This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com
I finished the week out +2.69R, though I’m still down -10.15R for the month, up from a max drawdown of -12.85R. Turned a corner, anyway! Charts of my trades today are farther down the page.
I tried a system inspired by 00NR7 for a few days, but I don’t think it fits me. It’s a terrific system, but just not for me. I won’t stick to it, since I want action more than the system dictates. That’s my personality, and I hate it! It’s so irrational, and a slow, methodical, steady method seems to make so much more rational sense–That’s how I think, and I wish that’s how I felt! But on days where there’s no setups, I go batty. So I want a system where there are trades every day, if possible.
I used to try some of Muddy’s trades a while back, before I was a prop trader. The thing is, I would pick the one that turned to stop me out, and I’d be done for the day. Now, I can shoot at as many of these as I want to. They are often very small cap, low float, sometimes OTC-BB stocks. It’s pure momentum–see it popping and buy it. Why? Who cares! That’s the mindset. Muddy has a chatroom where people are calling out stuff that’s moving. If Sloth even read a post from this chatroom his head would explode. I also watch the “Market Movers” list from Scottrader. Some of these can run 20% or more in a single trade. You have to be quick and have a plan, kind of like StreetSmack’s plays, only instead of watching a move, waiting to fade it, you’re trying to ride it while it’s still in progress. I guess the holy grail would be to ride it up and short it down, but I’ll leave that for another time. :)
You might think “why do you want to trade this way?” Well, it turns out that there is a similarity between this method and a method like trading gaps ala Trader-X:
They both have auto-generating watchlists–either tickers from a gap scanner or stocks screaming to new highs. They both say “HERE I AM, TRADE ME!” No fumbling through the markets trying to find a setup. There is even less of that with Muddy’s method, since when a setup presents itself, it is time for action! With Trader-X, you have to continually flip through your gappers, looking for the setup. They both are trying to take advantage of unusually high volume and interest in stocks. With X, you get in on a pause, with Muddy you dive in as close as you can to the beginning. When none of the gappers are moving, I float from chart to chart, randomly trying to fit setups to stocks, and lose money. I like narcissistic trades that get in your face. If I had Trade Ideas, I’d like to perfect StreetSmack’s method, since that’s another type like this. Anyway, I digress.
Here’s the charts from my trades today. My technique was a bit rusty, but I still came out ahead today. I need to fine tune better entry and stop strategies, but I’m happy with how I did today with my current experience level. On these charts, Orange is my entry, Red a stop, Light Blue a partial, and Dark Blue my final exit (if not stopped out):
I missed being on Wallstreak, though I did pop in a time or two. :(
Maybe you can explain this to me – how does the R’s translate into money? Tell me if I have this wrong or not. If a buy something Biotech stock at $15 and my risk is 20 cents – it pops up a $1.20 and I have made +6R’s – correct? Then I short DE with a risk of 70 cents and get stopped -1R and then I go long RIG with a risk of 60 cents and get stopped out for -1R – still correct? So I am +4R but I am losing money because of the R’s being different sizes. Can this happen? or am I missing something? I know many traders that talk in R’s but some widely different R values. Thanks and good luck – Denarii
Most of us adjust share size so that the ‘R’ in $ is approximately the same for every trade. So that biotech trade would have 3 times as many shares as that RIG trade, for instance. So, with some error and modulo commissions, the ‘R’s do actually make a decent proxy for cash. But, that’s really not what they’re for. You grade yourself in terms of risk because then you have some kind of measure of the quality of the trades. I mean, you could make the exact some trades with double the position size and make twice the money, but that doesn’t mean you are twice as good a trader. In R terms, traders that take the same trades make the same grades, regardless of their size. So, it’s like a size-normalized performance measure. Make sense?
Hey, Denarii! What you described is exactly what would happen if you used a fixed position size. If you do that, then your R’s will not match your $’s. I always try to size my positions such that an R is always a certain percentage of my equity in dollar terms. So if I risk say $100 per trade (say that’s 1% of a $10,000 account), then I would trade 500 shares on your first trade, 143 shares on the second, and 166 shares on the third. That way, even though I lost more cents on the second and third trades, the positions would have been normalized to all lose the same if I took -1R losses on each. Make sense?
