Blog #6 Key Take-Aways from designing my system.

So you’ve probably noticed that these blog posts are a bit of a disorganised mess in some ways, so I hope you’ll forgive that and enjoy them anyway. I usually have some sort of plan on what I want to write, but the plans typically fall apart from something I see in the market or in the various groups and forums I follow; this week is no exception 😊.

This week, I planned to focus on some of the key lessons I have learned from designing my systematic trading system. However, I’ve seen much chatter on various forums around crypto, so bear with me. I think there is some valuable content that can cover that.
Firstly, before I start, I should say I do have exposure to crypto in my portfolio, but I have limited myself to an exchange-traded bitcoin back product, as it suits my risk management regime better. I believe that crypto assets will continue to grow and that the big names such as BTC and ETH will continue to hold sway over the crypto market, predominately, I think, because they have brand recognition. I liken many of the altcoins to penny stocks. They could make you rich or just as likely lose your entire investment, essentially because they encourage investors/traders to take moon shots on them – more on that later.

If you watch the crypto space, you no doubt would have been watching Doge, which I understand is essentially a meme-based crypto asset, with no particular use case or functionality, therefore no fundamental purpose. So effectively, the entire market for this coin can only be priced on technical and trader psychology, which makes it interesting to watch.
Specifically on Doge, if you look at the daily charts, it is gone from around USD$0.05ish on the 1st of April to approximately USD$0.48, a massive 700% increase in just over 2 weeks. This enormous increase has triggered several emotional responses, which range from FOMO, regret and, in some cases, anger. None of these is overly helpful for a trader or an investor.
There is nothing wrong with taking a FOMO trade, but a few of the points are worth remembering (see last weeks post for more):

• if the rise has been rapid, the fall will likely be even faster.
• Risk must be managed by both position sizing and setting a sensible stop
• Know that risk-reward is more skewed against you.

​So to be clear here, I’m not saying buy Doge or sell Doge. I’m just saying if you want to trade it (or anything similar), do so carefully.

I also think that for many traders, particularly new traders, the reasons that these types of trades are attractive are that it’s the thought that one trade could make them rich, and you know YOLO. This is where many traders blow up, I think, and probably why sound advice on risk management is ignored. Basically, I think this because if you managing your risk, your likely to only take a small position in a massively swinging/volatile instrument, which makes it less likely to make you reach in one trade. TLDR; Risk management is not exciting and won’t make you rich with one trade, but it will push the odds your way long term!

Anyway, on with the post as I originally intended. In the way of introduction, I’ve been building my system on and off for around four years. I’ve experimented with a number of different ways and paid for several various programs and tools. All of them have involved some sort of systematic methodology, and all have been based on trend-following of one kind or another. Some have been less successful than others, and some have worked really well in specific market environments and not others. But I’ll now go through some of the common themes that I think are great take-aways from my experience to date (noting, of course, I am still on my trading journey here, and I certainly don’t want to portray myself as some sort of trading guru).
You’ve probably identified in a couple of my posts to date, but the critical thing to me is managing risk. For me, in all of my systems to date, risk has been managed via stops. Well, of course, aside from my initial trading ‘system’ where risk management was to panic sell a falling penny stock – I’m not really counting that though :-P.

In terms of stops, I’ve tried them at various levels, percentage, ATR multiples, Moving average levels, support/resistance, recent lows etc. All work to a different extent, but I think the most consistent I’ve found is ATR multiples. But that’s just me.
So to me, this is the first key take away. Regardless of how you trade, you have to have a way to manage your risk upfront, and to me, the cleanest way to do this is to set a stop. I know there are other ways, such as hedging or selling/buying options. But they’re not something I’ve explored – so I won’t comment.

I think closely linked to risk management is position sizing. As mentioned previously, I used to take big trades based on the hope that if they moved up one pip, I’d make enough to cover the commissions/brokerage fees (I was trading with a big bank, so it was expensive, lol). In my subsequent systems, I’ve refined my thinking away from how much I could make to how much I could lose if I’m wrong. This was a big shift! As noted above, all my recent systems use a stop, and I use this to define my risk and position size. I’ve tried various levels, but I think less than 1% is the way to go. I like what Steve Burns repeats throughout his books, with 1% risk; each trade is only one of the next 100. I personally use a lower percentage, 0.25-1%, but this suits my risk tolerance and allows me to aggressively compound if the trade goes my way. But that’s me.
The final point I’m going to cover in this post is around asset/instrument selection. I’ve tested several ways of screening stocks and instruments to find the right trade. Some have been complex, some simple. I’ve found the really simple screens give a lot of results which means lots of manual filtering. The more complex methods often give fewer results, but can be harder to apply consistently. Currently, I have two main screens that I use on tradingview.com to screen stocks; both have around 6 variables. For me, this is the happy medium, I often get a lot of results (50+), but I usually only do a screen once a week and then manually check the charts, which all up is about a 1-hour process. It works for me, but it may not for everyone.
S
o the TLDR version of this post:

• If you’re going to FOMO a trade, do it carefully and know it will be ‘less exciting.’
• Stops are important, and I’ve found ATR multiples work for me.
• Setting a position sizing strategy with a meaningful risk level for you is essential.
• Have a simple but robust system to chose trades, its easier to follow.

Once again, I find myself with a post that hasn’t entirely gone the way I thought it would, but hey, I guess that’s the creative process? Anyway, I hope you’ve found this interesting or useful. If so, I’d love you to leave a comment below and to share this page.

​Cheers
Nick the Trader Guy
April 21