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Everything between the entry and exit is unimportant

Volatility is good because it puts money to my bank account. Every timeframe has its own path of volatility, but without it stocks wouldn’t move. So volatility needs to be embraced and managed, not avoided. Once a trade is on, risk has been calculated, the stop loss and profit target are in place, then there’s nothing more to do than to sit back and relax. If there’s an edge to exploit, then the numbers will eventually play out. Of course, it needs a predetermined exit point besides an entry to begin with.

Simple works but it needs to be different

I’ve been experimenting and testing some unconventional ways of looking at the stock market. Tuning out the daily noise from news and social media has been part of it to forget about the popular analysis methods that everybody is adopting. I believe that technical analysis in terms of pattern recognition has been slowly losing its edge since the ‘90s due to becoming so popular. You can’t beat others in this game by doing the same thing with everyone else. The more money buying that clear pattern, the worse it’ll work, probably shaking out lots of stops first or just going in the other direction. I have also noticed it when backtesting lots of simple quant strategies – things work very well from 1990 but performance starts to deteriorate somewhere after 2017. Computing power has become so available that analyzing lots of data alone isn’t enough anymore. The goal is to look at the market a little differently than most others. It takes experience and screen time to generate unique ideas. It’s not about watching marketers showing their candlestick ‘secrets’ online to audiences as large as hundreds of thousands of people.

The index is just a formula

One of the more recent improvements in mindset for me has been to forget about the indexes, to let go of S&P. Everybody is watching it so the competition is huge, making it more efficient and therefore leaving less edge to exploit. There’s little to no benefit in drawing lines on its chart. Discipline and risk management are more important than technical analysis, but it takes some time and experience to reach that level of understanding. So I’m testing my own formulas for equities combined that don’t hold me in the frame of 500 stocks to make conclusions about The Market. I think it’s a necessary step going forward. Basically, I give equal weight to any individual name despite the market cap, otherwise the top 10 largest constituents dictate the overall movements anyway. Though it hasn’t always been the case. I backtested a strategy that rotates into the top 10 largest companies in S&P 500 index on a regular interval. The results have been amazing since 2016, but it underperformed strongly before. Without doing such research, one can easily become blinded by recency bias. Competition never sleeps so I need to be working on my edge as well.

Ho Chi Minh City, Vietnam

Ho Chi Minh City, formerly known as Saigon, is a big and crowded city with lots of cool and nice places. The Asian culture here is very friendly and polite. Some speak English, but an audio translator on my phone has made it much easier to communicate to locals. Vietnamese people are in good shape as they move a lot and their food looks healthy. During my first week here, I also made a new friend who is from California. Talking to people from different places all over the world gives a much better understanding of how the world works. Or how it might work, cause we always think we know a lot more than we actually do.

Traveling is a good way to relax, have fun and generate new ideas at the same time. Thanks to the timezone difference I’ve had my mind off the market because I’m sleeping while the US market is open. That’s how it should be with the automation available nowadays. Sitting in front of the screen watching candlesticks go up and down can create so many biases and errors while trading on gut feeling that besides being unnecessary, it even seems ridiculous to me now.

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2 replies on “Everything between the entry and exit is unimportant”

Your January 1 post.
Other strategies had the following volumes: 974 day-trades in stocks, 312 swings, 157 trend and momentum trades (around 40 trades are still open) and 8 hedges (a couple are open).

The question is what is your risk per trade with big account? If you have 40 trades open. It means alot of capital is not available for further trading or you use good leverage or very small risk?

For example right now in my 100k demo account i have 36 swings open. As i risk 1% per trade, some of the trades are in break even already. In total 450k is in stock value, it means i should at least get 1:5 leverage to trade this kind of strategy.

Well a simple example, if I was 100% invested in 40 positions with my own capital, it would allow 2.5% of capital per position if done in equal size, which in case of a $100k example would have $2500 per trade. However, in real life I calculate pos size from risk I’m willing to lose if I’m wrong on the trade and strategies have a different risk budget. I use leverage up to 1.25x at the portfolio level, but when trading derivatives like futures and options, leverage can go up to 20x at the trade level.
I understand your situation on the demo account. In such case I use margin account (leverage) to serve the risk budget if my own capital is already tied to positions, but it’s not as high as 1:5. The risk is always calculated using my own core capital and 1% per trade would obviously be too high for 40 open positions unless they’re very uncorrelated. So the answer is that my average risk per trade is less than 1% and I do use leverage through margin and derivatives. There’s no one size fits all, it needs to be set and optimized at the portfolio level depending on the exact strategies and risk tolerance. It’s better to start small to learn the optimal size for yourself in time. Demo account is also a good tool to figure it out.

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