Edge VS Mentality

[Nvesta81]

I have my own theory that the reason most people fail in this business is because they are under-capitalized. Finding an edge is one thing, but can your account handle the draw-downs? No system is %100. Having the patience to trade through draw-downs is devastating to the psyche and perhaps that is where most mistakes are made (doubling up on contracts to make up for losses etc... )

[DbPhoenix]

	Quote:	firewalker
	Unfortunately when, after all the hard work and after all the time you put in, you finally come up with something that gives you a decent profit on a consistent basis, without risking too much that you feel uncomfortable about putting a trade on, you are still not disciplined enough to follow your plan to the letter, then what should the trader do? It might be mumbo-jumbo for some, and at first I figured that's true. You don't need psychology to tell you how to define a strategy. But you might need it to help you understand why you aren't following your plan, why you are overtrading when you shouldn't, why you are having trouble pulling the trigger, why you have abnormal 'days' where you lose self-control, etc, etc,...

As I said, if one is unable to follow a perfectly good strategy once he has it in the can, then looking within is a perfectly legitimate course of action (or inaction, if one is coming over all introspective). People engage in all sorts of self-sabotaging behaviors, and not just with regard to trading.

But hand-wringing and commiseration do not make up for the lack of a profitable strategy. If more beginners were to put in more time on that particular front, the amount and degree of hand-wringing would likely be far less.

[ztrader]

OK, it's NY martini lunch time and I am done with my trading. Db, you are a rare bird. By that I mean, you maybe in the upper ranks in the 10% bracket of successful traders.

	Quote:
	There appears to be an underlying assumption that one is using somebody else's strategy. This is not what I was referring to. The "consistently profitable trading strategy" is one which the would-be trader develops himself. It is not something which one obtains somewhere else. Given that many if not most beginners obtain strategies from elsewhere, if buying a book or a course or a manual or a seminar or software with little red and green arrows were all there was to it, then the success rate would be far higher than it is.

To believe that a trading strategy "which would-be trader develops himself" is "consistently profitable" without putting it through the real time testings I outlined in my previous post, is absurd and naive. There is no such thing as "automatic touch down" just because you [meaning traders] call the play. This applies to those obtained from third parties by most beginners or even by experienced traders [as in years of trading] as many are still struggling and looking for an answer. Here again, there is no guarantee that the "success rate would be far higher". No two or more traders using the same and let's call it "consistently profitable system" will trade the same way nor get the same results. Unless, trade order signals with entries and exit at the same prices are given. There are still so many variables that come into play in reality trading.

	Quote:
	As to a "business plan", yes, such a document is handy, and the process of completing it is valuable. However, it has been my experience that most people who create these frameworks are so pleased with themselves from having written the list of things to do that they bask permanently in the glow of having written the list but never actually do many -- or any -- of the things they've listed.

In the true sense of a "business plan", and I only touched on this because it was brought up, it is considered the "bible", the official operating document in the corporate world, franchise businesses, and a structured small businesses. This is also an "imposed" discipline on accountability where executives and managers are expected to adhere to. It is not a just "list of things to do:. A trading plan is only a component of this. I am not implying here that traders should develope an extensive business plan.

	Quote:
	It is through the process of creating/developing his own strategy that the trader learns something directly -- not by proxy -- about how price moves, how his indicators act, how his software and datafeed and trading platform behave. This trader doesn't have to take anybody's word for anything. He needn't have "faith". He avoids putting himself in the position of wasting money on what turns out to be nonsense. And he can do it all for so little money that it amounts to a pittance. But he has to be willing to pull up his socks and walk the journey. Otherwise, he may as well just open up his wallet and say "here".

Agreed. But one should still put it through the same reality testing or it would just be pure fantasy. If one "needn't have "faith""; how can one execute the entries and exit consistently everyday and be consistently profitable?

I am not really here to debate this topic. We all have brought up before the readers some items to take into consideration in their journey in this rough world of trading the market to become successful traders.

Here to everybody's success in their Journey - Don't Stop Believing.

Best wishes and ENJOY!

ztrader

[OAC]

	Quote:	Nvesta81
	I have my own theory that the reason most people fail in this business is because they are under-capitalized. Finding an edge is one thing, but can your account handle the draw-downs? No system is %100. Having the patience to trade through draw-downs is devastating to the psyche and perhaps that is where most mistakes are made (doubling up on contracts to make up for losses etc... )

Nvesta81,
Here what Linda Bradford Rasche has to say about mechanical systems in her article on Tape Reading:

"I've known hundreds of professional traders throughout my career. I don't want to disappoint you, but I know of only two who where able to make a steady living for themselves with a mechanical system. (I am not counting the well-capitalized CTA's who are running a money-management program with "OPM" - other people's money.) All those other traders used some type of discretion that invariably involved watching the price action at some moment - even if just to move a stop up or down.
If you can learn to follow the price action, you will be two steps ahead of the game because price is faster than any derivative. You may have heard the saying, "The only truth is the current PRICE." Your job as a trader will become ten times easier once you accept this. This means ignoring news, opinions, and personal biases "

[atto]

She must not hang out with the algo guys much. I think this is off topic, because obviously we're talking about non-automated trading in this thread, but I personally have a couple algos that do well, and I personally know a trader who cleared 8 figured last year, 100% auto. It's not for everyone, and it's not easy at all. Neither of us sell our stuff, and I know how guarded he is about his strategies.

