Home > Creativity, education, management, Planning, trading > Profitable ETF Trading Strategies: an extended reflection on risk management and mental toughness

Profitable ETF Trading Strategies: an extended reflection on risk management and mental toughness


A Trader Quality Number  idea: if i want to trade AA today, and in the sideways mkt i have been using .1 iStop, maybe today i can use .4 as the iStop for position sizing, and acknowledge i will exit at -.5R or an adverse move of .2
if you are timid about pushing the button then you Risk level is too high. So, make a bold correction on your risk level by cutting it by a factor of 4
can u trade 1 share of the target without worry? can you trade 2 shares?
there is some threshold where you believe you can trade it, but that if you got any larger, it would begin to be an issue.
we set that threshold using our most optimistic mind.
i say start with 1/4 of what you “think” you can safely trade.
i say that because we know that our fear is 3x larger than our greed in terms of importance.
so if i want to “win” 1000 on my 2:1 venture, i have to risk 500.  then i ask myself: can i risk 500 and manage the trade? my optimistic mind says “sure”
so i actually risk 500 and i notice i am on pins and needles. why?
because my optimistic brain imagined i could handle 500 =R, when my stomach says “not so fast, thats 500!”
so i say , fark it, if you think you can handle 500 no problem, cut it in 1/4 and risk 125
and round that to 100 for math
if you feel you have to be successful then you are importing that stress to every trade, unless you make the trade so small that you can set aside the stress
i am giving you a technique to make it obvious to yourself that you can set aside the stress
you improve your stress management by desensitizing those excitement nodes in your brain
if you think you can handle 500 =R, then i say make R =100 and do it 30 times with no stress, then over the course of 2 weeks
you will have enough data points to see if you can trade that risk level routinely.
i dont mean tweak the risk level a little, i mean make a bold correction.
my plan for a day like today would be to buy breakouts of targets that are stronger than SPY.
I dont need pullbacks on days when the market is melting up.
lets look at HD today: i would normally engineer a .1 stop, but it looks like a “slow grow and dont look back day”.
fark it, its going up, everything is going up, buy it with 1 bullet at 1/4 of the position size
I will do the bold correction, since I am changing methods. ie a .4 iStop, instead of .1
$250 bullet (ie 1R), thats 2500 shares with .1 initial stop (iStop), or 600 @.4iStop (conservative rounding error)
if it moves .2 in my favor (ie .5R) go to “no lose”, and there is all the trade improvement i need to be content in that trade.
my worst case contingency? what’s the worst thing that can happen?
right after i buy it it starts failing, and i say fark it, exit after an immediate -.2R adverse move, for a -.5R loss; there is my “.25R per trade improvement”
if your risk voice is interfering with TQN (your trader quality number), then by definition you are trading at too high a risk level and your gut knows it.
its your gut that dominates anyway.  your gut is your lizard brain
the lizard brain is “fight or flight” and is the oldest part of the evolutionary brain, the closest to direct sensory organs
the next brain is the emotional mammal brain that tries to improve its environment to allow for contentment and safety out into the future
it needs comfort and love
it is challenged by the fear feelings generated from the lizard brain
on top of all that is the so-called rational brain of the “economic man” which thinks it is in charge
be serious. the rational brain is the last one to the party and has least  influence over our behaviors under conditions of stress
that’s the brain that works in the ivory tower of the best of all possible worlds
it is  out of touch with reality, yet that’s the brain we ask to calculate “the maximum ‘reasonable’ risk i should be able to manage on my best day with no distraction”
that brain calculates “$500” and we try to live up to that benchmark even though our mammal brain says “If I fail, i won’t be loved and i am jeopardizing the tribe” while the lizard brain is always looking for things to run away from
because he knows he can afford to be hungry a little longer, but if he gets caught, its the end
So the key is to desensitize the lizard then, with 30 trades of 1/4 of the rational risk, and this also means we never risk becoming “unloved”.
the lizard brain is activated when it sees what might be a threat inside its field of vision and sees how it can go wrong; it bases that on physical size
it interprets size as threat
we interpret “dollars at risk” as a threat the same way lizards view “size” as the threat
we say we can engineer a stop of .1 but we are seized with the image of a .4 adverse move in a sudden shock and interpret that, properly, as a potential -4R loss
so don’t figure out your R based on the best possible contingency case, ie an orderly set of losses that degrade a penny at at time in a smooth step function which lets you easily exit
ask the lizard what he’s really afraid of, his worst fear, and say “well, at least we know what our R really is”
based on cognitive science which puts fear at 3x more powerful than greed, you can be more psychologically balanced by estimating that your initial “best case” comfort level of R is at least 3x too large in reality, which is why i would say cut your R by 4 or 5
to make a bold correction
if your first estimate is that you can handle R = 100, i’d say, well start at 25 then , ie dinner for 2 in kansas, and demonstrate proficiency at that risk level first then build up
now this will establish whether or not it was risk level causing you grief; you can eliminate that as the issue
you might find its a deep seated need to be right: in order to please a parent? to validate the little kid who was osatracized as a youth? the shy new kid who needs acceptance? to have the respect of those you respect? to help the teen boy trying to be a man?
we get all sorts of “help” like this from the emotional mammal brain
to feel like you are a man who can provide for his family? we get a lot of standards to meet, which are connected to our emotional center, provided by our emotional connections to family and from society
all of these things stand between us and a state of mind which is pure, of “just trading”
that’s the zero state, defined in a new way; prepared to “just trade”, then trade. a pure zen moment
our organic brain has been conditioned by the 10 million years of the era of evolutionary adaptation to behave in certain ways based on chemical reactions, that are optimized for something quite removed from “just trading”
and filling out some checklists once, and doing an exercise now and then in the comfort of a seminar classroom is only tenuously connected to the act of trading everyday
those are preconditions, and potentially fast tracks to improved performance
but the truth comes from entering the ring everyday
and having the persistence to prepare properly every day
and then do it, rain or shine
the difference comes from the willingness to endure the pain, and to be able to keep going back into it, that’s what separates Lance Armstrong for example
you think he doesnt feel the pain like other guys? he does, he just is willing to endure it
the great ones hate the pain of practice, but they persist
our emotional brains do not operate as straight line functions
try this exercise  suggested by Robert:
If you really want to see how much stress you can handle, plan out a trade tonight and a position size to risk 10x the normal risk….$5000 lets say.
Now widen your stops and lower the size
Maybe the trade is 2000 shares( we can all buy 2000 right) with a 5 point stop. R=10k. See how it feels, see how you react that position. Now if you want to move out of your comfort zone, put on the trade.
Now sit with that 10K position for an hour or a day or a week.
this morning i observed KO breakthrough 50, and said that was massively important, psychologically. in the meantime it has moved to 50.54
i think it has every potentual for being better than SPY for the next 2 weeks because there is no resistance
it made a 6 month new hi; there is no resistance in sight
it stays on my watch list
i will buy it with tactical momentum each and everyday until otherwise noted
but acknowledging my lizard and mammal brain issues
relentless attention to the lizard and rat brain
listen to the guy in the ivory tower, but remember he isnt getting his ass kicked potentially on every trade
acknowledge he can see things from his height, but  remember that life is lived on the ground
Robert reminded us of “The man in the ring”  when he said:
Good thoughts KL…nothing take the place of the man of action. That’s been my experience in every part of life.
“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”
Robert also reminds us of the challenge to play to our potential when he said:
“I also tell anybody to play small as KL suggested. But there comes a moment where you have to see if its “possible” to play up to your potential. Play from tips, take on the big boys so you know what if feels like.
When you put on a big position for the first time wide stops, we have the time to comtemplate the responsiblity of trading the counter part of the freedome of trading
Tips”= On a golf course, if you play every hole from the back of the championship tees its the hardest setup for that course. (Never done in tournaments even)
It take a mental toll on your game b/c the course, any course becomes much more intimidating and the designers true intentions become apparent.”
Now get out there and trade.
Lombardi said: everyone wants to win, but not everyone will do the things it takes to prepare to win.

