Wednesday, October 25, 2006

Back to the Drawing Board

Although this week's trading has been better, I've been making mistakes and they're costing me money. I still have 4 open positions (long on USB, UARM, CVA and short on FDG) that could earn some money to offset the losses, but if you looked at my trading journal you'd think that I was addicted to giving the market my money. Granted, the bulk of the losses came last week primarily from bad entry strategy, but I'm still seeing flaws in the entry and management of my trades, so it's time I take a step back and test my trading rules in the sandbox again. This decision is primarily based on my failure to consistently apply my rules, not because I've incurred losses on the trades. Losses on trades are going to happen, but without consistently, flawlessly applying my trading rules, I have no way to know how successful my rules are and therefore I don't know how to systematically improve my results. The reason behind my failure to do so is because my trading rules are not explicit enough; they have too much gray area that's open to interpretation which makes it difficult to apply them. It's disappointing and I know you, my father and everyone who has helped me along the way are all interested in hearing of great success from me, but such is the current status of things. I'm implementing the following plan of action to get me back into live trades:
  1. Finish my business plan.
    • Includes my very specific, explicit trading rules. These are an adaptation of both Coach Rob's and Mentor Jordan teachings & thoughts on trading. It's an amalgamation of the two that I find appropriate for my risk tolerance, and burgeoning trading style.
  2. Trade 25 flawless paper trades with 10 in a row flawless before going back to real money.
    • Flawless only means I don't make any mistakes according to my trading rules.
    • I will evaluate my rules after 25 trades to see what rule changes could net me a better return.
    • If, after 25 flawless paper trades, I'm not seeing a net positive, I will apply some changes to my rules and retest on the next block of 25 trades and will repeat the process until I'm getting a net positive result.
  3. Set up an account with TradeStation.
    • TradeStation comes with very sophisticated tools for programming and evaluating rule-based trading including back-testing a strategy against up to 20 years of intra-day historical market data. I'm looking to TradeStation instead of Interactive Brokers because of these advanced features which should help with consistency and aid in reducing the time trading will require, making it more scalable and manageable on my time budget. I'm deciding to take this action now because it's the direction I'm planing to go, and while I'm tabling my money I may as well make the transition concurrently. TradeStation has great appeal to me because I'm a programmer and this sort of logical evaluation of a trade strategy based on my custom rules is pretty much a fantasy come true.
So there you have it. I'm putting myself back into the sandbox so I can play without further harming my account balance. You're probably thinking: Haven't you been paper trading and haven't you already seen success there? Answer: Yes, I have, but I made the mistake to not have more explicit trading rules and it was without the goal of flawless application of trade rules as I described above. I need to prove that I can consistently put in trades that follow my rules before I can go back into the market with real money. It's a bit of 2 steps forward 1 step back, but that's better than 1 step forward and 2 steps back. Who knows, maybe it is 2 steps backward, but they are much needed steps to take. Hang in there with me, it may take more time than I originally anticipated but I'm going to be a successful professional trader that will make a living trading the markets.

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