Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
How Do You Stack up Against Other Traders? (Part 5)
07/31/2009 12:01 am EST
My next clue came when we talked about where he wanted to take his trading: He was a professional and had no interest in changing his profession. He wanted to trade alongside what he did all day and wanted to start trading cash currencies on 240-minute charts so it wouldn't interrupt his daytime routine.
I had a hunch that finding the right time frame might be a very important component for this trader's success, so I gave him this exercise: I made him take screenshots of his computer every time he walked into his office at work and every time he sat down at his computer at home.
When we met the following week, we analyzed the results and found that on average, he walked into his office and looked at his computer sometime between 30 and 45 minutes.
At the end of this mentoring session, I told him he should trade based on 30 minute charts in the EUR/USD, CAD/USD, and AUD/USD pairs, and look at gold futures charts that were based on bars that contained 1350 contracts per bar. If he wanted to continue to trade the e-mini S&Ps, he should experiment with trading either 39 minute, day-only bars that started at 8:30 am CST and ended at 3:00 pm CST (to mirror the cash stock market hours) or try using a chart based on 10,000 contracts traded per bar.
While he was trying out the various markets I gave him to trade for the following two weeks, I could literally see the improvement in his trading on a trade-by-trade basis. The moment he reduced the size of his stops, everything changed for him, and by the end of the two weeks, he had switched from volume-based charts in the e-mini S&Ps to tick-based charts and was having a nice profitable run. As I mentioned earlier, he had a profitable month. The results were in so many different instruments and so many different timeframes that the statistics are made up of apples and oranges, so I won't bother showing them here. Instead let's look at his next month of trading.
Looking at the statistics from his second month in one-on-one mentoring, it's hard to find much to fault. The risk/reward ratio is a very nice 2.21:1, his largest winning trade was more than three times the amount of his largest losing trade, and most important to me (and he would realize later, to him) was the great reduction in his average losing trade and largest losing trade. He had taken control of his losses, and that meant that given his good risk/reward ratio, he had lots of opportunities to “roll forward” his losses.
By the beginning of the next month, he was trading e-mini S&P futures exclusively. He found a tick-based chart setting that “made pretty pictures” for him and he was really in tune with this market. And looking at the statistics from both the third and fourth month of mentoring, you can see the statistics speak to his ability to trade using the style and methodology we developed based on ideas like keeping the losses small, keeping the risk/reward ratio high, and trading what you see!
Charlie graduated last week. I thought I might be able to help him become a consistently profitable trader, but never in my wildest dreams did I think he would blossom into the extremely profitable and talented trader that he has become. I named him to my group of mentors at MarketGeometry.com because he has so much to offer to those who are still trying to become consistently profitable.
I am currently working with Charlie on position sizing. He has already successfully increased his trading unit size once, and by all indications, when we meet again at the end of July, he will increase his trading unit size again. Trade size, especially increasing and decreasing trade size, is an extremely underutilized technique. It doesn't have to be complicated and it can grow your account incredibly fast without adding too much risk if you do it right, but that is another article, and perhaps one I'll write using Charlie as an example when I return from The Forex & Options Expo, which is being held in Las Vegas next week!
There is no greater feeling for a teacher than to have your students succeed. All three of these students worked hard and responded to the methods I teach all my students, whether at one of my free webinars, one of my seminars, or in one of the mentoring programs. Once they begin showing consistently profitable results, we can work together to find each of them their own individual style. The journey always starts with controlling risk, but it quickly becomes fun and profitable after that!
I wish you all good trading! I hope to meet some of you next week at The Forex & Options Expo in Las Vegas. If you like my articles, please stop by and introduce yourself and buy me an iced green tea. If you don't like them, the tea is on me!
|Read Part 1 | Read Part 2 | Read Part 3 | Read Part 4|
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