How I Trade As If Price Is Random

[1a2b3cppp 10]

Let me start by saying this style of trading is not for everyone. I expect a lot of criticism and people to tell me I'm doing it wrong. I pretty much break every trading "rule" in every trade. More on that later.

 

Let me also say I'm not selling anything nor am I a vendor, nor do I accept "donations." This is all free for the sake of discussion and creative thinking. I have a website and a Twitter account but there's nothing for sale on any of those, either, and all I really do on them is call trades and write about how to avoid trading scams. No one is going to steal my edge and prevent me from making money unless they somehow manage to make the market go up forever without ever retracing in which case my retirement accounts will thank them.

 

Let me start by talking about my "edge." I hate that word because it gets thrown around all the time on the forums by people who don't always know what it means (the same people who calculate risk/reward after the fact).

 

My edge consists of:

 

Account size - I know there are stories of people starting with a $10,000 account or whatever and building it up to $1M. I'm sure that's possible if you can predict direction, but I can't, and this is not one of those stories.

 

Discipline - I don't have trouble following rules. I'm also patient. Some of you may have been following my journal thread for the last few years on another big trading forum where I've posted live calls for every trade and remember a point when I was sitting on around -$60,000 of drawdown and everyone was telling me I was doing it wrong and I should close the trade before it gets any worse and etc. I didn't care. I sat through big drawdown for a while, collecting dividends and profits from hedging the other side (more on that later) in the process, and ended up closing the trade for over $40,000 in profit. This was all posted in real time with daily updates, and that forum doesn't let you edit old posts so I couldn't change anything if I wanted.

 

Good thing I didn't listen to those people who told me I was doing it wrong.

 

Patience - I know that there are some times when I won't have any trades. Sometimes the market just slowly trends upward over time and I don't make very much money. I don't care. Focus on the big picture.

 

Money management - I never use margin. I plan entries and exits ahead of time. I know how to hedge the other side. I never use margin. Also, I never use margin.

 

Knowing what I don't know - I cannot predict price. I've studied every indicator, I've reverse engineered some of the popular ones, I've created my own. All useless. I've studied price action. I've studied volume analysis. I am still studying these things in my spare time but currently am still unable to predict direction, but maybe one day I will.

 

But until that time, I'll continue to trade the way I do, having no idea where price is going tomorrow, only knowing that it's going to go up and down.

 

(continued in the next post)

[1a2b3cppp 10]

Let's talk account size for a bit. This is not to brag, but just to paint a realistic picture of where I'm at. This style of trading is not going to be feasible if you have a $5,000 account.

 

Ever since college I have been very frugal and tried to live below my means. This isn't meant to be a financial lesson, but just because your salary increases doesn't mean your expenses have to increase. I'm sure you've all read "The Millionaire Next Door" and that type of books (if not, read it. Cliffs notes: rich people are frugal, poor people are flashy).

 

This is especially true in trading. If you have a normal salaried job, you know that every week you will get paid $500 or $1,000 or however much you make. Although your salary may be limited, it still allows you to plan for future expenses. If you own your own business (trading is included in this) then this is all uncertain. You may make $10,000 one week but that doesn't mean you won't make $0 the next week. Or -$10,000.

 

Being frugal helps ensure your survival.

 

Lesson over, back to trading.

 

Let me back up even further and say that the reason my account is where it is today is because during the "recession" of 2008, I averaged down heavily into weighted index funds (QLD, SSO). This is already breaking two "rules" that traders love to quote: 1. don't average down, 2. don't use weighted ETFs long term.

 

Everyone else was freaking out and selling. "Oh noes, the economy is collapsing!"

 

No it's not.

 

It hit me that this could be a great buying opportunity. My first thought was to buy as much SPY as I could afford, but then I learned about the weighted ETFs which were not only cheaper per share, but also double weighted, so for example, if the S&P 500 goes up 1%, SSO goes up 2%.

 

I picked the indexes because I had no idea what would happen to individual stocks but I was pretty confident that the indexes would not go to zero, and if they did, I had bigger problems than blowing my account.

 

While I watched everyone on the forums talk about the collapse and how they were selling, I just continued buying more every time it dropped a certain %.

 

"Be greedy when others are fearful."

