Newsletter-03-11-11
Tradingourway
Volume 4, Issue 21 Mar 11, 2011		 Tradingourway Logo
The complete Trading Process" Seminar CD is now available for $249

 Most stock market training courses only cover  how to find trades and that is only small portion of the total process. Then they require you to purchase additional products at thousands of dollars.

 "The complete Trading Process" training course contains 28 videos, over 1,100 minutes of stock market education with great trading tools and 3 proven profitable trading strategies. This training course will teach you all needed to know to become successful at trading the markets.

Best of all it is reasonable priced, We hold nothing back, there are no come-ons, there is nothing to buy later. You get it all up front for that one low price.

You also, get unlimited email support at support@tradingourway.com .  I can tell you not one single person has ever requested a refund.
You owe it to yourself to at least watch the Intro Video which is 17 minutes. Just by watching the Intro video you can pick up several key points about the trading process. If you like what you see and hear, just click this link.  to purchase the Seminar CD , only $249.  You won't find a more complete training course at any price. 
How do you know if your's or anyone's Trading Strategy will produce a profit?

 This is a question everyone of us should ask ourselves before we ever put real money on the line. I know because I've been there many times.  I personally believe one should never trade or invest without a trading strategy. Preferably, one that you know has a high probability of making a profit when traded properly.

I don't believe that just looking at a chart and thinking this should go up or down is a good enough reason to enter a trade. For those of you that have taken my seminar or purchased the seminar CD, you know I preach that one should know their expected entry price, their worst-case stop loss and multiple profit target prices prior to entering any trade.  This holds true whether you are a daytrader, swing trader, or a long term investor. This is also true whether you trade stocks, options, Forex or whatever.
 
Why is it that folks will plunk down thousands of dollar on a trade without having the slightest idea of what is going to happen in that trade? None of us are perfect. We will all experience losing trades, but isn't it much better to know your risk before entering.

How do we limit our risk and maximize our profit? We take the time to learn how to do it the right way.  
  1. We educate ourselves, 
  2. We have a trading plan,
  3. We have trading strategies
  4. We have trading rules
Finally, we follow our trading plan, we execute our trading strategies and we stick to our trading rules.

Every time we fail to do these things we increase our chances of  suffering a big loss.  Without them, we're almost guaranteed to fail.
But that's still not enough
You have got to know the likelihood of your trading strategy to make a profit when traded properly.  How do we determine a trading strategy's profitability?  Simply put, we need to backtest the Trading Strategy. To do that, you need a history of trades which can be done by:
  1. "Live Trade" the trading strategy for a year or more.  There is an excellent chance you will have a lot less money left after doing this method. 
  2. You can "Paper Trade" the trading strategy for a year or more. At least you won't have lost any real money.
  3. You can "Backtest" the trading strategy over a several year period under many different market conditions. However, backtesting takes a lot of time, effort and has a learning curve. Backtesting can be done several ways:
    1.  You can manually backtest as I did recently with the Trading Strategy Using High Yield Dividend stocks. That took almost 3 months and hundreds of long hours manually recording every trade. Using this method means you have to double, triple, and quadruple check your work because anytime you do something manually it is subject to human errors. However, some times it is the only way you can backtest a trading strategy. 
    2. You can use backtesting software to automate the process and save a great deal of time.  Not only is this faster but it is also more accurate. But there is a learning curve with the software. I use TC-Companion because it works with Worden Brothers Telechart software. In my opinion, TC-Companion is the best backtesting and reporting software on the market and I have tried many of them. Its only drawback is that it only works with Worden Brothers Telechart.  Hopefully, over the next few years we can change that and have multiple data feeds, including Forex.  The drawback using software is that your setup,  entry and exit rules have to be well defined and able to be formalized to where the software can understand them. 
    3. You can use a combination of manual testing and software testing when either your setup, entry, or exit rules require user interpretation. 
  4. You can use a combination of any or all of the above to create the trade history. 
Unfortunately, too many traders/ investors choose the "Live Trade" option which is the most costly and demoralizing. I know because that is how I use to trade. The only person who made any real money was my brokers.  

