понеділок, 28 березня 2011 р.
Market edges
Ok, thank you for your openess.
Answer to 1: that is correct - but there is no need to.
Answer to 2: that is correct too - fibo-hits for example occur as often as they don't in the long run, so a no-go as well (as are most indicator based occurrences).
Answer to 3: stop-hunts as they might be referred to happen as often intentionally as they happen coincidentally because of position taking that has its root in either hedges, position liqiuidation or large option related volatility.
Real inefficiencies are based on volatility breakouts, price behaviour relative to market open (in fx cash an artificial value, except sunday), and price behaviour relative to most recent high's and lows.
One other universally applicable truth about any tradable market is that large ranges (or large ranging days) are preceeded by small ranges (or small ranging days) and vice versa. That means its an occurrence you can bank on - over and over again. How you transform that into your rules (which is an indispensable process) is up to you, of course.
Daily volatility can be measured by calculating the difference between the day's high and the close. If that value increases out of recent proportion, trend changes are happening.
regards
daytrading
Answer to 1: that is correct - but there is no need to.
Answer to 2: that is correct too - fibo-hits for example occur as often as they don't in the long run, so a no-go as well (as are most indicator based occurrences).
Answer to 3: stop-hunts as they might be referred to happen as often intentionally as they happen coincidentally because of position taking that has its root in either hedges, position liqiuidation or large option related volatility.
Real inefficiencies are based on volatility breakouts, price behaviour relative to market open (in fx cash an artificial value, except sunday), and price behaviour relative to most recent high's and lows.
One other universally applicable truth about any tradable market is that large ranges (or large ranging days) are preceeded by small ranges (or small ranging days) and vice versa. That means its an occurrence you can bank on - over and over again. How you transform that into your rules (which is an indispensable process) is up to you, of course.
Daily volatility can be measured by calculating the difference between the day's high and the close. If that value increases out of recent proportion, trend changes are happening.
regards
daytrading
Targeting pips
I do not agree that pip goal has no effect on expectancy.
For equidistant 1000 pip goal, the house edge is 1 - (1000 - 2) / (1000 + 2) = 0.4%
For equidistant 100 pip goal, the house edge is 1 - (100 - 2) / (100 + 2) = 3.9%
For equidistant 10 pip goal, the house edge is 1 - (10 - 2) / (10 + 2) = 33.3%
To overcome the house edge for 1000 pip goal, our win% has to be at least 50.1%
To overcome the house edge for 100 pip goal, our win% has to be at least 51.0%
To overcome the house edge for 10 pip goal, tour win% has to be at least 60.0%
Obviously it is much easier to beat the house edge if you have greater pip goal.
For equidistant 1000 pip goal, the house edge is 1 - (1000 - 2) / (1000 + 2) = 0.4%
For equidistant 100 pip goal, the house edge is 1 - (100 - 2) / (100 + 2) = 3.9%
For equidistant 10 pip goal, the house edge is 1 - (10 - 2) / (10 + 2) = 33.3%
To overcome the house edge for 1000 pip goal, our win% has to be at least 50.1%
To overcome the house edge for 100 pip goal, our win% has to be at least 51.0%
To overcome the house edge for 10 pip goal, tour win% has to be at least 60.0%
Obviously it is much easier to beat the house edge if you have greater pip goal.
пʼятниця, 25 березня 2011 р.
Trading edge an casino
Firstly, there is a difference between 'automated' and 'mechanical' - but to answer your question about trade handling, yes, every trade is handled in precisely the same way.
When you step into a casino to play the roulette wheel, you have already lost because the casino has the statistical edge.
Good traders don't think how to beat the casino - instead they think like the casino and construct edges. Every casino 'knows' their edge even when they pay out to a great amount of people who play a little bit of 'red or black' or 'even vs uneven'.
Ultimately, the casino is in the game non stop and with the 'zero' in the wheel, the law of large numbers puts the odds in the casino's favour.
The casino uses money management as well. There is a limit to every game, hence the casino knows the maximum downside - which is always smaller than the ultimate upside.
The casino also uses risk management - for the odd clever guy who comes into the casino to count cards in black jack - if he wins too often for their taste, he will get kicked out.
The casino (like a good hedge fund) uses diversication in the portfolio. There are many games in the casino from slot machines to black jack tables to roulette etc. All have a statistical advantage over the player - some smaller some larger, but always in favour of the casino. So, even if in one night here and there, a payout happens on one of the one-armed bandits, the other games (or strategies) will cover for that (small) loss.
Even if the game looks like complete luck to the observer (like rolling dice), ultimately there is no luck involved - since bet size and rules of the game ensure that in the long run the casino wins.
Games like the ones you find in casinos have been created in the same way that modern portfolio managers create strategies with precise rules - whether those rules have more emphasize on the money management and less on the (precise) entry of a market (more discretionary one could argue) in order to catch bigger moves less often, or whether the entry and exit are precision made to capture an advantage over very many trades (throws of the dice) does really not matter and is more of an individual choice.
And yes, this is a relatively simplyfied way of explaining it - roulette probabilities are fixed for eternity unlike market behaviour (you will always find 37 numbers on the wheel, 18 red, 18 black, and one green), that is why you never see a casino go bust. In the financial markets, edges can be created but have to be carefully monitored in terms of results over time. Should results fall outside 'regular' parameters (either too negative or too positive), something might be about to change.
When you step into a casino to play the roulette wheel, you have already lost because the casino has the statistical edge.
Good traders don't think how to beat the casino - instead they think like the casino and construct edges. Every casino 'knows' their edge even when they pay out to a great amount of people who play a little bit of 'red or black' or 'even vs uneven'.
Ultimately, the casino is in the game non stop and with the 'zero' in the wheel, the law of large numbers puts the odds in the casino's favour.
The casino uses money management as well. There is a limit to every game, hence the casino knows the maximum downside - which is always smaller than the ultimate upside.
The casino also uses risk management - for the odd clever guy who comes into the casino to count cards in black jack - if he wins too often for their taste, he will get kicked out.
The casino (like a good hedge fund) uses diversication in the portfolio. There are many games in the casino from slot machines to black jack tables to roulette etc. All have a statistical advantage over the player - some smaller some larger, but always in favour of the casino. So, even if in one night here and there, a payout happens on one of the one-armed bandits, the other games (or strategies) will cover for that (small) loss.
Even if the game looks like complete luck to the observer (like rolling dice), ultimately there is no luck involved - since bet size and rules of the game ensure that in the long run the casino wins.
Games like the ones you find in casinos have been created in the same way that modern portfolio managers create strategies with precise rules - whether those rules have more emphasize on the money management and less on the (precise) entry of a market (more discretionary one could argue) in order to catch bigger moves less often, or whether the entry and exit are precision made to capture an advantage over very many trades (throws of the dice) does really not matter and is more of an individual choice.
And yes, this is a relatively simplyfied way of explaining it - roulette probabilities are fixed for eternity unlike market behaviour (you will always find 37 numbers on the wheel, 18 red, 18 black, and one green), that is why you never see a casino go bust. In the financial markets, edges can be created but have to be carefully monitored in terms of results over time. Should results fall outside 'regular' parameters (either too negative or too positive), something might be about to change.
четвер, 24 березня 2011 р.
Scalping rules from order flow trader
1. You have to be disciplined all the time. Better you enter trades with an OCO order.
Your min. risk reward ratio should be 2:1
As an scalper i'm always looking for trade setups where the risk is 5-6 pips to get 10-12pips after commission.It varies every time.
2. Don't rush. Be patient and look for opportunities. As an good trader you have to think about money. You don't want to lose it. On every trade don't risk more than 1% of your amount!
3. "High IQ".
No one can tell the future even when the IQ is 1000.Your system should be simple.Just focus on high-probability trades. Stick to your rules and plan.
4. "Clear mind and concentration".
You can trade with an clear mind when you're fearless and not greedy.That is one of the important stages in being experienced.
Wish you good luck!
Your min. risk reward ratio should be 2:1
As an scalper i'm always looking for trade setups where the risk is 5-6 pips to get 10-12pips after commission.It varies every time.
2. Don't rush. Be patient and look for opportunities. As an good trader you have to think about money. You don't want to lose it. On every trade don't risk more than 1% of your amount!
3. "High IQ".
No one can tell the future even when the IQ is 1000.Your system should be simple.Just focus on high-probability trades. Stick to your rules and plan.
4. "Clear mind and concentration".
You can trade with an clear mind when you're fearless and not greedy.That is one of the important stages in being experienced.
Wish you good luck!
http://www.forexfactory.com/showpost.php?p=2930190&postcount=7
середа, 23 березня 2011 р.
Academic research about Orders
Statistical identification with hidden Markov models of large order splitting strategies in an equity market
http://arxiv.org/abs/1003.2981
Asymetric Information and the Foreign-Exchange Spreads of Global Custody Banks
http://people.brandeis.edu/~cosler/
http://arxiv.org/abs/1003.2981
Asymetric Information and the Foreign-Exchange Spreads of Global Custody Banks
http://people.brandeis.edu/~cosler/
Mr Forex about order flow
Quote:
Originally Posted by Pdat100  In my eyes, there are actually two questions: The first is the one most dealt with here, how do we recognize the move with or without access to the tape? |
By monitoring/calculating inst. benchmarks on different time periods.
Here you can see their intentions on specific dynamic price levels.
And that is where you also want jump on.
Quote:
Originally Posted by Pdat100 And, second, once recognized (we can't know how deep is the iceberg), are we to stay out of the market or try to fade/shade - as the maneuver can sometimes be fast and sharp and other times long and persistent. Now, here's the thing, even if you recognized the iceberg, you would still need to assess its impact on price (PA). Actually I would argue that this is the more complex question. |
The procedure is:
if the institution(s) want buy f.e. the YEN and have a deadline (3 hours) for order execution, it can go like that:
enough liquidity available: normal price impact,smooth price action/impact
less liquidity: price rallys,orders get executed more often on smaller time periods
Quote:
Originally Posted by Pdat100 In fact, same goes for options expiration plays. If only one side drives the price (to or away from the strike price) that would have been easy. Alas, in practice, what you see around the strike areas is a fight between two or more elephants. How can anyone know in advance which side is to prevail? |
I don't watch options.
Quote:
Originally Posted by Pdat100 I would argue that this is the more important issue: a solid set of criteria to assess an institutional move impact on price. Are we back in VSA realm or what? |
No VSA.
You mostly don't get favorable prices because the move has already started.
http://corp.bankofamerica.com/public/public.portal?_pd_page_label=equities/ets/agencyalgo
wise stock trader about order flow
Pip, I'm a long-time stocks trader (15 years and counting). In stocks you have accurate T/S and Levels and you can use computers to quantify OF and execution/cancellation of orders. Everything is "clear" at least when compared to FX. Guess what? Stock pros have come up to all sort of gimmicks to hide their intentions in the clear and even having a L2 book, a T/S etc (and there're markets where T/S are much more accurate as well as L2 as opposed to US market), you can't be always sure what's going to happen.
The outcome is that OF-T/S-L2 has some predictive value, but that value is very limited in time and expires moments after being obtained (that is: your window lasts seconds or fractions of the second, hence the need for good execution).
What you need to do is move to the next level. You must absorb all information that is given to you and then "sync with the market". Man I know this will sound as voodoo, black-magic, witch-hunting etc to most of you, but when you get there you'll understand.
Like a pro piano player, you look at the music sheet and don't need to read each and every note. You can "feel" what the composer wanted from you: and you execute. Learn the music, forget the music, play!
Same goes for trading. You float in the ocean of information, rumors, charts etc. You must sync with this ocean. You must feel what others are doing and you must know where to put your bets to profit from other people actions. Let me say it again: You don't focus on the market. You focus on people. People generate orders. People are driven by their emotions. People use techniques to help them control their emotions, so you need to understand those techniques too.
I think this is what DS refers to when he talks about a state of mind. It's not easy to obtain and it's only partially mechanical. Some of it is on a subconscious level somewhere inside our brain (which btw is the best neural-net computer you can get). This state comes from a deep understanding of all the ingredients that make up the market. Market mechanics, order placement, S/R, and different strategies all make up for this.
So how can you do it? I can give you direction. It's not much different to what you have already read thousands of times.
Take a chart of a cross. Look at different time frames. Identify S/R levels (you don't need to draw them, just paint them in your mind). Think about M/A, Fibs, high/lows and other potential areas. Orders tend to cluster around these areas. You don't need to see orders. All you need to know is that they're there (being in the L2 book, in the brockers private books, in the heads of the traders doesn't matter... they're there even if they're hidden). Experience and knowledge can help you.
Now watch what price action is when price reaches those areas: Is there an acceleration ? Is there hesitation ? What the speed is ? What the direction is ? Is there oil poured on the fire ?
Look at different TF and try to feel what each trader might be thinking when starring at the same chart. Would they be buying ? Selling ? Panicking ? You get the idea.
That's all. KISS. Now go and profit.
http://www.forexfactory.com/showpost.php?p=3852614&postcount=902
The outcome is that OF-T/S-L2 has some predictive value, but that value is very limited in time and expires moments after being obtained (that is: your window lasts seconds or fractions of the second, hence the need for good execution).
What you need to do is move to the next level. You must absorb all information that is given to you and then "sync with the market". Man I know this will sound as voodoo, black-magic, witch-hunting etc to most of you, but when you get there you'll understand.
Like a pro piano player, you look at the music sheet and don't need to read each and every note. You can "feel" what the composer wanted from you: and you execute. Learn the music, forget the music, play!
Same goes for trading. You float in the ocean of information, rumors, charts etc. You must sync with this ocean. You must feel what others are doing and you must know where to put your bets to profit from other people actions. Let me say it again: You don't focus on the market. You focus on people. People generate orders. People are driven by their emotions. People use techniques to help them control their emotions, so you need to understand those techniques too.
I think this is what DS refers to when he talks about a state of mind. It's not easy to obtain and it's only partially mechanical. Some of it is on a subconscious level somewhere inside our brain (which btw is the best neural-net computer you can get). This state comes from a deep understanding of all the ingredients that make up the market. Market mechanics, order placement, S/R, and different strategies all make up for this.