Trader Quality Number  idea: if i want to trade AA today, and in the sideways mkt i have been using .1 iStop, maybe today i can use .4 as the iStop for position sizing, and acknowledge i will exit at -.5R or an adverse move of .2

if you are timid about pushing the button then your Risk level is too high.

So, make a bold correction on your risk level by cutting it by a factor of 4

can u trade 1 share of the target without worry? can you trade 2 shares?

there is some threshold where you believe you can trade it, but that if you got any larger, it would begin to be an issue.

we set that threshold using our most optimistic mind.

i say start with 1/4 of what you “think” you can safely trade.

i say that because we know that our fear is 3x larger than our greed in terms of importance.

so if i want to “win” 1000 on my 2:1 venture, i have to risk 500.  then i ask myself: can i risk 500 and manage the trade?

my optimistic mind says “sure”

so i actually risk 500 and i notice i am on pins and needles. why?

because my optimistic brain imagined i could handle 500 =R, when my stomach says “not so fast, thats 500!”

so i say , fark it, if you think you can handle 500 no problem, cut it in 1/4 and risk 125

and round that to 100 for math

if you feel you have to be successful then you are importing that stress to every trade, unless you make the trade so small that you can set aside the stress

i am giving you a technique to make it obvious to yourself that you can set aside the stress

you improve your stress management by desensitizing those excitement nodes in your brain

if you think you can handle 500 =R, then i say make R =100 and do it 30 times with no stress, then over the course of 2 weeks you will have enough data points to see if you can trade that risk level routinely.

i dont mean tweak the risk level a little, i mean make a bold correction.

my plan for a day like today would be to buy breakouts of targets that are stronger than SPY.

