Trading Frequency

How many trades do you make in an average month? In Trading, unlike other production based businesses, more trading does not result in more profits. Less is more most times.

 

My trading has been very light this year. In December and January this was by choice and that choice played out to be correct. By mid February and early March that choice was made by missing an opportunity and getting trapped on the sidelines.  I had my most active week last week and made four trades. Two stock trades, an index trade and one currency futures trade. I felt like I had woken up from a 6 month bear hibernation. I would be lying to say staying on the sidelines is NOT difficult. It is the most difficult position to take and requires the most discipline to adhere to.

 

The chart shows a study conducted several years ago that demonstrated more trading activity does not result into more profits. It is why it is crucial to understand the systems you trade and the activity you are producing. I always ask why one wants to trade? Most will answer to make money. Unfortunately many trade for the activity and others become addicted to the game.

 

I recently did some work for a trader that had to make over $60,000 per year to break even. That is correct, his commissions we over $60k for one year. He had lost a little over $23,000. His trading was profitable in the tune of $40,000 on a $150,000 account. This was a little better than 25% for the year. As in any business we have a cost to conduct that business. In the end he lost over $23,000. Of the trades that were made we indentified to best of our ability that about 60% of these trades were totally unnecessary. We were able to tag these trades as impulsive trades and never should have been made. This was a savings of over $35,000. He was down $23,000 for the year after commissions. He was not trading as poorly as he thought when he had a viable trade setup. He was simply trading too much and out of boredom making three to four times more trades than necessary. The only person that gets paid for your activity is your broker. I am sharing the info with his permission as he hopes it will help other traders.

 

I recently finished a two week trip working with clients and holding an Organization class in Florida. It was a great trip and offered me a chance to interact with a variety of clients and traders. I heard stories from those that struggled the last 6 months and lost thousands of dollars, to those that are gearing up to take more control of their investments/trading, to those that are preparing to take the next step in their trading journey, those that are unhappy with their activity and have not made many trades, to a few that are content with their accomplishments and preparing to wait for the next opportunity.

 

Of all those that I met and worked with the past two weeks I found a common denominator to those that were profitable and those that were not. The more activity one had the more they had lost, the less activity they had the more profits they had kept and was making money. There were those that had not done any trading to speak of, but those were traders that were gearing up to begin to take the next step.

 

We must have activity to make a profit, but there seems to be a balance between activity and profits/losses. There is a threshold when crossed we begin to lessen our ability to make a gain. That balance is difficult to find and can vary from trader to trader. The common thread was evident. Trade too much and profits became more difficult to earn and much more difficult to keep.

 

Another common trait I saw was a clarity of what a trader was looking for. Those that had more clarity in what they were looking to trade seemed to have been more profitable and those that were attempting too many styles and strategies seemed to be treading water or running on a tread mill.

 

This is not a post to say anything negative about those that I met and worked with. It is a post to re-iterate and confirm what occurs in the real world of trading. Remember there are those (brokers/vendors) that want you to be more active and offer you more of everything. In my personal trading and having the opportunity to see other successful traders, I look for the commonality of a theme. The theme is a balance of activity with a clarity and patience to wait.

 

Like the chart suggests, the more activity the trader had the less the trader was making. Don’t get me wrong, we have to have a certain amount of activity. That activity can vary based on style and strategies traded. The important element here is we understand what that activity should look like and keep our finger on the pulse so we do not cross that line by an extreme amount.

 

Do you know what your average activity should look like? Are you trading 200%, 300%, or maybe even 500% more than you should? There is a reason why brokers make it so easy to make a trade.

 

You want to take trades when you indentify that the probabilities are mostly in your favor. High probability trades with low risk opportunity is what a trader should strive for. These opportunities do not come across as often as we would like to think. In the end it is the bottom line that counts, not if we make a gazillion trades a year.

 

 

Traders feedback

Kerry, 

 

I just finished rereading Master the Markets for a 2nd time. I feel like it has allowed me to paint such a different story when looking at the charts. I hope you offer this book to all your clients. 

 

Again, thank you. 

 

S. 

 

 

Hi Sash,

 

Yes it is a book in my top 5 favorites and recommend reading.

