A reader recently asked me a good question for these volatile times: "How can I trade the way I want to trade and not trade P&L?"
I will provide my answer to this question, but then I'd like to invite readers to submit their own answers via comments to this post.
For me, position sizing is a psychological strategy as well as a strategy for risk management. If I have a system for position sizing and a stop-loss level, I can define precisely how much dollar risk I want to put into a trade idea.
My position sizing is currently half of what it normally runs; I've made that a standard practice when VIX > 30.
What that means is that I am keeping my dollar exposure to the market relatively constant across various market conditions. I do not experience undue psychological volatility during market volatility, simply because I do not allow myself to have more dollars at risk per trade. That normalizes my psychological exposure, allowing me to focus on trade ideas and the management of my positions rather than P/L swings.
I realize this goes against the grain of many traders' thinking. They see volatile market conditions and think that they should be making a fortune catching the large swings. But, to use the old analogy, I'd rather be the casino than the gambler. I'd like to take my piece of probability out of markets on a nice, steady, regular basis. It's much easier to not focus on P/L when no single trade or trading day can make or break your month. My dollar risk per trade is no different now than it was during 2007.
So how do you keep yourself trading the way you want to trade during these volatile times? Comments appreciated!
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12 comments:
Brett,
I trade using a very established set of rules that keep me emotionally aggressive. This is the single most important thing that I can do to keep me trading to my system and not trading to my p&l.
Since I'm fresh for the trade, I really only look at my p&l when it appears on a screen that I need for other reasons. Most of my time is spent managing the position(s) or looking for new set ups.
I only trade during a clear trend. I will not trade the chop. I only trade a certain type of issue. I will not trade tsunami type volatility. I will not trade certain issues that I consider to be malignant. Some see opportunity, I see headaches.
As I am out of the markets for decent periods of time, when I do come in I am not hesitant to pull the trigger. I haven't been beaten up by volatile swings and broken trades. I use my down time to study past winners and backtest different entry / exit strategies. I have great confidence in the system I use and my mastery of it. I consider that a massive edge and it's another reason that the p&l doesn't sway me.
I utilize stingy stop losses and have no issue with rentering the same trade multiple times. I don't see a reason to put my money into a trade that isn't working. I may have to pay up to renter, but I look at it as insurance.
I also mentally separate my core positions in an issue from the margined position, which I trade around. I find it helps that as the issue pulls back to come off margin. It allows me to keep my mind straight knowing that I am not seeing a loss multiplied through margin.
Long term, this style makes my p&l curve look like a set of steps with uneven risers. During unsteady times, I don't experience draw downs and suffer unnecessarily.
Good trading.
this market had me jumping all over the first few weeks but I was able to regroup and from there on, re-focused, modified my strategy and I was able to start picking my spots in this market. It has been one of the best trading environment in the last few months with all this volatility.
Brett,
You see, I am mostly a futures day trader and I trade the brazilian stock index futures.
Being mostly a day trader enables me to jump for the kill when I see an opportunity that fits my methodology.
Likewise, I am not exposed to wild next day's openings (around here you NEVER know where it's going to open!), so I don't have the disgust of wake up in the red.
I do trade stocks in swing trades (few days trading), but I don't do it in periods of volatility. For these trades, I like the slow pace market environment.
In this fast pace (volatility through the roof) I prefer only to day trade, since I can choose whether I will be exposed or not.
Also, I use a scale-in kind of trade, so I am never with too much money at risk if the market isn't payin off.
My stops are tight and it's not unusual for me to re-enter a trade in the same direction of a stoped trade 5 minutes ago. (Sometimes I "see" the opportunity "early" enough to be stoped 1, 2 times before it works out).
Another kind of self-control is to be able to say: "I will not trade today, because I am not feeling OK", or because the market is in a choppy mood.
That prevents a lot of trouble.
Best Regards,
Newton Linchen.
Assign a score to each trading action. The score is based on how well you performed. Don't worry about big calculations of the score, just give each category a number. Make P&L one of the scores.
Put the trades and scores in a spreadsheet. Seek to improve the scores in each column.
When there is volatility and when the banker and the government do anything to turn the market into the casino I want to see my profit/loss near zero or at maximum 100$, so I do only straddle delta neutral if only the market pick up my bid. Excuse for my English I am Italian.
