My son and I were talking about trading (and he was forcing me to make demo trades). He suggested that I set my confidence regarding a trade by setting the lot size.
I am using InterBankFX with Metatrader 4. I am trading their .01 lot. To use the CATS (Confidence Adjusted Trade Size) system, I would do the following:
Determine if I have a setup for a trade.
Determine how confident I am about the trade.
Set my lot size based on my confidence. If I am trading micro lots (.01), then for a low confidence trade I would set the lot size to .01. If I were highly confident of the trade, then I would set the lot size to 10 times that amount, or .1.
I see two benefits from this system:
My risk is reduced based on confidence level.
When I look over my trade history, I have an immediate indicator of trade confidence.
Logically, a trader would not make any trades below his/her comfort confidence level.
What say you about this? I have not seen it mentioned (formally) anywhere.
Thus you seem to have 100% confidence on a trade. I don’t have a lot of experience, but at least in my learning phase, I can rate my trades with a confidence level. Perhaps it’s only valid in a learning phase.
Even so, if you would accept trades at what you would consider 80 or more confidence level (you rate the conditions), then you could use the CATS to set your lot size. This goes more along with gaming theory. (I have just started reading the book, “Gaming the Market”).
I am learning something about the psyche of the experienced trader versus the newbie. This is how it looks to me:
An [B]experienced trader[/B] treats each trade as [U]sacred[/U]. Not only will he/she look for a good chart setup, but will also check for things like support/resistance, news, and other side effects.
The [B]newbie [/B]mostly looks at his/her indicators. The newbie is more “casual” about a trade.
That’s what I am learning too … in the beginning I would take lots of trades and adjust sizes (or take quicker profit) based on how valid I thought the trade would be. Now I am learning to just say No to the less-valid trades. Wait for the best ones, they will come.
An experienced trader treats each trade as sacred.
The experienced trader waits for all or most of their boxes
in a trade set-up to be ticked, & realises that being "flat"
in the market is a position as well.
But with an efficient money management system ,cutting losses
short & letting winners run, they also know that in the end all
trades are winners.
Employing this kind of method to determine position size begs a lot of questions because it impinges on a some significant issues in trading psychology.
Take steps 1 and 2:
Step 1 can and ought to be based off objective, verifiable criteria, such that you can look back on the trade entry later and determine why it was taken.
Step 2, if it were completely objective, ought to be redundant on Step 1: If you are using a method to take trade setups, it ought to be assumed your confidence in the method is implicit. So, any trade that meets the criteria of your method ought to merit complete confidence. This sounds like circular reasoning: confidence in the system means taking trades based off verifiable criteria that are based ultimately on confidence. But, confidence in a system derives from testing and observation of that system.
This is a contentious issue, though. Some will argue that any trade that does not meet 100% of your criteria is no trade at all - pass and wait for a legitimate signal. Others might say, for example, if 4 out of 5 of your criteria are met, that is a trade in which you can be expect success, even if it isn’t strictly legitimate.
Here you begin to delve into confidence, i.e. the aspect of subjectivity in any trading decision.
The problem with confidence is that, unless you have a graduated scale by which to measure it (e.g. 1/5 criteria: completely non-confident; 2/5 criteria: reasonably non-confident; 3/5 criteria: neutral; 4/5 criteria: reasonably non-confident; 5/5 criteria: completely confident), there is no quantifiable way to measure it - no external rule against which to check it. So, what is the tangible representation of your confidence that you use? If it is based simply on feeling without any control or regulation, application to trade opportunities will be widely variable, make comparison of those reasons one trade is taken to another trade all but impossible.
Now Step 3:
A lot of questions begin to crop up here: not only how do you gauge confidence, but once you’ve determined that, how do you apply it to position sizing? “Low confidence” - what does that mean? Where does a trade meriting .01 lots differ from a trading meriting .02 lots? And all of that begs the earlier question: how do you define varying levels of confidence?
Your risk isn’t necessarily reduced - that assumes confidence is an infallible indicator of the probability of a trade’s success. If your confidence was misplaced, your risk is actually heightened.
In any case, your trade history is an accurate measure of your confidence in those trades. But again, how valid a statistical measure this would be depends on how confidence is measured - confidence is affected by a lot of psychophysical variables that we can’t measure. Did I feel better about that trade when I took it partly because I had just eaten chocolate and my serotonin levels were spiking? So again, what does confidence mean? Logically a trader wouldn’t take trades beneath their confidence level, but where is that, exactly? Logically, a trader wouldn’t take trades that are grounded in irrationality, but emotional trading without any reflexivity (thinking about “thinking about your trades”) is just that.
This sounds critical, but it’s not: only meant to draw attention to how nebulous decision rationale can actually be if the emotional component of it isn’t acknowledged and dealt with. I don’t recommend throwing emotions out; but examining oneself and learning to maintain some level of dispassion while trading is absolutely key. Something like “CATS” is actually a part of my own repertoire, but “confidence” is caused by probability, and probability is correlated to objective criteria.
Okay, here we go. But what is “80”? And what does that mean relative to “10” or “100”? It is one thing to attribute a value, but there has to be a codified underlying basis for it. Otherwise it’s 1/3 charts and fundamentals, 1/3 hope and doubt, and 1/3 neurochemical agents. Roughly.
