Slow, Steady, Incremental Progress

 

Excerpt from an email from J.L.

  • Finally, do you have any articles that could be helpful going from sim to live?

 

Let's write one now…

Do NOT rush.

The markets will always be there, ready and waiting for when YOU are ready.

The journey takes as long as it takes. And the psychological challenge is different at each level of risk.

So aim for slow, steady, incremental progress.

Let's break the journey into stages, noting that this is for discretionary traders. Systems traders will use a different process.

 

Stage 1 – Historical Chart Study

Stage 1 involves study of past data in order to achieve the following two aims:

  • Understanding the strategy – HOW to trade it and WHY it should work.
  • Confirming potential for edge through study of historical chart sequences.

 

This stage takes as long as you need it to take, until the point at which you you understand the strategy and believe it has potential for edge.

The key word above is "potential". Any edge you perceive through historical study is only a potential edge. It needs to be proven at the hard right-hand side of the screen, with real-time data. This will be done in the following stages. For now – just confirm that all evidence appears to show edge.

The more thorough your work at this stage, the greater the likelihood that you'll not be wasting your time in the following stages with a strategy that does not offer any real long-term sustainable edge.

 

Stage 2 – Simulation – Proving Edge

Stage 2 involves operating the strategy in a simulated environment in order to confirm the edge is real.

Some people are tempted to skip this stage, through concern that a simulated environment does not offer the same psychological challenge of a live environment. But that is exactly the reason why you should start on the sim – keep it simpler. Why risk actual funds when the edge is not yet proven. Take the time to prove the edge in the simpler and safer environment, without this higher degree of psychological challenge. Then, once proven, you can advance to the live environment with a greater degree of confidence in the strategy and your ability to trade it.

Slow and steady!

Incremental progress!

We will be analysing our trade performance in groups of trades. So you need to start by determining a suitable group size for analysis of stats, ensuring that groups will contain no less than twenty trades. It doesn't really matter whether your groups contain a variable number of trades (perhaps weekly groups, or daily for more active traders who complete dozens per day), or whether your groups contain a fixed number of trades (20 or 50 or 100 trades). Pick something that makes sense for your frequency of trading. Just ensure it's no less than 20 trades. And be consistent.

Trade a complete group, recording your individual trade results in your Trading Journal Spreadsheet. While trading a group your concern is not profitability but rather consistency of process and quality of execution. Your trading should be carried out with minimum size, simulating the EXACT processes you will follow when you first transition to the live environment.

Only when the whole group is complete should you concern yourself with performance. Analyse the stats for the group, in particular the win percentage and win/loss size ratio. Confirm whether you have proven edge across this sample of trades.

If edge is not proven, determine which group statistic is underperforming. And then study the component trades to identify (a) one potential cause of this underperformance, and (b) a plan to improve performance over the next group. Now document the changes and start again with the next group.

If edge is proven, congratulations. Now do it again.

Repeat the process until you can prove edge in terms of profitability and consistency, maybe five times in a row. Only then should you consider transitioning to a live environment.

 

Stage 3 – Live Environment – Proving Edge

Stage 3 takes you live, with the ABSOLUTE MINIMUM exposure to risk that your strategy and your market allows. That is, the smallest position sizes possible.

The aim is to trade in exactly the same manner as just carried out in the simulated environment. The only change should be live execution and the additional psychological challenge of having money at risk.

Be completely clear regarding your maximum acceptable drawdown during this stage. And commit to dropping back to the sim again, should this limit be hit.

Slow and steady!

Incremental progress!

Performance will again be assessed in groups of trades, using the same group size as when sim trading.

Trade a complete group, recording your individual trade results in your Trading Journal Spreadsheet. While trading a group your concern is not profitability but rather consistency of process and quality of execution.

Only when the whole group is complete should you concern yourself with performance. Analyse the stats for the group, in particular the win percentage and win/loss size ratio. Confirm whether you have proven edge across this sample of trades.

If edge is not proven, determine which group statistic is underperforming. And then study the component trades to identify (a) one potential cause of this underperformance, and (b) a plan to improve performance over the next group. Now document the changes and start again with the next group. If performance is completely unacceptable then consider dropping back to the sim.

If edge is proven, congratulations. Now do it again.

