Game VS Business
I have been reflecting on trading as a game versus trading as a business.
As someone who has trained himself to be a discretionary trader with virtually no hard rules beyond risk management, "flow trading" is an incredibly rewarding game to play. However, the level of energy I must bring to the screens every day for this type of trading is not inconsequential. Furthermore, if I am not in fighting form, I am better off not trading at all. When I'm not in the right frame of mind, I'm likely to work extra hard just to make a small profit—or worse, risk going on tilt.
While my days of extreme tilt are behind me, these other issues remain very real and have caused me to question my process.
In marketing, there's an expression: "There's the reason you buy something, and the reason you tell your wife." The modern psychology version is: "There's the reason you do something, and the reason you tell yourself." I cannot say with complete certainty why I spent so much energy learning to flow trade. My stated goal was to make money every day. Perhaps part of it was to avoid the pain of down days. Perhaps it was a way to channel my competitive nature. Perhaps it was something else entirely. The more time I spend analyzing my own mind, the more it seems like financial pundits explaining why the market moved after the fact. But unlike those pundits, I actually have to put my money where my mouth is — and upon reflection, I don't think flow trading is the best way for me to turn my manual trading into a successful business.
Just as professional creatives are likely to struggle to make a living if they only work when inspired, professional traders face similar challenges if they only trade when in top form.
My goal is to be the most consistently profitable trader I can be, so I can compound my accounts with confidence. To achieve this, I believe I need to:
Stop trading my P&L every day
Become more mechanical in my entries and exits
Judge my daily performance based on process, not outcome
Judge my outcomes based on projected edge instead of daily results
For system traders, this is the only viable approach. However, for discretionary traders, these decisions involve more... discretion.
First, I need to define my trading process. How do I further mechanize my discretionary approach? I don't use standard signals, indicators, or chart patterns. To me, every market moment is unique, requiring full contextual understanding to execute properly. However, what I can standardize are my risk parameters, reward targets, and the confidence level required to place trades.
This gives me two performance metrics:
Execution: Am I taking every trade that meets my risk, reward, and probability criteria?
Edge: Are my actual results in line with how I was handicapping the returns?
My flow trading is so dynamic that I can only estimate results using this static approach. I'll assume a 60% win rate with an average 1:1 risk-to-reward ratio. I'll track performance by running Monte Carlo simulations and comparing both weekly and rolling sample sets against expectations.
If results exceed expectations, excellent. If they fall short, I'll reduce leverage, as my goal is to never exceed a 50% drawdown. After running 1000 trades 100,000 times, the maximum drawdown was 32.9R. So assuming my smallest risk per a micro is $30, I would be looking at trading one micro for every 2k in risk capital that I have available. However those are extreme outlier simulations, as 95% were under 15.3 R. Therefore it would be reasonable for me to trade 1 micro for every $1,500 in risk capital giving me a 95% chance that I will never draw down more than 30% during my first six months of trading.
This doesn't account for exogenous risks like broker failures, flash crashes or actual black swan events. Those issues must be addressed later when I have more capital and are just risk that I need to live with for now.
Of course, randomness isn't reality. Trading results tend to be lumpy—wins and losses cluster based on market conditions and our ability to adapt. Some factors make results lumpier than random (like performing better in trending markets), while others smooth them out (like trading cautiously when down). Since real trading rarely matches statistical models, I am trying to set conservative expectations. This ensures survival even if I underperform, with anything better being upside.
The more challenging aspect of this new approach will be my performance tracking. I need to track not only trades taken but also trades missed. This means being at the screens at set times daily, constantly setting odds, and taking every trade that matches my threshold. Here's the tricky part: what "matches my threshold" remains somewhat subjective. Without hard rules, there's always risk of unconsciously adjusting criteria based on feelings or recent results. It's something I must remain aware of. Eventually, I may also track setups where I have less than 60% confidence, as there's still plenty of edge in 50/50 trades with 1:2 risk-reward that we might add to our plan later.
Meanwhile, I've created a spreadsheet to track expectancy and results. I'll update my daily reports to reflect this new approach. Instead of posting ticks or dollars, I'll post daily percentages based on my risk management plan. If you're interested in doing something similar, I've included a Monte Carlo simulator [here]. Just remember it's a simplified model—don't bet the farm on it without understanding its limitations.
That's it for now. Happy trading, everyone.