So how can you do it? I can give you direction. It's not much different to what you have already read thousands of times.
Take a chart of a cross. Look at different time frames. Identify S/R levels (you don't need to draw them, just paint them in your mind). Think about M/A, Fibs, high/lows and other potential areas. Orders tend to cluster around these areas. You don't need to see orders. All you need to know is that they're there (being in the L2 book, in the brockers private books, in the heads of the traders doesn't matter... they're there even if they're hidden). Experience and knowledge can help you.
Now watch what price action is when price reaches those areas: Is there an acceleration ? Is there hesitation ? What the speed is ? What the direction is ? Is there oil poured on the fire ?
Look at different TF and try to feel what each trader might be thinking when starring at the same chart. Would they be buying ? Selling ? Panicking ? You get the idea.
That's all. KISS. Now go and profit.
http://www.forexfactory.com/showpost.php?p=3852614&postcount=902
Darkstar II
I'd like to try and clarify a few things...
First off, what Scotty is doing is one way to trade orderflow, but it isn't THE way. The truth is, there is no ONE way to trade orderflow.
As I've said before, orderflow trading is a mindset. The common thread that ties it all together is making decisions based on future orders. Sometimes those orders come from fundamental factors (econ reports or headlines), sometimes from technical (trend lines or fibs), sometimes there are simply no more orders to support the continuation of a trend (exhaustion).
What people like Sauron and Pip are hung up on is the fact that we have no time and sales. There is also no way of getting a brokers real time book, so they conclude that there is no way to front run big orders. They have a valid point, but they are missing the forest for the trees.
This isn't about front running (in the traditional sense). The truth is, as a retail trader there is zero opportunity to know when Toyota is going to make a block purchase of yen. So looking for a way to do it is a fool’s errand.
What’s also a fools errand is assuming that a fib or a trend line will "cause" price to do anything. All the technical patterns, tools, and indicators are arbitrary constructs humans project onto the market in an effort to understand what is likely to happen. Price doesn't give a crap about a trend line or a fib, but humans do. It's the humans acting on these patterns and indicators by placing orders that impact price.
It may seem like splitting hairs, but I can't tell you how many people genuinely think a trend line or an S&R level CAUSES price to reverse. Raise your hand if you have ever put your entry order 5 pips ahead of the trend line with your stop 5 pips beyond it. If you have you know exactly what I mean.
The flip side has a group of people who assume that fundamental factors cause prices to move. Whether its predicated on the idea that markets are efficient or that securities have some intrinsic value, I'm not sure. What I do know is that all the fundamental factors point to the euro falling, yet it's up 500 or so pips and rising.
Neither school of thought is capable of producing long term profits. I know there will be people who disagree with me on that, but I can point to the simple fact that if either were viable, someone who learned the principles out of a book would be able to instantly become profitable when trading. Even with 80k members at forex factory, I can't think of anybody who has been profitable from day one.
It takes years to learn how to trade because there is a subliminal message in the market that has to be learned from experience. Which trend line bounce should be taken and which should be skipped? What news is going to drive price through an S&R to start a trend? If you've been profitable for any length of time you know it's the trades you skip which lead to bankable profits.
The concept of order flow seeks to focus a traders attention on the subliminal message. By constantly asking yourself what is going to compel traders to enter and where, you cut right past all the TA/FA bullshit to what really matters... the orders.
Instead of trading because there is a trend line, you examine what happens to price when the trend line is reached. You figure out that 9 times in 10 price penetrates the fib level before reversing. And that price often reverses right at the point where people "should" place their stops. And that no matter what the fundamental story, if the COT is breaking records, a cataclysmic reversal is inevitable.
At the end of the day, an experienced order flow trader doesn't need to see the actual orders to know what’s about to happen. If you know why a majority of people will want to trade in the future then you can get in ahead of them and profit. It's really that simple...
First off, what Scotty is doing is one way to trade orderflow, but it isn't THE way. The truth is, there is no ONE way to trade orderflow.
As I've said before, orderflow trading is a mindset. The common thread that ties it all together is making decisions based on future orders. Sometimes those orders come from fundamental factors (econ reports or headlines), sometimes from technical (trend lines or fibs), sometimes there are simply no more orders to support the continuation of a trend (exhaustion).
What people like Sauron and Pip are hung up on is the fact that we have no time and sales. There is also no way of getting a brokers real time book, so they conclude that there is no way to front run big orders. They have a valid point, but they are missing the forest for the trees.
This isn't about front running (in the traditional sense). The truth is, as a retail trader there is zero opportunity to know when Toyota is going to make a block purchase of yen. So looking for a way to do it is a fool’s errand.
What’s also a fools errand is assuming that a fib or a trend line will "cause" price to do anything. All the technical patterns, tools, and indicators are arbitrary constructs humans project onto the market in an effort to understand what is likely to happen. Price doesn't give a crap about a trend line or a fib, but humans do. It's the humans acting on these patterns and indicators by placing orders that impact price.
It may seem like splitting hairs, but I can't tell you how many people genuinely think a trend line or an S&R level CAUSES price to reverse. Raise your hand if you have ever put your entry order 5 pips ahead of the trend line with your stop 5 pips beyond it. If you have you know exactly what I mean.
The flip side has a group of people who assume that fundamental factors cause prices to move. Whether its predicated on the idea that markets are efficient or that securities have some intrinsic value, I'm not sure. What I do know is that all the fundamental factors point to the euro falling, yet it's up 500 or so pips and rising.
Neither school of thought is capable of producing long term profits. I know there will be people who disagree with me on that, but I can point to the simple fact that if either were viable, someone who learned the principles out of a book would be able to instantly become profitable when trading. Even with 80k members at forex factory, I can't think of anybody who has been profitable from day one.
It takes years to learn how to trade because there is a subliminal message in the market that has to be learned from experience. Which trend line bounce should be taken and which should be skipped? What news is going to drive price through an S&R to start a trend? If you've been profitable for any length of time you know it's the trades you skip which lead to bankable profits.
The concept of order flow seeks to focus a traders attention on the subliminal message. By constantly asking yourself what is going to compel traders to enter and where, you cut right past all the TA/FA bullshit to what really matters... the orders.
Instead of trading because there is a trend line, you examine what happens to price when the trend line is reached. You figure out that 9 times in 10 price penetrates the fib level before reversing. And that price often reverses right at the point where people "should" place their stops. And that no matter what the fundamental story, if the COT is breaking records, a cataclysmic reversal is inevitable.
At the end of the day, an experienced order flow trader doesn't need to see the actual orders to know what’s about to happen. If you know why a majority of people will want to trade in the future then you can get in ahead of them and profit. It's really that simple...
http://www.forexfactory.com/showpost.php?p=3827892&postcount=883
Dark Star order flow
Orderflow trading in a nutshell:
1)Find the stops and fade them.
2)Find the barrier options and push into them.
3)Find pockets with a lack of open interest and gap them.
4)Find a sequence of stops spaced 10-25 pips apart and prepare to put your kids through college.
What you need? A prime broker currenex/ebs account, IFR, Oanda open interest, some friends on the inside of a large bank or brokerage, a proper understanding of risk management, and most importantly; your psychological issues completely resolved.
Its not an EA type of system. Even having the above, your still going to fail until you have developed a keen sense of the market. Intuition plays a huge part so if your stuck in the mathematical world of EA's and if-then-else logic, don't waste your time. Trading is an art, not a science.
Why am I telling you this? I really don't know, but I won't be giving you any more. Ever.
Do with it what you will.
http://www.forexfactory.com/showpost.php?p=3095398&postcount=643
1)Find the stops and fade them.
2)Find the barrier options and push into them.
3)Find pockets with a lack of open interest and gap them.
4)Find a sequence of stops spaced 10-25 pips apart and prepare to put your kids through college.
What you need? A prime broker currenex/ebs account, IFR, Oanda open interest, some friends on the inside of a large bank or brokerage, a proper understanding of risk management, and most importantly; your psychological issues completely resolved.
Its not an EA type of system. Even having the above, your still going to fail until you have developed a keen sense of the market. Intuition plays a huge part so if your stuck in the mathematical world of EA's and if-then-else logic, don't waste your time. Trading is an art, not a science.
Why am I telling you this? I really don't know, but I won't be giving you any more. Ever.
Do with it what you will.
http://www.forexfactory.com/showpost.php?p=3095398&postcount=643
the truth about profitable trading
This is my first post, and I don't foresee myself becoming a regular poster (although I wouldn't bet against it either). That said, I have learned a great deal from this place and the realizations that it has helped elucidate, that I felt it incumbent upon myself to share some of the some of my conceptual beliefs.
As with any good disclaimer, please note that these are only my views, and that many may find success or failure doing drastically different things. I am by no means making categorical statements, but merely expounding on some of my market beliefs. Some may find them trite, some may find them helpful, and some may find them ludicrous. Also, I am not interested in sharing my systems, or any of the specific methods that I use. As with most areas of life, I find it very gratifying to help steer motivated people to viable sources of information that will positively impact their learning, but very much resent doing the work for them.
I think that it is impossible to ever 'predict' the movements of the market. Its funny, when people ask me something like "what do you think the dollar is going to do in whatever period of time", I always say that I have no idea. This sometimes causes people to look at me with disbelief, presumably wondering how someone who seemingly has such impressive returns knows so little about what the market may do. Ironically, it was that very realization - and figuring out to how translate that into a practicable, mechanical format - that finally afforded the kind of profitability that I wanted. And this is a statement that many, many traders would disagree with, which is precisely why I think that the vast majority fail to make significant money, and why the analysts seem wrong nearly as often as they are right. When you first see that certain technical trading setups go a certain direction more often than not, you start to subconsciously believe that any such setup WILL or SHOULD go in that direction, instead of that it merely has a slightly higher than x% chance of going in that direction. It is a key distinction that most traders - including many great technical guys that I have known, who are able to expertly read the complexities of price movements, and who sometimes even give theoretical lipservice to these very concepts - fail to ever substantively realize, or at least effectively put into practice.
It is ultimately about ego. So many get caught up in trying to be so clever with their charts and indicators, in an effort to win all the time. I certainty did myself, revelling in my winning trades and chastising myself for the losers. "I should have seen the resistance at 1.3729, and it was obviously breaking out of the trendline, espechially when I draw it like that. How could I have missed that factor - I'll never make that mistake again." This, however, implicitly assumes you are somehow responsible for that loss; that you were somehow ever actually in control of what the market was going to do. It is a dangerous mentality to have, and one that is unfortunately born from the equally instrumental realization that you can actually make money from trading the market. I even think the basic tool of drawing a support or resistance line on a chart is potentially hazardous, as its exact placement is really so arbitrary, but once you put it there it suddenly seems so authoritative - like a constraint that you have craftily imposed upon the market. I prefer to passively OBSERVE concepts like support and resistance in the functioning of my systems, rather than trading based on my imperfect, arbitrary, and surely biased understanding of their specific placements. Unlike many traders, I don't even set targets for trades, since I believe that even that would be forecasting. I exit the trade reactively when the market tells me to. It could be at a large profit, a small profit, breakeven, or a small loss - and I couldn't care less about which one it turns out to be on any given trade; only that the statistical outcome over many, many trades is within the appropriate range. One of the shrewdest statements that I ever heard on this was that the only way to make a million dollars in trading (as opposed to investing) is to make 10 million dollars and lose 9 million dollars (in concept, at least: some of you may well be making 10 million and losing only 8, or 7, or 6.2...)
In essence, one could view this as a debate between proactive and reactive modes of thinking. In many - if not most - areas of life, proactive behaviors are rewarded. CEOs and heads of industry are generally proactive people - decision makers who exercise control over their situations and environments. It is the reactive people that society generally doesn't reward: the guy who waits for life to present him an opportunity rather than actively trying to create one. I myself am a control freak - a trait which served me well in life until I encountered the insanity of the markets. I wanted so desperately to control them - to be smart, to be right, to win, to see the complexities in a movement that others 'foolishly' missed and bask in the resulting accolades - and nearly drove myself crazy in the process. My closing advice is not to do this, although I think it is almost an inevitability of the learning process - I am forever envious of those that don't have to go through this, or who can somehow consistantly profit from it. In short, it is understanding that randomness and making money from the market aren't nearly as mutually exclusive as it would intuitively seem. To the diversified 'buy and hold' guys as to many an active trader, they are seemingly incommensurable opinions - but I have found that it is a complete surrender to the randomness of any one trade that allows for a grounded confidence in a statistically significant outcome over many instances.
As with any good disclaimer, please note that these are only my views, and that many may find success or failure doing drastically different things. I am by no means making categorical statements, but merely expounding on some of my market beliefs. Some may find them trite, some may find them helpful, and some may find them ludicrous. Also, I am not interested in sharing my systems, or any of the specific methods that I use. As with most areas of life, I find it very gratifying to help steer motivated people to viable sources of information that will positively impact their learning, but very much resent doing the work for them.
I think that it is impossible to ever 'predict' the movements of the market. Its funny, when people ask me something like "what do you think the dollar is going to do in whatever period of time", I always say that I have no idea. This sometimes causes people to look at me with disbelief, presumably wondering how someone who seemingly has such impressive returns knows so little about what the market may do. Ironically, it was that very realization - and figuring out to how translate that into a practicable, mechanical format - that finally afforded the kind of profitability that I wanted. And this is a statement that many, many traders would disagree with, which is precisely why I think that the vast majority fail to make significant money, and why the analysts seem wrong nearly as often as they are right. When you first see that certain technical trading setups go a certain direction more often than not, you start to subconsciously believe that any such setup WILL or SHOULD go in that direction, instead of that it merely has a slightly higher than x% chance of going in that direction. It is a key distinction that most traders - including many great technical guys that I have known, who are able to expertly read the complexities of price movements, and who sometimes even give theoretical lipservice to these very concepts - fail to ever substantively realize, or at least effectively put into practice.