Repeat the process until you can prove edge in terms of profitability and consistency, maybe five times in a row. Only then should you consider increasing risk.

 

Stage 4 – Live Environment – Improving Edge

Stage 4 is a never-ending process of stretching yourself to new levels of performance.

Identify the change you wish to make, ensuring that it is in ONE PART of the process.

The obvious example here is an increase in size. Make it a small and incremental increase.

But this may also be any changes to process. Keep it small and incremental. One change at a time.

Performance will again be assessed in groups of trades, using the same group size as in previous stages.

Trade a complete group, recording your individual trade results in your Trading Journal Spreadsheet. While trading a group your concern is not profitability but rather consistency of process and quality of execution.

Only when the whole group is complete should you concern yourself with performance. Analyse the stats for the group, in particular the win percentage and win/loss size ratio. Confirm whether you have proven edge across this sample of trades.

If edge is not proven, determine which group statistic is underperforming. And then study the component trades to identify (a) one potential cause of this underperformance, and (b) a plan to improve performance over the next group. Now document the changes and start again with the next group. If performance is completely unacceptable then consider rolling back the changes in order to return to something that was working, before again attempting change at some point in the future.

If edge is proven, congratulations. Now do it again.

Slow and steady!

Incremental progress!

Two final points here.

Firstly you should never completely trust an edge. Maintain constant vigilance. Continue to monitor the stats for your groups of trades, in order to confirm not just profitability but also some degree of consistency from group to group.

And secondly, if you're not growing as a trader, then the problem is that your review processes are not driving any growth. Fix your review processes.

<image: If you are not growing as a trader, this is the problem...>

Best of luck with your journey.

Remember, there is no hurry.

Slow and steady!

Incremental progress!

Lance Beggs

 


 

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12 Comments to “Slow, Steady, Incremental Progress”

  1. Michael says:

    Lance, I would like to propose a small addendum to Stage 3, let me know what you think:

    Once you are ready to transition to live trading, wire into your account enough funds to trade the smallest possible position size, plus only two times the $ amount of one full risk unit.

    Considering the E-MINI NASDAQ 100 (NQ) as an example: my broker (Tradestation) shows an initial margin of about $6400 (it fluctuates depending on market conditions), and a Day Trading Rate of 25% of the initial margin; trading one contract, if one full risk unit (the maximum loss you will accept per trade) is $100, then you should put into your account:
    C=($6400 x 0.25) + 2 x $100 = $1800

    This will render you unable to trade for the rest of the day if you mess up badly and lose 2 full risk units, forcing you to take a break until you are able to replenish your account.

    If you really have an edge, that initial sum should grow quite quickly; if that’s not the case, you will be forced to take a break every time you mess up. In any case, this will condition unto you the healthy habit of taking a break and analyze your mistakes every time you have a bad day…

    M.

  2. Josh says:

    Great idea Michael,

    I funded my account with a little more than that yesterday, it would of been great to see this earlier :)) Cool idea for controlling the emotional risk.
    It would be nice to be able to have some kind of function with the broker where you can pre determine how much risk/loss you are willing to take before being in an emotionally state and judgement is impaired. I remember when i used to play online poker many years ago they had these settings. It helped me stay in the game longer.

    • Lance Beggs says:

      Josh, I have heard of some brokers offering this risk management feature, where they limited your account only to a pre-accepted level of loss per day. Once that drawdown is hit, positions are closed and you cannot enter new ones till the next day. I don’t recall if it was forex, stocks or futures. Nor who the broker was. But you may wish to enquire with your broker. Perhaps they can offer that service.

      Best of luck,
      Lance

    • Michael says:

      Josh,

      from my experience emotional risk is really best managed by taking a break, so I’m used to calling it a day if I’m losing 2R no matter what.

      With that said, what I experience often when having a bad day is not simply making 2 trades losing 1R each, but rather strings of smaller losses maybe interspersed with some marginal gains that don’t quite compensate. This is what tends to be hard on my focus, when it happens…

      Unfortunately I don’t recall the exact blog post by Lance about this, but I’m 100% positive that I read about the following idea in one of the past blog posts a long time ago – by now it’s an ingrained habit for me:

      before hitting the extreme scenario of having to quit for the day, I have a simple alert system in place that calls for my attention if a potentially good trading opportunity arises.