Hello Brett, Over time, my stops have become smaller, and my trading frequency has increased, i take about 20 trades a day, my stops are about 2-3 pts, my gains are about 3-7 points on avg. I trade using volume at price, the NYSE tick, volume delta, and divergences in the etf's, I also use a 5 tick reversal chart. I focus on exectution based on support and resistance in the 5 tick reversal chart and volume at price chart, I use market profile in understanding the larger time frame participants and use it to stick with trades for a longer time if I see a breakout with longer timeframe traders coming in.I also use the NYSE tick and the 5tick reversal chart for my more active trading during balancing types of days, or in and out on trend days if i am feeling energetic! I increase my contract load that i trade by 1 contract for every $10,000, but after I get to 4 contracts, I increase the contract load by 4 contracts at every $40,000 dollar interval. That gives me time to get used to the new equity swings, and as you trade larger lots, you have time before you have to increase in your contract load. I also use my program that tracks preformance so that I can see how various metrics relay information through a continual version that takes advantage of the increased contracts load as trading requires based on money management protocol. I also start keep track in another version that starts with the same balance every month. That helps me keep a month to month comparision, and is a great tool, as you can see lots of relationships by comparision to past months, combined with Breif Therapy, it gives you an insight into how you are doing on various goals set for the month as compared to the past on an even keel. The continual version gives you the actual picture using the increasing leverage since the beginning of the fiscal year.If that was the only version I used, I wouldnt be able to see the comparison of win/loss from month to month, the dollar spread from month to month, etc. That is the beauty of starting with the same balance in the program every month, along with keeping the running total in the continual version that gives you the actual running total of all the various metrics. All of these things, keep me focused on execution and not the money. I never change my stops unless I recoginze a mistake, I am always ready to get stopped out, and many times will reenter right away, if nothing changed in the fundemental trading idea, many times the reentery is at a slightly better price and is a very good trade.Every day I approach the market with the mindset that I will have a winning day, and that works well. I never say to my self that I will never have losing trades.I have many, but i am trading about 73% accuracy with over 1600 trades for the year, so I have lots of losers, but not many losing days. There is a big difference. There is enough opportuinty during a day to turn a bad day into a winning day if you apply the lessons you teach. If you limit your stop losses, and focus on exectution, and are aware of your mindset and how your are preforming, you can come back after a bad start or a losing streak. Most times, my best trading comes after a losing streak. I do take a break after most losing streaks though, I like to play my percussion instruments after a losing trade, this helps me to clear my mind and find the right frequency on the dial.I used to set a limit on how much I would lose during the day, but I no longer do that. When I did that, I was focusing on the money to much. I have been able to control my stop loss to the point that I am not at risk of disaster during any particular point during the trading day. Since I started studing under you, I am in another trading universe, thank you, Best,Steve (SSK)
As longer-term option trader (1-3 month positions), I'm investing as much as I usually do.
Instead of reducing my trade size, I now own positions with a higher probability of success, without having to sacrifice profit potential.
Risk management is more important than ever
Like you, I cut my position size in half and I stay out of the market if I think I'm not good enough to trade it. An example would be today's decision on the bailout package. Yes, it offered excellent volatility for day trading, but like Fed rate cuts, I'm usually humbled by the market and reminded that humility is realizing more opportunity will come your way if you have money to trade.
So I have learned to know when I'm not experienced enough to keep my emotions in check.
Like all traders my number one obligation is capital preservation. I never forget that.
“How can I trade the way I want to trade?”
Change, but don’t change.
It has always been my preference to make as few trades as possible under any market regime. I spend under an hour per week clicking to buy or sell and 55 – 60 hours per week building models, testing them and trying to disprove my market hypothesis. What remains after disproof is the truth.
I never look at fundamentals, and only glance at technical analysis ~ which has shown some value in markets with a buyer for every seller.
I’m a quantitative rules-based trader today because years ago I learned that every time I “go with my gut,” I lose. Brett has written wonderful things explaining this more artfully than I ever could.
None of this has changed under the current market regime. It has been this absence of change that has been my greatest recent challenge. That is, no matter what the market is doing, I am still who I am, with my character and persona. These things determine what trading style works for me.
As formerly successful trading models have broken down ~ signals returned by my models are now practically meaningless ~ sticking to those core methods that have most consistently been successful for me has sometimes been a test of will.
Giving in to gut feeling has caused regret. My regret is that because these trades fall outside my methodology, their outcomes are useless. I lost (or made) money without learning anything from them except what I already know: Don’t go with your gut.
