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A Common Requirement A traders coach is frequently asked for help in identifying potential trading systems with specific characteristics. This case study relates to one such type of request and identifies some of the lessons perhaps relevant for most traders whatever their trading style. When some traders reach, what is for them, a good level of profitability, they often seem to look for methods of smoothing out their profits month to month, quarter to quarter. A common request of such traders goes something like "Please help me to find a second trading system or method to make profits when my existing trading system loses, so I can take a regular withdrawal out of my account." It seems what they are after is a second, successful trading approach, with returns having a negative correlation with the profit profile of their existing system. The Two Traders Over the last 15 months several such requests were fielded and included at differing times, two particular traders - we will call them Jan and Antonio. Both are successful, each making at least 30% p.a. compound or more on their account value for several years. Both were dissatisfied with the level of drawdown they suffered in the process of a winning year. The two traders, Jan and Antonio, have significantly differing preferred trading styles. Jan Jan trades one market, the S&P 500, using a volatility breakout approach. As might be expected for a successful trader, Jan has well-defined, objective criteria and follows her system with discipline. Her system and discipline provides large profits on a few trades, and relatively small losses on most trades. Jan uses a time-frame that gives about 4 or 5 trades a month. It is rare for Jan to have a losing month, but monthly results have a large standard deviation of returns. A particularly bad series of losses (which Jan defines as more than 9 losing trades in a row) can take her months to recover from. She wanted to trade an additional (overall profitable) trading system with a tendency to win when her current system lost. She was happy to lose some of her existing profits in profitable months as a price of having lower draw-downs. Her trading style involves making single trades and closing out these single trades at a profit or loss before undertaking another trade. Antonio Antonio trades two main markets including the S& P 500. His trading approach is a market making style - he repeatedly sells into rises and repeatedly buys into falls. His concept is to combine two price-frames (as opposed to time-frames) - in practice this turns out to be a compound of the same simple trading system. Antonio describes himself as being by character a trader of a trading method rather than a trading system. By this Antonio means he allows himself some discretion in initiating and closing trades. In practice this turns out to mean Antonio has clearly documented criteria within which his discretion can operate. Antonio accepts that the market making style requires trading at a trade size such that he has the capacity to handle relatively large running losses for extended periods. While he is comfortable with this, he tried reducing his normal trade size so he could, in parallel, trade a third (very different) market using the same basic approach. He anticipated this would reduce his draw-downs as the two markets would tend to make big moves at different times. He reports overall profits on all markets, but not as much evening out of draw-downs as he anticipated and planned for. Like Jan, Antonio wanted help in finding another successful trading method to make profits when his system made losses and vice-versa. His trading style involves having multiple open trades taken one unit at a time. Trades when closed are closed one unit at a time on a first in, first out basis. Permission Both Jan and Antonio had previously given authority for a structured outline of their trading system/methodology to be published to other clients. This uses the same list of description and criteria used in the TradersCALM Traders Procedure Manual for documenting trading systems and methodologies and had been verified as being an accurate and reasonably comprehensive description of her/his trading method by each trader. This had the advantage that both Jan and Antonio is familiar with this manner of describing trading systems/methods. Response to Requests The two traders requests for a second trading systems were separated in time by over three months. So each request had been treated individually, according to their needs and apparent capabilities at the time. Of the various trading systems available and appropriate, it transpired that each had been provided with a description of the others trading system. So both had been given a second trading system that: * had negative correlation of returns with their existing method as requested, * used trading concepts alien to their normal mode of thinking. Reaction, Surprise, Response In their different ways, both Jan and Antonio had 'adverse reactions' to the system descriptions - a little like, perhaps, the way our bodies attempt to reject a foreign body such as in a heart transplant operation. Both said, using different words, the equivalent of "Do not waste my time, give me another system." Following reinforcement of the explanation of the history of success documented in the system description (percent per annum return, draw-down pattern etcetera), both Jan and Antonio were persuaded to try paper trading the new (to them) system for a period of six weeks. Of course they were unaware of the other traders experience until recently; and are still unaware of the actual identify of the other trader - their exchange of experiences has been via TradersCALM - and both want it kept that way. Both were surprised that each others trading system could make money! And, while not still not fully convinced, agreed to continue paper trading for another two months. They are both now in response mode, actually trading the new system alongside their favourite trading system, in order to smooth out their profits - and both are partially achieving their objectives. For one, it is early days in terms of live trading experience. What is noticeable is the change in openness and confidence being expressed by both Jan and Anotonio. They both say they are happier in their trading. Both are asking more searching questions. They are at differing stages in applying position sizing techniques to their new found discovery - but that is a different story. Any second part of the story will have to await their readiness and their approval for publication. Lessons Learnt There as many ways of trading as there are people. And from other experience we discover that some approaches have more inherent difficulties and some are more in tune with the way markets and people tend to operate. Yes, some approaches sit more happily than others based on a match with trader personality. But a key lesson is if you are disciplined, you can successfully trade most systems, methods or approaches successfully - if you get past denial and into initial experience mode. Full integration into your very being as trader takes more experience - a trading system takes a while to become yours. What seems to happen to many who trade one system is that the trading system starts to own them rather than the trader owning the system. Experience is still a powerful route to behaviour change. There is no limit to the opportunities to learn provided by getting past denial and inertia and gaining experience. TradersCALM home page |