 

I can't predict price direction, but I was pretty sure those funds would go back up.

 

So, remember when I said I regularly break commonly-accepted trading rules?

 

What is it, 95% of traders lose? And they all probably follow those rules.

 

- Never add to a losing position

- Never let a winner turn into a loser

- Never risk more than 2% of your account

- The trend is your friend

 

Let's talk about those:

 

- I regularly add to losing positions. I do it within certain boundaries, never with margin, and never with risk of blowing my account.

 

- My winners often turn into losers. I have no idea if price is going up or down. Sometimes they go against me.

 

- My drawdown sometimes goes well past 2% of my account.

 

- Every trade I make is counter-trend.

 

"The trend" is a bunch of nonsense and is a great topic for another post. Let me summarize it like this:

 

- price can reverse at any point and the "trend" only exists in hindsight. Just because whatever trend identification method you use (MA slope, higher highs/higher lows, whatever) happens to say "hey, we are now in a trend whereas one tick prior to this we were not in a trend" doesn't mean price is going to keep going in that same direction.

 

(continued in next post)

[1a2b3cppp 10]

My original method, the one used in my journal thread, was based on Fibonacci retracements. Keep reading before you flame me: I don't think Fibonaccis are special, and I joke about people who think they have magic powers.

 

I do not believe that a 38.2% retracement is really any fundamentally different than 38.1% or 38.3%, or 43.6%, or 19% or 39.4%, or any other number. Literally any number will work just as well because, say it with me, price is random. Do you think price goes "hey, this is a 38.2% retracement! Time to go the other way now!" No. And do you think the market makers do that?

 

I do not believe Fibonacci numbers are special. I know that some people are pretty serious about using Fibonacci number tick or volume charts as if the Fibonacci number is somehow magic and will work better than any other number. That’s all nonsense.

 

When I first shared my method elsewhere a few years ago, the discussion quickly turned into an argument between people who think that because Fibonacci numbers may sometimes be found in nature, they are therefore applicable to trading, and the people who think that’s a bunch of crazy talk.

 

 

I decided to share this method because of a few conversations I had been having with people who were paying a monthly fee to some “guru” to learn how to trade with Fibonaccis. None of them were making any money (other than the “guru” who was collecting monthly subscriptions), and the thing I noticed is that these “gurus” were always extremely vague.

 

They would post after the fact charts where price happened to bounce off of a Fibonacci level and say “see?! Fibonacci retracements work!”

 

The gullible students would say “wow u r so smart! Here pleez take my money to teach me!”

 

But the people who had more accurate BS detectors see that that is all nonsense. Without knowing ahead of time if price was going to bounce off a Fibonacci level, and if so, which one, such a method is useless.

 

I originally used two methods: one for daytrading the ES, and one for long term trading SPY (or SSO). The daytrading system is much crazier and I will talk about it later. Since I don't daytrade regularly anymore, let's just talk about the longer term system.

 

This is a long term system so we're using daily charts.

 

The general idea is that since price is random, we know that it goes down and up, but we don't know when it's going to either, nor for how long. We do know that it can't go to negative, and we have a pretty good chance that the S&P will not go to 0.

 

Do not use margin. You are going to be averaging down quite often. Using margin is a good way to blow your account when SPY goes one penny further than you can afford. If you do not use margin you cannot blow your account.

 

The initial profit target will be the previous high. Depending on how far your position goes against you, you may wish to change the target in the future (for example, if you start buying SPY at 140, and it eventually drops to 90, you might not still want to have to wait for it to get back up to 140 before you close your position).

 

Step 1: Wait for SPY to make a pullback. You can use Fibonacci retracements if you want. I did for the sake of proving the point that Fibonaccis can be traded profitably but it really doesn't matter. You can use 25% increments, you can use 30%, or 42%, or 51% or anything you want. There are no magic numbers. When price has pulled back to your level, buy a small amount.

 

Step 2: Buy more SPY when it goes against you another predetermined amount (perhaps the second Fib retracement, perhaps a random percentage, etc).

