loop, whilst this will be an interesting read and I am looking forward to reading it. I have already read a summary of his works and this has given me enough information to incorporate a version of the loop into my own decision making. Therefore reading the whole book does not score highly on above four criteria. So it is not a priority.

Q.2 Would you mind sharing the calendar you sourced the graph for NFP from, assuming you didn’t create it yourself in excel?

A.2 I use the calendar from Investing.com. If you click on the link with the actual news release, it drops down to give the past history of the release. I then copy and paste that information into Excel to produce the table and the graph.

We only have to do this once, after that we can just add a column to the table and add the latest release information and everything updates.

Q.3 Given your detailed NFP plan, I would appreciate if you could post afterwards how you directly used your plan in your trades

A.3 My NFP trade plan review is here.

Q.4 Finally, and hopefully not too much to ask, can you explain your reasoning behind a big beating of NFP expectations is negative for bunds.

A.4 My starting point for all news for the Bund is that if it is positive for the US Dollar then it is bearish for the Bund. This is based on looking at the market reactions on the past news. I then look to see if there is any reason why this might not be the case this time.

Q.5 I’m interested in the Price Ladder Course by Futex, but not sure they cover my markets (ZB/ZN). I’ve tried to access a list of markets they trade and focus on, but struggling to find anything concrete. Can you let me know the main markets the course focuses on?

A.5 The replays and examples tend to be focused on the Bund and Eurostoxx 50. Out of the 11 drills we do, 8 of them give you the choice of trading the T-Note’s. So in my opinion whilst they focus on European products during the actual course material there is plenty of time to practice the order flow skills on the market of your choice.

Weekend Reading – 27-28 Feb 2016

Weekend Reading – 27-28 Feb 2016

This is a collection of articles I have read over the weekend to further my education and to get a feel for the overall macro conditions / themes.

Trading

Chat with traders with Ari Pine

EP 061: A scientific trading perspective, process over outcome, and the law of large numbers w/ Ari Pine.

Ari Pine has many years of real market experience on his side, and during this time he’s traded a whole range of markets in various positions and roles…

Some of those include; working at J.P. Morgan, developing risk management software, trading for a long volatility hedge fund, making markets in gold and silver options, and even giving presentations to the Chinese stock exchange.

Our conversation includes all the above, plus some really valuable info about; positive expectations, the law of large numbers, and process over outcome.

Very interesting listen, worth an hour of my time. The best stuff for me starts at 44 mins in.

Full story at Chatwithtraders.com

An Alternate View: Filter Ticks

I have been very impressed by my friend Japhy’s new enterprise at datatraderpro.com, which provides a “deeper look” beneath the surface of the markets. One feature he has promoted strongly on his twitter feed is to watch for block institutional trades and what transpires around the price levels where they occur.

FT71 had a similar insight the other day where he called out some very large block trades just before the market opened, that turned out to be the key resistance zone before price surged upwards.

For this reason I was extremely interested when Investor RT announced tick filtering in version 12.5.

I am always interested in the new features of Investor RT and how people are using them to improve their trading.

Full story at Trading for Singles 

Defining “No-Trade Zones”

The problem we attempted to address was one of continual attempts to fade long and extended price swings, finding that instead of timing that entry to perfection we more often than not end up with two to three stop outs, and a mindset destroyed for the remainder of the session.

Lance Beggs articles are always an interesting read about applying price action practically into real markets. This article about timing a pullback, has a lot of useful advice on fading a move (pullback).  Something most of us can identify with.

See full article here

Train your pattern recognition to become a fluent chart reader

Trading is all about pattern recognition and the setups you trade are patterns with unique characteristics that allow you to put the odds in your favour by reading market clues. Your job as a trader is then to make sure that you can reliably identify your setup patterns and differentiate between high probability and low probability setups.

Pattern recognition is a skill and you can train your brain to process information in better and more efficient ways so that you are able to recognize patterns fast and accurately.

Developing pattern recognition as a skill. It is important to remember that it is not practice that makes us perfect, it is perfect practice.

See full article here

Macro

Marc Chandler

Three reads for the weekend.

Liberty and 500 Euro Note

The Return of Moral Economy?

Sovereignty and Brexit

Commitment of Traders and the US Dollar

Small Changes in Speculative Positioning in the Futures Market

Are the Dollar Bulls Retaking the Initiative?

Notes from the Underground

A Quickie On the G-20, Or the Summers of Enchantment

Vader Declaration to Trading [working document]

Vader Declaration to Trading [working document]

 

Trading is an elite performance. Not everyone can do it. Like any professional I need to put the time in to improve. Below I put together a working list of intangibles I believe will keep me on track for FU trading going forward.

  1. Model 3 high probability ideas – trades that present 3R+ risk/reward ratio. Don’t waist my time with scalps, stick to trades with high confidence factors.
  2. PATIENCE, PATIENCE, PATIENCE – 90% of my time should be spent lurking like a lion
  3. Try hard NOT to scale – I need to get paid on the RISK I am taking. Let the trade come to fruition before thinking about exiting.

Vader7x has written a declaration to trading and has some very good advice on focus and simplifying our trading.

The article is worth a read, and has definitely given me some thought about my own goals and milestones for this year.

