In Episode 8 of the Optimus Future’s Podcast, Matt Zimberg drives into one of the most crucial aspects of trading futures and options, selecting a trading method.
The methods that we choose to trade with can make or break our success. To help with that success, Matt goes over how to select a trading method that best suits you, how to endure and stick with a method during lackluster periods, and how to decide when it’s time to hang up the towel and drop your current method.
There is a substantial risk of loss in futures trading. Past performance is not indicative of futures results.
Episode TranscriptRead Episode Transcript
Hi guys, this is Matt from Optimus Futures and today I’m going to talk about how to choose a method, how to stick with the method, and when to change your method.
When you choose a method, it must be based on your skills. That’s the first thing I would go by, you must choose a method that you feel comfortable analyzing. So, let me give you an example, some people are very visual. They could be looking for patterns in the market, they could draw lines of support, resistance or other patterns that they see that the market repeats and they have the ability to do that. They have a good visual eye. There are people who like to concentrate on microanalysis, for example, of order flow. Some people like to look at fundamentals, so whatever you choose, you have to choose a method that you’re comfortable with analyzing.
Majority of people, unfortunately, choose methods that are outside of their skill set, meaning that they choose something that they are not that good analyzing. They go with what’s popular, what someone told them about, or what they wrote online read. There is no method which is better than another method. After doing this for so long I cannot tell you that somebody who’s a tree swing Trader is better than a day trader or somebody who uses some sort of a statistical analysis to evaluate is better than a pattern trader. What I’m talking about is a skill set. What I’m saying is that you need to stay in the area that you feel comfortable with in terms of analyzing and that, I think in my opinion, is the best decision that you would make as far as making a decision about a method. I know it’s not easy. I know sometimes you have to look at multiple methods multiple and systems in order to choose what’s right for you, but at the end of the day it always should start from the question of “What am I good at? What can I apply within my skill set that will serve me long term?” That’s number one.
Number two. Realize the risks behind your method. What are the risks that you’re looking at? Let me give you an example, in my opinion someone who’s a swing trader and trades for example, trades for a number of sessions or a number of weeks and takes overnight positions could potentially have a larger drawdown then somebody who is a day trader. I say potentially because even in day trading you could have drawdowns, but the nature of having overnight exposure might give a lot of surprises. Of course, from the Asian sessions, the London sessions and so forth. So when you get into a method find out what’s the downside of the method. What are you going to encounter in that method that most people don’t want to address? What they don’t want to address is the drawdown and the risk side. Unfortunately, the majority of us look only at the reward side. I say look at the risk. Start with a method you feel comfortable and start looking at the risk, that’s where the secret is.
Let’s look at the reward side of the method. You choose the reward side and you choose now to see if this analysis or the method you chose could be consistent and how consistent it is. Consistency is the key. What I mean by consistency is that I don’t mean that the system has to be consistently profitable every day or every week. You check where the consistency exists. Let me give you an example, you can choose a method, that for 3 months will not give you any profit, but during volatility, it will produce more. That’s one thing that you want to look at. Where is the consistency for profits in this method? A lot of us unfortunately and I say unfortunately because I do not want to criticize anybody, it’s because it’s our nature. Our nature is to look at the good things in the rewards. That’s why we’re in the markets, but we have to be objective when we analyze things and we have to choose a method that we will really understand what we’re getting into.
The reason we want to understand what we’re getting into is because we don’t want to change methods like shoes. If you choose a method you have to stick with it for a long time. Can methods can be broken? Absolutely. Can systems fall apart? Absolutely, but if you’re objectively analyzing a system and look back at the drawdowns that it can produce if you look at the consistency of the system, then you know that the system is working or not working while you trade. Let me give you an example, let’s say you chose a system of day trading. The system itself goes in every day between 12 and 3 o clock. I chose that time randomly. There’s a lot of traders that trade all day and there’s some traders that trade the first hour or the last hour. I just chose it randomly. So let’s say you go in 12 to 3 and you’re looking back now at the charts at that those time zones. You’re seeing the results of your methods and you might realize that for 2 weeks, 3 weeks, and 4 weeks. There might be periods that there are no returns and all the sudden there are days with exceptional returns. So let me just repeat that again, you have prolong periods of lackluster, with very short periods of outstanding performance. That’s very important to observe patterns like that and understand if they repeat. Why? When you go live majority of Traders dump systems because it doesn’t bring them profit right away. It goes into a drawdown. So let’s assume randomly again that you start with a $25,000 account. Let’s say that your first month was not that successful. Let’s say you lost a $1,000. Now you’re sitting debating, do I drop this system? Is it not a good system? Okay, you could drop the system, but if you look back at you’re back testing results, your charts, or anything else and you saw that the drawdown on the system is let’s say $5,000, then you know that you have to stick with it. If your losses exceed $5,000 then you have to ask yourself, is the method good? Is there anything I can do to improve it or dump? But that would be a better decision to do then just in the first month or the first week of trading decide that you want to change your method to something else. That’s what a lot of people do, they open accounts, they start trading and it doesn’t go well. They might go to a model again and look at backtested results to test something else. So the key is to be really objective in your analysis prior to trading the system.
Now I’ve used a lot of negative examples but let me tell you about a positive example that could work as well in your evaluation of things. Let’s assume you’re a day trader and you expect a certain profit on your model per day. Randomly I’m choosing a number here, let’s say it’s $500. Let’s say it’s the first month of your trading you’re actually averaging $1,000 per day instead of $500. So your model said $500 now you’re going to live trading and you’re actually awesome. So you’re going to obviously pat yourself on the shoulder and say I’m a phenomenal traitor, but here’s another scenario that you should look at or another angle that you should look at. You should say what happened in the market that gives me double the rewards? Is the volatility double? Has something changed in the market that gives me this reward? If something doesn’t go your the way you expected or it goes more in a positive direction, if it’s not what you expected you have to analyze it and see if it’s within the model. That’s what you have to analyze so essentially, for example, your profit or double of what you expected. Then you have to say, okay. What happens if the volatility you know dies off? Did I test my method during a period that the volatility was very low? Now that the volatility is higher maybe I should take the number of positions down not to encounter big drawdowns when the volatility falls off? Essentially, what I’m trying to say is that anything that you analyze or any approach to the market that you have, has to be objective and not based off a gut feeling. You have to know your method before you approach the market. Few words of advice, start with something that you feel comfortable with. As I mentioned, trade within your own risk tolerance. Choose methods that you’re comfortable with in terms of your risk capital, risk tolerance, and your skill in that it will potentially build a foundation for better trading in the future.
I would love to have you as a customer at Optimus Futures. If you have any questions you can always go to our website to www.optimusfutures.com. You can call me at 1-800-771-6748 if you need advice or you have any questions. We would love to talk to you. I wish you a good and profitable day and looking forward to future podcast. Take care guys.
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Please remember that this matter should be viewed as a solicitation to trade trading futures and options involve substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. Optimus Futures LLC is not affiliated with nor does it endorse any trading system methodologies newsletter or similar service. We urge you to conduct your own due diligence.