Newsletter
November 17, 2007
Setting Goals
Should You Test?
Largest Changes In Raw Numbers (21 Days)
There will be no newsletter next week. I wish everyone a joyous and thankful Thanksgiving Holiday!
As we express our gratitude, we must never forget that the highest appreciation is not to utter words, but to live by them.
~John Fitzgerald Kennedy
Setting Goals
It's that time of year again, nearing the end. Now is the time to begin putting together notes and writing out your goals for 2008.
Often new and inexperienced traders enter the trading arena thinking that they can begin making big profits right away. I'm going to tell my boss where to go and make my living trading the markets - freedom at last. How often I have heard those words. It takes skill, knowledge, and experience to trade profitably over the long term. Anyone may experience some initial success, and begin to think I love this, it's easy. Often however the success is sporadic and short lived. A seasoned trader hones his/her skills over many years gaining a wealth of experience. If you do too much too soon, odds are you will fail, and become very disappointed. New traders after experiencing that failure and disappointment will give up rather than continue on. If you are new or even relatively new take smaller steps and build up your skills, the failure and the disappointment is your education (just like college), you will soon experience profitability, if you learn from your disappointments.
Psychologists have learned that setting high performance goals, such as trying to make your living from trading when still a novice, are not always the most appropriate goals. If you lack the skills and experience to reach a particular goal you are setting yourself up for failure. You would not try to win a triathlon without proper training, would you? Why make such high trading goals until you have the requisite knowledge and skill? Setting goals to high is certainly understandable, however, ambitious people are taught to set high goals. If you do not even consider achieving an ambitious goal, then you will probably not even try to achieve. It's very important that we set high standards and go out and do whatever it takes to reach them. The important difference is the initial goals must match your skills and experience. If you push yourself before you are ready you may not only fail but you may give up as well.
We need at this point to distinguish between performance and learning goals. It's quite normal when setting goals to think only in terms of performance; that is, we think about specific dollar amount or percentage gain per month, or quarter that we should achieve. If you are new to this game, it is much more useful to think in terms of learning goals instead. A learning goal is more modest and easily achievable. Break down the larger goal into specific steps that are doable and achievable, and rewarding yourself after each step is accomplished. For example, a learning goal may be, "I'm going to read one book about trading the markets every week (month)." This specific goal may not lead you directly to your monetary goal right away, but it is easy to achieve, and the knowledge gained definitely will aid you in developing a plan that will get you to your monetary goal.
So if you're a novice trader, set yourself up to win. Don't set overly high performance goals; set high and realistic learning goals. Break the bigger goal down into specific steps, and reward yourself after you complete each one. When you become a seasoned trader with advanced skills, you can set out to achieve those high performance goals. But right now, it's in your best interest to focus on skill building, rather than high performance.
Should You Test?
When it comes to changing, developing, and implementing a trading strategy there seems to be a debate on whether to test it on historical data first? There are many, including a few successful traders, who do not believe in historical or back testing of ideas. They believe this because they believe the past will not repeat itself. If any of you think this way then let me ask a question or two: How do you arrive at a strategy without knowledge of the past? And what is the alternative? Guessing!
The only information we have is what happened in the past. If you're a discretionary trader you're really relying on your personal experiences in the markets; in other words your own personal interpretation of the past. Smarter discretionary traders after years of experience in trading begin to make note of repeating patterns that offer profit opportunities. They have, over the years developed strategies to capitalize on those opportunities. Newer traders often pour over hundreds, if not thousands, of charts before they even begin trading; in order to determine what has happened in the past and what may likely to happen in the future.
When I began trading there were no home computers; only large mainframes that took up large and usually very cold rooms. Now with the proliferation of home computers that actually have the same computing capacity of those old behemoths' and historical data readily available, simulations of trading strategies are within the realm of the average trader/investor. Computer simulation enables traders to perform a more rigorous analysis of their trading strategy even before they begin. More experienced traders can input new ideas and strategies in order to analyze potential improvements to their strategy. Quite often I will run a simulation of what appears on the surface, to be a promising strategy, only to find out it will not work because of something that was unanticipated. Isn't that worth knowing prior to employing that strategy?
Over the years hundreds if not thousands of different types of indicators have been designed. Many are published in trading magazines with convenient examples of when they work. The articles are often written quit well and can seem as if the author has come upon "The Holy Grail". Excited traders are anxious to apply this or that new indicator to their trading; a) without the proper understanding of what the indicator is really indicating and b) without doing any historical simulations against a variety of stocks and/or markets to determine when this new indicator works and when it does not. No indicator or strategy works all the time, its a game of probabilities, not certainties. I think you and I owe it to yourself to create your own simulations of these new fangled indicators in order to determine if it's indeed something we wish to incorporate into our trading arsenal or whether we should really ignore this new finding.
Back testing an idea or a strategy does not predict the future but it will give you a way to determine whether an approach is likely to be profitable in the future. It is not a crystal ball, a time machine would be better; it is however the best tool we currently have.
In most fields the number of people who really understand what is going on is very limited. For everyone that understands there are scores who are able to perform in that field, have assembled some knowledge, and in the eyes of those outside appear to be true experts. Although they can perform they really do not understand and therefore their rules tend, not be rigid. In trading a good example would be someone who runs a complex simulation formula on a couple of weeks of data, then attempts to extrapolate that run to next weeks trading, not understanding that next week could be radically different than the previous two. Its one thing to do the math, it's quite another to understand what the math is doing and why.
Do not confuse experience with expertise or knowledge with wisdom!
So should you test? I read this quote recently and I think it expresses the situation well: "the fact that you would not give a knife to a small child does not mean you don't want to use one in the kitchen when you are cooking. You just need to be careful with sharp instruments." In this authors' humble opinion, if you have the means, you should test often, if only to find out something does not work, then you can investigate the why. Is it random affects, a deficiency in the logic or factors considered, is the time period tested too short, to mention just a few considerations.
Largest Changes In Raw Numbers (21 Days)
NOTE: The presentation of this report has now been changed to an excel spreadsheet format containing all Industry Groups, ETF's, and Indexes, allowing you to sort all from best to worst. In addition each weeks report will appear next to the last weeks report and so on, allowing I believe much easier research on your part.
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Enjoy your Thanksgiving Holiday!
Bill
Prudent Trader.com
Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.
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