 

Step 3-x: Continue to buy more SPY when it continues to go against you. Again, you can use Fibonaccis, or you can divide its current price into increments (such as if SPY is at $140 and you buy every time it drops $10), or into percentages (such as if you buy every time it drops a certain percentage), etc. Remember that each add is going to be bigger than the previous. This is averaging down. Remember that you are not using margin. Begin your first add with a small enough size that you can continue to buy more as it goes against you. If SPY is $145 and you keep buying all the way down to $100 and then run out of money and then SPY goes down to $80, you did it wrong.

 

Remember, price is random so you have no idea how far it's going to go down.

 

Some of the trades will be awfully slow and boring. I currently have a trade in QLD that has been open since November of 2012 and has barely gone anywhere. I didn't know QLD was going to chop for a few months when I bought it. Patience, remember. Not every trade will end up in a huge winner. Some of them will just be small winners.

 

Ok I've been spending a few hours writing this now and need to take a break. There is much more to discuss, including:

 

- hedging a SPY position with SH to make money when your SPY position is drawing down

- uptrends and random entries

- using covered calls in slow boring uptrending markets

 

And some more rules to be discussed, such as why I never add to a winning position.

 

And now to preempt some of the inevitable questions and criticisms:

 

1) "Dude you are so dumb, this isn't trading."

 

Well, I'm making money buy buying and selling stocks, so yeah, it is trading. And I've been consistently doing so for years with every trading posted in real time, so... yeah.

 

2) "This system sucks and doesn't make money in big up trends. That's when all the big money is made. I know because some "guru" told me so. You would know that if you were a real trader. Trend following for lyfe!!1!1!!!!"

 

Yeah, I don't make much in big up trends unless I happen to have a big position from a previous downtrend. That doesn't always happen. But I also don't have big losses following downtrends the way most people do. And when price goes up and down I do pretty well.

 

3) "You idiot, you are basically just throwing a lot of money at the market and when it eventually rebounds, you make money."

 

Yup. Since I cannot predict price, this is how I have to do it. I view the markets as a mathmatical random sequence rather than whatever you view them as. If you were going to make money from a random sequence, how would you do it? Averaging down, that's how.

 

Look, this is not everyone's holy grail. Sometimes it works very well. Sometimes it doesn't produce big winners.

 

If you can predict price, keep doing what you are doing. If I could predict price I would just enter in the correct direction with my entire account on each trade. There would be no reason to start small and add more as price goes against me.

 

I fully admit that this method is inferior to price prediction methods. But I've never seen anyone who could successfully predict price, and until I am able to do so myself, I will continue to trade this way.

 

To give you an example of a complete trade that lasted a whlie, on October 27, 2011, I closed out a trade that had been open for a while. This was the previously mentioned trade that at one point was drawn down over $60,000. On October 31, 2011, the dividend was paid and the final numbers looked like this:

 

SPY: $31,115.00 (closed)

hedge: -$3,281 (closed)

 

$27,834.00 (SPY gain + open hedge loss)

$1,223.60 (realized hedge gain)

$2,931.69 (realized hedge gain)

$1,129.72 (dividend)

$3,562.22 (dividend)

$5,221.55 (realized hedge gain)

————————

$41,902.78 (total for trade)

 

I had a SPY position which I had been continually adding to, several SH positions that had been closed and reopened, two dividend payments, and a currently open SH position that was closed at a loss.

 

That's how I trade as if price is random.

Edited April 24, 2013 by 1a2b3cppp

[steve46 12]

so I want to amend my comments

 

First what a wonderful thing you are doing sharing your system....good for you

 

and from your comments it seems clear that you inherited (or possibly won) money

 

Also seems that English may not be your native language

 

And in an effort to understand your initial comments......it seems apparent that you were willing to risk at least $60,000 in an effort to make approximately $42,000

 

if that is even partly correct it clears up any questions that I might have..

 

I find this all very enjoyable and look forward to the next installment...

[MightyMouse 12]

Every so often a blind squirrel stumbles upon a nut.

 

In your case, you had no idea what you were doing and Bernanke provided a floor ( which he continues to provide) in the S&P. so you have been lucky.

 

I am going to guess that you have no strategy to add when it goes in your favor, but are perfectly willing to add when you are losing. If so, then you are playing a very dangerous game even though you haven't lost yet.