It is ultimately about ego. So many get caught up in trying to be so clever with their charts and indicators, in an effort to win all the time. I certainty did myself, revelling in my winning trades and chastising myself for the losers. "I should have seen the resistance at 1.3729, and it was obviously breaking out of the trendline, espechially when I draw it like that. How could I have missed that factor - I'll never make that mistake again." This, however, implicitly assumes you are somehow responsible for that loss; that you were somehow ever actually in control of what the market was going to do. It is a dangerous mentality to have, and one that is unfortunately born from the equally instrumental realization that you can actually make money from trading the market. I even think the basic tool of drawing a support or resistance line on a chart is potentially hazardous, as its exact placement is really so arbitrary, but once you put it there it suddenly seems so authoritative - like a constraint that you have craftily imposed upon the market. I prefer to passively OBSERVE concepts like support and resistance in the functioning of my systems, rather than trading based on my imperfect, arbitrary, and surely biased understanding of their specific placements. Unlike many traders, I don't even set targets for trades, since I believe that even that would be forecasting. I exit the trade reactively when the market tells me to. It could be at a large profit, a small profit, breakeven, or a small loss - and I couldn't care less about which one it turns out to be on any given trade; only that the statistical outcome over many, many trades is within the appropriate range. One of the shrewdest statements that I ever heard on this was that the only way to make a million dollars in trading (as opposed to investing) is to make 10 million dollars and lose 9 million dollars (in concept, at least: some of you may well be making 10 million and losing only 8, or 7, or 6.2...)
In essence, one could view this as a debate between proactive and reactive modes of thinking. In many - if not most - areas of life, proactive behaviors are rewarded. CEOs and heads of industry are generally proactive people - decision makers who exercise control over their situations and environments. It is the reactive people that society generally doesn't reward: the guy who waits for life to present him an opportunity rather than actively trying to create one. I myself am a control freak - a trait which served me well in life until I encountered the insanity of the markets. I wanted so desperately to control them - to be smart, to be right, to win, to see the complexities in a movement that others 'foolishly' missed and bask in the resulting accolades - and nearly drove myself crazy in the process. My closing advice is not to do this, although I think it is almost an inevitability of the learning process - I am forever envious of those that don't have to go through this, or who can somehow consistantly profit from it. In short, it is understanding that randomness and making money from the market aren't nearly as mutually exclusive as it would intuitively seem. To the diversified 'buy and hold' guys as to many an active trader, they are seemingly incommensurable opinions - but I have found that it is a complete surrender to the randomness of any one trade that allows for a grounded confidence in a statistically significant outcome over many instances.
edge and luck
That is certainly a fair point. Obviously the question of what even constitutes a recovery sequence (or necessary percentage return) where you would resume live/full risk trading is debatable. Again, this will largely be an issue of risk tolerance, but one would presumably need to see a recovery that would be statistically similar to how your system would perform if your edge was still functioning. For me, I would want to see a new equity high in the paper traded results. Moreover, I would be concerned not only with the the account reaching a hypothetical new account high, but equally with the specific makeup of the trades and the time required to achieve it. All of this would be important in making a determination of whether your system was still operating with an edge.
Of course, this could take a long time, or perhaps never happen at all. If your edge had deteriorated or never existed, then you would paper trade the system into further drawdown and never trade it live again.
But, to your example, imagine that the system completely recovered on a paper traded basis - complete with every statistical verification that would give confidence that your edge was still functioning. Then imagine that when you resumed live trading you hit another drawdown that was outside of expectation. What then? Well, in that situation I would again stop at a preconceived point, and would be very weary about continuing to trade that system again. Yes, you could always reach that point of drawdown, stop live trading, paper trade a subsequent recovery, resume live trading only to have another drawdown that was statistically unsound. That system, at its most catastrophic, would have lost the trader x% from the first drawdown and a subsequent x% from the second drawdown. It would be very unpleasant, but at least it would be controlled, and certainly not catastrophic. The more conservative your risk management, the less you could potentially lose even in both drawdowns. If, say, 20% was your statistical cut off, you would lose a worst case total of 36% from your peak equity. If this occurred on day 1 (just to make the example even more improbable) you would have lost 36% of your principal, rather than merely giving back profits.
If it sounds like I am agreeing with you, it is because I am - its just that it doesn't really agitate me. Sure, it could happen, but with a good edge, a good system, enough data to formulate reasonable expectations, and conservative enough position risk, it becomes increasingly unlikely. The trader that prepares himself properly and still completely fails - having been slowly bled from unsound drawdown after unsound drawdown, only to devise new systems and have it happen all over again until he is broke - would be extremely unlucky indeed. So, there you go, you need some luck, but adequate preparation surely negates the need for a constant fixation on it. Most who fail in this industry are not like the unfortunate character I just described above; they fail for a myraid of other more inane reasons. And most that do meet those characteristics, I would imagine, haven't failed - or at least not yet...
http://www.forexfactory.com/showpost.php?p=2506456&postcount=578
Of course, this could take a long time, or perhaps never happen at all. If your edge had deteriorated or never existed, then you would paper trade the system into further drawdown and never trade it live again.
But, to your example, imagine that the system completely recovered on a paper traded basis - complete with every statistical verification that would give confidence that your edge was still functioning. Then imagine that when you resumed live trading you hit another drawdown that was outside of expectation. What then? Well, in that situation I would again stop at a preconceived point, and would be very weary about continuing to trade that system again. Yes, you could always reach that point of drawdown, stop live trading, paper trade a subsequent recovery, resume live trading only to have another drawdown that was statistically unsound. That system, at its most catastrophic, would have lost the trader x% from the first drawdown and a subsequent x% from the second drawdown. It would be very unpleasant, but at least it would be controlled, and certainly not catastrophic. The more conservative your risk management, the less you could potentially lose even in both drawdowns. If, say, 20% was your statistical cut off, you would lose a worst case total of 36% from your peak equity. If this occurred on day 1 (just to make the example even more improbable) you would have lost 36% of your principal, rather than merely giving back profits.
If it sounds like I am agreeing with you, it is because I am - its just that it doesn't really agitate me. Sure, it could happen, but with a good edge, a good system, enough data to formulate reasonable expectations, and conservative enough position risk, it becomes increasingly unlikely. The trader that prepares himself properly and still completely fails - having been slowly bled from unsound drawdown after unsound drawdown, only to devise new systems and have it happen all over again until he is broke - would be extremely unlucky indeed. So, there you go, you need some luck, but adequate preparation surely negates the need for a constant fixation on it. Most who fail in this industry are not like the unfortunate character I just described above; they fail for a myraid of other more inane reasons. And most that do meet those characteristics, I would imagine, haven't failed - or at least not yet...
http://www.forexfactory.com/showpost.php?p=2506456&postcount=578
Drawdown in MTS trading
Every trading methodology has a point where if there are x consecutive loses, the account will either be wiped out or the drawdown will be so large that the return required to recover would be unpalatable (50% drawdown requiring 100% return, for instance - although this is largely personal). As Hanover points out, the length of this potential sequence is purely a function of position risk.
Regardless, no amount of money management can prevent this unlucky series of trades; it can only decrease the probability of its occurrence. However, if one has a comprehensive understanding of their strategy - including statistical data based on a large enough sample size - it doesn't need to feel like this fearful quest to maximize profits before the impending catastrophe. For example, lets say you have a trading system, with thousands of trades worth of data, where based on Monte carlo simulations you find a 99% confidence level of not exceeding a 25% drawdown. Could you exceed 25% drawdown at any given time? Sure. Assuming that you trade your system over an infinite period of time it will almost certainly fail completely, but what is the 'likely' time frame for such a failure? Within 5 years, 10 years, 100 years? The probability, and thus the length, of a sequence necessary to destroy one's account is completely under the trader's control. At certain position sizing levels, the likelihood of it occurring within a trader's lifetime can be extremely small - at such small levels, the chance of your edge deteriorating (or your system's ability to adaptively capture it) becomes a much more likely culprit for eventual failure than that unlucky sequence...
The bottom line is that we can never deal in certainty. Anything can always happen, and things can suddenly change in unforeseen ways. This is the case with most things in life that, unlike casinos, aren't confined to static probabilities. The casino could theoretically fail if that extremely low probability (in the casino's case) losing streak was to occur; as traders, we could fail either as a result of:
1) a functioning edge but detrimental losing streak
2) no edge/diminishing edge.
What matters is that you are aware of this, and know what you would do in any potential situation. You would know that when you reach a certain drawdown level you are outside of expectation and should either stop trading completely or cut risk significantly while you continue to at least paper trade the strategy to see if it does ultimately recover. If it does, then you can resume trading; if not, thnn at least you only lost x% of your account, and hopefully achieved significant net profit regardless. Use position sizing to trade a system that has drawdown expectations that are tolerable for you; then, even if you exceed them in that catastrophic event - be it an unlucky sequence or a failed/non-existent edge - you haven't lost something that you weren't prepared to lose.
Personally, I tend to be more conservative, and like to have the probability of even a 15% drawdown be very low, but this is obviously just my comfort zone. I find it fascinating how different traders approach this question. I remember a certain fairly prominent trader on this forum who allegedly ran up an account 1000% in a year, risking - if I remember correctly - 8% on each trade. He was so immodestly certain that, based on testing, his system would continue to work - even though during testing it had some incredible drawdowns. I didn't even doubt the quality of his testing, but his certitude was ridiculous, especially after the live year. At 8% risk, you don't need THAT many losing trades to destroy you. Of course, it all crashed and burned, and his future posts were somewhat more humble.
I think that is really what Tdion is getting at: that sense of certainty that many seem to have, and how it is completely unfounded. I get that and I agree. At the same time, the hysteria surrounding luck in trading is overdone. Know what to expect as an acceptable worst-case, the likelihood of it happening, and what to do if it does happen within your trading career.
Regardless, no amount of money management can prevent this unlucky series of trades; it can only decrease the probability of its occurrence. However, if one has a comprehensive understanding of their strategy - including statistical data based on a large enough sample size - it doesn't need to feel like this fearful quest to maximize profits before the impending catastrophe. For example, lets say you have a trading system, with thousands of trades worth of data, where based on Monte carlo simulations you find a 99% confidence level of not exceeding a 25% drawdown. Could you exceed 25% drawdown at any given time? Sure. Assuming that you trade your system over an infinite period of time it will almost certainly fail completely, but what is the 'likely' time frame for such a failure? Within 5 years, 10 years, 100 years? The probability, and thus the length, of a sequence necessary to destroy one's account is completely under the trader's control. At certain position sizing levels, the likelihood of it occurring within a trader's lifetime can be extremely small - at such small levels, the chance of your edge deteriorating (or your system's ability to adaptively capture it) becomes a much more likely culprit for eventual failure than that unlucky sequence...
The bottom line is that we can never deal in certainty. Anything can always happen, and things can suddenly change in unforeseen ways. This is the case with most things in life that, unlike casinos, aren't confined to static probabilities. The casino could theoretically fail if that extremely low probability (in the casino's case) losing streak was to occur; as traders, we could fail either as a result of:
1) a functioning edge but detrimental losing streak
2) no edge/diminishing edge.
What matters is that you are aware of this, and know what you would do in any potential situation. You would know that when you reach a certain drawdown level you are outside of expectation and should either stop trading completely or cut risk significantly while you continue to at least paper trade the strategy to see if it does ultimately recover. If it does, then you can resume trading; if not, thnn at least you only lost x% of your account, and hopefully achieved significant net profit regardless. Use position sizing to trade a system that has drawdown expectations that are tolerable for you; then, even if you exceed them in that catastrophic event - be it an unlucky sequence or a failed/non-existent edge - you haven't lost something that you weren't prepared to lose.
Personally, I tend to be more conservative, and like to have the probability of even a 15% drawdown be very low, but this is obviously just my comfort zone. I find it fascinating how different traders approach this question. I remember a certain fairly prominent trader on this forum who allegedly ran up an account 1000% in a year, risking - if I remember correctly - 8% on each trade. He was so immodestly certain that, based on testing, his system would continue to work - even though during testing it had some incredible drawdowns. I didn't even doubt the quality of his testing, but his certitude was ridiculous, especially after the live year. At 8% risk, you don't need THAT many losing trades to destroy you. Of course, it all crashed and burned, and his future posts were somewhat more humble.
I think that is really what Tdion is getting at: that sense of certainty that many seem to have, and how it is completely unfounded. I get that and I agree. At the same time, the hysteria surrounding luck in trading is overdone. Know what to expect as an acceptable worst-case, the likelihood of it happening, and what to do if it does happen within your trading career.
Trading system design
Lucky...That would be far more exciting.
I rarely post on the FF, but I have seen a lot of these posts recently - questioning (or, in some cases, audaciously claiming) that it is impossible to trade successfully in the long term, or that any long-term prospect of success is weighted far more towards luck than a sound trading practice. Let me address this as thoroughly as possible, hopefully in a somewhat logical order.
The time-frames that are you trading on (1m, 5m, etc) will undoubtedly be exposed to a significant amount of noise - news releases or other liquidity spikes will be much more likely to stop you out if you hold tight-stopped, short-term positions. I am NOT saying that is it impossible to trade smaller time frames, but just for someone that is worried (and seemingly overwhelmed) by the numerous factors that effect the market, I think larger timeframes would be a better bet.
I will now run through the process that I personally use to construct trading systems. Yes, I only ever trade a system with a strong statistical basis, since trading anything other than that would be impossible for me to put any long-standing faith in, and subsequently impossible to mentally stick with in times of greater drawdown. Even an EA that I hadn't PERSONALLY tested and judged to be statistically significant in its expectation would be very difficult to stick with during losing streaks. But I digress...
The first step of the process is to identify variables that you believe create a slight statistical edge - where given 1000s of incidents of that variable occurring, you would expect the chance of "something" occurring slightly more 50/50 (the greater the ratio, the greater the edge of that particular variable). Once you have that variable, you look for other variables that can be used in conjunction to further increase your statistical outcome through filtering out some of the initial trades. Eventually, you have an entry condition that could be expressed as an if statement: if x=3 and y=5 and z=10 then you place a buy stop/sell stop at a certain predefined point (the numbers and variables used are completely arbitrary, so don't pm me asking how I defined z...). On that note, to truly create a system that you have any statistical confidence in, everything - every single possible action that you take entering, existing or modifying a position - has to be 100% defined.