So without proper position sizing, R’s are worse than pointless–they’re misleading.
I disagree. Even with fixed position size, R’s are still a useful normalized performance measure. They just become useless as a proxy for cash.
Thanks guys – my style of trading – I will put on more or less shares based on how good the setup is and if the trade is going against the general market or not and how big the spread is and how liquid the stock is so on any given trade – I might only risk $100 on one and then the next trade I risk $1000
keep up the solid trading prospectus
@Richard: Yes, you do have a point about how good a trade is technically. However, you could be amazing in the R world and broke in the $ world if they diverge too much. If you are the “best” trader in the universe in R’s but don’t make any $’s, then I’d say you’re not really a good trader in the whole sense. Most people give R’s as trading results, rather than s trade grades, though.
@Denarii: If you are a good discretionary trader, that method of position sizing will serve you very well, better than a blanket % equity system like mine.
Just because many people misuse risk-based reporting doesn’t mean we have to, as well ;-) I tell people, if you want to talk about the money you made, then talk about the money. If you don’t like to give actual $$ figures, give % returns. If you care about the quality of the trades, talk in R terms. Or give all three. Whatever, but try to use them correctly.
I used to correlate money and R’s in my head, but I eventually realized how wrong that was. You clearly know this, too, since you say the trader with the best R-results can still be broke. So, it doesn’t follow that you should say that R’s are pointless and misleading unless position sizing makes them roughly correlate to $$. They’ve been a great help to me, and my r-curve and equity-curve haven’t agreed at all since I started trading 5 types of setups with different risk amounts.
@Richard: I just got what you are saying. When I say R’s are misleading, I mean in a bulk trading results reporting sense only. R’s without $’s are worse than pointless in results reporting, IMO.
As you say, R’s are still a good metric for individual trade quality regardless of the $ involved. My only caveat is that the risk you defined should be intelligent and consistent. You can game the “system” with an artificially tight or wide stop. Why would you? Who knows, just sayin’…
If your stop is actually where you say it is, then you aren’t gaming the system… if you’re lying about it then you might as well lie about the dollars of profit as well!
Why is there no value in the total R’s, just because they don’t line up with the dollars made? Surely your opinion is based on something? I’ll give you just one example of why it’s still worth something. Trader Bobby Joe isn’t making any money. What’s his problem (besides the corny name)? Should he ditch his system? Fine-tune his indicators? Use a trailing stop? It’s a mystery. Luckily, Bobby Joe has been tracking his R results, and knows what they are for. Turns out he has a positive expectancy in terms of R’s. So, he knows his entries, stops and exits aren’t the biggest problem. The trades themselves are good enough to make him some money. It must be his position sizing (or possibly commissions drag) that’s hurting him most. Focusing on that will do more good right now than working on his actual trades.
(and, I have to ask, if bulk Rs are worse than pointless, why are you graphing yours against trader mike’s???)
I see your points, Richard. I need to clarify–I think that using R’s as a proxy for cash is bad if your R-$ conversion ratio is not consistent. I also think that you could have a good system, and take good trades, but have a crappy (and somewhat non-representative) Risk adjusted performance if you use stops that are way too wide. I guess your R results would help diagnose problems like that as you said. I find value in R’s, and I use them.
I don’t think bulk R’s are useless as a proxy for cash, if they are consistently tied to your equity. Mine are. I assume Trader Mike’s are, since he said so. That’s why I plotted mine against Trader Mike’s. However, if I risk $100 on one trade and $1000 on another, the R’s and $’s will be way off. Then, R’s are not a good proxy for cash IMO. I like R’s as a proxy for cash better than % increase, if the R-$ method is consistent. Anybody can make 5% on their money, but if they risked 50% to get it that’s dumb. R’s make that transparent.
I think we might be saying some of the same things, but keep missing each other on this one.
I guess the problem I have, is why do you want R’s to be a proxy for cash so much? It only kida-sorta works that way under very specific conditions anyway… In most cases, you might as well compare your R-graph to a bag of cheetos. Like you said, worse than pointless. Haven’t you changed your % risk at least twice recently? That should distort your own R-to-$ relationship quite a bit, and I bet trader mike made the same kind of adjustments… we all do.