[1a2b3cppp 10]

so I want to amend my comments

 

First what a wonderful thing you are doing sharing your system....good for you

 

and from your comments it seems clear that you inherited (or possibly won) money

 

I increased my net worth during the recession in 2009 by buying when everyone else was selling.

 

Also seems that English may not be your native language

 

I was typing pretty fast and it's possible I made some errors.

 

And in an effort to understand your initial comments......it seems apparent that you were willing to risk at least $60,000 in an effort to make approximately $42,000

 

if that is even partly correct it clears up any questions that I might have..

 

I never know how much price will go against me when I enter, but at the time I didn't think $60,000 in drawdown was a bad thing. I had no idea how far SPY would go down or when it would go back up. Reviewing my notes I was planning on buying more (in the form of SSO) if SPY continued to go down. In that case, the total profit would've likely been higher than $42,000. Because of this, I'm not sure if it's necessarily correct to assign a risk:reward value.

 

Sometimes trades go immediately in my favor (for less profit given the smaller starting size). For example, I've had 200 shares of QLD since November 2012 at an average cost of $53.31. Today that position is up $1,724 plus another $58.50 from 2 covered calls in Feburary that expired OTM. Like I said, sometimes I don't make much when price doesn't go anywhere. I had no idea QLD how QLD was going to behave. It's normally a pretty trendy beast, but of course just because it did something in the past doesn't mean it will continue to do it in the future.

 

I find this all very enjoyable and look forward to the next installment...

 

Cool, thanks for your interest.

Edited April 25, 2013 by 1a2b3cppp

[clmacdougall 11]

I increased my net worth during the recession in 2009 by buying when everyone else was selling.

 

 

 

I was typing pretty fast and it's possible I made some errors.

 

 

 

I never know how much price will go against me when I enter, but at the time I didn't think $60,000 in drawdown was much. Reviewing my notes I was planning on buying more (in the form of SSO) if SPY continued to go down. In that case, the total profit would've likely been higher than $42,000. Because of this, I'm not sure if it's necessarily correct to assign a risk:reward value.

 

Sometimes trades go immediately in my favor (for less profit given the smaller starting size). For example, I've had 200 shares of QLD since November 2012 at an average cost of $53.31. Today that position is up $1,724 plus another $58.50 from 2 covered calls in Feburary that expired OTM. Like I said, sometimes I don't make much when price doesn't go anywhere. I had no idea QLD how QLD was going to behave. It's normally a pretty trendy beast, but of course just because it did something in the past doesn't mean it will continue to do it in the future.

 

 

 

Cool, thanks for your interest.

 

Your method is outlined in the book "vibratrading". This is not new. Hedging your positions by writing options is how he deals with price stagnating in his buy only vibratrading system. Have you read this book?

[1a2b3cppp 10]

Every so often a blind squirrel stumbles upon a nut.

 

In your case, you had no idea what you were doing and Bernanke provided a floor ( which he continues to provide) in the S&P. so you have been lucky.

 

If the S&P drops further I will buy more. It's not like there's a hard level beyond which I lose (unless it goes to zero). Proper money management and position sizing helps with this.

 

Now, if the S&P went to 10,000 or something that would change my game because it would mean huge levels between entry points, but until that happens I'll keep doing what I'm doing.

 

I am going to guess that you have no strategy to add when it goes in your favor, but are perfectly willing to add when you are losing. If so, then you are playing a very dangerous game even though you haven't lost yet.

 

Absolutely. Adding to winners makes it easier for a winning position to turn into a loser. Since I cannot predict price I never know when an uptrend is going to turn into a downtrend and turn my winner into a loser (which will happen sooner if I added to a winning position). I have a whole post about why I never add to winners.

 

I'm not saying never add to winners; I have heard that with certain strategies it can be helpful. It works great if you get in at the beginning of a trend and add all the way up. But since I cannot predict direction I have no idea if it's going to be a big trend or a little trend. Adding during every pullback sounds like a good strategy but it's not something I'm able to make work consistently.

 

I'm not saying never do it or that it's wrong, just that it's not something I have been able to make work. If you are able to add to winners and are a profitable trader then by all means, keep doing what you are doing.

 

Like I said in the first post, I expect to get criticism because I add to losing trades. It doesn't bother me, however. I know that's one of the "rules" you're not supposed to break but remember that I do it in a calculated manner.

