I read Mathematics at Warwick University.
I started as a credit analyst at Kleinwort Benson (1985-1988). Throughout that time, I was often awestruck listening to the "war" stories of a good friend about interbank FX trading. He was then with Citibank and such a captivating story teller that it's a wonder I lasted 3 long years before abandoning the study of balance sheets, seduced by the sex appeal of trading.
I traded mostly interest rate instruments in UBS (1988-1997) and ABN AMRO Bank (1997-2006).
Ed Seykota : "I feel my success comes from my love of the markets. I am not a casual trader. It is my life. I have a passion for trading. It is not merely a hobby or even a career choice for me. There is no question that this is what I am supposed to do with my life." My sentiments exactly.
In Apr2006, I started T4L full time. At the time, I felt that with an 18 year head-start in interbank trading, I was well equipped to be a success in T4L. I could not have been more wrong. It is a mistake to think that being able to make money in interbank trading will translate into automatic success in T4L. Never has "a little knowledge can kill" been more true. By end 2006 I had lost 90% of my trading capital. I had 6 margin calls that year and each time I handed over a cheque to my broker I felt utterly humiliated. I was not trading back then; it was reckless gambling. As they say, I had "lost it".
Looking back now, I wish I had read Jeffrey Kennedy (of Elliot Wave International) : "the goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them – and achieve them – you will fend off the Hand." I only came across this a few years later by which time I had already lived through and recovered from the nightmare. I had unrealistic expectations starting out and took on undue risks as a result. Probably would have saved myself a lot agony and hard cash otherwise. Or perhaps not. It might be something I still had to go through myself to learn the lesson.
(Addendum 23Mar11) : From Gainful Employment to Complete Nightmare
In Aug05, I started dabbling in Nikkei futures as a prelude to actual T4L. Nikkei had just broken 12000 and was to embark on an uninterrupted bull run for the next 9 months to 17000. To win big, you had to be a 1-trick pony. Buy dips and hold. Any other strategy would have been sub-optimal. Take profits and you underperform. Cut loss on setbacks and find yourself chasing market higher later. I was thus pre-programmed to be a buyer only and thus, self destruct on the first change in market conditions. My successful pre-T4L foray also set the bar very high for T4L expectations.
As Fate would have it, I started T4L in Apr06, the very same month Nikkei peaked at 17563. In Jun06 it made a low of 14056 (-20%), by which time I had lost 50% of my money. For the rest of 2006, I proceeded to lose another 40%. Out of 17 markets traded, I had losses in 16. I did not have a single winning month for the whole of my T4LY1 (2006). Pre-T4L, I made money holding 3 to 5 contracts of Nikkei. On 08Jun06, when I cut my biggest position, it was to sell 39 contracts! And looking back at my blotter for the 1 month before that, it was mostly all buy orders. Go figure.
I recently came across “The Four Biggest Mistakes in Futures Trading” by Jay Kaeppel. These are 1.Lack of a Trading Plan. 2.Using Too Much Leverage. 3.Failure to Control Risk. 4.Lack of Discipline. Guilty on all 4 charges. Now that I am wiser and able to look back to the dog days with objectivity, I would say that averaging losers is the root of all trading evils. Once you start, everything bad follows. Greed, fear, hope, despair, doubt, worry, anger, 2nd guessing, impatience, sleepless nights, gastric pains, etc. Don’t do it. Avoid it and you have a fighting chance.
I remember the great relief I felt on 08Jun06 after I took my biggest loss ever. That very afternoon, I went to 双林寺 (Buddhist temple) and prayed for wisdom in trading. Looking back now, I am glad I didn’t go pray for help in making my losses go away while I was still holding the bad position. That would have been looking for the easy way out.
(Addendum 25Mar11) : How did I screw up so badly?
90% drawdown in my first 9 months was certainly not a readily expected outcome, especially given my prior experience doing exactly the same thing in banks. So wtf happened ?
- As above, conditioned by 9 months of 1-way Nikkei prior to T4L. No excuse but certainly a factor. Even before I started, I learnt that taking losses (on long Nikkei) was wrong (wrong for sure – so double negative = taking loss is right). My pre-T4L unbroken winning streak was the worst thing that could have happened to me.
- Traded own money for years, restricted to buying stocks and holding. Whenever setbacks occur, hold and eventually stock will make good. I had never ever taken a loss on own position (ie own money). (I was not involved in the internet bubble at all, only ever invested in blue chips). You can get away with it on part time, unleveraged, spare cash investing. But not in the leveraged futures market.
When you embark on a new challenge, people tell you they are sure that you are going to be a smashing success. I believed in all the hype. So, I started with the belief that there could only be one possible outcome – that I would make a lot of money. Dream on, big boy. It never occurred to me that I could blow myself up, in record time too. [Enthusiasm kills. T4L is not a game to high 5s with your buddies on]. I let myself be lulled into a false sense of invincibility right at the start.- I had no game plan. Only knew vaguely that I was going to use charts to trade any and all instruments, perhaps focusing on Nikkei. No risk control rules, vague stop loss limits, and very ambitious targets based on scaled up projections of what I had achieved on my Nikkei 5 contracts prior toT4L.
- Cutting a position and taking a loss with own money (painful and difficult to execute) is quite different to doing same with other people’s money (easy). It takes a bit of getting used to, not thinking of what you could have done with all that (own) money that you just pissed away on a bad trade.