Some folks will say backtesting does not prove a Trading Strategy will be profitable. That is true but it certainly goes a long ways toward helping you be successful. If you are not disciplined, consistent and have not obtained the knowledge of how to trade then you have a high probability of failing.  I cannot stress enough that you need to learn before you trade or invest.

In 2000, I lost an embarrassing amount of my portfolio, first by not learning to trade properly, then not applying what I learned and finally trusting others to invest and manage my money.  That is when I decided enough is enough. I, then, spent a great deal more money to learn the right way. I firmly believe, people should not have to spend thousands of dollars to learn to trade. That is why, I have priced my Seminar CD at a very reasonable price.

Unfortunately, I found out that just because training was expensive did not mean it was good. The more I learned the more I realized that no one's methods fit me exactly. I learned to create, test and analyze my own trading strategies. I encourage all of you to do the same. That is the goal of my Seminar CD.

I warn you it is not like a quick trip to the corner market. It is a long journey and one where you will make many mistakes. Hopefully, you will analyze every mistake and learn from them. Otherwise, you will keep making the same mistakes over and over. Albert Einstein, was credited with the saying "Insanity is doing the same thing over and over and expecting different results".

Expecting is the keyword here. In fact, that brings us to the reason for this newsletter.

How do we know what to "expect" from our trading strategies?
Many smart people have worked on this question for a long time. A few even came up with formulas to help us figure it out.  Two of the most popular methods are Expectancy and Kelly Criteria ( some times call Kelly Criterion ).

I have created a spreadsheet to automate the calculation of both. Of course, they both require the trading history of a trading strategy. The example I use is the "Trading Strategy Using High Yield Dividend Stocks" where we analyze all 132 Trades.

In the  Newsletter- 01-22-11 I showed this Trading Strategy had a winning trade percentage of 85%.  That still does not tell us what we can expect from this trading strategy. It is possible, though highly unlikely, that we could lose money even with this high of a winning percentage.

Before I go any further, I will tell you I am not fond of the Kelly Criteria on extremely high winning percentage trading strategies because most of the time it has you putting too much of your portfolio into a single trade. That is particularly true in our Trading Strategy as the Kelly criteria recommends putting 85.6% of our portfolio into one trade. Please do not do that.

While Dr Van Tharp's Expectancy does not tell you what you should put into a trade., It tells you what you can "expect" on average for each dollar you RISK. Notice, I said what you RISK not what you invested. You need to follow the process I laid out on the Seminar CD for controlling your risk.

The Expectancy shows us we can expect to make $3.03 for each dollar we RISK
While the Kelly Criteria shows an expectation of  $3.20 for each dollar you RISK
Quite a bit of effort went into learning and developing the Excel Spreadsheet. Therefore I am not going to give it away for free. I have placed a very reasonable price of just $9.95 to purchase this very useful spreadsheet.

 Trading Strategy Expected Performance Excel worksheet is only  $9.95   
To order   click here
After you order the spreadsheet you will receive it as an attachment in an email confirming your purchase
I am not going to go into details on the calculation of Expectancy or the Kelly Criteria. The spreadsheet has links to information on both of them.

The Expected Performance spreadsheet contains 4 worksheets. The one shown below is the Performance worksheet which calculates all the results based on the data in the Repository worksheet. You will need to copy/paste your trading data to the Repository worksheet.  

I have not password protected any of the excel worksheet or cells. Please be careful as all of the formulas are exposed. I left it this way for those that might wish to copy the Performance and Repository into their trading journal. That is, if it happens to be an excel spreadsheet. I suggest you make a backup copy if you are going to change anything in the spreadsheet. 

If you decide to move the performance and repository worksheets to your own spreadsheet, you will have to change the links in the Performance worksheet to wherever you have the trade information.

