Finding Your Trading Balance in the Sandbox

Don't you love it when kids go wild in a sandbox? They build bridges, rivers, castles, and moats, their imaginations going wild with what is possible. For kids playing in a sandbox, anything is possible. They twist their minds, try all sorts of things, learn a ton, and exit much smarter little people.

Many traders have recently asked me how they can create a trading algorithm from scratch. The answer resides in finding your balance with a strategy that works for you. Let me explain by giving you a real-life example. I have a good friend and business partner who trades S&P 500 futures against Nasdaq 100 futures. He has been trading them for many years and has made a little bit of money, but nothing dramatic.

Last year, all of that changed. He made a couple of million in 2008, and he is on track to produce the same payoff in 2009. His trading successes started ramping up when he got in balance with his strategy. After tweaking his strategy for a few years and improving it, the strategy now makes sense for him, and he is comfortable running it. I know what he does, but I can't implement it: that strategy doesn't work for me. I am a stock and options guy. So I took some of my friend's recommendations and created my own strategy, ran it in a trading sandbox, tweaked it, and now I am making money with it—enough so that I got a significant capital allocation interest from an institutional investor. I am in balance with my strategy, it works for me, and I project confidence when I talk about it.

So, to answer my traders’ question, my advice is to start trading the market from different angles (short, neutral, long, low and high frequencies, etc.) and figure out an individualized "how to skin the cat" strategy that works for you. Experiment, tweak, tinker in the sandbox, and find your balance.