Comparing R-graphs as a measure of trade quality, or just looking at your R-graph alone as a measure of trade quality, is very useful. You’ve just got to use it for what it’s for. Like you said, if someone’s stops are too wide, their expectancy will suffer, and they will be able to spot and correct the problem. That’s a good example.
So, when you say you compare your R-graph to trader mike because you assume his graph correlates to dollars makes me worry that you have missed the point. Compare the graphs to see about trade quality, which always works no matter what kind of position sizing they have used. Trying to use it as a backdoor to compare $$ made turns it into a kind of pissing contest or something. It’s not a race. It’s not a race. It’s not a race.
(it’s not a race)
I compared Trader Mike’s graph to mine because I was floored that I was doing so well on an “R” basis. Since I’m back underwater now,, which is closer to what I expected, the anomaly is resolved.
You’re right, it’s a bad proxy for cash. I should only use it for what it’s for.
It may not be a race, but when you’re going backwards like me it’s not even a journey…
Since I chide the MtM gangmembers about “R” routinely, I thought I’d weigh in.
Richard said, “I mean, you could make the exact some trades with double the position size and make twice the money, but that doesn’t mean you are twice as good a trader. In R terms, traders that take the same trades make the same grades, regardless of their size. So, it’s like a size-normalized performance measure.”
Listen you freaks, dollars and cents are an excellent metric. IT IS A RACE because trading is a zero-sum game. If I make a trade with 400 shares and the guy next to me makes the same trade with 4000 shares, he absolutely made a better trade. Why? Because he made more money. That is the only metric that counts when trading. It is much more difficult to trade with greater share size… that’s why it’s a better trade. It’s more difficult emotionally but also practically…
Okay, now you guys can jump me for bashing the “R.” Oh, and I called you “freaks” too….
-DT
I will go fully leveraged in deep OTM calls, then, so I have a chance at being the best trader in our community. Wish me luck.
kudos on managing to combine the “risk-multiple results” argument with the “stock market is zero sum” argument, though… two of the biggest flame-bait topics in stock trader blogging, now in one simple package.
Being a great trader isn’t just about one trade and I’m not arguing that. I’m just saying that since the market began, people have measured traders and their performance by money earned. The more you earn, the better you are. It’s a crude measurement, sure, but it’s the market.
Meanwhile, is there a debate about the market not being a zero-sum place? It makes the point about why share size is important to consider when valuing how “good” a trade was. There are a finite number of shares available at a given price and time.
-DT
I don’t feel compelled to follow flawed thinking just because it’s been around since the market began. :-) This part of the argument is silly, though, since there’s no one measure of trading greatness. Profit is one aspect, as is expectancy, and risk of ruin, and the size of their… track record.
If you search around, you will find the zero sum debate on several blogs, including this one I think. There are always people on both sides of that one.
I prefer actual P&L instead of “R” calculations but the way I have been trading lately I’m not making either
I will start posting my trading results in “Zero-Sum Freak-Race Risk Multiples” and then everybody will be happy.
Prospectus,
LOL, That’s good! I think the question we need to answer is, “How would Mr. Rodgers post his trading results?” He was a straight shooter… I’m guessing dollars and cents.
-DT
DinosaurTrader says: “If I make a trade with 400 shares and the guy next to me makes the same trade with 4000 shares, he absolutely made a better trade. Why? Because he made more money. That is the only metric that counts when trading. It is much more difficult to trade with greater share size… that’s why it’s a better trade. It’s more difficult emotionally but also practically…”
That makes more sense with two traders of the same account size, but what if the guy next to him manages a hedge fund with $200 million – that 4000 share trade is nothing. Your 400 share trade would be more difficult emotionally than the 4000 (unless you have a $200 million account). Or if you were trading MSFT – 4000 shares is nothing – no practical difference really in the trade. So does the more $ profit still signify a 10x better trade for the 4000-share trader? I don’t think so.
R just simply shows you how much you make/lose compared to how much you risk. More money is not always better – look at Brian Hunter. R is a nice measurement because it is important to consider what was risked in comparison to the profit.
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