[1a2b3cppp 10]

Your method is outlined in the book "vibratrading". This is not new. Hedging your positions by writing options is how he deals with price stagnating in his buy only vibratrading system. Have you read this book?

 

No, I've never heard of it. Googling now.

 

edit - looks like that book was published in August of 2011 which is a bit after I started my profitable journal thread. Maybe he's a fan? My system is not buy only, though (well, it is if you buy SH instead of shorting SPY). We'll talk about that in the future, though.

 

Most trading books I've read have been crap. I actually just sold a big stack of them to a used bookstore a few months ago. I might look into this one, though.

 

edit 2 - found a sample of this book on scribd. It looks like he's doing equal purchases at each level. That's not how I do it, but maybe that's just for this one example.

 

Seems like a bunch of overly complex terms, too. Securitization? Monetiziation? Why not just say buy and sell?

Edited April 25, 2013 by 1a2b3cppp

[1a2b3cppp 10]

For those of you interested in following this, I've also started buying USLV (3x weighted SLV) last week @ $10.85 after commission. Normally I don't stray from the indexes but decided to buy some silver after the big drop and am thinking about getting UGLD, too.

[Patuca 13]

Adding to winners makes it easier for a winning position to turn into a loser.

 

 

 

yes yes yes true true true

[Patuca 13]

Catching a falling knife can be a very lucrative strategy.

[Patuca 13]

1a you have just opened a big can of worms. For some reason i think you don't care LOL. Please be aware that superior intelligence will attempt to riddle your maverick stance with holes. You shall be detested. You shall become as a worm. Stay the course.

[SIUYA 11]

1a2b3cppp - thanks for sharing your method.

Its nothing new, but that is fine, not much is, funds and investors have been doing this for years. There are income and option fund strategies that are very similar over baskets of dividend paying stocks. Usually they stick to equities only due to restrictive mandates.

 

To me its simple mean reversion trading without using a lot of leverage (you say margin, but if you are using a 2x instrument then its leverage no matter how its described or accounted for) and building a position as opposed to putting it all on at once.

Some may call it investing, lets keep calling it trading. (I also think you have given it a poor heading – the way you trade appears to assume the market is not random and will mean revert – maybe the thread heading is not appropriate. I guess as the thread develops more will be revealed as to where randomness comes into it. The adding to losers but not winners reveals you don’t think the markets are random. )

 

I also think you point out the obvious advantages you have – your edge (but many others wont have) in trading this method - patience, a large account, and an ability to sit through large drawdowns. Most cant do that and it also means that your system really cant be backtested as it involves a lot of discretionary traits.

Picking the right instrument, stock indexes are generally mean reverting and made up only of survivors.(lets say you had been shorting gold, or buying the Japan indexes over the years, or selling oil when it went from 20 to 120, then 120 to 30 with the issues of backwardation/contango etc), I will be interested to see how you determine you are wrong and exit the trade.

yadda yadda.....this is not meant to be an attack.

 

As for fib, MA s or any thing similar – agree - there is nothing magical about them, but they provide a framework for patience rather than punting IMHO, and if you find that one pullback level has a greater measure of success over another then all the better for using it.

 

......as an aside - when you say everything else is crap or does not work for you, i hope you also realise that this too has its downsides and will not work for many people except through dumb luck. You do realise that most people, even those who have never read an investing or trading book do the opposite even when they are trying to do what you say anyways....its human nature.....so this like any method may work for some people, but for most my guess is they will fail even if it works for some others.

 

 

It certainly does not have an edge apart from those that you list, and these are personal and not able to be replicated by everyone. So when you criticize others for not backtesting it is too easy to say something is crap but then fail similar methods yourself, even though you admit its not for everyone. Point being – this system falls into the same criticisms you level at other systems, so most of what you say maybe be equally regarded as ‘nonsense’ by some.

Every system has holes and just because others may or may not be doing it means nadda despite protestations or encouragements.

 

Looking forward to more thoughts…..

[MightyMouse 12]

For those of you interested in following this, I've also started buying USLV (3x weighted SLV) last week @ $10.85 after commission. Normally I don't stray from the indexes but decided to buy some silver after the big drop and am thinking about getting UGLD, too.