So at this point, what do you have? You essentially only have an entry condition where you are confident that when x,y and z align in a certain way the outcome over many instances should be within some statistical expectation. Does this mean you have a winning system and can conquer the world? If only it were so easy...
At this point - which honestly is the point that many traders stop at, if they even define things so precisely at all - you simply know when to enter the market. That’s it. You have no concept of money management, stop placement (fixed pip or varying based on recent volatility), or exit conditions. How do you go about defining those? In much the same way as you defined the entry. By looking at 1000s of occurrences where your system produced an entry, and then meticulously testing variations of all of the above. Sounds pretty tedious right? Well, it is, but it is double for those with patience and reasonable logical faculties.
Let me give you an example. (Disclaimer: this is by no means an actual system - I am literally making this up right now with no basis in anything. I will sell it to you though…) Say you have defined your timeframe as the daily charts. The entry condition that you have defined is that when the RSI 96 is above 50 AND when you have an inside bar AND when the price breaks the inside bar by at least 15 pips (through the use of a buy). Your stop lose is based on some consistent measure of recent volatility (ATR, etc), and you are using fixed fractional position sizing for your MM. Your exit is defined as whenever the move reaches 1.5R in profit. You also mechanically cut loses depending on other x,y,z factors that you observe at the end of a given period (at the end of the day, in this case). All trading actions are taken at the end of the period, and only at the end of the period, to remain 100% statistically consistent.
So, now you have a system that is completely defined, but does it work? The only way to answer that (aside from live trading, of course), is to first backtest it over 1000s of occurrences. Another point is that in a statistically based system, you have to take EVERY SINGLE INCIDENCE of a trade that aligns with your variables, making it more difficult to do on lower time frames without an EA unless you want to watch the monitor at the end of every period like a crazy insomniac. Backtesting over a large sample size with 100% defined trading rules will allow you to see how your system would have performed over a certain time period.
To make it clear, when I say backtest, I don't mean what I think many in this forum do: looking at their chart over a couple of years (or months - or even weeks...) and gleefully counting in their head "winner, winner, winner, winner, loser, winner, winner, loser, winner", while half-focusing on the finishings on next year's 200 foot mega yacht. The testing should be nothing less than scientific. You are a market scientist, trying to create a market theory, so every stage of the process needs to be defined and testable. You will know that you are doing this right when you aren't thinking of all the money you are going to make but instead simply recording, in thorough detail, all of the data that you are going to need to properly formulate a compelling theory; as a side benefit, you will also limit testing bias, since you will no longer TRYING to prove anything, but simply testing to see if it could be a tenable theory.
Lets say you do this, and you find that your system over 5000 consecutive trades would have produced a win rate of 55% and a average win/average lose ratio, as a percentage of R, of 1.3/1. As a brief aside, for those that haven't done this before, constructing a system is always a balancing of two often-competing factors: win rate and ave win/ave lose ratio. Generally they are inversely correlated to a degree. A trend following system, where you typically have high R multiple winners will typically have a high ave win/ave lose ratio, but a lower win rate (often below 50%). A scalping system, on the other hand, where you are quicker to take profits, will typically have a higher win rate, but a lower ave win/ave lose ratio, since, well, you are quicker to take profits and therefore don't capitalize on those large R moves. It is the balance of these two factors that creates your expectancy - and, if you have developed a good edge, hopefully a positive one.
So are we done yet? Haha - not quite. Those two factors are only a small measure of a system's success. Ultimately you should focus on the biggest factor that will determine your system's biggest success: its annual return/worst annual drawdown. And the ratio itself is only part of the battle. Sure, you can have a 50/1 ratio, but if you have a max drawdown of 60% than the ratio is somewhat misleading, even with that 3000% return. You can of course decrease the drawdown by decreasing your position risk, but that will also exponentially decrease the ratio due to less compounding on the upside. Ultimately, you are looking for a decent ratio - but more importantly, a reasonable drawdown that is psychologically palatable for you, and which your system can reasonably recover from.
After that you have that, for an extra measure of confidence, you should perform a monte carlo test on your 1000s of results. You want to make sure that 1,000,000s of permutations of the results are consistent, and that the results that you obtained were not just the product of 'lucky' historical sequencing.
Finally, once you have all of that, then you are finally ready to...forward test. How glamorous, huh? So, you forward test the system over a couple of months, and if it clearly performs within statistical expectation, then, and only then, are you ready to go live.
Some other notes on system development:
1. Make sure that your sample size is suitably large. Constructing a system over 50-100 or so trades is complete foolishness, and 'curve-fitting', in the negative sense of the word (with the arduous strategy above being in the more positive sense). You are a scientist, and you need enough results to formulate a plausible market theory.
2. Make sure that EVERYTHING is measurable and defined. If not, then your system will have elements of inconsistency. Wishful thinking prays on these little pockets of testing-inconsistency, and can significantly distort your statistical expectation if you allow it to leak into a system that is crafted with anything less than 100% precision.
3. Make sure that your testing period includes diverse markets, and preferably functions over numerous market conditions and many years. Even better if it broadly functions across different currencies, but this is not essential. Essentially, you want to limit the myopic curve-fitting experience, where your system is highly calibrated to a rigid set of market parameters. If for instance, your system works great in 2008, make sure that is works well in 200x, since 2008 is not necessarily broadly representative.
4. Always remember that there will be testing inaccuracies. Be it that certain positions were different/entered/not entered based on spread changes, charting errors (hopefully not if you choose a good feed) and the tendency for human positive bias (mitigated by 100% rigid testing parameters). Generally, a shorter time-frame system will be affected more my the spread change issue than a longer-term one.
Whew! So there you have it: a system that you can put a fair degree of faith in moving forward. And that, ladies and gentlemen, is about all you can ever hope for in trading. Why? Well, to finally address the initial question in the thread, because you can never, ever, ever get away from the fact that the market is uncertain, and that at any moment in the future it can behave completely differently from any way that it has behaved before. So is that luck then? Only if you define luck as the market consistently behaving based on robust expectation. At that point it just becomes a question of semantics.
One thing that certainly isn't luck, though, are the long-term track records of the successful few; that type of legacy is the product of systematically superimposing robust constraints on the markets. But what about when the systems stop working - does that not then negate the proceeding accomplishments and make it all a lucky ride? Not in the slightest. For one, the more robust and broadly functioning the system, the less likelihood that it will stop working - which, of course, is a design feature that has nothing to do with luck.
Sure, Chris, but even THOSE can stop working too - isn't that luck? Well, yes, in that very rigid sense I suppose that you could define this inextricable luck component as the "duration of time that a particular robust system functions before it no longer functions". I will concede that limited point, but again, I more than accept that as inevitable uncertainty, that you will necessary have in any endeavor that you peruse. You could start an orange juice company that does great year after year for 20 years until the FDA comes out and says that orange juice knocks 10 years off the average life, and the market completely shrivels up. I never look at any system I develop as a sure thing, or something where I can simply press play, go into a 50-year coma, and wake up the richest man in the world. Again, this is where long-term success should not be confused with luck. There are always exogenous uncontrollables (black swans, as it were), but the part that isn't lucky is having a feedback mechanism to recognize when one has happened, and having a plan in place for when it does.
To bring it back to the example, say the system that you designed had a maximum drawdown, over a 15-year period, of 20%. With monte carlo analysis, over millions of permutations based on 1000s of initial observations, you conclude that you have a 95% confidence of never dropping below a 25% drawdown. Does this mean that it will never happen - is this the certainty that you were looking for? No way. It very well may happen; in fact, I would postulate that given enough time it will happen, since, after all, it is only a 95% confidence. Even a 100% confidence would still be based on only x thousands of occurrences, never escaping the uncertainty of what may come.
What you do know, however, is that if you drop below 25% drawdown then you are starting to venture outside of statistical expectation. So you make a fail safe. You write it on your wall and you stick to it no matter what. If the system ever breaches x% drawdown, then I will stop trading until I am again assured that it is operating within expectation, and that the drawdown was merely a standard deviation event; if, however, it doesn't resume its normal functioning - if it doesn't recover from the drawdown based on a reasonable logarithmic expectation - then it is time to go back to the drawing board, figure out what changed, modify your variables accordingly, and strive to develop a version of your system that incorporates all of your previous 1000s of occurrences AND the new ones that had previously thrown it off. Curve-fitting? Sure, but again over many, many occurrences so that it is broadly functioning. The more robust your model in the first place, the fewer changes that you will likely have to make, and it will be easier to integrate them without a complete overhaul.
Well, that’s about it from me for today. I hope this was helpful. I obviously know that it can appear overwhelming, but this is simply the reality that has allowed me to be consistently successful. Stop looking for certainty, stop worrying about luck and designing something that will prove to be infinitely viable. Become a market scientist, create a viable market theory, play it out until it stops working (hopefully, if it is exceedingly robust, you will be dead long before that happens), and then have a feedback mechanism ready so that you can roll with the punches, make your adjustments, and continue moving forward. And specifically for the initial poster, don’t worry so much about all the millions of factors that move the market. Stop trying to know and control everything - you can’t and you don’t need to.
Best,
Chris
The time-frames that are you trading on (1m, 5m, etc) will undoubtedly be exposed to a significant amount of noise - news releases or other liquidity spikes will be much more likely to stop you out if you hold tight-stopped, short-term positions. I am NOT saying that is it impossible to trade smaller time frames, but just for someone that is worried (and seemingly overwhelmed) by the numerous factors that effect the market, I think larger timeframes would be a better bet.
I will now run through the process that I personally use to construct trading systems. Yes, I only ever trade a system with a strong statistical basis, since trading anything other than that would be impossible for me to put any long-standing faith in, and subsequently impossible to mentally stick with in times of greater drawdown. Even an EA that I hadn't PERSONALLY tested and judged to be statistically significant in its expectation would be very difficult to stick with during losing streaks. But I digress...
The first step of the process is to identify variables that you believe create a slight statistical edge - where given 1000s of incidents of that variable occurring, you would expect the chance of "something" occurring slightly more 50/50 (the greater the ratio, the greater the edge of that particular variable). Once you have that variable, you look for other variables that can be used in conjunction to further increase your statistical outcome through filtering out some of the initial trades. Eventually, you have an entry condition that could be expressed as an if statement: if x=3 and y=5 and z=10 then you place a buy stop/sell stop at a certain predefined point (the numbers and variables used are completely arbitrary, so don't pm me asking how I defined z...). On that note, to truly create a system that you have any statistical confidence in, everything - every single possible action that you take entering, existing or modifying a position - has to be 100% defined.
So at this point, what do you have? You essentially only have an entry condition where you are confident that when x,y and z align in a certain way the outcome over many instances should be within some statistical expectation. Does this mean you have a winning system and can conquer the world? If only it were so easy...
At this point - which honestly is the point that many traders stop at, if they even define things so precisely at all - you simply know when to enter the market. That’s it. You have no concept of money management, stop placement (fixed pip or varying based on recent volatility), or exit conditions. How do you go about defining those? In much the same way as you defined the entry. By looking at 1000s of occurrences where your system produced an entry, and then meticulously testing variations of all of the above. Sounds pretty tedious right? Well, it is, but it is double for those with patience and reasonable logical faculties.
Let me give you an example. (Disclaimer: this is by no means an actual system - I am literally making this up right now with no basis in anything. I will sell it to you though…) Say you have defined your timeframe as the daily charts. The entry condition that you have defined is that when the RSI 96 is above 50 AND when you have an inside bar AND when the price breaks the inside bar by at least 15 pips (through the use of a buy). Your stop lose is based on some consistent measure of recent volatility (ATR, etc), and you are using fixed fractional position sizing for your MM. Your exit is defined as whenever the move reaches 1.5R in profit. You also mechanically cut loses depending on other x,y,z factors that you observe at the end of a given period (at the end of the day, in this case). All trading actions are taken at the end of the period, and only at the end of the period, to remain 100% statistically consistent.
So, now you have a system that is completely defined, but does it work? The only way to answer that (aside from live trading, of course), is to first backtest it over 1000s of occurrences. Another point is that in a statistically based system, you have to take EVERY SINGLE INCIDENCE of a trade that aligns with your variables, making it more difficult to do on lower time frames without an EA unless you want to watch the monitor at the end of every period like a crazy insomniac. Backtesting over a large sample size with 100% defined trading rules will allow you to see how your system would have performed over a certain time period.
To make it clear, when I say backtest, I don't mean what I think many in this forum do: looking at their chart over a couple of years (or months - or even weeks...) and gleefully counting in their head "winner, winner, winner, winner, loser, winner, winner, loser, winner", while half-focusing on the finishings on next year's 200 foot mega yacht. The testing should be nothing less than scientific. You are a market scientist, trying to create a market theory, so every stage of the process needs to be defined and testable. You will know that you are doing this right when you aren't thinking of all the money you are going to make but instead simply recording, in thorough detail, all of the data that you are going to need to properly formulate a compelling theory; as a side benefit, you will also limit testing bias, since you will no longer TRYING to prove anything, but simply testing to see if it could be a tenable theory.
Lets say you do this, and you find that your system over 5000 consecutive trades would have produced a win rate of 55% and a average win/average lose ratio, as a percentage of R, of 1.3/1. As a brief aside, for those that haven't done this before, constructing a system is always a balancing of two often-competing factors: win rate and ave win/ave lose ratio. Generally they are inversely correlated to a degree. A trend following system, where you typically have high R multiple winners will typically have a high ave win/ave lose ratio, but a lower win rate (often below 50%). A scalping system, on the other hand, where you are quicker to take profits, will typically have a higher win rate, but a lower ave win/ave lose ratio, since, well, you are quicker to take profits and therefore don't capitalize on those large R moves. It is the balance of these two factors that creates your expectancy - and, if you have developed a good edge, hopefully a positive one.
