Big Mike's Trading Blog

Day trading futures, discussing money management and trade management techniques, and more

So, you want to trade, huh? Really? Seriously?

Some more advice...

BMT now has over 4,000 registered members.  In only 9 months since inception, we've amassed about 500 new traders a month into our community.  And we're growing more rapidly every day, meaning we grew more this month than last month and so forth.

Still, the majority of people are unregistered.  We're approaching 1 million pageviews a month, and about 70% of that traffic is from unregistered members -- some might say "leechers".  People that don't bother registering because they never intend to participate.

People spend a lot of time on the site.  Most of the time is spent reading.  In March, we had about 4,500 new posts to the community.  It means we had about 150 new posts a day. 

Hang in there, my advice is coming :)

I believe I will get no argument when I say that those of us who have traded and lost it all, yet are still trading today (ie: made a comeback) -- well, we've realized the importance of psychology

We've realized that our past trading mistakes were primarily due to our own shortcomings and failures.  While we were busy blowing our account, we might have remarked each day how unlucky we were or how "if only I had...".  But how many days or weeks or months of "bad luck" or "if only" can you keep telling yourself before you realize the problem is, in fact, you.

Ok, so I think you're with me on this.  Making money in trading is about discipline.  Discipline comes from experience.  Making money is about conquering fears.  Conquering fears comes from discipline and experience.  Making money is about having an edge.  An edge comes from managing your fears, having discipline, and experience.

As a member of BMT, what is the best way you can work to improve these areas?  Sure, you can read the 150 new posts a day and you can participate in those discussions.  No doubt, there is value to be had there.  The more you participate in anything the more experience you gain.  Experience is not biased, the experience can be positive or negative.  Perhaps by participating in a thread you've found or reached the conclusion that the method being discussed within that thread does not agree with you.  You now have gained experience as to what you don't wish to do in trading.  Perhaps you've discovered a new method you had never considered, and really enjoy it.  Either way, you've gained experience.

But for the most part, what is the #1 way that a BMT member such as yourself can advance their trading career via BMT?  It's by starting and maintaining a journal.

Let's first tackle some of the excuses of not starting a journal:
- I don't know how
- I don't have time
- I don't want to disclose my trade secrets
- I think it's stupid
- I am just trading sim right now
- I don't want to look like a fool when I lose money

I don't know how
benbrooke put together a short tutorial here.  Check it out.  If you need more help than that, just ask.

I don't have time
If you don't have time to journal, then you certainly don't have time to trade.  Try Vegas instead, it will be more fun to lose your money there than trading.

I don't want to disclose my trade secrets
There are no secrets in trading.  If you are still operating under the assumption there are, then you've got a lot to learn.  A secret implies there is some shortcut, some "secret sauce" that you can apply to your chart and magically start making money.  There isn't.

I think it's stupid
Well I think your stupid!  lol.  Seriously, the traders who believe they don't need to journal are, in fact, not traders.  They are gamblers.  Would you open up a brand new business and pour $100,000 [insert trade account size here] of your money into inventory to stock the shelves, then hire a bunch of employees you don't know that are fresh out of high school, and not bother performing an inventory or auditing your stock?  In other words, would you not maintain any books?  Would you just hope no one is stealing and hope that you are making money?  Of course not.  Any successful trader will tell you that journaling is not only "not stupid" but in fact a requirement to success.

I am just trading sim right now
And?  Sim is like reading the forum but not participating.  Unless your trading sim for the thrill of it and never plan to actual trade, then you've got to take the next step.  Sim is great for about 8 weeks.  I don't think too many people need more than two months of sim to get the feeling for their platform, their DOM, how orders work, etc.  Beyond that, sim is just holding you back.  You'll spend all your time on sim and then one day go to cash and completely lose your ass.  Why?  Because with sim, the psychological impact is about zero.  And psychology is where the money is, it's all the nuances of trading and what it causes you to do and react to situations.  Sim doesn't reproduce any of that.  I am not saying you should go out and blow your account when you don't have a couple years experience under your belt.  But, experience is not really advanced by sim.  Experience in this case is gained primarily by actually doing something that has consequences.  Even if you only trade cash for 1 day a week, or 1 day every other week, you will at least be adding to your real world experience.  Traders who think they can go on sim for a year or two and then trade like a pro are in for a rude awakening.  That would be a shortcut, and there are no shortcuts in trading.  You have to pay your dues in trading.  It's like college tuition, and it isn't free.