Image courtesy of vadercapital.com

2016: Lead by Example

2016: Lead by Example

One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity. Bruce Lee

What do you need to do differently this year? How are you going to accomplish it? As active traders, these two questions are perennially on our minds this time of year. We have just wrapped up the year past and look forward to the coming year with always higher expectations. The expectations are fun and empowering. Every year we feel as if this year this is the one, the one in which we reach the lofty goals we have set for ourselves as traders. The reality is very few of us attain or surpass these expectations. Why? I cant answer for you, but I will give you the answer for me, in one word Focus.

Very true words, every year I set goals and I reach about 60% of the goals I set. This tells me that I am not focusing enough and maybe have too many goals. I need to narrow down my focus.

Do less. And do the things that you ARE doing better and with higher quality. You don’t need to be hot. You need to be successful and those are two different things. Success often comes from doing a few things extraordinarily well and noticeably better than the competition. from @99U

There are certain things I do well, and I need to keep doing these and focus on what is working for me. Thus adding in some secondary markets I can focus on the my most profitable trading edges and strategies.

Image courtesy of medium.com

What I am reading now – New Year Reading List

What I am reading now – New Year Reading List

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It seems that I have been a good boy (relatively) this year, and Santa brought me a few books to read.

Tradermind: Get a Mindful Edge in the Markets – Steve Ward

TraderMind is an essential resource for understanding and applying mindfulness–based approaches that help to enhance an individual trader′s overall performance. Based upon extensive research and practical application in the real world of the trading floor, TraderMind includes methods, tactics and techniques to build and enhance awareness and insight, which help manage thoughts and emotions and maximize trading performance.

I actually got this book last xmas, as a prezzie. I read it and completed the 8 week mindfulness course and continue to mediate regularly till about seven months ago.  I stopped doing it due to lack of time and failing asleep during the sessions due to being over tired.

So I am going to start this again, as I found many benefits to mindfulness mediation, calmer, more sanguine and being able to focus for longer periods of time. These benefits have also helped me in me life outside trading.

I will do the eight week course and then incorporate it back into my daily routine.

Trading Psychology 2.0: From Best Practices to Best Processes –  Brett N. Steenbarger

Trading Psychology 2.0 is a comprehensive guide to applying the science of psychology to the art of trading. Veteran trading psychologist and bestselling author Brett Steenbarger offers critical advice and proven techniques to help interested traders better understand the markets, with practical takeaways that can be implemented immediately.

Looking forward to reading this, as I am having a drive on building my own Best Practises Manual and this should be very helpful.

Science, Strategy and War: The Strategic Theory of John Boyd

John Boyd is often known exclusively for the so-called ‘OODA’ loop model he developed. This model refers to a decision-making process and to the idea that military victory goes to the side that can complete the cycle from observation to action the fastest.

This book aims to redress this state of affairs and re-examines John Boyd’s original contribution to strategic theory. By highlighting diverse sources that shaped Boyd’s thinking, and by offering a comprehensive overview of Boyd’s work, this volume demonstrates that the common interpretation of the meaning of Boyd’s OODA loop concept is incomplete. It also shows that Boyd’s work is much more comprehensive, richer and deeper than is generally thought. With his ideas featuring in the literature on Network Centric Warfare, a key element of the US and NATO’s so-called ‘military transformation’ programmes, as well as in the debate on Fourth Generation Warfare, Boyd continues to exert a strong influence on Western military thinking.

John Boyd also produced the Aerial Attack Study, which became the official tactics manual for fighter aircraft. Boyd changed the way pilots thought; prior to his tactics manual, pilots thought that air-to-air combat was far too complex to ever be fully understood.

This should be an interesting read and I am sure there will be some interesting crossovers for trading.

Christmas is not just for Mince Pies, my review plan over the holidays.

I will be using this Christmas break to do a general review of my trading and practises that support the trading.

I will use this review to set up goals for the 1st quarter of 2016.

I will be focusing on the following areas:

1) To review my trade journal of the past 200 trades to see if there are any obvious problems with my trades.

2) to read and review my Best Practises Manual, one to remind me of what works best and secondary to see if there any obvious areas that I am not following or could be improved.

3) To review the way I handle my hypo trades. Currently I treat the majority of the trades the same way. I need to be able to split my trades into hypo (intraday swing trades) and the shorter term scalps. These should have different targets and stops. I will be using my trade journal alongside harmonic rotations to help me come up with some rules regarding these.

4) One problem has been error trades, I have done work to reduce these, but occasionally I still have a run with taking error trades. These tend to occur after periods of frustrating trading. I will be looking deeper into these periods to see if I can come with ways to reduce this error even further.

5) I will look at adding a secondary market, on slightly higher timeframe. I am thinking that this could help in the frustrating periods in Bund where there is no high probability setups.

6) I will look at my daily routine especially my start time regarding the open, whilst I am generally full ready to trade 5 mins before the open, I rarely take a trade at the open. There are not always opportunities at the open but when there are it is not often that I take them. I need to look at the reasons behind this and take a look at what trades I want to take at the open.

7) To look back at what I have done to improve my no fill problem, where I am with that and what are the next steps.

My List of Great Articles

My List of Great Articles

This is a list of articles that deserved to be bookmarked and re read regularly. The information in this is timeless and has crossovers into trading and everything we do in life.

The Best Way to Implement Simplicity

The first is a excellent article on the right way to make our trading as simple as possible but not any simpler.

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Read the full article. Keep it simple in trading

The Most Important Question of Your Life

“A more interesting question, a question that perhaps you’ve never considered before, is what pain do you want in your life? What are you willing to struggle for? Because that seems to be a greater determinant of how our lives turn out.”

For me, this is an essential read every month.

Read the full article. The Question