A DISCUSSION ABOUT ANALYZING AND OPTIMIZING TRADING METHODOLOGY

by Gary I just noticed a post by one of our members, @86944T where he shared some work that he has done in analyzing his own trading methodology and his results. He has been a member here for just one year, and I suspect that his work now puts him ahead of about 95% of all traders. I’m serious — it’s that important!

Here is his post, followed by my (belated) response:

@86944T: #Stops @Dan I am trying to stay in trades longer and keep from being stopped out. Dan typically says stops at 4%, and I read the “How to Make Money in Stocks” book and it says 8% stops. Since the start of the year I have put on every trade with duals stops, half at 4%, and half at 8%. 30 trades with 13 winners and 17 losers. For the losers, the data is very easy to interpret, having two stops expanded my average loss from 3.07% to 6.64%. For the winners, the average profit for the 4% stops was 8.32%, and 20.5% for the 8% stops. The data for the 8% winners was entirely driven by 3 trades that I stayed in with 38%, 48%, and 112% returns. In addition to those 30 trades, there were also 12 trades where both stops were hit on the same day. 7 winners at 25.3% and 5 losers at (5.3%). Each of these trades would have been more profitable or had a smaller loss if I had only used a 4% stop. Keeping dual stops on each position was an administrative chore, and I plan to just go back single stops of about 4%.

======================
MY REPLY
======================

@86944T #Stops Seriously, @86944T…I congratulate you for doing that work. Really, studying the outcome of 42 trades is a lot of work to do, and it takes diligence and resolve to do your own work on this. Most people don’t do that work — they are just action junkies and trade for the excitement — the thrill of victory…and the agony of defeat.

Nice job…I wish everyone would do that.

It’s a good thing that you checked out 4% versus 8%, and how each method performed. One thing that I must emphasize (and I suspect you already know this), is that the ENTRY IS EVERYTHING! The only way you can sustain a “4% max” loss without really hurting your performance is if your entries are pretty precise, and at levels that are within 4% (and hopefully even less) of that level where, if the stock galls that low, you’ll conclude that the stock is not acting as it should–that you are wrong–and you can just exit the trade without any damage…other than minimal.

I think Bill O’Neill’s 8% rule is a function of his approach of buying breakouts. I’ve read a lot about him and his methodology, and I’ve never seen anything that indicates that he’d be buying a stock on a pullback — at least initially. And because of that approach, he had to put a looser limit on his positions or he’d get stopped out of perfectly good stocks that just didn’t hold their breakout.

I could be wrong about his aversion to buying pullbacks to support…anyone is encouraged to fact check me on this. (Rem ember, I am a student of the market, too. The amount of knowledge I still have to gain far exceeds the stuff that I already know…so we can and should all work together to become better and more consistent traders).

As you guys know, I know Mark Minervini pretty well and he has taught me more about stock trading than any single person I have worked with — and I’ve been fortunate to rub elbows with some of the best, and have read more books than I can count. Minervini, O’Neill, Livermore, Wyckoff, Bollinger, Pring, Murphy, Edwards & Magee, Cramer, John Carter, Najarians, and others that escape my memory right now.

If you’ve read Mark’s books (and you should), you’ll learn that he was buying those pullbacks on stocks with certain characteristics and he described those buys as “cheating.” And I think that it’s this “cheat” trade that can enable a disciplined trader to keep losses very small. It might impact your batting average a bit because the stock doesn’t really have to move that much to stop you out. But the losses will be smaller, and I think that outweighs any decrease in your batting average. But the proof is in the numbers…in YOUR numbers. (You will also read Mark’s view of the importance of tracking your trades…EVERY trade.

This is really awesome to see. It makes me humble and proud to see you really putting in that work…and I can guarantee that your trading results will improve, and that this work will pay you dividends throughout the rest of your trading endeavors. 🙂

==================================
MY CHALLENGE TO YOU…Yes, YOU!
==================================

Do you have the tenacity and persistence to make similar assessments of your own trades? If you do, I assure you that you will find it well worth your while. If you don’t, then feel free to wander around on the fringes of profitability.

It is people like @86944T who demonstrate why many traders are just crushing it in the trading room every day. Sharing what they know, and exchanging ideas that turn inexperience into profitable trading.

-Dan

Free Chart Free Chart Videos Market Update