I don't want to look like a fool when I lose money
This one is important.  It is, in fact, the psychology behind not wanting to look stupid that will in turn help your trading!  By knowing that your trades are being watched by peers you automatically give each trade more thought.  And you probably should.  Professional Traders know that loss is just part of the business.  Loss is nothing to be ashamed of.  Now, if you are losing money because you are making mistakes, then you have nothing to lose and everything to gain!  BMT is a very "safe" community.  There are no flame wars, no bashing, no calling people names here.  People will genuinely want to help you, so swallow your pride and start the journal!

Alright so how do I plan to tie those early forum statistics into this thread, you ask?  Like this: out of all those people visiting the site each day, there are only 15 members who have active journals.

Uh oh.

There is an extremely good chance you are reading this thread and do not have a journal.  Given everything that I just wrote above, I would really like to hear from you.  Make me understand your thought process.  If you aren't serious about trading as a career don't both replying, but everyone else ... I am trying to help!  I am like the personal trainer at the gym telling you "keep going!!" on that last set.  I'm pushing you out of your comfort zone because I believe it is for your own good.

Join the discussion:


Focus on beating other traders

Let's talk about focus, energy, discipline, experience, humility, financial security, and motivation.

Today I've started reading a new book, "Evidence Based Technical Analysis" by David Aronson.

I really like what I am seeing so far. The author tests over 6,000 indicator combinations with the purpose of determining if any of them have predictive qualities. He uses 30 years of market data. The result is that none of them do. But that isn't spoiling the book, the book itself is the journey and testing methodologies themselves and that is what I find fascinating.

One thing occurred to me as I was reading the early chapters of this book. I've been preaching about how psychology and money management are what control your profitability, and how indicators are not the answer.

Perhaps I need to reshape that a bit and apply more focus to this: your goal as a trader is to beat other traders. Nothing more, nothing less.

Really, truly, that is what it comes down to. In order for you to "win" trading, someone else has to lose. When an indicator tells you to take a position, or you look for market bias and trends, gap plays, breakouts, etc -- all of these things are inconsequential in the big picture. You may analyze, as David did, 30 years of historical data and find that one particular occurrence or setup happens during the current conditions and play that setup as an edge, but at the end of the day your balance sheet will reflect whether or not you beat other traders, or if they beat you.

Everyone has heard "buy low, sell high" or if that doesn't work "buy high, sell higher". Everyone has heard "cut your losers, let your winners run". I really think you could delete everything except these two statements, remove all indicators and methods, and just by following this advice you have the tools to be a successful trader. In order to beat the pack, all you need to do is make better decisions than the majority of the other players on the field.

"Is that all? Gee so simple!", I hear you saying... I didn't say it was easy, but it is simple.

The point I am trying to make is that in order to trade better than the rest you have to make smarter decisions than the rest. And I don't think those decisions are benefited by any value an indicator, oscillator, gap play or method. The decisions are all within you. You have to be at the top of your game in terms of focus, energy, discipline, experience, humility, financial security, and motivation. In each of these areas you must outperform or best your fellow traders.

The countless hours (hundreds or thousands of hours) that people spend on indicators would be better spent on practicing or bolstering your focus, energy, discipline, experience, humility, financial security and motivation. For example, if each day you are spending 4 hours a day on backtesting and you do it six days a week, perhaps you could take those six days focus on one of the above items instead, rotating them in and out on a daily basis.

It may sound odd, but I think the time is well spent.


MultiCharts vs. NinjaTrader backtesting and optimizing strategy

In this video I conducted a head-to-head comparison of MultiCharts and NinjaTrader evaluating which performed better for backtesting and optimization.

The full discussion is on the forum here:

The data was provided by IQFeed, for ES S&P 500, 5-minute bars over a period of 2 years (3/22/2008 to 3/22/2010). RTH market hours were used. Where possible, every setting was exactly duplicated in both NinjaTrader and MultiCharts.

