Monday, May 14, 2007

Part 2. Defining My Objectives

This post continues my assessment of my personal goals and objectives as outlined in Chapter 3 of Tharp's Trade Your Way to Financial Freedom.

Part 2. Defining Your Objectives

"This section is probably the most important part of developing a trading system."

Objectives for Individuals

What is your advantage or edge in trading? What is the particular concept that you are trading that gives you an advantage?
I have successfully traded several different strategies. I have the most experience with trading breakouts. Over the last 9 months or so, I have had some success buying pullbacks to the breakout level, or to the moving averages. I am also experimenting with trading counter-trend strategies. I’m not sure whether any of these strategies provides me an edge currently, as I’m constantly adjusting my time frame for exits. For example, if a stock breaks out, moves 15% in one day, I am likely to take half or all my profits and move on. However, if a stock moves 15% over a week or two, I am more likely to hang on to it rather than taking profits. Often I give back a good percentage or take a loss as the stock retraces. One of the biggest factors in my lack of recent success I believe is that I’m trading without a clear strategy for exiting the trade.

How much money do you have personally? How much of that money could you afford to lose? For example, most funds stop trading at 50 percent. How about you? How much risk can you afford to take on a given trade.
My personal trading account has just over 100K in it. This is money that I could conceivably lose without causing any tangible damages to myself or my family’s lifestyle. I could afford to lose all of it. However, I do not have a strong stomach for loss, and I think that losing more than 35% would make me consider stopping trading. If I knew from testing that my system may have a drawdown of as much as 50%, then I could feasibly deal emotionally with such a loss, but I know it would be difficult. On any given trade, I typically like to limit risk to .75% of capital.

How much money do you need to make each year? Do you need to live off that money?
I do not need to make any money trading each year. My full-time job and my wife’s full-time job pays the bills and provides for a comfortable lifestyle. I do not need money made from trading to live. However, I do hope in the future to be able quit my occupation and take up trading for a living.

What if you don’t make enough to live off it? Can you make more than you need to live off of so that your trading capital can grow? Can you stand regular withdrawals from your trading capital to pay your monthly bills?
I do not need to live off it. I can absolutely let my trading capital grow. In the past, I have used the profits to pay off revolving debts and buy nice things for my family. Now we are virtually debt-free, except for one student loan and a mortgage. I will not need to make regular withdrawals from my trading capital to pay monthly bills.

Are you being realistic, or are you expecting to trade like the best trader in the world? For example, suppose you have a very good system that is right half the time and gives you profits that are twice as large as your losses. In that system, just by chance, you could still easily have 10 losses in a row. You system is still working as expected, but you could easily have 10 losses in a row. Could you tolerate that?
I think I am being a bit unrealistic. I am expecting double-digits returns, which I have heretofore been able to achieve. If I new from extensive testing that my system might generate 10 losses in a row and still be working, I could absolutely tolerate that. For me, I just need to trust that the system is robust, and have a general idea of various possible outcomes.

Do you have time to trade short term?
Yes, I can swing trade fairly easily.

How much social contact do you need?
I love social contact. It is something that keeps me happy, healthy, and grounded.

Can you work by yourself day after day? Do you need one or two other people around, or do you need a lot of other people around? How much do those other people influence you?
I would not be able to work by myself day after day. I would enjoy having at least one person around, but several or more would be better. I would not say that I need a large number of other people around. Very few people influence me unless I perceive them as being intelligent, perceptive, creative, talented, or possessing something that will help me to achieve my goals.

In summary, what do you expect to make each year as a percentage of your trading capital?

What risk level are you willing to tolerate in order to achieve that?
I am willing to accept as much as a 25% drawdown from starting capital to achieve that.

What is the largest peak-to-trough drawdown you are willing to tolerate?

How will you know your plan is working, and how will you know when it’s not working? What do you expect from your system in various kinds of markets? Trending? Consolidating? Highly volatile?
I will know my plan is working if my winners are larger than my losers, if I have a positive expectancy, if my emotions and psychology are calm throughout the process, and if I have time to maintain the system without severely impacting my full-time job and home life. I will know its not working when my losers become larger than my winners, when I develop a negative expectancy, when I lose conviction in the system, when I trade frantically or without a clear edge, or when my family or professional lives begin to suffer. I expect to design several systems to work in both trending and consolidating markets. At this time I’m not sure that I want to trade highly volatile markets.


grant said...

Ahhhh, here we are, the non-goog account.

Mechanical trading would probably suit your current lifestyle very well.

The vast majority "down under" who are successful trade mechanical systems.

To be fair, I don't think it is the system, rather, the huge amount of work and research that is completed prior to actually trading that accounts for the success.

However, that is a moot point.

jog on

Anonymous said...

Brent Buy: VRTB. 2k shares at 5.65.

Woodshedder said...

Thanks Brent.

Ducati- I agree it is the work pre-system that makes the difference.

GovtMule said...


I stumbled on this easy system last week & I thought of you, & your quest for a "system". I have been doing some backtesting and the results are excellent. Check it out will cost you $1.25 a week.

indypass said...

ck out the chart pattern on tu. bull flag. your favorite?

Woodshedder said...

Very nice bull flag. Thanks Indy, and yes, it is one of my favorites.