I dont need pullbacks on days when the market is melting up.

lets look at HD today: i would normally engineer a .1 stop, but it looks like a “slow grow and dont look back day”.

fark it, its going up, everything is going up, buy it with 1 bullet at 1/4 of the position size

I will do the bold correction, since I am changing methods. ie a .4 iStop, instead of .1

$250 bullet (ie 1R), thats 2500 shares with .1 initial stop (iStop), or 600 @.4iStop (conservative rounding error)

if it moves .2 in my favor (ie .5R) go to “no lose”, and there is all the trade improvement i need to be content in that trade.

my worst case contingency? what’s the worst thing that can happen?

right after i buy it it starts failing, and i say fark it, exit after an immediate -.2R adverse move, for a -.5R loss; there is my “.25R per trade improvement”

if your risk voice is interfering with TQN (your trader quality number), then by definition you are trading at too high a risk level and your gut knows it.

its your gut that dominates anyway.  your gut is your lizard brain

the lizard brain is “fight or flight” and is the oldest part of the evolutionary brain, the closest to direct sensory organs

the next brain is the emotional mammal brain that tries to improve its environment to allow for contentment and safety out into the future

it needs comfort and love

it is challenged by the fear feelings generated from the lizard brain

on top of all that is the so-called rational brain of the “economic man” which thinks it is in charge

be serious.

the rational brain is the last one to the party and has least  influence over our behaviors under conditions of stress

that’s the brain that works in the ivory tower of the best of all possible worlds

it is  out of touch with reality, yet that’s the brain we ask to calculate “the maximum ‘reasonable’ risk i should be able to manage on my best day with no distraction”

that brain calculates “$500” and we try to live up to that benchmark even though our mammal brain says “If I fail, i won’t be loved and i am jeopardizing the tribe” while the lizard brain is always looking for things to run away from

because he knows he can afford to be hungry a little longer, but if he gets caught, its the end

So the key is to desensitize the lizard then, with 30 trades of 1/4 of the rational risk, and this also means we never risk becoming “unloved”.

the lizard brain is activated when it sees what might be a threat inside its field of vision and sees how it can go wrong; it bases that on physical size

it interprets size as threat

we interpret “dollars at risk” as a threat the same way lizards view “size” as the threat

we say we can engineer a stop of .1 but we are seized with the image of a .4 adverse move in a sudden shock and interpret that, properly, as a potential -4R loss

so don’t figure out your R based on the best possible contingency case, ie an orderly set of losses that degrade a penny at at time in a smooth step function which lets you easily exit

ask the lizard what he’s really afraid of, his worst fear, and say “well, at least we know what our R really is”

based on cognitive science which puts fear at 3x more powerful than greed, you can be more psychologically balanced by estimating that your initial “best case” comfort level of R is at least 3x too large in reality, which is why i would say cut your R by 4 or 5

to make a bold correction

if your first estimate is that you can handle R = 100, i’d say, well start at 25 then , ie dinner for 2 in kansas, and demonstrate proficiency at that risk level first then build up

now this will establish whether or not it was risk level causing you grief; you can eliminate that as the issue

you might find its a deep seated need to be right: in order to please a parent? to validate the little kid who was ostracized as a youth? the shy new kid who needs acceptance? to have the respect of those you respect? to help the teen boy trying to be a man? to feel like you are a man who can provide for his family?

we get all sorts of “help” like this from the emotional mammal brain

we get a lot of standards to meet, which are connected to our emotional center, provided by our emotional connections to family and from society

all of these things stand between us and a state of mind which is pure, of “just trading”

that’s the zero state, defined in a new way; prepared to “just trade”, then trade. a pure zen moment

our organic brain has been conditioned by the 10 million years of the era of evolutionary adaptation to behave in certain ways based on chemical reactions, that are optimized for something quite removed from “just trading”

and filling out some checklists once, and doing an exercise now and then in the comfort of a seminar classroom is only tenuously connected to the act of trading everyday

those are preconditions, and potentially fast tracks to improved performance

but the truth comes from entering the ring everyday

and having the persistence to prepare properly every day

and then do it, rain or shine

the difference comes from the willingness to endure the pain, and to be able to keep going back

into it, that’s what separates Lance Armstrong for example

you think he doesnt feel the pain like other guys?

he does, he just is willing to endure it

the great ones hate the pain of practice, but they persist

our emotional brains do not operate as straight line functions

try this exercise  suggested by Robert:

If you really want to see how much stress you can handle, plan out a trade tonight and a position size to risk 10x the normal risk….$5000 lets say.