The latest version of both platforms was used:
- MultiCharts 6.0 beta 2
- NinjaTrader 7 beta 11

Before we begin, you need to know a few things. First, if I made any mistakes here it was not intentional and if you should feel free to correct me. Second, this video and the below post summarizes how I feel. Keyword being "I". Each trader has their own method and everyone has their own ideas of what is important and what isn't. I've focused on what I know, and what is important to me. It may have little relevance to you, or you may find that things I have left out that mean nothing to me in fact mean much to you.

Here is the video comparison, remember to watch in HD mode and full screen for best viewing:
Review: MultiCharts vs NinjaTrader backtesting strategy from Big Mike Trading on Vimeo.

My rig is a Core i7 920 overclocked to 4ghz with 12GB of ram, hardware RAID 3Ware 9690SA with (4) 750GB drives in a RAID 0+1, running Windows 7 x64. No antivirus and minimal background processes were running during the test.

Raw execution speed:
MultiCharts 6.0 beta 2: 6m 50s
NinjaTrader 7 beta 11: 6m 55s

Platform features:
MultiCharts has IOG (intrabar order generation) which allows it to submit orders intrabar. This is equivalent to NinjaTrader's "calculate on bar close = false", but without all the nasty side effects and repercussions that one must suffer through when using COBC=false in NT. An example would be on a 5-minute bar, MultiCharts can look intrabar and see that your condition (in this case, our moving averages and CCI) were met intrabar (say on minute 3 out of 5) and submit an order without waiting for the bar to close.

NinjaTrader is not capable of submitting intrabar orders in backtesting. Live strategies can submit intrabar orders using calculate bar close = false. Trying to simulate IOG within a backtestable strategy in NinjaTrader requires writing custom code to use MTF and try to work-around the problem, and it adds a great deal of complexity, plus MTF doesn't even work in current beta's of NinjaTrader.

MultiCharts also has Bar Magnifier. This allows MultiCharts to more accurately determine the OHLC (open/high/low/close) for each bar. If you are using a 5 minute bar but have enabled Bar Magnifier, you can select an improved resolution such as 1 minute, or even 1 tick, so you can accurately know the OHLC order. Why is this important? Without it knowing the OHLC, if your strategy enters on the Close of the prior bar and has a profit target that falls within the High of the current bar but also has a stop that falls within the low of the current bar, how is the platform to know if the trade was a winner or loser? Was the high made before the low, or vice versa? One condition would cause a winner, and one condition would cause a loser. MultiCharts has the solution with Bar Magnifier. With bar magnifier turned off, MultiChart's is set to assume the worst-case scenario, which is far better than assuming the best case and then being in for a rude awakening when running the strategy live.

NinjaTrader assumes the best case scenario. If the high of the bar is higher than your profit target, then your profit target will be met. The only way to try to work around this is to again develop a custom complex strategy that uses MTF and submits orders to a smaller time frame but manages entry signals from the larger original time frame.

MultiCharts has far superior reporting capabilities. The backtest performance report is far more detailed and has loads more information. You can also export it to Excel with far more detail than what NinjaTrader offers in its export.

NinjaTrader does have one nice feature MultiCharts is lacking, the ability to narrow the report down by hour (say 8am-9am) so you can see what time periods during the day your strategy performs at its best and at its worse. Nicely done. I'll be making a feature request to MultiCharts to add this.

The language behind the strategy:
All the fancy features in the world won't help if your platform simply cannot be made to do what you want. MultiCharts uses EasyLanguage, which is obviously widely used by TradeStation. On the other side of the ring is NinjaTrader which uses C#.

I've always been a programmer and have learned many languages, all self taught. But I don't think I am the norm when it comes to successful traders. And in fact, I think for the most part a computer geek that knows how to program probably makes a poor trader, because their time is spent wrapped up in code and not in psychology -- where the real money is at

Alright, so EasyLanguage is just that - easy. I've picked up all the basics in about two days. It's intuitive. In fact, it's so intuitive I've often be struck and just how easy it is. Not easy as in simple, but easy as in -- in just works!

On the other hand, C# is incredibly powerful. If you want your Ninja strategy to use neural networks, land on the moon, cook you breakfast and not even break a sweat, then C# is the way to go.