      It’s as simple as looking at the chart, and deciding “if the price gets to this level, I’m going to monitor closely and act, otherwise I do nothing no matter how good a pattern looks.” Then I set an alert for the level I spotted, and literally do nothing until the price gets there.

      This forces me to always do a basic market analysis: is a trend in place? Where are the swing points? Is the market ranging? Where are the range bounds? etc.

      Does the price always get to these levels? Of course not, but I never had to regret doing nothing when my predetermined conditions were not verified… 🙂

      If I’m so upset that I’m not even able to accomplish this basic analysis, then I call it a day even before hitting 2R loss because I must be really on tilt… It happens once in a blue moon, but when it does it’s really costly if you don’t realize you are on tilt – probably more so than in poker, I’d bet! 🙂

  3. Josh Schwartz says:

    Hi Lance, How do you use your TJS on the scalping time frames? Did you make any modifications to the way you log your trades when you went from the 3min to 1min TTF? I have been trading in Sim on the 1min TTF and would love to know how you log these trades.
    Thanks
    Josh

    • Lance Beggs says:

      Two options. The first (which I prefer) is to use the TJS Importer. It used to be an add-on. I assume that’s still the case. If your home screen doesn’t have it, contact Greg at TJS. It was pretty cheap. This will allow you to import the data straight from a Ninja export file. A word of caution though – this worked really well with NT7 where you could group the Ninja trade export data for any ATM Strategy. Since NT8 took this export option away, it makes tracking data more problematic for anyone who’s not an all-in-all-out trader. Ninja have plans to fix this, but as of yet there is no expected completion date. Until then, you end up with multiple lines per trade. Not ideal, but ok if you don’t mind tracking each part of the trade separately.

      The second option is manual entry, but using the HFT Mode. You’ll find the toggle to turn that on or off on the Trading Log page (RHS top somewhere). This allows you to skip a lot of the manual entry data and just go straight to the P&L for each trade.

  4. Josh Schwartz says:

    Fantastic. Thanks for your advice Lance! 🙂

  5. Sergio says:

    Hi Lance.

    After finish studying the YTC PAT course (which I really enjoyed by the way), I’m in the very first stage of establishing my foundation.
    I’ve already choose my market, timeframe, charting platform and broker and now I am documenting my trading plan.

    Here I have some doubts about risk and money management alongside with transition from sim to real enviroment:

    The capital I want to allocate to my trading is 20k EUR, but I think I won’t be psychologically prepared to risk 200Eur (1%) per trade when I can transit to real enviroment, not even 100Eur, maybe 50 (0.25%) is the most comfortable number to start. My idea is to start with this small risk unit and increase it gradually as I burn stages (proving my edge)
    Keeping this in mind I have chosen a market that allows me sufficiently small position sizes.

    So for my simulation enviroment stage, it would be better to setting up my unit risk in 200 to practice with my future maximun risk or would be better to setting it up to 50 in order to make more natural the move from sim to real?

    P.S. Regardless of the equity balance I use when I move to real I will use Michal’s idea, it’s simply brilliant. It automatically protects the account from catastrofic days and allows not having the whole money blocked in the broker’s account

    • Lance Beggs says:

      Hi Sergio,

      This is a good plan. There is absolutely no need to trade with 1% equity risk per trade. The reality is that there will be a period of drawdown initially and so it’s vital that money management is in place to ensure this drawdown is survived. If your market will allow position sizes of 0.25% equity risk, then that is great. Definitely do so. Or even less if you can.

      And also, as per Michael’s comment, there is absolutely no need to keep all your trading funds in the account. Deposit sufficient to cover margins plus a buffer. And keep the remainder elsewhere where it earns better interest.

      To your actual question though – generally I suggest that the sim stage should be run EXACTLY as you will be trading when you first transition to a live environment. So if your aim is to trade live with 50 Euro risk, then this is how you should use the sim. Keep everything as “real” as possible.

      The risk with operating on sim with 200 Euro risk, is that when you go live with 50 Euro risk you will be frustrated by gains not being of the usual size. There is temptation to increase risk too quickly.

      Keep sim exactly as if it was live.

      Cheers,

  6. Sergio says:

    Thank you very much for your advice Lance!

    Cheers!

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