Now widen your stops and lower the size

Maybe the trade is 2000 shares( we can all buy 2000 right) with a 5 point stop. R=10k. See how it feels, see how you react that position. Now if you want to move out of your comfort zone, put on the trade.

Now sit with that 10K position for an hour or a day or a week.

this morning i observed KO breakthrough 50, and said that was massively important, psychologically.

in the meantime it has moved to 50.54

i think it has every potential for being better than SPY for the next 2 weeks because there is no resistance

it made a 6 month new hi; there is no resistance in sight

it stays on my watch list

i will buy it with tactical momentum each and everyday until otherwise noted

but acknowledging my lizard and mammal brain issues

relentless attention to the lizard and rat brain

listen to the guy in the ivory tower, but remember he isnt getting his ass kicked potentially on every trade

acknowledge he can see things from his height, but  remember that life is lived on the ground

Robert reminded us of “The man in the ring”  when he said:

Good thoughts KL…nothing take the place of the man of action. That’s been my experience in every part of life.

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

Robert also reminds us of the challenge to play to our potential when he said:

“I also tell anybody to play small as KL suggested. But there comes a moment where you have to see if its “possible” to play up to your potential. Play from tips, take on the big boys so you know what if feels like.

When you put on a big position for the first time wide stops, we have the time to comtemplate the responsibility of trading the counter part of the freedome of trading

Tips”= On a golf course, if you play every hole from the back of the championship tees its the hardest setup for that course. (Never done in tournaments even)

It take a mental toll on your game b/c the course, any course becomes much more intimidating and the designers true intentions become apparent.”

Now get out there and trade.

Lombardi said: everyone wants to win, but not everyone will do the things it takes to prepare to win.

Advertisements
  1. Terry Lesniak
    July 16, 2009 at 10:33 am

    When you write that book…let me know, I want to be the first in line for an autographed copy!
    Great stuff…Thanks!

    Regards, Terry

  2. August 2, 2009 at 5:31 am

    From the Ivory Tower,

    there is too much goof stuff in this post and just found the ezine place ,

    But here is a technique to “trade without stress” that makes it easier to get into the ring, very helpful to me!

    I acknowledge there is too much to learn without the asking the following question and that maybe it is fear based or evasive.
    Better to ask if I understood “zero state” through stress free practice and practical learning and these are tools for me to use.

    But.

    R eventually needs to get to some percentage of your capital to preserve your portfolio, to improve your account size and if it is not or can not ever be then is System B not applicable.

    I realize no one is disputing that.

    But how “big” can initial R be in System B and with a .10 stop in QlD or EEV for example or

    if R can never be 1% of trading capital with a .10 stop does it makes sense to trade smaller sizes

    I think its OK on one hand because it would allow you to learn a skill and 10R a month at $250/R is “enough” for plenty of rice and gravy for everyone but what if it is not enough to serve as a hedge for system A or to maintain purchasing power of the trading capital is the time better spent snorkeling.

    I have been finding these currency markets to be so valuable because of both the liquidity and lack of overnight risk but most importantly they trade in my daytime which helps a lot if I don’t want to be up at night and part of the day.

    Trading a full R in the currency market made the lizard commentary resonate with me, as well as the idea of trading small until you can understand zero state, and many techniques translate also.

    I need to trade an initial R of 15k to get to a one percent position size Ken but really all I want to do is maintain my purchasing power and learn this game so I can share it. I think that is what system A attempts to do.

    If you decide to post this its ok to leave that part out or edit it unless it is helpful to someone else. The U tube stuff is helping me understand what is going on in the Daily Report when I had trouble getting it with the other material

    I’m enthusiastic about it being OK to trade small and it seems so obvious to me but I think you get my point/question.

    I’ve always thought that R would have to be 1% to “play” but maybe it does not if what you want to do is maintain purchasing power?