But what if you could have both? In essence, MultiCharts lets you do both because you can use external DLL's which means your EasyLanguage indicators can call and reference C# DLL's!

I know that there is a die hard debate of EasyLanguage vs. C#. But having used both now, I don't think there is a clear winner. The right choice will be decided by what the individual traders needs are and what they are trying to accomplish. My final advice on this topic is this: more complex is rarely better.

Usefulness of backtest, which is what it's all about, right?:
With MultiChart's IOG (intrabar order generation) and Bar Magnifier, I find myself only interested in the MultiChart's backtest results.

Since NinjaTrader has neither feature, you are left with either accepting known-faulty results, or trying to write an extremely complex MTF strategy to work around these limitations and get you to the end result you want. Writing MTF strategies is very complex, and doesn't even work in the latest beta's of NinjaTrader.

Final comments:
In my opinion, MultiChart's is the clear victor. But, I am not happy that MultiChart's soundly trounced NinjaTrader. I own NinjaTrader and have been a diehard fan. But in the last two years the NT7 snafu has just left me flabbergasted and sickened. There are only so many times you can hear "we're unable to duplicate that" and be treated like you are the only person experiencing problems before you just give up. The same is true of "we'll add that to our list of considerations". After two years of waiting, NT7 still doesn't address half of the things I felt were important, and instead adds dozens of things that were meaningless to me, and even removes some functionality that used to be there!

Competition is good, and I think that NT7 has been a very humbling experience for the NinjaTrader executive team. If they can recover, then they hopefully won't make the same mistakes again. The competition is catching up quickly, and MultiCharts 6.0 is just the beginning. MultiCharts plans to release v7.0 of their product around the end of June 2010, and TradeStation 9 is also coming soon. No one is standing still, and in the end, traders win.

You can find more discussion on MultiCharts here:
MultiCharts, MultiCharts, MultiCharts...

You can find more discussion on NinjaTrader here:
The Truth: NinjaTrader

I encourage and welcome you to post your own reviews. I have focused on what is important to me so I am biased in that regard, and you will focus on what is important to you. Hopefully with enough information people can make some education decisions without having to go through all the leg work.

You can participate on the trading forum here:


Support from your wife and kids or other loved ones in trading

I'd like to talk about the psychology of having/not having support from your wife (and kids) in your trading business.

First, notice I used the word business. Trading is a business! If you run it any other way, it's just gambling.

From students and friends that I've talked to, it seems many times "the wife and kids" have no appreciation for what you are doing. They don't support it or respect it. Examples would be constant interruptions throughout the day or nagging remarks in the bedroom, etc.

Why do you think this happens?

I think that unless you are a trader yourself, it is about impossible to fully respect the emotional roller-coaster trader's experience, the psychological impact, the stress, the preparation required, the concentration, all of it.

So you cannot completely fault an outsider, even your wife or kids, for not being able to fully appreciate it. They can't, not until they are no longer an outsider!

Needless to say, trying to succeed in trading is hard enough without problems of lack of support from your loved ones.

I think there are a few angles to approach this from. One, if your family is not in a financially stable situation and you are "home all day playing on the computer" instead of out in the "real world looking for a job", then you can expect this is not a good situation and you have to understand that you are risking a lot for your own personal happiness.

But two/second, if you are in a somewhat stable situation, then it is possible your loved ones still do not appreciate or possibly even condone trading because they feel it is just a toy/hobby or even gambling, a "no win" situation, etc.

Assuming the second situation, one possible way to overcome this barrier is to involve your loved ones more. In fact, doing so will almost certainly dramatically improve your trading since most trading mistakes are due to psychological missteps, by thinking things through more carefully so you don't make mistakes when explaining them to others and look like a fool, you'll find that you're actually a much better trader for it.

The first two to three years of your trading business is probably a losing proposition in terms of your bank statement. That's true of any business of any nature. It's also true most businesses fail within two years, just as most traders do. Your wife and kids need to understand that this is a business, and just like if you opened a restaurant, or a fitness club, a computer/electronics storefront, any of these things --- they are all risks and require support as well as "leaps of faith" in order to be successful.

