Hello Michael,
I hope you are doing well and want to thank you ahead of time for taking the time read my email. I’ve been a long time listener and fan of the podcast as well as your books. In fact, my favorite episodes are your monologues. Also, I have been tossing the idea around to email you for the past 2 years and just always overanalyzed what to say and how to say it. Finally, tonight I was sitting here and just decided to stop procrastinating and overthinking it and just send the email.
I served in the United States Air Force for about 8 years and separated a little over a year ago. Within the 8 years that I was in the military, I was stationed in Okinawa, Japan for about 4 years. It was there in Japan that I discovered trading 3 years ago and became extremely passionate about it. After working close to 12 hours a day on average, I would come home and watch YouTube videos about trading, join webinars, read books, and stay up until pretty late in the night to watch the markets open. Unfortunately, I followed all the typical new trader mistakes where I first learned about candlestick patterns, predictive technical analysis, gambling (and regretting a really dumb decision spanning across 3 trades that literally cost me thousands of dollars within 2 days), and then performing in-depth fundamental analysis using 3 statement financial models to develop discounted cash flows in Excel. Of course, I didn’t have any success following any of these methods. One thing I did learn the hard way from all this, is the high importance of risk management.
Last year I became very serious about trading by tracking all my trades and trying to follow [name’s] approach in the markets. Not saying anything bad about his trading at all; however, I didn’t find success with this because it still felt like it was based on discretion, intuition, and overall pattern recognition. This type of approach has worked wonders for him and his followers seem to have success as well, but it just wasn’t for me. I have learned that I have issues when it comes to any type of discretion in my trading and need a very scientific approach; otherwise, I tend to make the exact wrong decision at the wrong time. What to trade, exactly when to get in, exactly where to place my stop, exactly how much of my account to risk per trade, and how to trail my stop with the trend to obtain that asymmetric risk profile is more my style. Finally, in November of last year, I really committed to a long-term trend following systematic approach using donchian channel breakouts as well as moving average crossovers and have found my stress levels have decreased, I don’t have to worry, I feel free from the market noise, and have actually been increasing my equity for the first time since I started 3 years ago!
I understand that I am supposed to trade as many markets as I can, diversify as much as possible, and attempt to trade uncorrelated assets. I only have $20K in my account and my current broker is TD Ameritrade. With TD Ameritrade, the smallest forex position you can take is 1 mini lot which caused my risk per trade to be thrown off. Also, I struggled with the mathematics behind calculating exact risk per pip— I always came within a dollar or so of what TD Ameritrade calculated my PnL, but never to the penny. So, I tried incorporating micro futures in my trading using currencies that way along with trading cryptocurrencies as well. Again, my position sizing was still off with only 1 contract taking up too much risk for my account size when using 4 ATR initial stop loss method. I am a little lost on how to best incorporate a diversified and expansive portfolio of markets to trade with such little capital without risking a high percentage of my capital on any one trade and would like to ask your advice.
I have been working on a certification in Data Science with Python using Pandas and Numpy. This has been helping in developing different trend following strategies and backtesting them programmatically which I have definitely enjoyed. Compounding on the above question regarding diversification, I have been hearing and seeing a lot of successful trend followers not only diversifying the markets they trade, but also the number of strategies that they trade per market as well. This will increase your sample size, increase the possibility of capturing outliers on the right tail region of the return distribution, and increase the level of diversification when one system isn’t working at the time. Not sure how do trade multiple systems at one time. If I am long 10 shares of SPY at 300 in system A, and system B tells me to get in 13 shares at 305, but then I am stopped out of system B prior to system A, won’t that just change my average trade price around? Of course, this would get more complex when trading even more systems than 2 simultaneously on a market. Could you shed some light on this?
I can literally talk about trading all night long and keep typing away, but don’t want to completely overwhelm you or bombard you with a long email. In fact, I would love to have a career with a trend following firm such as Dunn Capital, AQR, Graham Capital Management, etc as this would not be considered work in my eyes Thanks again for taking the time to read all this as I really appreciate it! Hope to hear from you soon!
Very Respectfully,
Scott E.