Beginners should absolutely not expect to be able to use a "black box" to make good money. However, it's possible (I've only seen it work on custom algos, not bought).

edit: I received a PM about this. Here was my response (and let's keep this kind of talk out of this specific thread from now on, because it's not really on topic):

	Quote:	atto
	There aren't many great information sources for algo trading, and to be honest, I would never recommend it to a newbie. The reason is that many newbies see it as a short cut, and end up on quests for holy grail after holy grail, without even meaning to. Several retail forex web sites are big into this, and I'm not convinced anything you'd find there is worth while. I'd say trade as normal, and after you're profitable and have been trading for a while, see if you notice any market tendencies that could be automated. It's much more work than you think to get something of quality, and my discretionary equity curve is a whole lot cleaner. The 8 figures trader I mentioned traded manually for many years first.

[DbPhoenix]

	Quote:	ztrader
	To believe that a trading strategy "which would-be trader develops himself" is "consistently profitable" without putting it through the real time testings I outlined in my previous post, is absurd and naive.

I agree. The procedures I've detailed elsewhere are essential. A strategy isn't automatically profitable simply because it's home-made.

	Quote:
	If one "needn't have "faith""; how can one execute the entries and exit consistently everyday and be consistently profitable?

Experimentation, testing, analysis, verification. And doing it all over again if the results are unsatisfactory. All of which is, of course, something different from having the "faith" to implement the plan. But that has nothing to do with the plan, assuming that there is a plan and that's it's worth implementing.

[zdo]

	Quote:
	Basically, each of us brings a quantity and quality of pre-existing habits and biases to the table that will forever condition our responses and adaptability. These should be brought to awareness and neutralized very early in each person’s trading career or most don't stand a chance of discovering and or applying a functional strategy. Doing this is only a minor issue for some, important for others, and absolutely crucial for still others. Db your counsel from out in the tail is appreciated by all – but most traders have to go up the middle – dealing with both ‘strategy’ and ‘sychiology’ at the same time.

zdo

	Quote:	DbPhoenix
	All of this has to do with implementing the strategy, not with creating/developing it. Since most beginners skip these initial steps, I suggest that they don't "have to go up the middle" but rather elect to do so. Developing a strategy is rather cut and dried. All of the angst about proving that one is not the loser that everyone thinks he is (or whatever psychological tarpit one elects to stir up) can come later. If one can't define his edge, then I suggest, again, that that is where he should look before undergoing therapy. If he has all his ducks in a row and still can't make it work, then by all means bring on the shrinks.

That is so sensible and so reasonable – but I disagree. I’ll say it again DB. I think you’re an ‘outlyer’ (actually you are more like an ‘outhonester’ ) who believes you are in the central stddev’s and thinks that most will have your same general set of challenges – ‘typical genius’.

It is a mistake to delay the ‘mental’ work for the follow-up / clean up / tarpits / emotional crap encountered in execution after one has developed a strategy – until the things you have aptly described as “unable to follow a perfectly good strategy once he has it in the can” and “People engage in all sorts of self-sabotaging behaviors” occur. I’m saying that most need to do both ‘edge’ work and ‘mental’ work concurrently – FROM DAY ONE! You are making a huge mental jump by saying that one should never deal with ‘sychicological’ issues until a strategy is developed or until issues come up. Why? By discounting each person’s preexisting dispositions and patterns and accentuating focus on studying and mastering market action only, by discouraging beginners from bringing to awareness the unconscious beliefs they bring to their ‘research and development’ that will literally shape what they are able to perceive and develop, by encouraging them to forever accede to that pre-existing set of limitations – you are actually shepherding them into the herd of loosers instead of possibly speeding them through strategy creation a whole lot faster with some of that “unnecessary” “introspection” (did you do some and forget you did it ???). And btw, the kind of mindful awareness I’m encouraging has little time or room for “psychological mumbo jumbo”. Be aware that you are giving ‘mental’ side advice by advising beginners to ignore the ‘mental’ side. I too am giving ‘mental’ side advice by advising beginners to start in the middle and give both sides adequate energy each ‘developmental’ day… else… at best...

	Quote:
	most "successful" traders think they are disciplined when in fact they never fully addressed their mental set backs and because of that they are limited to breaking even or making 100k a year when there is far more than that to make.

jonbig04 (who was quoting ‘Mike’ Douglas ?) ...and at worst...

[jonbig04]

Sorry for the mix up...Mike, Mark, Mel..what can you do? haha. I wasn't quoting Douglas directly there, just making a postulation of my own. If you ARE in fact in control and have a sound method, shouldn't (like I said in my journal a second ago) the number of contracts be arbitrary?

EDIT: I'm not making suggestions as though I am right, I'm just trying to get the very bottom of trading by asking questions.