Just like you could hopefully turn to your wife and kids to support you in your new business venture of starting a "fitness club", and get them involved and make them feel like they are contributing, you can also do the same thing with trading!

Most families and outsiders think trading is pure gambling and frown on it. They think you are a degenerate for trading and spending your life savings or not looking out for your family. I think there are two extremes here -- one, it is possible to treat trading like a gambling addiction in which case you don't know when to stop. But it's also possible to treat trading like any normal business. If you started a coffee shop and invested 50k of your own money, and 3 years later it failed, most likely your wife and parents and friends would not disown you. However, in trading, they just might. It's a stigma.

Unless you are willing or capable of doing this on your own, the best way to combat this stigma is by involvement. Not just involvement for the sake of understanding of the complexities of trading by your loved ones, but involvement for the sake them better understanding the pleasure and joy it brings to your life. Most men would do anything for their wife and kids if they knew it would bring them joy and happiness, even at great financial cost. The same is true in reverse, your wife and kids need to give you some freedom and room to experience these things even at great financial cost.

So what are some of the better ways to involve your wife and kids? Well, I hope to hear from you guys! But here are some of my suggestions (although I'm not currently married, and have no kids!)

- Don't just make them watch. Give them something to do.
- What they do needs to have meaning. It needs to have an impact and even consequences.
- Make it consistent. If it is not consistent they cannot appreciate both up's and down's.
- Let them control some of their own trades. Sim at first, but move them to a small cash account. For kids, you can make it tangible (more for teenagers). Rewards for certain percentage gains like clothes, ipod, movies, xbox games, etc. For wife it can be stuff a bit more extravagant, like hit 'xx%' gain and we'll add that new deck in the backyard you wanted, or a weekend get-a-way trip for family, etc etc.

What do you guys think?  Join the discussion on the forum, here:


NinjaTrader Economic News Calendar Indicator

John Thom has released a new version of his NinjaTrader Indicator which adds a panel to your chart to display news events (direct from forexfactory's feed).

You can download it on the forum, or visit John's blog directly.

More detailed information is on John's blog.


Money Management Rules

Here are some Money Management thoughts.  I came up with these after having a quick conversation with another trader who, in my eye, has very weak money management skills.

He's been trading stocks and doing ok, but he often averages down and his approach has been to just buy more if it goes against him.  He has a very large account and in terms of position sizing he tends to leave himself some room to average down, but this obviously is an extremely dangerous game.  One single bad trade could wipe out months of gains if you keep averaging down until your leverage is exhausted.

At any rate, the trader is now venturing into futures and I wanted to instill upon him the importance of sound money management.  Profitability is all about money management and discipline.

So I covered some of the basics, which I will lay out here as well:

- Assuming a 25,000 account size.
- Use 1% risk, meaning no one trade can lose more than $250.
- Require a 1% reward, or better.  This means your edge has to have a win/loss dollar ratio of 1:1 or better.
- Trader is going to trade CL.  With 1% risk that means he cannot trade more than 2 contracts (even that is pushing it) with $25,000.
- As the equity builds, we can add a third contract and that third contract is really where the majority of profits will probably come from.  It will be the true runner and raise the win/loss dollar ratio beyond 1:1.
- The edge must have a positive expectancy, and it will with a win percentage of 65% or better.
- Set daily, weekly, and monthly stop-loss and profit-target goals to tell us when to stop trading.

Now that's a lot of stuff, so lets break it down into some real-world examples before going further.

After researching the edge, it is the belief of the trader that he will trade approximately 5 times a day.  That's 25 times a week, and roughly 100 times a month.  It is believed that the edge (again, after research) is right about 65% of the time, and we are using 1% risk and 1% reward (equal).

Specifically, we're using a 12 tick stop and a 12 tick target, and will trade 2 lots on CL until the equity is sufficient to where we can add a third lot, and so forth.  We need an additional $12,000 of equity for each lot we trade, using a 12 tick stop and 1% risk.

- Five trades a day
- 12 tick stop per contract
- 12 tick profit target per contract
- 2 lots

With CL, 12 ticks is really a very inefficient way to exit a trade.  But until we add a third target, it can be difficult to do so otherwise.  With a third target, a runner can be left on and very easily capture enough ticks to equal 2 or 3 whole trades (24-48 ticks on the runner).  In fact, with CL quite often runners can go for 80-100 ticks.