The other 2 worksheets contain introductory information on Expectancy and Kelly Criteria with links to web pages where you can get detail information. The Internet is full of people's explanations of both methods.  
AVG Loss Amount Avg Win Amount Percent winners total trades Winning trades Losing Trades Win/Loss $ ratio
336.72 1261.10 84.8% 132 112 20 3.7
Starting Portfolio Balance Avg Dollars Invested Total Dollars invested Dollars won Dollars Lost Gross Profit Gross % Profit
$100,000.00 $10,399.06 $1,372,676.34 $141,243.13 -$6,734.48 $134,508.65 134.5%
 
Kelly Criteria W%-(1.0 - W%)/(W$/L$)  Amount of portfolio to invest
85.6%
Expectancy (PW * AW/AL) – (PL * 1) Expected profit per dollar risked 3.03
Expectancy (PW * AW) – (PL * AL) Expected profit per trade 1019.00
Expectancy  Kelly *W$/L$ Kelly Expected profit 3.20
       
Winning dollars 141,243.13   Winning Trades 112
Losing Dollars -6,734.48   Losing Trades 20
AVG Win 1,261.10   W% PW 84.8%
AVG Loss 336.72   L% PL 15.2%
Total Dollars invested 1,372,676.34   Before using this or anything else one should take the time to learn and understand how it works and why. Please research both Expectancy and Kelly Criteria before using.         
Avg Dollars per trade 10,399.06  
Total shares purchased 110253  
Van Tharp Expectancy
Expectancy = (PW * AW) – (PL * AL)
          PW = probability of a winning trade
          PL = probability of a losing trade
          AW = average win
          AL = average loss
To convert this formula into “expectancy per dollar risked” you will need to assume the AL is 1 dollar and the formula becomes:   Expectancy = (PW * AW/AL) – (PL * 1)
Note: the above form's appearance may not be exactly as the actual spreadsheet due to the way browsers and email programs reformat data.
Past Performance is Our Key to the Future
As I have stated several times in the past newsletters, I truly believe that past performance is the best indicator of how a given stock or a Trade Strategy will perform in the future. That goes for the overall market as well. However, it is certainly no guarantee as there are many things that affect stock prices. Most of them have to do directly with the individual stock and how its company is performing. There are many factors that affect a sector or the entire market. That is why even savvy investors have to stay on top of their position.

As always, know your Risk  before you get into a trade. Know your Entry, your worst-case Stop-loss and your profit targets. Have a plan to take some profits along the way.  NEVER let a profitable trade turn into a losing one.
 Trading Strategy Using High Yield Dividend Stocks can be purchased for $49.95   
To order   click here
After you order the Trading Strategy you will receive an email confirming your purchase. The email has a link to a zipped file that you will download onto your hard drive.
This table shows the final performance results of the Trading Strategy Using High Yield Dividend stocks. I have to admit that I never expected while developing the Trading Strategy that it would have an 85% win rate. I was also surprised at the Winner to Loser ratio of 4.4 to 1  times.
At these Win/Loss ratios you only need to be right 19% of the time to break even   
Final performance results

As always, I want to hear your thoughts on the newsletter, trading tips and any subjects. Please feel free to send an email with your suggestions, complaints or comments to kermitp@tradingourway.com
I have listed some useful products below that I feel are beneficial to any trader. Please take the time to learn about them and see if they can help you in your trading and investing goals.

Thank you for taking the time to read Trading Our Way newsletters and good trading to all.
Kermit Prather
Worden Brothers Telechart and StockFinder Software
           
Worden Brothers' now produces 4 products. Each product in itself is a really good software package. Together they make for a great set of stock market analysis software.
                    Checkout                      Telechart                       StockFinder                               Freestockcharts

The latest product is  an online version that is a combination of the other 3 products.  If you order  Telechart you can get both the TC2007 and the new online version.  It is not clear on their website.  You can check it out on the order and Pricing page or you can compare the products on the features page