Today, I am mostly in cash, have reduced my average position to under 1%, and have cut the resolution (time frame) between entries and exits by over 65%. I am trying to lose as intelligently as possible during the time it takes to learn how to win under the new market regime.
We are witnessing seismic change in the market landscape. An entire industry, full-service investment banking has vanished. The debt of a grand old firm founded in 1850 went from investment grade to default literally overnight as the institution filed for bankruptcy.
The US government has embarked on a suite of policies sure to yield a harvest rich in unintended consequences. All of us are venturing into unknown territory. Uncertainty of all kinds is increasing all around us. We must resist doing what our guts seem to demand.
The way to trade this market is to trade it the way you want to, with this proviso: That the way you want to trade accurately reflects your best skills and best aspects of your nature. This is the first and best way of reducing uncertainty.
Adam.
I trade the way I want to trade and not worry about my P&L by doing just that. I focus on trading well, on taking positions only when I perceive the odds to be significantly in my favor and adjusting my risk to current market conditions. Once I’m in a trade, my focus is on trade management - sticking to my plan and allowing the trade to run to target, or making minor or major adjustments - based on how the market is developing, not based on my emotions. This way, the P&L takes care of itself. I have an edge and by trading well I make money Not on every trade or everyday, but I certainly make more money than I lose.
I’ve noticed that by doing that, my emotions are greatly diminished. They do not disappear but, because I focus on external things – the market’s development and managing my trade accordingly - they do not interfere with my trading. It’s as if I am dissociated from them, I know the emotions are there but I do not experience them, I don’t identify with them. Sounds Zen but I think that this what Brett refers to as the internal observer; you see all these things going on inside yourself but you do not identify with them.
Unlike many who’ve shared their comments here I have not reduced my risk exposure. These are extraordinary times and I want to take advantage of it as much as possible. Periods of high volatility offer greater opportunity and can often make one’s month or even year.
And this has been the case for me this past month.
My strategy has remained the same and works as well or better than normal. I account for the increased volatility in the placement of initial and trailing stops, as well as profit targets. As such, my risk to reward ratio as remained about the same. I always take the same amount of risk per trade as a percentage of my account. My position size is a function of my current equity and risk for the trade. Thinking of my risk in terms of percentages has the added benefit of removing the nervousness of trading larger size than what I may be used to as it keeps the risk always the same regardless of size.
I used to fear increased volatility and the perceived higher risk but have decided to embrace it. My strategy is highly scalable in that it works equally well in periods of high and low volatility, provided I adapt to such changes.
Hope this helps.
Sincerely,
Marc
I trade the way I want to trade and not worry about my P&L by doing just that. I focus on trading well, on taking positions only when I perceive the odds to be significantly in my favor and adjusting my risk to current market conditions. Once I’m in a trade, my focus is on trade management - sticking to my plan and allowing the trade to run to target, or making minor or major adjustments - based on how the market is developing, not based on my emotions. This way, the P&L takes care of itself. I have an edge and by trading well I make money Not on every trade or everyday, but I certainly make more money than I lose.
I’ve noticed that by doing that, my emotions are greatly diminished. They do not disappear but, because I focus on external things – the market’s development and managing my trade accordingly - they do not interfere with my trading. It’s as if I am dissociated from them, I know the emotions are there but I do not experience them, I don’t identify with them. Sounds Zen but I think that this what Brett refers to as the internal observer; you see all these things going on inside yourself but you do not identify with them.
Unlike many who’ve shared their comments here I have not reduced my risk exposure. These are extraordinary times and I want to take advantage of it as much as possible. Periods of high volatility offer greater opportunity and can often make one’s month or even year.
And this has been the case for me this past month.
My strategy has remained the same and works as well or better than normal. I account for the increased volatility in the placement of initial and trailing stops, as well as profit targets. As such, my risk to reward ratio as remained about the same. I always take the same amount of risk per trade as a percentage of my account. My position size is a function of my current equity and risk for the trade. Thinking of my risk in terms of percentages has the added benefit of removing the nervousness of trading larger size than what I may be used to as it keeps the risk always the same regardless of size.
I used to fear increased volatility and the perceived higher risk but have decided to embrace it. My strategy is highly scalable in that it works equally well in periods of high and low volatility, provided I adapt to such changes.
Hope this helps.
Sincerely,
Marc
It's worth remembering - we don't always have to trade. Sometimes the best trade is simply to wait for the right conditions that you know (from past experience) work with your methodology.
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