- And so I plunged in bursting with enthusiasm, sure I was going to be a BSD. My very first trade was to buy 11 lots of Jun06 Nikkei at 17030. Almost from the get go, I was under water. Subsequently, I went on to build that up to 40+ contracts (extreme greed, looking for easy way back to par, adding to losers) at its peak. I was a small time Charlie on days when it rallied a little and taking quick profits (fear of giving back), but a useless paralytic when it came to cutting losses when it sold off large (hope it comes back to par quickly). Of course, as indicated above, it all came to despair in the end, with disastrous results. When I finally got out 08Jun06 at 14525, it was because I could no longer take the pain, not because it was the right thing to do by the charts. That moment had long passed.
- Of course, lack of discipline and over-leverage = major factors in my demise. Every step of my painful descent into hell, I kept feeling that the loss I was staring at was too large to take and I would cut loss if it came back some. Of course, it never comes back whenever you find yourself in such a desperate state. Better to just grit your teeth and cut off the cancer.
- Subsequent to 08Jun06, I soldiered on, a bit smarter but still a trading disaster. Losses were no longer of the instant bomb variety, but of the slow attrition kind. See from the above Nikkei chart that it went back above 17000. So 17k to 14k I lost 50%. And 14k back to 17k I lost another 40%. A 90% loss on a round trip! Very humbling indeed.
- After Jun06 was when I started experimenting with different instruments, trading methodology, time frames, etc. If I use Jul06 as the start of my first year as per Jeffrey Kennedy, I still would have been down in year 1 although much less spectacularly. But these later losses were tuition fees and discovery charges which served me in good stead for later on. Not the unnecessary stupid losses due to ill discipline.
- So didn't I realize what I was doing was wrong at the time? Of course I did. But I lost control and I lost discipline. And I firmly believed (mistakenly) that I was going to be a winner in the game. And learning to take a loss with own capital was a new skill that I had not learnt yet. Winning is not an entitlement; at the very minimum, it requires a lot of hard work. By Jun06, after blowing up spectacularly, "illusions of that grand first prize, are slowly wearing thin." Only then did I start doing the hard work.
- I only started making money more consistently from Jun/Jul07 onwards.
(Addendum 27Mar11) : Road to Recovery
With my 50% left after blowing up in Nikkei Mar-Jun06, I started again from scratch. In the early months, I could not get the 50% I had lost off my mind, and thus unable to get rid of the anxiety of wanting to plug the hole quickly. Mentally I was still not right. I honestly believe now that had I been less anxious then, the additional 40% could really have been reduced to 20% or less.
In my year of experimentation after the temple day (866), I came to a few strong conclusions regarding trading and adapted accordingly :=
- As already mentioned above, trying to trade patterns off short term charts eg hourly is absurd. The regularity with which unexpected (or even expected) news completely changes the picture turns the short term strategy into a coin toss. Imagine looking at a possible SHS top formation ahead of a major data release. It’s 50-50 whether the pattern works and price reverses, or it fails and you get uptrend continuation. But once you get to higher time frames eg weekly, the impact of any particular event on the chart is diluted by other equally random events. Hence the net resulting trends are more reliable and real.
- Using longer time frames, risk parameters are clearly much larger (eg stop loss per contract). So, it is absolutely necessary to reduce trade size. But, in trading much smaller quantities, how is one to make enough for a living? This is where adequate capitalization is absolutely essential. If you need $50k a year to live on, it is foolhardy to think that you can do T4L with capital of only $25k. The more capital you have relative to your cost of living, the easier T4L is. If you have insufficient capital relative to required earnings, better put off T4L.
- Diversification is also vital when trading in small sizes. There is no guarantee that the market you are trading will trend to give you a decent absolute return on your small position. Thus you need to spread your bets into many markets.
- Thus I did a lot of work on optimal trade sizing (Balsara, Vince, Le Beau & Lucas, etc) and also a lot of experimentation in real time real money. The end distillate was a few simple rules based on EAR (or IMR) as a percentage of Capital which I follow to this day, with refinements as I gathered experience.
- Exact methodology falls way behind trade sizing for achieving good results. As long as you use something that roughly works (ie positive expectations in back-testing), you're OK.
- (Long before T4L, I had already come to the conclusion that having to stare at the screen waiting for indicators to turn, cut, whatever was not for me. I did not want to be involved in range trading markets. In trending markets, technical indicators are unnecessary).
By the time subprime came around, (start = HSBC US subprime losses in Feb07), I was long over the Nikkei fiasco and enjoying T4L even though results were not yet on the up. But I could feel it in my bones then that I was making progress.
Jul07 was when I started shorting USD/JPY and a few months later in Sep07, buying Gold. These were flight to quality trades that worked well in 2007 (and into 2008). In 2008, the crisis got a lot worse and flight to USD resulted in a big win for me in short EUR/USD. These are all chart trades on long time frames. As mentioned earlier, Mar08 was when I recovered all my prior losses. I was overall nicely ahead by end 2008, and done on small fixed sized positions without too much pyramiding ie low risk relative to capital.
So, my earlier T4L journey in summary :=
- Apr06-Jun06 : Blow up. = -50%
- Jul06-Jun07 : Study. Experimentation. Risk Control. Learning to take losses. = -40%
- Jul07-Mar08 : Trending markets. Back to 100% = Par.
- Apr08-Dec08 : More trending. Solid returns.
Readers of my old Proprietary Trader blog will remember that I said one should set aside 2 years' worth of living expenses quite separate from trading capital. This is the reason why.
to be continued ...