 

Glad you found it helpful. All the best!

Kerry

The Analyst and Trader

Many of you know that I believe we wear two hats in this game we call Trading. There is the Analyst and the Trader. They are both uniquely different. We can be good Analysts yet be lousy Traders. We can be poor Analysts yet be Great Traders.

I read a post by Brett Steenbarger yesterday… The chart above is an excerpt from this post… I cannot find that post now I wanted to link to it. If any of you have it please forward it to me.

Typically it is easier to become a good analyst and more difficult to become a great Trader. This is why we find ourselves getting a directional move right, yet we find ourselves not profiting from our analysis work. We begin to doubt ourselves and will look for other’s opinions to follow, hoping to find others to agree with our outlook. Don't trade solely because someone else told you to.  I will be the first to say do not trade anything based on someone else’s opinion and that includes me.  I'm a risk manager first and trading coach/mentor second. I am not a fortune teller or psychic. I will likely miss every single move in some form or another. None of us get it right 100%. If we do we were lucky.  Take what I say or anyone else for that matter as "information", not "instructions".  Then make your own decisions, and then take action based on those decisions.  Embrace that you may not get it just right. You will also be wrong many times, we all are. This is what makes trading the markets so difficult. We will always get it wrong somehow or some way. After the move occurs we will know exactly what we should have done. The market has a way to make us feel we messed up. It has a great way to make us feel downright stupid and diminish our self esteem.

I teach by showing what I do, not by making a bunch of after the fact explanations of buy here and sell there. You see my analysis and you see many of my trades, good or bad. Sometimes I trade the moves well and sometimes I miss the move in grand fashion. More times than not I miss the moves in Grand Fashion. It’s not easy to show just how fashionable you can be wrong sometimes. At times the Analyst and the Trader is not functioning so well. At other times they will be in sync. It is always more fun when they are in sync. It is a nightmare when they are both out of sync. These are the days we ask ourselves… “Why the hell am I doing this?”

Thursday evening I posted my thoughts and “opinion” to sell strength and buy weakness based on the morning action. We got a slight bounce from the opening and then sold off, attempted a failed bounce mid morning then eventually sold off to new lows. The sell strength analysis was not a bad directional call. The trader in me attempted to hold the final position in my IWM short. I was not fully positioned as I hoped due to where I had to take the trade near its -1ATR. Again the analyst in me got the move right but I was not participating as much as I hoped. Never the less I had to manage the risk for the trade I had on. Wishing I had more exposure to the short side was not going to help the Trader in me to manage this trade any better. If not careful those thoughts would hinder the Trader managing this trade.

Once we broke to new lows and the oscillator dropped to -270 to -280 it was time to think of closing the short position. I had also remembered that I had 1050 as a support area on the SP and we were beginning to hit -3ATR on multiple time frames. Probabilities suggested the Trader was beginning to overstay his welcome and it was time to get out of this short. This was the Traders job based upon information received from the Analyst. My first job as a Trader was to exit my shorts, I then could start thinking about trading the bounce. The Trader in me felt prudent to exit the final shares of the IWM short and I covered.

I took about a 15 minute break and decided to write a post to the Trading Blog. At about 2:05 EST, I began to write an intraday post of the day’s action and showing how the $TICK indicator can help one manage the intraday action. I knew I was getting ready to call it a day and go pick up my son at the airport.

I wrote…

The market may find deep enough oversold levels to have an afternoon bounce. I had some emails come in about playing the bounce but first I wanted to get out of my last IWM short. That is closed as of now. I will not play the bounce other than a day trade. I rather not hold positions over the weekend as the Sovereign debt news spreads like wild fire. We may set up for a bounce next week.

The Analyst in me (now in hindsight) got the intraday move correct. The markets began to bounce at 2:10 EST (in hindsight) and by 2:55 EST was beginning its big run into the close. When I wrote this I was stating probabilities not anything I knew for certain. Had I known 100% we were going to get a 22 point SP rally from low to high, I would have placed that MIX strategy bet and made off like a bandit.  In my post I wrote…

We have a few signals in place but not all of them. Again, even if they were all aligned, I doubt I would put the position on into the weekend. That is just my personal style and my little chicken trading ways. ;-)

As a trader I was debating if I was going to make another trade for the week or call it a day. I know I had limited time to be in front of the screens. If I had taken the MIX strategy the SPY 104’s was selling around 2.70 and closed at 3.67 for a 35% gain in about 2 hours. The 106 strikes netted about 41%.

