The Theory Behind ThePath
I’ve traded a large number of markets, products, and strategies over the years. I view trading as art. There’s art in developing a strategy, implementing it, refining it, and abandoning it.
Some methodologies work over time with refinement and others fail. No strategy works well all of the time and most strategies require ongoing care and feeding to adapt with structural changes in the markets. However, there are principles of trading that remain universally true over time and good trades are build on those principles.
Expected Outcome
At the end of the day, all trading comes down to expected outcome. There’s no reason to trade without a positive expected outcome. Additionally, the expected outcome per trade needs to be large enough to make the trade worth taking. I’ve personally tested and ignored many strategies that have two tick wins with beautiful equity curves because there just isn’t enough substance to the outcome.
Given some positive expected outcome, what matters next is how we feel about the trade. I’ve traded systems with high win rates and other systems with low win rates. What I’ve found is that there’s generally a tradeoff in win rate and win size relative to loss size and the potential heat you take on a trade. I personally prefer less heat and many small losses to fewer losses and more heat.
Cultivating a higher win size to loss size is my preferred approach to trading. The reason for that is that I’ve seen it work much better than when I attempt to win more for smaller amounts. Over the past 15 years or so I’ve had a few trades that have returned hundreds of percent. Those trades had very little intervention from me as an operator and paid for many, many small losses.
Building a Book of Strategies
Given the characteristics of the trades I want to use, I like to approach markets with an evolving book of trading strategies. Book is just a fancy way of saying “multiple strategies.” Strategies should come into the book and strategies should leave the book. Good strategies should receive larger allocations and poor strategies should receive less.
Strategies in the book should be easily comparable with common metrics. Strategies in development or consideration should also be comparable with common metrics. It’s easy to create a backtest with an upward sloping equity line, but it’s more important to quantify the characteristics of the line and strategy. How we experience the curve matters much more than the curve itself.
I’m starting the path with the following goals:
- Build a book of systematic, fully automated trading strategies.
- Deploy capital to the strategies.
- Create a framework for comparing live trading results and backtest results.
- Create a review process to objectively assess the success or struggle of individual strategies.
- Constantly learn, improve, and build.
To accomplish the objectives behind ThePath we could either use off the shelf software solutions or build our own. Ultimately, I want to build my own (primarily in Python with Javascript and Vue for web stuff), but I’ll also use some off the shelf software for testing.
ThePath is about documenting the process of building machines that make money. One of the misconceptions about building machines that make money is that they’ll be self sufficient and allow us to hang out on a beach somewhere without working. That belief is entirely FALSE. Yes, the machine will perform the tasks that it’s better at performing, mainly monitoring strategies and trading. However, it’s up to us to build the machine and keep it running.
Awareness
Understanding what’s working, what isn’t working, and when to adjust are essential aspects of building a machine to make money. We can also describe those things as having awareness. It isn’t enough just to trade. We need awareness of our trading and ourselves.
One of the best ways to increase awareness is to meticulously track our activity, reflect, and learn from it. There are quite a few ways to accomplish tracking, but I’m interested in building and documenting the process of building a tracking system.
Note that I’m glossing over self-awareness and the importance of that in trading. For now, just recognize that self-awareness is deeply ingrained in the process and something that can’t be overlooked.
Onward . . .