So are we done yet? Haha - not quite. Those two factors are only a small measure of a system's success. Ultimately you should focus on the biggest factor that will determine your system's biggest success: its annual return/worst annual drawdown. And the ratio itself is only part of the battle. Sure, you can have a 50/1 ratio, but if you have a max drawdown of 60% than the ratio is somewhat misleading, even with that 3000% return. You can of course decrease the drawdown by decreasing your position risk, but that will also exponentially decrease the ratio due to less compounding on the upside. Ultimately, you are looking for a decent ratio - but more importantly, a reasonable drawdown that is psychologically palatable for you, and which your system can reasonably recover from.
After that you have that, for an extra measure of confidence, you should perform a monte carlo test on your 1000s of results. You want to make sure that 1,000,000s of permutations of the results are consistent, and that the results that you obtained were not just the product of 'lucky' historical sequencing.
Finally, once you have all of that, then you are finally ready to...forward test. How glamorous, huh? So, you forward test the system over a couple of months, and if it clearly performs within statistical expectation, then, and only then, are you ready to go live.
Some other notes on system development:
1. Make sure that your sample size is suitably large. Constructing a system over 50-100 or so trades is complete foolishness, and 'curve-fitting', in the negative sense of the word (with the arduous strategy above being in the more positive sense). You are a scientist, and you need enough results to formulate a plausible market theory.
2. Make sure that EVERYTHING is measurable and defined. If not, then your system will have elements of inconsistency. Wishful thinking prays on these little pockets of testing-inconsistency, and can significantly distort your statistical expectation if you allow it to leak into a system that is crafted with anything less than 100% precision.
3. Make sure that your testing period includes diverse markets, and preferably functions over numerous market conditions and many years. Even better if it broadly functions across different currencies, but this is not essential. Essentially, you want to limit the myopic curve-fitting experience, where your system is highly calibrated to a rigid set of market parameters. If for instance, your system works great in 2008, make sure that is works well in 200x, since 2008 is not necessarily broadly representative.
4. Always remember that there will be testing inaccuracies. Be it that certain positions were different/entered/not entered based on spread changes, charting errors (hopefully not if you choose a good feed) and the tendency for human positive bias (mitigated by 100% rigid testing parameters). Generally, a shorter time-frame system will be affected more my the spread change issue than a longer-term one.
Whew! So there you have it: a system that you can put a fair degree of faith in moving forward. And that, ladies and gentlemen, is about all you can ever hope for in trading. Why? Well, to finally address the initial question in the thread, because you can never, ever, ever get away from the fact that the market is uncertain, and that at any moment in the future it can behave completely differently from any way that it has behaved before. So is that luck then? Only if you define luck as the market consistently behaving based on robust expectation. At that point it just becomes a question of semantics.
One thing that certainly isn't luck, though, are the long-term track records of the successful few; that type of legacy is the product of systematically superimposing robust constraints on the markets. But what about when the systems stop working - does that not then negate the proceeding accomplishments and make it all a lucky ride? Not in the slightest. For one, the more robust and broadly functioning the system, the less likelihood that it will stop working - which, of course, is a design feature that has nothing to do with luck.
Sure, Chris, but even THOSE can stop working too - isn't that luck? Well, yes, in that very rigid sense I suppose that you could define this inextricable luck component as the "duration of time that a particular robust system functions before it no longer functions". I will concede that limited point, but again, I more than accept that as inevitable uncertainty, that you will necessary have in any endeavor that you peruse. You could start an orange juice company that does great year after year for 20 years until the FDA comes out and says that orange juice knocks 10 years off the average life, and the market completely shrivels up. I never look at any system I develop as a sure thing, or something where I can simply press play, go into a 50-year coma, and wake up the richest man in the world. Again, this is where long-term success should not be confused with luck. There are always exogenous uncontrollables (black swans, as it were), but the part that isn't lucky is having a feedback mechanism to recognize when one has happened, and having a plan in place for when it does.
To bring it back to the example, say the system that you designed had a maximum drawdown, over a 15-year period, of 20%. With monte carlo analysis, over millions of permutations based on 1000s of initial observations, you conclude that you have a 95% confidence of never dropping below a 25% drawdown. Does this mean that it will never happen - is this the certainty that you were looking for? No way. It very well may happen; in fact, I would postulate that given enough time it will happen, since, after all, it is only a 95% confidence. Even a 100% confidence would still be based on only x thousands of occurrences, never escaping the uncertainty of what may come.
What you do know, however, is that if you drop below 25% drawdown then you are starting to venture outside of statistical expectation. So you make a fail safe. You write it on your wall and you stick to it no matter what. If the system ever breaches x% drawdown, then I will stop trading until I am again assured that it is operating within expectation, and that the drawdown was merely a standard deviation event; if, however, it doesn't resume its normal functioning - if it doesn't recover from the drawdown based on a reasonable logarithmic expectation - then it is time to go back to the drawing board, figure out what changed, modify your variables accordingly, and strive to develop a version of your system that incorporates all of your previous 1000s of occurrences AND the new ones that had previously thrown it off. Curve-fitting? Sure, but again over many, many occurrences so that it is broadly functioning. The more robust your model in the first place, the fewer changes that you will likely have to make, and it will be easier to integrate them without a complete overhaul.
Well, that’s about it from me for today. I hope this was helpful. I obviously know that it can appear overwhelming, but this is simply the reality that has allowed me to be consistently successful. Stop looking for certainty, stop worrying about luck and designing something that will prove to be infinitely viable. Become a market scientist, create a viable market theory, play it out until it stops working (hopefully, if it is exceedingly robust, you will be dead long before that happens), and then have a feedback mechanism ready so that you can roll with the punches, make your adjustments, and continue moving forward. And specifically for the initial poster, don’t worry so much about all the millions of factors that move the market. Stop trying to know and control everything - you can’t and you don’t need to.
Best,
Chris
http://www.forexfactory.com/showpost.php?p=2212020&postcount=12
You need a rules
No problem, Leon. Glad to know that I have helped at least give you some ideas.
As for your question, you are asking if you sat me down in front of some naked charts and said "trade away Chris" if I would be able to be consistently profitable. Haha - while I would love to think so it is highly doubtful. And not because I wouldn't have winning trades; I'm sure that I would have many, and probably even some decent streaks. However, I would likely fail in the longer-term for several reasons:
1. I would be lacking the precision that I find necessary in my trading to properly exploit an edge. Looking at a naked chart would force my process to become discretionary, which would distort the integrity of my exits and position risk adjustment, etc.
2. I would almost certainly lose faith in my 'strategy' when I went into drawdown, since I would have no statistical drawdown expectations to help ground my battered confidence.
3. I would undoubtedly get caught up in the emotion of trading again, which is never something that has made me successful. Overconfidence or fear would inevitably erode my capital.
I do want to make it clear, though, that my only input is price. I don't use volume or any sort of fundamental analysis. I don't want to give you the idea that my screen is cluttered with a million lines and indicators; at the same time, I follow carefully constructed rules that cover every potential occurrence. I never even contemplate whether or not to enter a position: it is a given based on my rules, as is every single action that I could possibly take with that position as a reaction to the market.
To put it simply, there is no thinking involved in any of my trading decisions; in fact, I wouldn't even really call them decisions, since they were decided along time ago. Now they are simply givens. All of the thinking (discretion) went into creating the strategy, following it is simply about discipline. Discipline only ever wavers during drawdowns, and even then it is kept in check by more rules. Rules, rules, rules - they are what keep me confident enough to follow a strategy consistently; sane enough to live everyday without a frenetic fixation on the market; and humble enough to know that the outcome of any single trade - or series of trades - is completely out of my control. After all, I'm just following orders. Just make sure that those orders are grounded on a tenable foundation - that you actually have a solid edge at the core of the entire process.
Good luck,
http://www.forexfactory.com/showpost.php?p=2385007&postcount=72
As for your question, you are asking if you sat me down in front of some naked charts and said "trade away Chris" if I would be able to be consistently profitable. Haha - while I would love to think so it is highly doubtful. And not because I wouldn't have winning trades; I'm sure that I would have many, and probably even some decent streaks. However, I would likely fail in the longer-term for several reasons:
1. I would be lacking the precision that I find necessary in my trading to properly exploit an edge. Looking at a naked chart would force my process to become discretionary, which would distort the integrity of my exits and position risk adjustment, etc.
2. I would almost certainly lose faith in my 'strategy' when I went into drawdown, since I would have no statistical drawdown expectations to help ground my battered confidence.
3. I would undoubtedly get caught up in the emotion of trading again, which is never something that has made me successful. Overconfidence or fear would inevitably erode my capital.
I do want to make it clear, though, that my only input is price. I don't use volume or any sort of fundamental analysis. I don't want to give you the idea that my screen is cluttered with a million lines and indicators; at the same time, I follow carefully constructed rules that cover every potential occurrence. I never even contemplate whether or not to enter a position: it is a given based on my rules, as is every single action that I could possibly take with that position as a reaction to the market.
To put it simply, there is no thinking involved in any of my trading decisions; in fact, I wouldn't even really call them decisions, since they were decided along time ago. Now they are simply givens. All of the thinking (discretion) went into creating the strategy, following it is simply about discipline. Discipline only ever wavers during drawdowns, and even then it is kept in check by more rules. Rules, rules, rules - they are what keep me confident enough to follow a strategy consistently; sane enough to live everyday without a frenetic fixation on the market; and humble enough to know that the outcome of any single trade - or series of trades - is completely out of my control. After all, I'm just following orders. Just make sure that those orders are grounded on a tenable foundation - that you actually have a solid edge at the core of the entire process.
Good luck,
http://www.forexfactory.com/showpost.php?p=2385007&postcount=72
system development comments
I would say that conceptually most successful trading systems capitalize on capturing herd behavior; the edge is simply derived from quantifying and mechanizing this behavior. If the herd change how they collectively react to these various factors, then there goes your edge. The bet - or, I suppose, the lucky or uncertain element - is the belief that aspects of human nature dictate that the crowd will always react in this way (obviously given a sufficient sample size, etc). It is merely a belief and that is all it can ever be.
The part that puzzles me about this whole debate is that it really seems no different than any undertaking that isn't governed by completely fixed rules and probabilities. Casinos and certain card games fall into this category; the long-term statistical outcome may not be favorable for the participant, but at least it can be accurately relied upon. In all other cases, you simply do the best you can, making reasonable extrapolations from the data available to you. If you are starting a business, for instance, you would determine all of the various supply and demand factors that might contribute to your success: other competitors in the market, demand elasticity for your product, etc. Does this ensure your success? Of course not, since any of these things could change at any time.
So, I agree with Tdion in the sense that 'luck' plays a role in trading, as it does in pretty much everything. As Merlin said, though, it is about having a market premise(s) that you believe in, and that you don't feel is broadly subject to change. Once you have that, even though it COULD stop working, the feeling that you are simply being lucky goes away and is replaced by a humble gratitude that your system continues to capture your broad understanding, and that your understanding itself is still holding true. Either that, or your edge involves some specific loophole (like darkstar with oanda) and you hope that it never becomes widely exploited and dries up.
Btw, congrats on being up 4000% in 9 months. I had never given much thought to such a high return/risk strategy with a small amount of truly risk capital, but it certainly has its merits. I have found that when managing clients, people are far happier not having large drawdowns than they are with industry-exceptional returns; if anything, they are actually incredulous if you're returns are fairly high. Sad but true. For a portion my own capital, however, I think that I may just try such an approach!
http://www.forexfactory.com/showpost.php?p=2233071&postcount=277
The part that puzzles me about this whole debate is that it really seems no different than any undertaking that isn't governed by completely fixed rules and probabilities. Casinos and certain card games fall into this category; the long-term statistical outcome may not be favorable for the participant, but at least it can be accurately relied upon. In all other cases, you simply do the best you can, making reasonable extrapolations from the data available to you. If you are starting a business, for instance, you would determine all of the various supply and demand factors that might contribute to your success: other competitors in the market, demand elasticity for your product, etc. Does this ensure your success? Of course not, since any of these things could change at any time.
So, I agree with Tdion in the sense that 'luck' plays a role in trading, as it does in pretty much everything. As Merlin said, though, it is about having a market premise(s) that you believe in, and that you don't feel is broadly subject to change. Once you have that, even though it COULD stop working, the feeling that you are simply being lucky goes away and is replaced by a humble gratitude that your system continues to capture your broad understanding, and that your understanding itself is still holding true. Either that, or your edge involves some specific loophole (like darkstar with oanda) and you hope that it never becomes widely exploited and dries up.
Btw, congrats on being up 4000% in 9 months. I had never given much thought to such a high return/risk strategy with a small amount of truly risk capital, but it certainly has its merits. I have found that when managing clients, people are far happier not having large drawdowns than they are with industry-exceptional returns; if anything, they are actually incredulous if you're returns are fairly high. Sad but true. For a portion my own capital, however, I think that I may just try such an approach!
http://www.forexfactory.com/showpost.php?p=2233071&postcount=277
вівторок, 22 березня 2011 р.
Pay less attention to psychology
EDIT: LOL Looks like this went straight to the recycle bin while I was typing. Guess this post will get buried before ya know it...oh well someone might read it so I ll leave it up....
It is entertaining to me to watch the shifts in sentiment among young traders regarding this topic. A new trader does not think at all about psychology, but gets shafted because he has a poor system. Then he reads about successful traders battling psychology, and he believes that psychology is now the sole key to success, and he will forget about system development and focus only on psychology. He will still lose, because the same problem exists now as it did when he was newer: which is that his system just plain old sucks. So then he finally figures that out, and decides that psychology is not all that it is cracked up to be, so its back to the drawing board looking for the perfect entry grail.
From a trader who has been there and done that, let me run through some of my thoughts. First, I dont think that a new trader needs to worry much about psychology. I am talking about the baby trader. What this trader needs to focus on are the basics and mechanics of the market in which he wants to trade. Learn how to use a trading platform, what market vs limit order are, the value of a stop loss, etc. He should spend some time in front of a chart as he is learning all of this to see some of it in action.