  3. August 2, 2009 at 11:53 am

    Ken , all of that was a round about way of asking “If a trader could trade a full R (being 1% of trading capital) then they got to buy 150,000 shares to fire one blast of 1% using a .10 stop. I’m asking what is the opposite side of this arguments. How big should R be in System B assuming they got past the hypothalamus and into zero state, I haven’t. I’m wondering how you are figuring the R for system B and thinking that it isn’t about the size of the account but about feeding the dog or in my case eating rice and gravy. That R doesn’t have to be about preserving your purchasing power but could be about cash flow? I mean I shouldn’t even be asking this because I got too much to learn from trading small as you are encouraging and the reasons why are interesting. But what is the size of R from zero state in System B or how big can R be in QQQ for example or QLD. I figure if something trades a billion a day thats about 22 million a minute or 360k some odd a second on average at 7.5 hours. Maybe the answer is the same as with the exits that if that is the problem then your giving us a good problem to worry about and come back to me with your 30 non lizard trades and we can talk about it. Not sure if you should put these post through but I don’t care but was happy to see the invitation for questions and I got a feeling that your System B position sizing has nothing to do with one percent risk and something to do with learning what size gun one can handle comfortably when staring into the abyss

  4. August 2, 2009 at 7:38 pm

    John: always good to hear from you. You are catching my centgral point that the limiting factor is not always a % of portfolio to risk. With the very tight stops we are sometimes able to manage, lets say .1 in EEV or any of the large caps, you can find yourself trading several thousand shares pretty quickly.

    Example: $250 @ risk, with a .1 initial stop (“iStop”) gets you a position size of 2500 shares: at with KO at 50, you are at 125K in capital. Buying power is quickly eaten up. i cant get any larger than that realistically and still have cash available.

    250@risk/500k in the account is a very small % of portfolio at risk, and once you get above 2500 shares you are starting to run into some slippage issues and speed of execution issues if you are trading for narrow slices of the move. since the R multiple moves coming out of these positions is significant and the time spent with money at risk is generally small, i feel satisfied that it is ok to trade such a small fraction of the portfolio per trade.

    the technique should translate pretty well to the futures where leverage will help with purchasing power.

    if you cut the numbers by a actor of 10 u will realize just how low risk each trade can be and how you can think of the large pool of capital as a reliable money generating machine, with micro risk per individual trade

  5. August 3, 2009 at 10:24 pm

    thank you ,

    I’ve learned:

    that its not imperative to trade a 1% position size

    That a trade can be stress free simply by trading one share on up (this is good for me in breakouts where fear is stronger)

    That for reasons I (been to lazy to do the work, didn’t get it, my night time your daytime) that the U Tube videos help me to see stuff that I gave up trying to understand “Daily Stratagy and its relevance, Max Pain, Stealth)

    That above 2500 shares speed of execution and slippage can become an issue for a thin slice of the pie

    And also I found this subject addressed from a different perspective in the “Feeding the Dog” article

    Im thinking I need mow the grass or stand in to sell lottery tickets to express my gratitude for all that you doing here. In the meantime I got another credit card with a new date on it that i’m overdue to submit.

  6. ken
    August 3, 2009 at 10:45 pm

    John: am enjoying a Teach12 lecture as i write this, which makes me think of u everytime! glad u like the videos!
    cheers,
    ken

  7. August 4, 2009 at 11:40 pm

    For me it is a sublime place to hide and healthy distraction. Got the entire high school and college stuff ripped and put onto a 300 gig hard drive so its a high school/college education that fits in a pocket, if I could get anyone to listen/watch it or get a license to hand it out it might work, they kind of said no (teach12) but I wasn’t very clear about it and didn’t have a plan what to do with it but we’ll see. I don’t think the majority of the kids would take it on, on their own, or they are not begging me to borrow it to help with college/high school and the irony is that we get interested in that stuff at our age not at school age.

    I think I’ve been listening to some of the similar stuff that you have when I listen to Robert Sapolsky on Biology and the Brain and Paleolithic stuff, I liked Robert C. Solomon on Emotions and I like the Ancient History/Religion stuff, one called Big History was fun for me.

    I got this concept from the Big History that sticks with me all the time about how fixed “emergent qualities” have been emerging forever and if spirit were an emergent quality it would not be any more miraculous than is life or “the elements of the periodic table” or “life” and so on. That the universe expanding and contracting as it does as many times as there are pages in the Library of Congress for example would leave a thought residue with an electric charge that would coalesce and form spirit, like a 2nd order emergent quality and I guess the fun is some of these guys really get your imagination going.

    Anyway there is something for everyone and I’ve got plenty of them that I haven’t completed or got to but I wish more of my local friends listened to the stuff because it is fun and useful to talk about the courses as sometimes the imagination should be reigned in for a breath of fresh air.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: