Transcript Trading as a Journey

Evolve or Die !
Simon Townshend
9th March 2011
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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Setting the scene…
 After more than a decade scalping S&Ps, one day I just quit !
 I moved from 1 minute to daily charts, and never looked back
 Today is about what I did and why…
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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Here’s the “Why”…
 Someone who thinks he/she has finally reached the goal of
trading success, is merely waiting for disappointment
 As the markets evolve over time, they move ever further away
from a stationary trader, whose edge is slowly eroded
 Long-term trading success only comes to those whose trading
tactics are honed as the markets evolve, so success is a never
ending journey and not a final destination
Note: trading tactics, not trading strategy!
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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Topics for today
 Who is Simon Townshend?
 My philosophy of trading
 Strategy vs. tactics
 KISS trading
 Market and trader evolution
 Example – my own evolution
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
M
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My background (3 careers!)
 Engineering:
 1st class honours / Masters degree from London University
 Skills – lateral thinking, analysis and discipline
 Management consultancy:
 1987 killed any investment careers so “go do something else!”
 Skills – working with incomplete data, business context to trading
 Trading (the first 3 decades!):
 1980’s stocks – funded university life
 1990’s futures & options – learnt about equity swings!
 2000’s primarily S&P scalping – averaged ~ 50% per year
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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Today
 Head trader for a private fund
 Originally S&P scalping – highly intensive, high pressure, high volume
 Evolved into longer term swing trading in 36 markets – what a relief!
 Long term FuturePath client – must have the right team around you
 Signal service
 Small group of professional traders
 Training / Speaking events
 Major new project for later in 2011 – Cloning 4 more me’s!
 Los Angeles June 25th – with Jeff Quinto and George Kleinman
 Free newsletter at www.Simon-Townshend.com
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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Philosophy of trading (6 key principles)
 Forget the future:
 Nobody knows what the future holds, so just forget about it
 Trade in the present, take best shots and manage positions well
 Trade off fact not fiction:
 Eliminate computer clutter, it only creates internal argument
 There are NO leading indicators, they only serve to confuse
 Learn to observe and react to what actually happens
 Clarity of decision making:
 Simplicity of both strategy and tactics
 Take offline every decision possible
 Make all decisions digital not shades of grey
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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Philosophy of trading, continued
 Markets are all the same:
 A good strategy will survive in all markets and all timeframes
 But seek the best environments to apply it and it will thrive
 Don’t confuse buying & selling with supply & demand:
 Price charts show what buying and selling HAS happened
 Supply and demand determines what happens NEXT
 There is no hurry:
 Be slow to adapt and slow to adopt
 Be even slower to increase leverage
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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Strategy vs. tactics
 Businesses have strategic plans & tactical (implementation) plans
 Strategic plans are set and are largely fixed
 Tactical plans change with the changing environment
 Trading is a business – yet strategy and tactics are often confused
 We all talk about our “trading strategy” but for today try to
separate these – in my view of the world these are very different
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Your strategic model
 Has nothing to do with entering or exiting the market
 It is a model that describes how you believe markets move
 It should be simple, logical and stand up to peer scrutiny
 You should be able to write it out in 1-3 pages
 Yet 90% of your effort goes into this – get this bit right!
 It must belong to you, you must believe it and trust it
 My own model breaks all market movement into 6 phases
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Your tactical trading plan
 Neatly flows from the overall strategy as a logical overlay
 It defines how you capitalise on your strategic model
 It contains:
 Trade setups
 Separate entry triggers
 Risk / reward filters
 Exit and management rules (the hardest bit…I’ll give you mine)
 Your tactical trading plan may contain ~ 1 page per setup
 It can and should evolve over time, where the strategy does not
 I have 6 trade setups to mirror 6 phases in my own strategy
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A common question
 “Can’t you just teach me one of your setups Simon?”
 I could but it would be meaningless without the right context
 Whereas if you understand the strategic model, the setups are
just plain obvious (KISS approach)
 Which is why I can scan 36 markets for trades in 15 mins per day!
 So don’t focus on setups, focus on understanding how the
markets actually move
 Which will also help to move you away from indicators!
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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My KISS trading approach
 Use a price chart only (no clutter)
 Use a fixed unit size (digital decision)
 Identify the current market phase from the strategic model
 Watch for the one setup that could potentially form
 If the setup does form, then:
 Identify the initial risk point and potential exit points
 Qualify the setup based on risk/reward filter
 Wait for an entry trigger
 If it triggers enter, or if any of the above criteria rule it out pass
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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Trade management (for all 6 setups)
 Initial stop is based on chart (typically 1.5 ATRs)
 I use 3 exits of 1/3rd each and a specific reason for each:
 First target:
Many losers still achieve this
 During the initial impulse, approx equal to initial risk
 Stop tightened to 50% of initial risk or less
 Eliminates all the risk quickly, still leaving bulk of the position in play 
 Second target:
 Try to ride initial impulse to its end, approx twice initial risk
 Stop to breakeven or better by this time
 Third exit (requires great patience!):
 Await the first retracement after initial impulse to trail stop
 Always trail stop, some have a third target (only variation between setups)
 The trade is already a success, this may be a lottery ticket !
 Time stop = 4 bars maximum
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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Market evolution
 Markets constantly evolve over time:
 Volatility changes
 Daily ranges change
 Volume changes
 Participants change
 Markets come in and out of favour
 There are long term trends, short term trends and plenty of chop too!
 However crowd psychology does NOT change
 Which is why your strategic plan does not change
 But in a changing environment you have to make tactical changes
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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Trader evolution
 There is only one you and also you cannot stockpile time
 Therefore apply your time where is can be most fruitful!
 The evolutionary choices are simple:
 Slowly adjust the tactical plan to better suit the new environment
 Change your timeframe to be better aligned with activity levels
 Change your chosen market(s)
 Possibly a combination of the above
 The right choice will vary from trader to trader, but:
 Markets constantly evolve AWAY from stationary traders!!!
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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My own evolution
100%
 Over recent years my
S&P scalping delivered
poorer annual returns…
 The choice was to evolve
or just watch the market
move further and further
away from me?
80%
60%
40%
20%
 I felt that the S&P was
just going through an
untradeable period and
tried something VERY
different
0%
1
2
3
4
5
6
7
-20%
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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Something VERY Different
 But also something exactly the same…
 The Strategy did not change
 To a large extent the Tactical plan did not even change
 The honing was simply applying it to a more friendly environment:
 Different markets (36 instead of 1) and
 A MUCH longer timeframe (Daily instead of 1 min)
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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You are welcome to the S&P !
Cumulative P/L @ 1% Risk
160%
 Went live in March 2009
applied to daily charts of 36
markets, on small size
 The results have been
better than I had hoped for
and it is SO much easier
140%
120%
100%
80%
60%
 Conclusion – the strategy
remains as robust as ever,
the trick is just applying it
in a friendly environment
40%
20%
1
14
27
40
53
66
79
92
105
118
131
144
157
170
183
196
209
0%
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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A few tactical considerations
 Overnight risk – yes but much smaller trade size
 But far fewer trades – each one feels more important than it is
 Stops – worked 24 hours
 Slippage – only use the best platforms – Photon, CQG Trader
 Costs – minimal data fees, brokerage etc.
 Reports – don’t worry too much, you are outside the noise
 Limit moves – so far all our way, but one day we’ll get unlucky!
 Free time! – this is another world to 1 min scalping
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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The transition process
 Research – take time to think everything through thoroughly
 Tactical trading plan – write it and test its logic with a buddy
 Paper trade – to get the feel for the unfamiliar new world
 Trade small – to get the feel of yourself / your discipline
 Scale up – slowly (I’m still working on this)
 Review progress – with a buddy, partner, mentor etc.
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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A typical day
 Day starts at 8:30pm (2:30pm CST)
 8:30pm – check 36 markets for possible new trades
 8:45pm – check filters / trigger & adjustments to open positions
 9:00pm – publish to the team and place own orders
 Day ends at 9:00pm !
 Spend the rest of the day doing other things:
 Check open positions every few hours
 Hourly trades – more recent development
 Research, training, etc.
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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I love longer
term trading
Evolve or Die !
Simon Townshend
9th March 2011
Copyright 2011 © Simon Townshend Ltd. All rights reserved.
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