After that, it is time to speculate. Two seconds later he will realize that he sucks, and wonder why. Of course he will blame his system, but it is also important that he gain a basic understanding of money management, specifically the dangers of over trading and the cost implications, as well as the importance of cutting losses and running profits. At this point psychology is still not important, because as he solves the money management problem, he will be trading so small (or not live at all), that he will be pretty mechanical and unemotional about trading. Which is good.
Many years later, if he ever even makes it to this point, he will begin to profit consistently. The natrual result is that before he knows it, he will be trading larger sizes.
But a strange phenomena happens as trading size increases, and you guessed it, psychological factors begin to kick in. It can be easy to tame the fear/greed beasts as a baby, but as the account grows, so do those feelings. (As a side note, everything gets amplified once the step is taken to trade for a living.) It IS possible to over come those feelings. In fact, I should say, it is NECESSARY to over come those, but it is not easy. However, psychology extends beyond the open and close of a trade. Let me elaborate:
First, your trading habits can change. Lets say you have a great string of winners, and you make $50,000 in a month. If you are not used to swinging those kind of lines, or more so you are not used to having $50,000 fresh in your account, then you will be tempted to "spend" the money until your account resembles something more psychologically comfortable. If your psychological comfort level exists around $20,000, you will be surprised to notice your trading habits will change until your account matches that level. Think supply and demand, where equilibrium is fixed and demand will adjust to dampen supply. Same thing happens to lottery winners or homeless people when they are quickly elevated in monetary success. They end up losing everything they had because they just could not handle the money. You cannot understand this principle fully until you experience it first hand, but don't worry, many of you won't.
But where psychology changes outside of trading comes after that. Consider when you just made or lost the equivalent of a new car in 1 hour. The first time you do that can be scary shit, and what can happen is that you can easily begin to compare the win or loss you just had with something in real life. Over a long enough period the values you hold for material items will decrease not just because you are making money but because that $900 flat screen doesn't look so expensive when this morning you just risked $5000, lost $2500, but ended the week $10,000 in profit. This mindset can also lead to financial ruin.
So anyway, I know a lot of these are abstract statements that can be hard to truly understand, but I just want to add a different perspective about how psychological fortitude is an essential in trading. If you think otherwise then later in the game you will have a very hard time. My belief is that psychology has its place in trading, but that it usually gains more importance later in trading, and eventually extends beyond the trade.
http://www.forexfactory.com/showpost.php?p=2791750&postcount=17
It is entertaining to me to watch the shifts in sentiment among young traders regarding this topic. A new trader does not think at all about psychology, but gets shafted because he has a poor system. Then he reads about successful traders battling psychology, and he believes that psychology is now the sole key to success, and he will forget about system development and focus only on psychology. He will still lose, because the same problem exists now as it did when he was newer: which is that his system just plain old sucks. So then he finally figures that out, and decides that psychology is not all that it is cracked up to be, so its back to the drawing board looking for the perfect entry grail.
From a trader who has been there and done that, let me run through some of my thoughts. First, I dont think that a new trader needs to worry much about psychology. I am talking about the baby trader. What this trader needs to focus on are the basics and mechanics of the market in which he wants to trade. Learn how to use a trading platform, what market vs limit order are, the value of a stop loss, etc. He should spend some time in front of a chart as he is learning all of this to see some of it in action.
After that, it is time to speculate. Two seconds later he will realize that he sucks, and wonder why. Of course he will blame his system, but it is also important that he gain a basic understanding of money management, specifically the dangers of over trading and the cost implications, as well as the importance of cutting losses and running profits. At this point psychology is still not important, because as he solves the money management problem, he will be trading so small (or not live at all), that he will be pretty mechanical and unemotional about trading. Which is good.
Many years later, if he ever even makes it to this point, he will begin to profit consistently. The natrual result is that before he knows it, he will be trading larger sizes.
But a strange phenomena happens as trading size increases, and you guessed it, psychological factors begin to kick in. It can be easy to tame the fear/greed beasts as a baby, but as the account grows, so do those feelings. (As a side note, everything gets amplified once the step is taken to trade for a living.) It IS possible to over come those feelings. In fact, I should say, it is NECESSARY to over come those, but it is not easy. However, psychology extends beyond the open and close of a trade. Let me elaborate:
First, your trading habits can change. Lets say you have a great string of winners, and you make $50,000 in a month. If you are not used to swinging those kind of lines, or more so you are not used to having $50,000 fresh in your account, then you will be tempted to "spend" the money until your account resembles something more psychologically comfortable. If your psychological comfort level exists around $20,000, you will be surprised to notice your trading habits will change until your account matches that level. Think supply and demand, where equilibrium is fixed and demand will adjust to dampen supply. Same thing happens to lottery winners or homeless people when they are quickly elevated in monetary success. They end up losing everything they had because they just could not handle the money. You cannot understand this principle fully until you experience it first hand, but don't worry, many of you won't.
But where psychology changes outside of trading comes after that. Consider when you just made or lost the equivalent of a new car in 1 hour. The first time you do that can be scary shit, and what can happen is that you can easily begin to compare the win or loss you just had with something in real life. Over a long enough period the values you hold for material items will decrease not just because you are making money but because that $900 flat screen doesn't look so expensive when this morning you just risked $5000, lost $2500, but ended the week $10,000 in profit. This mindset can also lead to financial ruin.
So anyway, I know a lot of these are abstract statements that can be hard to truly understand, but I just want to add a different perspective about how psychological fortitude is an essential in trading. If you think otherwise then later in the game you will have a very hard time. My belief is that psychology has its place in trading, but that it usually gains more importance later in trading, and eventually extends beyond the trade.
http://www.forexfactory.com/showpost.php?p=2791750&postcount=17
market structure
Just some weekend reading for you
They say there is no such thing as a stupid question. This I do not agree with. I mean, just browse through the trading system section and you will be exposed to useless banter on repetitive subjects which offer little to no direction for success whatsoever. However, it is my belief that to find the right answers you first need to ask the right questions. That is what I have done and found success.
So you want to know what influences the market. Let's talk a little about participants and the consequential discovery of price. In a nutshell, information drives the FX market, so first you need to understand how information is factored into price.
It all begins with people who demand the need to exchange currencies, and therefore they seek to participate in the FX market. These people are called customers. Why they enter is important, but the exact reasons why they enter vary enormously. Obvious reasons could be anything like news, events, politics, investments, technical levels, risk management, entertainment, business, whatever! The point is that customers, for one reason or another, need to move money from one currency to another. Just so you know, small retail traders count as customers in this equation, though seeing as how they represent roughly two percent of the entire traded volume, any impact they have is insignificant. Regardless, it is the institutional customers I refer to who actually do make a difference.
So at this point, how does a customer go about participating in this exchange? Well, first off they need access to the market, which means they need a dealer. That is simply put the main role of the dealer; to grant access, offer participation, or by all other means sell liquidity to a customer. So all day long customers place orders with their dealers who are obediently buying and selling the opposite side of what their customers are demanding or supplying. This has been commonly referred to as tier two and three trading. Liquidity is the product; spreads or commissions are the cost.
Now, what have the dealers gained? Well, in addition to gaining spread or commission for their service, they have also taken on the unwanted risk of accumulating inventory from the unbalanced trades with their customers. However, more importantly than either of these, dealers have also gained information based on order flow. That is, information telling them how their customers are reacting to the public information (stated above) through signed transactions. Now, based on the customer who signs these transactions, the dealers determine if the information contained in the order flow is informative or not. In general, the larger the bank, the more customers it has and the bigger the orders are. This leads to more informative order flow.
Either way, the bank responds to this newly acquired information by participating in the interbank market, referred to as tier one. Therefore order flow is a dealers main medium of information. It is what banks use as their primary reason for participating in the interbank market; to either offset the risk they have accumulated, obtain insight into other banks order flow status, or to profit from knowledge gained from informed customers (among other reasons). Consequently, price discovery occurs on the interbank level because the best bid and the best offer prices are supplied and demanded by the largest participating banks who offer the most competitive (and informative) prices. Therefore, response to order flow directly, if not completely, drives and determines how price moves in the FX market.
Thus the flow of orders is formed: Public info drives customers to the dealers, who then view order flow and participate with other banks, which leads to shifts in price on the interbank market as dealers accommodate the incoming flow, which is then mapped out on a chart, which is the average retail traders medium of information. This process is why I always stress and encourage that new traders develop a deep understanding of how the FX market works, how dealers manage inventory, what techniques they use to speculate from their own order flow, how they gather information on the order flow from other large banks, etc, etc, etc.
So the next logical question is: what does all this mean for a retail trader like me? As mentioned above, information drives the markets. He who has the most information has the greatest potential, but he who understands and utilizes the information given to him has gained knowledge, wisdom, and most importantly, an edge. Low level retail traders are at an immediate disadvantage due not only to lack of good information, but to overexposure to bad information as well. This means that a retail trader must learn to filter out the rubbish. This does not necessarily mean looking to exotic sources of information on markets, but instead discerning how information is really being discounted into price.
Ask the right questions. What is the market thinking right now? Are we at an important level of historical support or resistance, or did an unexpected news event just get released? Is today a holiday in some other country, or did Gaston just take the day off? Did the U.S. just elect a new president, is a central bank intervening, or are options expiring soon? Are conditions volatile, deep, steady, trendy, consolidated? Is this a reversal or just a pullback to interest more buyers?
Information can be gathered from everywhere. What information is the most important RIGHT NOW? Don't know what the market is thinking right now? Don't trade.
Ask the right questions with the filter of how price will react based on the internal boundaries of our FX market. We do not have access to the banks order flow. In fact, they do not even have access to each others. But that does not make us incapable of speculating on exchange rate returns. Charts are not bad, and they are a great way to interpret information. But we should never forget that it is what lays behind that chart that gives insight into what the intentions of the market really are. Charts show us what already happened. Fundamental info tells us what might happen. Understanding why price is behaving like it is according to how it fits into the structure of the market will make finding ways to profit from every day events clear.
Have a great weekend,
Gaston
So you want to know what influences the market. Let's talk a little about participants and the consequential discovery of price. In a nutshell, information drives the FX market, so first you need to understand how information is factored into price.
It all begins with people who demand the need to exchange currencies, and therefore they seek to participate in the FX market. These people are called customers. Why they enter is important, but the exact reasons why they enter vary enormously. Obvious reasons could be anything like news, events, politics, investments, technical levels, risk management, entertainment, business, whatever! The point is that customers, for one reason or another, need to move money from one currency to another. Just so you know, small retail traders count as customers in this equation, though seeing as how they represent roughly two percent of the entire traded volume, any impact they have is insignificant. Regardless, it is the institutional customers I refer to who actually do make a difference.
So at this point, how does a customer go about participating in this exchange? Well, first off they need access to the market, which means they need a dealer. That is simply put the main role of the dealer; to grant access, offer participation, or by all other means sell liquidity to a customer. So all day long customers place orders with their dealers who are obediently buying and selling the opposite side of what their customers are demanding or supplying. This has been commonly referred to as tier two and three trading. Liquidity is the product; spreads or commissions are the cost.
Now, what have the dealers gained? Well, in addition to gaining spread or commission for their service, they have also taken on the unwanted risk of accumulating inventory from the unbalanced trades with their customers. However, more importantly than either of these, dealers have also gained information based on order flow. That is, information telling them how their customers are reacting to the public information (stated above) through signed transactions. Now, based on the customer who signs these transactions, the dealers determine if the information contained in the order flow is informative or not. In general, the larger the bank, the more customers it has and the bigger the orders are. This leads to more informative order flow.
Either way, the bank responds to this newly acquired information by participating in the interbank market, referred to as tier one. Therefore order flow is a dealers main medium of information. It is what banks use as their primary reason for participating in the interbank market; to either offset the risk they have accumulated, obtain insight into other banks order flow status, or to profit from knowledge gained from informed customers (among other reasons). Consequently, price discovery occurs on the interbank level because the best bid and the best offer prices are supplied and demanded by the largest participating banks who offer the most competitive (and informative) prices. Therefore, response to order flow directly, if not completely, drives and determines how price moves in the FX market.
Thus the flow of orders is formed: Public info drives customers to the dealers, who then view order flow and participate with other banks, which leads to shifts in price on the interbank market as dealers accommodate the incoming flow, which is then mapped out on a chart, which is the average retail traders medium of information. This process is why I always stress and encourage that new traders develop a deep understanding of how the FX market works, how dealers manage inventory, what techniques they use to speculate from their own order flow, how they gather information on the order flow from other large banks, etc, etc, etc.
So the next logical question is: what does all this mean for a retail trader like me? As mentioned above, information drives the markets. He who has the most information has the greatest potential, but he who understands and utilizes the information given to him has gained knowledge, wisdom, and most importantly, an edge. Low level retail traders are at an immediate disadvantage due not only to lack of good information, but to overexposure to bad information as well. This means that a retail trader must learn to filter out the rubbish. This does not necessarily mean looking to exotic sources of information on markets, but instead discerning how information is really being discounted into price.
Ask the right questions. What is the market thinking right now? Are we at an important level of historical support or resistance, or did an unexpected news event just get released? Is today a holiday in some other country, or did Gaston just take the day off? Did the U.S. just elect a new president, is a central bank intervening, or are options expiring soon? Are conditions volatile, deep, steady, trendy, consolidated? Is this a reversal or just a pullback to interest more buyers?
Information can be gathered from everywhere. What information is the most important RIGHT NOW? Don't know what the market is thinking right now? Don't trade.
Ask the right questions with the filter of how price will react based on the internal boundaries of our FX market. We do not have access to the banks order flow. In fact, they do not even have access to each others. But that does not make us incapable of speculating on exchange rate returns. Charts are not bad, and they are a great way to interpret information. But we should never forget that it is what lays behind that chart that gives insight into what the intentions of the market really are. Charts show us what already happened. Fundamental info tells us what might happen. Understanding why price is behaving like it is according to how it fits into the structure of the market will make finding ways to profit from every day events clear.
Have a great weekend,
Gaston
http://www.forexfactory.com/search.php?do=finduser&u=84703
order flow Gaston
Lets clear a few things up here. Rabid, I am going to use your post as an example, even though your reply is among the more thought out ones in this thread. I am just trying to offer a different mindset that may allow a trader to understand more clearly the dynamics of price discovery.