Hi BarryPips,
I haven’t interacted with you in a while now. I hope your learning (and trading) is going great.
Low confidence trades are normally the small losses that I subtract from my big gains. After a while of doing this, I cut it out. It was eating into my equity curve. Over time, most low confidence trades just turned out to be losing trades or trades with to tight of stops because of me getting wishy washy at the first sign of a loss.
Be patient and wait for trades to come to you. Sitting on the sidelines is a perfect high confident trade alternative.
About holding each trade sacred. I don’t. Maybe that is because I am a newbie. My business experience has proven to me not to get married to anything. So I take what I have learned there and apply it here. I don’t get to attached. If I have a cluncker, I chunk it and move to the next opportunity.
I mean, what the hell is so sacred about it. No matter how big your IQ and ego, you will not shape this market. Losers are losers, chunk em and find a winner.
By sacred I don’t think he means getting attached as much as taking great care - like the experience trader reveres the process of deciding on a trade, patiently waiting for the best trades to come along, while the noob gets a whiff of something good or has some vague feeling of optimism and just punts it - which is true, and describes two completely different takes on how the “confidence” topic would be approached.
Notice that you said “all or [B][U]most of[/U][/B] their boxes
in a trade set-up to be ticked”.
Granted that you have a list of boxes to check, and there must be a set amount of them to take the trade (adding in an inactivity factor…how long from last trade…I want to trade now, so I’ll accept fewer criteria – boxes – to be met). But if you have fewer boxes, then you are less confident to trade.
Now I Have to Mention My Current Trading methodology
I am trading using channels (and fractals). I want to enter a trade with a buy or sell stop, and set a take profit and a stop loss.
I do not want to monitor my trades, but check them at the end of the day. I know that I’ll lose pips on long runs, but I have to trade the way that is comfortable to me.
I hinted about this in my previous thread (Noobies Path) as shaking the money box. I can look at setups that meet my conditions, but I have lower confidence for many superstitious reasons, that I am trying to avoid. I want to be able to play the game as I described – set up the trade and then return to see the results. Thus the confidence and lot size become parameters in my trade.
I hope that you never have any internal physical pain (pain in the gut, chest, head) not applicable to a sprain or break in a bone. One of the first questions a doctor will as is on a scale of one (no pain) to 10 (worst pain you have felt, but what does that mean???) describe your pain.
You can relate internal states to numbers. Heck, psychological research shows that people will relate musical notes to shapes or colors. The field of psychometrics and other attitude measurements is based on this quantification.
Gaming theory and gambling. (We’re not gambling, but we are gaming.) You risk the amount that you feel is warranted for the game.
Great post, Barry. So working off the supposition someone has a list of criteria, confidence can be correlated to how many boxes are checked. But then, as you said, there are the ever-present intangibles that work into each decision: “superstitions”, bias, distraction, and any number of vague misgivings. These also augment or diminish confidence, and are more difficult to quantify.
In fact, I don’t think they can be quantified. Synaesthetic experiences (associating tones with letters, colors with numbers, etc.) come in all shapes and sizes, but they are associations between aural/visual/tactile symbols - so associating a feeling with a number in this way wouldn’t be a quantification. There’s no systematic way to quantify or ascribe numeric values to subjective mental states - e.g., the pain scale is crude shorthand to triage a patient that is relative to and subject to the selective memory and bias of the individual, not the first leg of a scientific assessment. A trader could ascribe a number to a group or complex of characteristics , probably, both objective and subjective; but that would be an approximation; nothing more. And, it would take a lot of interior work to learn enough about oneself to map your emotions with that level of reliability.
When it comes down to it, most traders will work off of “raw feels” without much conscious thought about how they are feeling before they pull the trigger. Compared to that, even a pain scale scenario is preferable.
Of course it will. Maybe not acronym, but also name. For example, Northern Electric was a profitable company and hired folks to produce their high-rolling name, NORTEL.:eek:
You raise some good points Barry. I have 100% confidence in my approach but with an individual trade who knows. The expectancy gives me my return per trade for the approach and of course this is positive. But why take less than guilt edged low risk high probability trades? The trade either matches your criteria (take it) or doesnt (dont). If indeed you end up showing your high confidence trades return a higher E then ditching your low confidence trades will enable you to increase your lot size on the high confidence trades, reduce your drawdown and increase your profitability
It’s a nice idea, but to my mind, not that practical unless you’ve been trading a decent amount of time. I can’t remember where I heard it, but someone said “until you’ve been trading for 3years or more, you don’t deserve a gut instinct” - reflecting the fact that until you’ve been seen and traded hundreds of different set-ups, your gut instinct is going to be based on so little experience as to be worthless.
I’m not saying you’re at that stage - I have no idea - but I’d test your theory out on paper first…
But what is “80”? And what does that mean relative to “10” or “100”? It is one thing to attribute a value, but there has to be a codified underlying basis for it. Otherwise it’s 1/3 charts and fundamentals, 1/3 hope and doubt, and 1/3 neurochemical agents. Roughly. 