Did the Trader in me participate? No… and just why not?

The Trader in me decided to call it a day and I had some personal obligations to tend to. I don’t think my son would appreciated the fact I left him stranded at the airport, although it might would have helped if I had brought my winnings and gave it to him. I had decided to write an intraday post and took care of a few phone calls, did some updating on my record keeping, and managed some Spike related issues. I spent about an hour to finish my day up before it was time to leave for the airport.

The point is the Analyst got the direction correct, the Trader followed directions, “closing the final short position”. The Trader chose not to follow the intraday trade opportunity for various reasons. Is the trader badly wrong and should be dragged out behind the wood shed and beaten? I hope not. Be careful talking negative to yourself after having the benefit of hindsight.

Had the market bounce fizzled out and we sold back off into the close I would have felt I had made the perfect decision. In hindsight I would not have done anything differently other than If I had not had the obligation to go pick up my son. ( I could have asked my wife or his grandparents to do it) I might would have day traded the bounce. In hindsight I would have liked to say I would have traded and made some extra money. In reality I know that it was late Friday afternoon going into the weekend. I did not feel I had traded the past two weeks as well as I could have and was looking forward to calling it a week. I did not want that emotion of wanting more to force me into a bad trade. In reality I might have made the same decision to stop trading if I did not have the obligation to pick up my son. I was looking forward to seeing him and so I have no right to take this Trader out behind the ole woodshed and give him three lashes.

The moral of the story is….

This past week the Analyst in me was looking for a bounce that would eventually lead to another leg down. The direction was correct, we bounced Monday and Tuesday with a pause day on Wednesday at resistance levels of 1100 - 1110. The Analyst had been mentioning these levels in my updates. The market began another leg down on Thursday with a gap down and continued into Friday. Thursday evening the Analyst suggested probabilities existed if we saw more selling pushing us down into extreme oversold conditions that we could set up for a bounce. We got all the action in one day on Friday. The directional call was good and the Analyst in me did his job. Did I participate as well as I would have liked as a Trader? Did the Trader in me trade the direction based on the  analyst recommendations as well as I should have? The answer to both of these are NO. The Trader did not participate as well as I feel I could have although the Trader did get a little piece of the action. The important part is to recognize who is doing their job well. Make sure you don’t let the market make either one of these parts feel worse than they should.

I wished I had traded my analysis better than I did. My risk profile did not match up that well with the way the markets traded leaving me on the sidelines more than I would have liked. When reflecting back on the week’s events, the Trader in me did not do so bad considering the various events the Trader must maneuver around.

1.        The Trader in me must stay within certain risk parameters to control losses in case the Analyst IS wrong.
2.        The Trader in me must deal with outside interruptions, regardless if they are good interruptions or bad.
3.        The Trader must deal with emotions and directions within hours sometimes minutes. It is not as easy as it sounds to be bullish for a bounce two days, flip to be bearish for two and half days and then flip back bullish for two hours.

What kind of expectations do I have on myself as a Trader? If we are not careful no one will be able to live up to those expectations we impose on ourselves.

In the end – I am happy of the Analyst work and the Trader did the best he could considering all the circumstances. Only in hindsight I know for sure what I could have done differently. In the end, the Trader did not make any foolish mistakes or take any unnecessary impulsive trades. The Trader did not violate any money management rules and did not trade against the direction of the Analyst work. It was a profitable week. The only issue is hindsight. I wished I could have participated better and that the market was not so difficult to trade sometimes. We like to be paid for our work but in Trading that is not always the case.

Why can’t this game be easy so I could just kick back on auto-pilot and let the money roll in?

Have a great weekend!

From the “Analyst and Trader” that feels like “Mr. Jekyll and Mr. Hyde” ;-)

Kerry