Fundamental analysis is the study of what is happening in the world. This is more than what is on the FF news board. This includes what you wrote above Rabid, plus a whole hellofalot more.
I will make my main point here.
Price does not not rally because it was at the bottom of a range. In fact, price does not "do" anything. It merely reflects human behavior. It helps me to humanize the market, give it psychological tendencies, and put people behind the movement of price. Either way, you must think in terms of supply and demand. Ranges exist because of a fight between bulls and bears; buyers and sellers. When a range hits the bottom, then bounces, it did so as a reaction to buyers entering the markets overcoming the sellers. It is not the "range" or "S/R" that caused the sellers to be bought. It is the buyers that bought out the sellers, thus forming the bottom of this range. The range then becomes a product of supply and demand. It shows a historical battle of two sides.
Now, there is a good chance that there were a great many people who saw the support and a range forming, and therefore decided to buy at the bottom of it. This is technical analysis, and it shows some nature of psychology in the markets. Technical traders can easily justify entering the market at the bottom of a range, however, to be able to stop the downward movement, buy up all of the sellers, and reverse supply and demand takes incredible orderflow, much of which technical traders cannot account for. Just a hint, who do you think benefits from the widespread assumption that technical information holds enough weight to be considered a superior cause of market movement? I wonder. Now, I am sure there are times that sole technical analysis can move markets in areas like this, but I believe those times are few and far between.
So, if technical traders are not often responsible for the reversals of market direction, then perhaps the data on a chart does not carry as much weight as we often assume. Or at the least, maybe we are thinking too concretely about how important a support or resistance line is.
Technical analysis is the study of what is happening on a chart. However distorted you make it (ie with indicators), it is still technical analysis.
Again, it is just shifts of supply and demand. In order to capitalize on supply and demand shifts, if would benefit you to not think inside of technical and fundamental boxes (my point way back at the beginning of the thread). Instead, ask yourself who exactly has the power to shift supply and demand. And then, what reason would they have to make such a shift anyway? Kudos to anyone in this thread who can answer those questions correctly.
Quote:
Originally Posted by Rabid I guess it depends on how you draw the line. I see fundamentals as stuff like GDP and jobs reports and trade balances, etc. Each of those effects cash flow to some degree, and in that they have an effect, but other than immediate news trading... the impact of those things are fairly random. You can have a great GDP result, but the market priced-in something better, and end up with a massive negative response on seemingly good news. |
Fundamental analysis is the study of what is happening in the world. This is more than what is on the FF news board. This includes what you wrote above Rabid, plus a whole hellofalot more.
Quote:
| Not at all. The S&P rallied because it was at the bottom of an S&R range. Granted you can't pull up that info on a EURUSD chart, but if you pull up an S&P chart you certainly can. With tightly correlating markets like these you have to extend your TA a bit. |
I will make my main point here.
Price does not not rally because it was at the bottom of a range. In fact, price does not "do" anything. It merely reflects human behavior. It helps me to humanize the market, give it psychological tendencies, and put people behind the movement of price. Either way, you must think in terms of supply and demand. Ranges exist because of a fight between bulls and bears; buyers and sellers. When a range hits the bottom, then bounces, it did so as a reaction to buyers entering the markets overcoming the sellers. It is not the "range" or "S/R" that caused the sellers to be bought. It is the buyers that bought out the sellers, thus forming the bottom of this range. The range then becomes a product of supply and demand. It shows a historical battle of two sides.
Now, there is a good chance that there were a great many people who saw the support and a range forming, and therefore decided to buy at the bottom of it. This is technical analysis, and it shows some nature of psychology in the markets. Technical traders can easily justify entering the market at the bottom of a range, however, to be able to stop the downward movement, buy up all of the sellers, and reverse supply and demand takes incredible orderflow, much of which technical traders cannot account for. Just a hint, who do you think benefits from the widespread assumption that technical information holds enough weight to be considered a superior cause of market movement? I wonder. Now, I am sure there are times that sole technical analysis can move markets in areas like this, but I believe those times are few and far between.
So, if technical traders are not often responsible for the reversals of market direction, then perhaps the data on a chart does not carry as much weight as we often assume. Or at the least, maybe we are thinking too concretely about how important a support or resistance line is.
Quote:
| Personally I'm not a fan of the term "technical analysis" at all. It has come to mean indicator analysis, and that's usually what people do. Even basic S&R is usually reduced to an indicator, or just a line on a screen. I prefer "market analysis" as better a term. |
Technical analysis is the study of what is happening on a chart. However distorted you make it (ie with indicators), it is still technical analysis.
Quote:
| At some point when the market rallies enough the current correlation will unwind. Equities rally, people sell dollars, the dollar will lose value, people buy more equities, the market will rebound, and the dollar will rally back as people invest in US-based business again (sell native currency, buy dollars, build factory, repeat). It's all just phases of the financial moon. |
Again, it is just shifts of supply and demand. In order to capitalize on supply and demand shifts, if would benefit you to not think inside of technical and fundamental boxes (my point way back at the beginning of the thread). Instead, ask yourself who exactly has the power to shift supply and demand. And then, what reason would they have to make such a shift anyway? Kudos to anyone in this thread who can answer those questions correctly.
__________________
http://www.forexfactory.com/showpost.php?p=2392029&postcount=36
Order flow trading with demand supply zones
I am sorry I should clarify a few things. I use orderflow differently then how the banks use it. When I describe a big player buying where others sell, I am talking mostly about bank participation here. (Although technically we are all buying were others are selling…but I hope you get my point)
Example: They have a reason to get in the market, lets say long, and it’s a huge ass order. If they just hit the buy button right now, they will most likely shove price up through the roof as they buy out seller after seller at various price levels. If, on the other hand, they buy in at an area of high liquidity, then they can get in without driving price up as much, as there are more sellers at this level. When you see price bouncing on a level several times, this is often times one huge order that is taking several moves to work into the market. You are seeing support form. These levels form when price touches a point where the banks think there is sufficient liquidity, and they buy until all sellers are gone and price climbs to a certain level. Then they let price jump around for a while, do its thing, and come back down to the level again. They buy once more, taking out all of the sellers and spiking price up. They do this until their order is worked in.
I in no way play the market like this. I do not have orders nearly as large as they do to work in the market. I simply identify potential concentrations of order flow (in much the same way they do), but I have structured a strategy based on the reactions in those areas that I can take advantage of.
Now, I could ramble on this topic forever, but there is just too much and honestly I do not care about half of you that much anyway.
Sorry. If you want to understand this stuff, then get reading. The information is out there. It is no secret. There are tons of concepts and market characteristics that can be explained by bank (and others) behavior. What I described is extremely simplified and dumbed down. Hopefully, however, this clears up a few things.
http://www.forexfactory.com/showpost.php?p=2385665&postcount=83
Example: They have a reason to get in the market, lets say long, and it’s a huge ass order. If they just hit the buy button right now, they will most likely shove price up through the roof as they buy out seller after seller at various price levels. If, on the other hand, they buy in at an area of high liquidity, then they can get in without driving price up as much, as there are more sellers at this level. When you see price bouncing on a level several times, this is often times one huge order that is taking several moves to work into the market. You are seeing support form. These levels form when price touches a point where the banks think there is sufficient liquidity, and they buy until all sellers are gone and price climbs to a certain level. Then they let price jump around for a while, do its thing, and come back down to the level again. They buy once more, taking out all of the sellers and spiking price up. They do this until their order is worked in.
I in no way play the market like this. I do not have orders nearly as large as they do to work in the market. I simply identify potential concentrations of order flow (in much the same way they do), but I have structured a strategy based on the reactions in those areas that I can take advantage of.
Now, I could ramble on this topic forever, but there is just too much and honestly I do not care about half of you that much anyway.
Sorry. If you want to understand this stuff, then get reading. The information is out there. It is no secret. There are tons of concepts and market characteristics that can be explained by bank (and others) behavior. What I described is extremely simplified and dumbed down. Hopefully, however, this clears up a few things.http://www.forexfactory.com/showpost.php?p=2385665&postcount=83
No charts needed
A rant on charts
Given enough time and motivation, I probably could pull profit from nothing but a naked chart and my buy/sell buttons. Could I do that tomorrow? Probably not, but only because my trading style takes in information found outside of charts, and therefore I would need to come up with a new system that does not lean on outside information. For me to be successful, I need order flow, and often times chart information alone does not provide sufficient amount of order flow for me to trade it effectively.
You mention that a “chart shows me the end result but not the story”. I would say you almost have it backwards. A chart will tell you a story. It will tell you where supply and demand balances shifted, and how price got to be where it is now. It will never, however, show you the end result, because supply and demand are always imbalanced. Even when price is ranging, the number of bears vs. bulls are still off balance, it is just a battle of who will run out of buying/selling power first. But is this thought process as far back as you should go? Let me take you further back, along the lines I was thinking when I was your age (trading age).
Think on a macro scale of what the market is really all about, and how a chart fits in to all of this. Nations have different currencies, and they need to exchange them across a standard rate. Boom, you have a foreign exchange market. As values of nations bounce up and down, the rate of exchange changes to accommodate these fluctuations. These fluctuations are then plotted on a chart, and divided up into timeframes. That is it. A chart is simply a picture of fluctuations that have already happened. It is a tool used to provide a perspective of the market.
Now take a minute and think about that, then consider the following.
Chart reading and interpreting skills are considered essential to successful trading, and this mindset runs rampant throughout the trading community. New traders cannot comprehend price movement without a chart in front of them. To the vast majority of traders, the forex market IS a chart. To them, the markets do not represent currency rates, and the little 6 letter symbol in the corner of the screen means nothing to them. They spend all their time and energy reading charts, learning charts, and forecasting chart movement. They are addicted to them. It is appealing to the mind, as they see all the big moves on the left side of screen, and they just imagine if they were in them. As price dances in front of them, their mind becomes entranced, and they can easily justify why price SHOULD go here or SHOULD go there; all according to these bars in front of them. Then consider that countless brokers catch a trader’s eyes by advertising a computer monitor with a pretty looking chart towering over them. Consider that almost every new trader believes that success begins and ends on this picture in front of them, then consider that 95% of these people fail. Next, ask yourself why you think studying the same tool which countless others have failed with is the best and most efficient route to success.
Charts are used by newbies as a sole tool to predict price. Professionals know this, so they use charts to determine what all the newbies are thinking. Therefore, charts often times provide the right amount of information needed to trick a trader into losing his money. Big players need order flow to get into and out of the market. What better way to do it than to buy at a point you know everyone and their dog is going to sell? The market will follow the big money on such a transaction, because all the speculators in the world cannot provide enough buying/selling power to eat up and oppose a bank’s intervention.
So anyway, my long winded point is to question the importance of charts. Can I profit off a naked one with a buy/sell button only? Probably. Should I devote years of my life studying a TOOL of the market instead of the market itself? Probably not. Again, this is the thought trail I walked down to take me where I am today. Hopefully it benefits you as well.
You mention that a “chart shows me the end result but not the story”. I would say you almost have it backwards. A chart will tell you a story. It will tell you where supply and demand balances shifted, and how price got to be where it is now. It will never, however, show you the end result, because supply and demand are always imbalanced. Even when price is ranging, the number of bears vs. bulls are still off balance, it is just a battle of who will run out of buying/selling power first. But is this thought process as far back as you should go? Let me take you further back, along the lines I was thinking when I was your age (trading age).
Think on a macro scale of what the market is really all about, and how a chart fits in to all of this. Nations have different currencies, and they need to exchange them across a standard rate. Boom, you have a foreign exchange market. As values of nations bounce up and down, the rate of exchange changes to accommodate these fluctuations. These fluctuations are then plotted on a chart, and divided up into timeframes. That is it. A chart is simply a picture of fluctuations that have already happened. It is a tool used to provide a perspective of the market.
Now take a minute and think about that, then consider the following.
Chart reading and interpreting skills are considered essential to successful trading, and this mindset runs rampant throughout the trading community. New traders cannot comprehend price movement without a chart in front of them. To the vast majority of traders, the forex market IS a chart. To them, the markets do not represent currency rates, and the little 6 letter symbol in the corner of the screen means nothing to them. They spend all their time and energy reading charts, learning charts, and forecasting chart movement. They are addicted to them. It is appealing to the mind, as they see all the big moves on the left side of screen, and they just imagine if they were in them. As price dances in front of them, their mind becomes entranced, and they can easily justify why price SHOULD go here or SHOULD go there; all according to these bars in front of them. Then consider that countless brokers catch a trader’s eyes by advertising a computer monitor with a pretty looking chart towering over them. Consider that almost every new trader believes that success begins and ends on this picture in front of them, then consider that 95% of these people fail. Next, ask yourself why you think studying the same tool which countless others have failed with is the best and most efficient route to success.
Charts are used by newbies as a sole tool to predict price. Professionals know this, so they use charts to determine what all the newbies are thinking. Therefore, charts often times provide the right amount of information needed to trick a trader into losing his money. Big players need order flow to get into and out of the market. What better way to do it than to buy at a point you know everyone and their dog is going to sell? The market will follow the big money on such a transaction, because all the speculators in the world cannot provide enough buying/selling power to eat up and oppose a bank’s intervention.
So anyway, my long winded point is to question the importance of charts. Can I profit off a naked one with a buy/sell button only? Probably. Should I devote years of my life studying a TOOL of the market instead of the market itself? Probably not. Again, this is the thought trail I walked down to take me where I am today. Hopefully it benefits you as well.
http://www.forexfactory.com/showpost.php?p=2385299&postcount=73
Trader development from Topherkhk
Member |
Leon,
As you can probably see from my post count, I very rarely post to the forum. I have been trading for long enough now that, like many in the same position, I limit my posting to the few occasions where I can potentially add some value. For some reason, your post struck me as one of those occasions - I see someone who is on the right track, but just can't seem to get everything to 'click'. While I truly believe that most forums like this are largely comprised of the blind audaciously leading the blind, there are the few people like yourself who are humble enough to put it out there in a reasonable way - only after having explored extensively themselves. Perhaps I can be of some help.
