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
середа, 23 березня 2011 р.
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
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