PMKing Trading LLC
Trading Blog September 2006
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 A (Usually at Least Weekly) Trading Blog - September 2006
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blog, noun, an online journal, diary, or collection of thoughts; shortened form of web log.

 

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Paul King, September 29th 2006
 
There has always been a lot of heated debate about whether financial instrument prices are random or not.  I haven't really gotten into the details because I decided early on with my trading that I would design trading systems that would still work even if prices were random.  I'm not talking about truly random where each price bears no discernible relationship to the previous one, I'm talking about a pseudo-random price movement where the direction of the next tick (and the distance from the previous tick) is random (within certain parameters).
 
It would be pretty easy to define a market with rules for pseudo-random changes in volatility, direction, and price for each instrument along with some underlying market influence based on volatility and trend that changed at random intervals.  If you add in random reactions to random news events the whole thing would be close to indiscernible from a "real" market.  How do you know you're in the Matrix?  How can you prove this isn't the way markets work?
 
Anyway, the main implications of this (for me anyway) would be that entry signal is not predictive of anything since future price movements would be mostly random and you can't predict random.  This means that your entry should simply set trade frequency and you should design your exit strategy to determine the expectancy of your trading.  This, coupled with your position sizing, determines whether your trading results meet your objectives for risk and reward.
 
It's pretty simple when you state it like that.  What's the point of over-complicating the whole thing in the hope that prices aren't random by trying to find recurring patterns that may just be random anyway?  It took me quite a while to get to this stage of thinking, but now I'm there it gives me much more confidence in my trading methods because they're "random-proof".  I hope yours are too.
 
 

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Paul King, September 28th 2006
 
Have you ever wished there was a trading journal/calendar/diary thing specially for traders?  Do you write your thoughts about trading, trades, orders, or mistakes on the back of used envelopes?  Do you have any idea why I'm asking you these questions?
 
I found that regular desk calendars either had too little room for writing stuff, skimped on the weekend days, or took up too much room on my desk so I just designed and published my own version specially for trading.  I liked it so much I wanted to make it available to other traders and the details are here.
 
I hope you find it as useful as I do, and don't mind waiting 3 months to be able to use it.
 

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Paul King, September 20th 2006
 
OK, so it's about personal finance rather than directly about trading (I am an independent financial advisor too!), but I recently refinanced the mortgage on our house and I used Lending Tree.  My situation is a little complicated in that I am a temporary resident alien (in residency legal speak), and I don't have a "proper job" (i.e. regular pay check) since I am "self employed".
 
Local banks have responded to my request for a mortgage with answers like:
 
"Yeah, right, you must be joking"
"Under no circumstances will we lend you any money"
"We don't care if you have 50% equity-to-loan value"
"Come back when you don't need a mortgage any more"
 
I had been in a position where the bank that did actually want to deal with me would only give me a 1 year "note" that I had to refinance every year (with all the normal closing costs) and the rate kept going up.
 
With that situation I didn't hold out much hope for Lending Tree, but I figured that PMKing Trading had been in business for 4 years now so that ought to count for something.  I was pleasantly surprised that the whole process was simple and easy and the end result was a 30 year fixed-rate mortgage with no points and no escrow account - exactly what I wanted.
 
The basic process looked like this:
  1. Apply Online at Lending Tree
  2. A credit check  is performed
  3. You get offers from up to 4 lending institutions
  4. You choose 1 and lock in the rate
  5. An appraisal and title search is done on your property
  6. The loan is finalized
  7. You close using a closing agent that comes to your home or office
  8. The loan is funded and your existing mortgage (if this is a refinance) is paid

The whole thing was done in less than a month and was mostly electronic (apart from the huge wad of paperwork to be signed at the closing).  Maybe one day that will be electronic too but don't hold your breath - the closing agent said in the years that he'd been doing this the thickness of the paperwork has increased not decreased.

Anyway, if you need to get a loan, or refinance an existing one, in my experience Lending Tree is quick, easy, and efficient.  Why do all the work yourself when they can find you the loan you want easily?

Visit Lending Tree.

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Paul King, September 18th 2006
 
One area of contingency planning for your trading business that often gets overlooked is what you will do if you actually succeed (I know it's hard to believe, but you're not doing this to fail are you?).  There are 2 main parts to this and they are:
  1. What is your definition of success?
  2. How will you change your life if you meet your definition of success?

Contingency planning is normally all about failure in that it answers questions like:

  • What is the maximum drawdown I can tolerate?
  • What if my trading computer blows up
  • What if my systems don't get any trades to put on?
  • What if I don't make any money trading for 12 months?
  • How will I know if my system stops working?

It is easy to neglect all the positive contingency planning that answers the much more interesting and pleasurable "problems" to deal with like:

  • How much of my trading profits will I donate to which charities?
  • What will I invest my spare cash in?
  • When will I withdraw profits from my trading account?
  • How much will I give to may family?
  • What additional expenses will I be able to afford?
  • How will I make sure my success has a positive impact on myself and my family?

When you formulate your trading contingency plan, don't just focus on the negative - be sure to include planning for being successful too.  If you don't, you may cause a psychological "fear of success" that can lead to sabotaging your own trading results so you never have to worry about the unknown impact of that success.  If you've already planned to succeed and know what "good looks like" then there will be no fear of the unknown, and you can simply concentrate on reaching your goals rather than worrying about the impact of achieving them.

