How do you to get to the point where you have an unwavering trust in a trading system? A trust so deep so you can navigate the drawdowns with nary a thought to quitting. How do you Build a Tower of Trust?
Once I started to write, and investigate this issue, I came to appreciate the investment of one’s time and attention that goes into developing trust. There was a lot more to this than meets the baby blues.
When you begin the complex task of building a “Tower of Trust” in a trading system you run into the same dilemma new university graduates face. “How do I get a job without experience but need a job to get that experience?” A trader new to an algorithm trading system needs to build trust in the system. Yet at the same time needs to trade it to build that trust.
What can you do to overcome this conundrum?
How do you even begin this “Indiana Jones” expedition through a mysterious and strange forest of Regulation T, Mark to Market, limit vs. market orders? What is the first step down a path that is teeming with cavernous emotional pitfalls and landmines that can blow up your trading account in days? What will lead to the trust that is vital to becoming a consistently successful trader?
Now I imagine you thought I would start with CAR. Or maybe once again jump on my soapbox and start ANOTHER oration about MDD. Nope, I’m not doing that today.
Today I’m going to take a detour to the garden shed and just like a gardener who makes sure his soil has all the nutrients and components necessary to grow luscious tomatoes and squash, we are going to cultivate the ground and soil required to grow the most profitable money tree possible.
Our discourse will not be about a trading systems’ Performance Records. At least, not yet.
It will begin with basics that every trader needs before they even start the due diligence on a systems metrics.
Gone are the days of calling your broker to have him/her enter trades for you (thank heaven for that). In order to take full advantage of a trading service, you have to have an online broker account. It goes without saying you probably also should have a smidgen of knowledge as to how online brokers conduct business.
What are its commission rates?
How does it handle margin?
How readily available is inventory to borrow when trying to enter a short?
Here’s an Example
All QiT exits are signaled based on the close. As you all know, after the market is closed, if we get a signal to exit, we place an order to get “outta Dodge” the next day. Since small caps can be (and are) manipulated as much as a magician manipulates a deck of cards we need to protect our deck from these magicians who can magically make our money disappear.
Trying to exit a small cap stock at market is like a flashing a red neon light saying, “Hey market makers I’m over here take my money. No seriously, please take it I don’t need it.” Thus QiT exits small cap stocks with a limit order as opposed to a market order but in order to facilitate this we need to use an Order cancels Order. Believe it or not, some brokers do not offer this type of order.
Ya, crazy I know.
If you’re thinking of asking a trading service to go steady make sure you find out if it has been tested for survivorship bias.
Then ask it “What kind of Adjustments to Price and Volume do you make?”
You should understand all order types but I won’t belabor this topic for I covered it in detail in the July 9th newsletter. If you’d like to review it, click here.
Day order vs. Good-till-canceled (GTC). Some brokers, like E*Trade, have GTC orders set to expire in 60 days. This is because the broker doesn’t want you entering a good-till-canceled order, forget about it and have it hit a year later when you forgot to cancel it. Some brokers, like TD Ameritrade, let you specify the specific day on which you want your GTC orders to expire. What kind of order does the service you’re evaluating use?
QiT uses Day orders only.
Margin vs Cash Account
You will need a Margin account if you want to trade on margin or short. If you want to trade long only than you can stick with a retirement type account or a Cash account. If you want to be able to use uncleared funds to continue to trade in a Cash account you need a Margin Cash Account.
This is getting really confusing, isn’t it?
We’re the Plan in “Plan your Trade and Trade your Plan” – TraderJanie