You might question why we're waiting for a third lot before doing a runner.  Why not do a runner with lot #2?  It is possible to do it, but after having talked about it I felt that due to some psychological reasons (and not pure math) it would be far better to implement a "it's either a winner or it's a loser" trade mentality in the beginning.  That means that we want to make it simple.  Does the edge really exist?  If so, then we'll know, and until we know 100%, we are going to keep it as simple as possible.  That means there is no order management mid-trade.  No breakeven stops, etc.  All in, all out.

Ok so if we anticipate trading 100 times a month, with a 65% win rate, and our WLD ratio is 1:1, and we trade 2 lots with a 12 tick target/stop, that means each winner or loser is $240, plus commission which is $10.   So a net winner is $230, and a net loser is $250.  So already you can see that when you factor in commission, our WLD ratio just dropped from 1:1 to 0.92:1.

If we win 65% of the trades, that means 65 out of 100 trades are winners ($230 x 65) for $14,950, and 35 out of 100 trades are losers ($250 x 35) for $ 8,750.  That leaves us with a net profit of $ 6,200, which on a $25,000 account would represent a 25% gain in one month's time.

At that rate, we would require two months of back-to-back winners at the 65% win rate before we accrued enough winnings (and assuming we do not take a draw out of our account) to be able to add the third lot (runner).

Now remember, the 65% win rate, the 12 tick stop and target, and the 5 trades per day were all factors provided by the customer who after doing his own research believes those figures to be true.

Time will tell :)

But, just in case everything is not perfect -- I advised the trader to make some firm contingency plans.  That is where the daily, weekly and monthly stop loss limits and profit target limits come in.

Let's talk about the loss limits first:

- Daily loss limit:  5 losing trades
- Weekly loss limit: 15 losing trades
- Monthly loss limit: 50 losing trades

If the trader expects to trade five times a day with a 65% win rate, that's approximately 2 losers and 3 winning trades per day.  So it seems logical that in any one single day if you experience 5 losers, something is not working quite right and it's a good idea to stop trading for the day (both from a psychological standpoint as well as from a market behavior standpoint, ie the edge is not working today).

If the trader expects to trade 25 times a week with a 65% win rate, that's approximately 9 losers and 16 winners a week.  So again, it seems logical that if you've hit 15 losing trades you should stop for that week.

And again, if the trader expects to trade 100 times a month with a 65% win rate, that's approximately 35 losers and 65 winners a month.  If you hit 50 losing trades in a month, it seems logical that something is not working right and you should stop.  You may only be 2 1/2 weeks in and you don't trade the remaining 2 weeks, but that's the way it is.

Now let's talk about profit targets:
- Daily profit target: 7 winning trades
- Weekly profit target: 30 winning trades
- Monthly profit target: 100 winning trades

We add the daily targets so if the edge is performing well we are allowed to keep trading past the "typical" or "average" but not so far as to start impacting us psychologically and risk over trading.

Having both sets of limits also allows us a little leeway, so for instance if we had two bad days we could trade more than 5 times a day for the remaining three days a week if those days are better, so that we can make up for the losses we took early on.

The idea is that you keep trading until you hit one limit or the other.  If the daily stop loss limit is 5 trades, the the winning limit is 7 trades, that means if you have 4 losers and 6 winners you take one more trade.  Same for weekly and monthly.  But once you hit either side of the limit, you must stop.

The limits are designed to minimize psychological impact as well as minimize dramatic shifts in your account size.  Consistency is king here.  Our task at hand is to prove whether or not we really have an edge, and whether or not it is the size we thought it was, the frequency we thought it was, etc.  Our goal is not to double our account in one month, our goal is to prove the edge.  Even if an edge works out to be only 2% per month, that's 24% a year and when you start compounding, that is astoundingly HUGE.  You could soon rule the world with a return like that, so remember to keep your goals modest or they will humble you.

This is a good exercise -- in fact it's a "must" -- for any trader who's purpose is to be profitable and believes they have a defined edge.