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Coming Soon: The Complete Guide

Paul King, September 15th 2006 

I'm just completing the finishing touches on my first (non electronic) book:

"The Complete Guide to Building a Successful Trading Business".

I hope to have it published (in hardcover) by the end of the year.

This book contains most of the important things I've learned in creating PMKing Trading and teaching other traders to develop thier own trading systems.  The book is split into 3 main parts:

  1. Business Management
  2. Trading System Management
  3. Trader Management

Each of these areas is essential for a trading business to run efficiently and I explain important aspects of each in enough detail so you know what is required.  In all cases I have erred on the side of completeness and all ideas and concepts are presented in my normal understandable but concise (almost minimalist) style (i.e. no waffle, padding, or fluff). 

I really hope that this book will become the main instruction manual for my trading clients and eventually appear on every trader's "Must Read" list.

For more details about the book click here.

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In Search of the Perfect Trade

Paul King, September 7th 2006 

Sometimes it's easy to confuse a bad trade with a losing trade.  It's easy to feel good when a trade makes money and bad when it doesn't.  In fact, it's much more useful to classify trades based on how closely they matched your trading rules (as defined) rather than whether they are winners or losers.

For me, a good trade is one where the implementation of it is a close to perfect as it can be.  I entered on a valid setup and entry, when I should have, I position-sized correctly based on my rules, I added to the trade if and when I should have, and exited the trade (winning or losing) when my system said to.  The R-multiple the trade generated was similar to the theoretical R-multiple based on "perfect" implementation.

On the other hand a "bad" trade would be one where I deviated from a perfect implementation for some reason.  The reasons could be psychological (e.g. I did not stick to my rules but chose to ignore them) or environmental (e.g. my computer, internet connection, broker, exchange etc) had a problem that meant I couldn't manage the trade like my rules dictated.  Or any other of the numerous reasons a deviation occurs:

  • Volatility suddenly increased and the price went straight through my stop
  • I typed in the wrong symbol, stop price, size etc
  • Someone visited my office just as I was supposed to be entering a position so I delayed the entry

Whatever the reason for the deviation, tracking the difference in actual R multiples versus "perfect" ones is a useful metric about your trade implementation quality.  I call this deviation "D" for short and closely watch the trend in it to ensure my trading is improving continually.  Note that this has nothing to do with whether I'm making money or not.  A 1R winner that should have been a 2R winner is -1D, whereas a 0.5R loser that should have been a 1R loser is +0.5D.  Also, it may be some time after the trade has been closed before you can determine the D-value (especially if you exit early by mistake - you have to wait until the "real" exit point is hit before you know the theoretical R-multiple of the "perfect" trade, and therefore the D-value).

Generally the D-value is negative (i.e. your errors have a detrimental effect on your performance).  If you consistently generate positive-D trades then you are actually performing "better" than your system rules and is a strong indication that you are best suited to being a discretionary trader.  For most people D will be negative (i.e. deviations from your rules will generally cost you money).  Tracking your D-value (especially by category) can be a useful indicator of how your trading is improving (or not), and which areas of your trading business need most attention to prevent implementation errors.

For example if 50% of your D-value over the last year is due to your PC crashing then it may be a good idea to have a backup trading environment you can immediately switch to if your main trading computer has a problem.

Lastly it's important to note that if you don't have a complete trading system or method that has rules you should follow for all eventualities then it is impossible to work out what a "perfect" trade looks like, and therefore impossible to determine your D-value.  If that's not a good incentive to develop a complete trading method I don't know what is.

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Are you Doing What you Want to Do?

Paul King, September 5th 2006 

As we approach another anniversary of September 11th find it's a good time to remember the people who died in the attack, reflect on where I am for the year and do an assessment of how I'm performing relative to my goals.

I was on the ferry on the way to work in Manhnattan on 9/11 and the whole thing had a profound effect on me.  I asked myself a very serious question after living through it which was:

If I had died that day, would I have been content with my life to-date?

My answers was a resounding "No!"  Partly it was because my wife was pregnant and I had not had a chance to achieve on of my life goals which was to be a father.  The other reasons were more subtle and had to do with things I wanted to achieve before I died that (at that time) were very fuzzy rather than concrete and well-defined.

I'm not saying 9/11 is the reason PMKing Trading exists now, but it was definately a strong catalyst to the process of defining and then attempting to achieve my life-goals.  As we remember the people who died simply going about their lives on 9/11, take a moment to ask yourself the questions below in the context of the fact that life is short, it can end any time, and only you can choose what you do with yours until it ends.

  • What are your main life goals?
  • Do you have a plan to achieve them?
  • Are you happy with the progress of your life plan?
  • Do you do something every day that gets you closer to your life goals?
  • Are you satisfied with what you have achieved so far in life?
  • Why do you continue to do some things you aren't happy with and use up your time if they don't contribute to your life goals?
  • Why do you just do what conventional wisdom says is possible and acceptable rather than choosing to do things you really want to do?

A big part of trading for me is about doing what I want to be doing, enjoying learning to improve my performance, and helping other people improve their trading and financial situation.  Those are part of my goals for my life - do you know yours?

Replace the word "life" with "trading" in this blog entry and read it again - you may get some interesting perspectives.

Click here for information about John Strelecky's excellent little book "The Why Cafe" that can help you think differently about how you should approach your life.

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