Firstly, I understand how you have grown tired of the platitudes: using sensible risk management, cutting loses, mitigating emotion, naked trading, trendlines, etc, are thrown around casually, but you can't just bang them all together and hope to have something that is remotely profitable.
So what do I truly believe you are lacking, Leon? Quite simply, you are lacking a market inefficiency that stands to be your 'edge' (to use another of those terms). Once you have that, and you figure out a way to consistently capitalize on it, many of the tools that you have already learned will serve to keep the machine running - but, unfortunately, they alone can't build it without a proper foundation.
Before I start, I will disclose that I am extremely biased towards mechanical trading. In my view, the factors that makeup every 'A-trade' can be mechanized if one endeavors to take the time to meticulously define every aspect that made it so (at least if you are using technical inputs). There are certainly some great discretionary TA traders who I believe have completely internalized the specific criteria that comprise their edge, but I find that having it clearly defined makes the entire process much less stressful, and far more consistent (if perhaps also less fun and exciting).
Anyway, you can't even begin to do any of that until you have a strong foundation - and this is precisely where many get it wrong. They want a mechanized model, so they do a 'backtest' of various rules that they have composed. However, what is the logical basis for those rules, aside from the fact that they appear to historically work? Finding that you make x% over x years based on rules that are not grounded on a specific understanding of market dynamics is likely to be no more than a mere coincidence. To borrow from Taleb's monkey example in 'Fooled by randomness', if you tinker with enough variables you are going to find something that fits. This of course is the process of curve fitting - something that is easy to inadvertently do, mainly because it is so perversely satisfying and so seemingly reasonable.
The only way to really avoid this is to first truly understand what your chosen inefficiency is before developing a system to exploit it. And I don't mean understanding exactly why x bank placed x order that moved the market x amount on xyz date; rather, the overriding concept that what you're designing will attempt to capture.
I know this all may seem somewhat esoteric, but figuring out an edge can be somewhat of an esoteric (and exhausting) process. Doing all of what you have done; learning all that you have already learned; falling into all of the traps that you have likely already fallen into, are generally all prerequisites to the process of understanding, in a broad sense, why certain things tend to happen more often than not. It is understanding why, given certain identifiable situations, people 'tend' to act in a particular way with at least enough reliability to exploit.
Once you have that, you can than take that concept and build yourself a great system. You recognize a system that you have designed in this way because watching it in action will be a satisfying experience (a somewhat slow, unexciting pleasure), and something that you have a very large degree of confidence in. And all of this will ultimately be constructed with many of the tools that you already know.
I have put a link to another post of mine where I go into a reasonable degree of detail about my development process. There is no need to rehash that here.
To give you a few concrete things to take away:
- if you are going to use trendlines, support/resistance, etc, make sure that you have a very consistent way to define them. Simply going by 'seeing it' hardly provides much of a basis for an edge, even if one's judgments often prove to be right.
- Make sure that your system dynamically allows for differing volatility levels. Something that is shown to make x pips in 2004 means very little in today's market.
- Take every single trade that meets your rules. If you are trading on an hourly basis, that means either looking at the charts every single hour or potentially developing an EA sophisticated enough to encapsulate the entire process. It is for this reason that I don't trade on anything less than a daily basis.
- Making sure that you will know what you are going to do in every possible situation. Be it placing an order, not placing an order, taking out an order, adjusting a trade's risk, exiting a trade - none of this should be left to whim, mood or chance. No matter what happens, you should have an unflinching response - one that would have been exactly the same if everything happened all over again.
- Finally, have a fail-safe. No edge is guaranteed to continue to work. Some are more robust than others, but nothing is certain. You should have a measure for live trading whereby you know when your edge has ceased to work (or potentially never actually worked in the first place). The easiest is statistical - having an understanding that when you lose x trades consecutively, or go into x drawdown, then you should probably take a closer look at either your edge, the way that your system attempts to capture it, or possibly both.
Anyway, I hope this helped Leon. From something about your various posts, I think that you have the combination of open-mindedness and many of the necessary tools to do this. I wish I could just tell you (and really, I probably could if I so choose), but that would likely hinder you developing something organically yourself, which could potentially lead to a better equity curve than mine.
http://www.forexfactory.com/showthread.php?t=67217
Trader development
Orderflow Sniper |
Leon,
Topherhk88 has by far the best advice on here. Virteks has perhaps the worst. Now I do not want to pick on Virteks (too much), but what he writes captures the mindset of the retail Forex loser. What is missing from Virteks thought process, and what is highlighted in Topher's, is the concept of an edge.
The forex loser believes that everything you need is here at FF (or babypips). He believes that he can just plow through threads and get enough "opinions" about the market that he will be profitable. He thinks that because he read that a "trend is your friend", then went on to read Jacko's method or something, that he can now start retiring because it looks so easy. He also believes that if one system does not work, he can simply move on to another one. A loser believes that if he has been trading for 2 months and still has an account, he is being consistently profitable. A loser believes that back testing is a waste of time, or at most he will scroll back a few months and just eyeball his system. This is called shitty back testing. A loser believes that anyone can make it in forex.
Now, I know you don't want to hear all about losers. There are plenty of "Top Ten Reasons Losers Lose" threads. But I thought I would highlight some relevant reasons here. So anyway, how do you become a winner?
Again, Topher sheds some light on the importance of an edge. Now I know that "edge" is just another forex term thrown around, but what most traders do not understand is that your edge is the foundation of your system, and everything else is used to augment and exploit that edge. What you find on babypips and FF is the "everything else". Most of this "everything else" information fails to produce profits on its own because false edges are identified through self-fulfillment of these methods; but there is little, if any, edge behind them.
The reason edges are not found so easily on public forums is because a real edge would crumble if made public (assuming the readers were smart enough to use the edge given to them
). An edge is based on information that very few others know, but it can be implemented in a system that many others use. A breakout trader will use the same breakout formation that many others did, but his edge might keep him in long enough to make more profit, or it take him out before price turns around, or put him in the trade just a tad sooner, or identify a false breakout faster. Everyone saw the same formation and traded it. A handful got lucky, a few were successful.
You are fed up with all the "grail is in the mind" bullshit. This is because (or at least my theory) when a breakout pattern that everyone sees generates profit for only a few, it is easy for the system seller to say that, “the system is good (see I was profitable!), but it is YOU who sucks.” This is of course true, ie the trader probably does suck, but then again so does an edgeless system. A bad system will fail because it is bad, not because a weak trader traded it. A weak trader who trades a bad system will be forced to bend his discipline, and then be yelled at for breaking his rules. Hence the huge psychology movement in trading. Great psychological discipline and money management used on a bad system will only slow the bleed. You will ultimately fail if you are not exploiting a proven edge.
That being said, a trader does need to use his mind. I am a James16 member and my favorite section on that site is the psychology section. What I mean is, a good system will indeed fail if a weak trader trades it. A trader who finds, develops, back tests, and uses his own edge will trust it. A trader who trusts his system will be less prone to trade against it. This equals discipline.
So in search of the next step in your trading, I would recommend starting here. Look around at some traders who you deem successful, and try to identify what their edge is, or at least where it lies. Trend traders tend to find edges in their exits, while news traders find it in their entries. I personally exploit market inefficiencies through mispricing and crowd overreaction. Any successful trader should be able to tell you where his edge is = why his system works.
This is still no new information to you, I am sure. But again, this is what you get on a public forum. You get hints, pointers, suggestions, and vague concepts. There is great information on this site, but it is only the beginning. You need to be an expert in your field. This is why I do not trust someone who says trading is easy, and I hesitate when they claim it is simple. Keep it simple is a common phrase, but I believe it is misinterpreted. Many take the KISS concept and think that means they can be market morons, that they do not HAVE to know about price discovery, market participants, central bank interventions, orderflow, etc. True, they may make a little money without understanding why the market is moving, but how long do you think that will last. Talk to any trader who has made money consistently for over 10 years and they can tell you more about what influences the market than any website can. I strive to understand the complexities of trading. KISS can be applied to the system itself, meaning do not cloud your trading with so many rules and regulations that you only get one signal a year. However, KISS is by no means an excuse to be ignorant and lazy about this profession you have decided uptake. If reading a 650 page book on market microstructure seems too daunting and boring to the pursuit of success, maybe you need to reconsider why you are here in the first place.
With all of that being said, one possible route for you to take is to stop reading, get away from this website, and just trade for a while. Another component of success is experience. When you wake up in the morning and turn on your computer, where do you go first? The chart? Or this website? If you are trading from a chart (most, here do), then allow the chart to be your primary influence, not this website. Open the chart and interpret the data BEFORE jumping on the net to see what is going on. How many years have you been lurking around this site? Of that time, how many trades have you actually taken? You can still take trades without a system (demoing of course), but just get in the habit of making decisions about price movement, then track those decisions and the outcomes that occurred. Chart time is valuable, and you must manage your time to incorporate that.
Alright alright, I’ll shut up now. Hopefully I will have given you a few things to chew on. Now, never trust what you read. Second guess what I tell you and go try to prove me wrong. The process of discovering truth in trading will teach you a few things, and if you do prove me wrong, then I may benefit as well.
Good luck.
Topherhk88 has by far the best advice on here. Virteks has perhaps the worst. Now I do not want to pick on Virteks (too much), but what he writes captures the mindset of the retail Forex loser. What is missing from Virteks thought process, and what is highlighted in Topher's, is the concept of an edge.
The forex loser believes that everything you need is here at FF (or babypips). He believes that he can just plow through threads and get enough "opinions" about the market that he will be profitable. He thinks that because he read that a "trend is your friend", then went on to read Jacko's method or something, that he can now start retiring because it looks so easy. He also believes that if one system does not work, he can simply move on to another one. A loser believes that if he has been trading for 2 months and still has an account, he is being consistently profitable. A loser believes that back testing is a waste of time, or at most he will scroll back a few months and just eyeball his system. This is called shitty back testing. A loser believes that anyone can make it in forex.
Now, I know you don't want to hear all about losers. There are plenty of "Top Ten Reasons Losers Lose" threads. But I thought I would highlight some relevant reasons here. So anyway, how do you become a winner?
Again, Topher sheds some light on the importance of an edge. Now I know that "edge" is just another forex term thrown around, but what most traders do not understand is that your edge is the foundation of your system, and everything else is used to augment and exploit that edge. What you find on babypips and FF is the "everything else". Most of this "everything else" information fails to produce profits on its own because false edges are identified through self-fulfillment of these methods; but there is little, if any, edge behind them.
The reason edges are not found so easily on public forums is because a real edge would crumble if made public (assuming the readers were smart enough to use the edge given to them
). An edge is based on information that very few others know, but it can be implemented in a system that many others use. A breakout trader will use the same breakout formation that many others did, but his edge might keep him in long enough to make more profit, or it take him out before price turns around, or put him in the trade just a tad sooner, or identify a false breakout faster. Everyone saw the same formation and traded it. A handful got lucky, a few were successful.You are fed up with all the "grail is in the mind" bullshit. This is because (or at least my theory) when a breakout pattern that everyone sees generates profit for only a few, it is easy for the system seller to say that, “the system is good (see I was profitable!), but it is YOU who sucks.” This is of course true, ie the trader probably does suck, but then again so does an edgeless system. A bad system will fail because it is bad, not because a weak trader traded it. A weak trader who trades a bad system will be forced to bend his discipline, and then be yelled at for breaking his rules. Hence the huge psychology movement in trading. Great psychological discipline and money management used on a bad system will only slow the bleed. You will ultimately fail if you are not exploiting a proven edge.
That being said, a trader does need to use his mind. I am a James16 member and my favorite section on that site is the psychology section. What I mean is, a good system will indeed fail if a weak trader trades it. A trader who finds, develops, back tests, and uses his own edge will trust it. A trader who trusts his system will be less prone to trade against it. This equals discipline.
So in search of the next step in your trading, I would recommend starting here. Look around at some traders who you deem successful, and try to identify what their edge is, or at least where it lies. Trend traders tend to find edges in their exits, while news traders find it in their entries. I personally exploit market inefficiencies through mispricing and crowd overreaction. Any successful trader should be able to tell you where his edge is = why his system works.
This is still no new information to you, I am sure. But again, this is what you get on a public forum. You get hints, pointers, suggestions, and vague concepts. There is great information on this site, but it is only the beginning. You need to be an expert in your field. This is why I do not trust someone who says trading is easy, and I hesitate when they claim it is simple. Keep it simple is a common phrase, but I believe it is misinterpreted. Many take the KISS concept and think that means they can be market morons, that they do not HAVE to know about price discovery, market participants, central bank interventions, orderflow, etc. True, they may make a little money without understanding why the market is moving, but how long do you think that will last. Talk to any trader who has made money consistently for over 10 years and they can tell you more about what influences the market than any website can. I strive to understand the complexities of trading. KISS can be applied to the system itself, meaning do not cloud your trading with so many rules and regulations that you only get one signal a year. However, KISS is by no means an excuse to be ignorant and lazy about this profession you have decided uptake. If reading a 650 page book on market microstructure seems too daunting and boring to the pursuit of success, maybe you need to reconsider why you are here in the first place.
With all of that being said, one possible route for you to take is to stop reading, get away from this website, and just trade for a while. Another component of success is experience. When you wake up in the morning and turn on your computer, where do you go first? The chart? Or this website? If you are trading from a chart (most, here do), then allow the chart to be your primary influence, not this website. Open the chart and interpret the data BEFORE jumping on the net to see what is going on. How many years have you been lurking around this site? Of that time, how many trades have you actually taken? You can still take trades without a system (demoing of course), but just get in the habit of making decisions about price movement, then track those decisions and the outcomes that occurred. Chart time is valuable, and you must manage your time to incorporate that.
Alright alright, I’ll shut up now. Hopefully I will have given you a few things to chew on. Now, never trust what you read. Second guess what I tell you and go try to prove me wrong. The process of discovering truth in trading will teach you a few things, and if you do prove me wrong, then I may benefit as well.
Good luck.
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