 

Silver and gold are not supported by Bernanke.

[BlueHorseshoe 10]

In your case, you had no idea what you were doing and Bernanke provided a floor ( which he continues to provide) in the S&P. so you have been lucky.

 

I am going to guess that you have no strategy to add when it goes in your favor, but are perfectly willing to add when you are losing. If so, then you are playing a very dangerous game even though you haven't lost yet.

 

Bernanke did not "provide a floor". The fact that the world financial system did not completely collapse provided a floor, as this is pretty much the only concievable scenario (ie. one of a doomsday type) where the S&P goes to Zero.

 

As the OP acknowledges, such a scenario would leave all of us with bigger things to worry about than a blown account.

 

I am sure that countless competent fund managers were scooping up equities at exactly the same time (some using leverage) - did they know what they were doing? Were they just lucky? Maybe if you take the stance of the OP - that price is random - then "lucky" is the best that you can hope for?

 

An interesting exercise for confronting ego - how do you react to each of the following?

 

- "You just got lucky, that's why you made money . . ."

- "You made that money because you know how to trade . . ."

 

BlueHorseshoe

[BlueHorseshoe 10]

Every system has holes and just because others may or may not be doing it means nadda despite protestations or encouragements.

 

Looking forward to more thoughts…..

 

I agree with your comments RE pros and cons of this and any other approach and how it may or may not be suitable for others . . . Confused about your Mean Reversion comment though - Mean Reversion is a product of Random Distribution - but we're not going to have another coin-flipping discussion

 

Also, regarding backtesting . . . if you want the general flavour of this rather than whatever specific criteria with fibs etc the OP apparently relies on . . . Buy SPY after 2 Down Years . . . Buy SPY after 2 Down Months following 2 Down Years . . . Buy SPY after 3 Down Days after a Down Month following 2 Down Years . . . Cut it any way you like: it's always better to buy it when it's falling if you have a mechanism - zero leverage - to weather the drawdown.

 

BlueHorseshoe

[ed_inacloud 10]

1a, I fully support most of your view and have trodden a similar path except that I moved from stocks to indices to forex as the spread is more consistent through the 24 hr period.

 

I too have a well funded account and always make sure I never put myself in a position of being wiped out. I happily add to losing positions in order to bring a trade back, averaging in is not uncommon. However to the point that some are making I was long €/$ @about 1.4 just as Greece was kicking off, I did add to the position when things looked as though they were quietening down but the trade kept moving against me. I also took equivalent short positions to limit the drawdown for periods. I did end up cutting the trade for about £12K loss about October late last year, my averaged in position was 1.36 . If I’d stayed with it then it would have come back.

 

However a lot of the entries were based around feel. I have tried to formalise a strategy with set points for averaging in and profit taking. I found that within the parameters I set I could get 88% chance of success or stop at break even, of the ones I let run they too would break even 88% of the time. Unfortunately the bad trades <2% of the time had the potential for massive drawdowns as with my €/$ 1.4 entry.

 

I support your comments on randomness and have proven it conclusively to myself, as I’ve commented on your other thread it needs to be embraced, understood and worked with in order to be successful.

[bmistiaen 10]

I have a website and a Twitter account but there's nothing for sale on any of those, either, and all I really do on them is call trades and write about how to avoid trading scams.

Would you like to share your website and/or twitter account?

[1a2b3cppp 10]

1a2b3cppp - thanks for sharing your method.

Its nothing new, but that is fine, not much is, funds and investors have been doing this for years. There are income and option fund strategies that are very similar over baskets of dividend paying stocks. Usually they stick to equities only due to restrictive mandates.

 

To me its simple mean reversion trading without using a lot of leverage (you say margin, but if you are using a 2x instrument then its leverage no matter how its described or accounted for) and building a position as opposed to putting it all on at once.

 

I do use leverage when I use QLD or SSO or whatever, but I'm not using margin on my account (ie. I'm only using cash). This means I won't get a margin call and at worst the position goes to 0 and I lose what I invested.

 

Some may call it investing, lets keep calling it trading. (I also think you have given it a poor heading – the way you trade appears to assume the market is not random and will mean revert – maybe the thread heading is not appropriate. I guess as the thread develops more will be revealed as to where randomness comes into it. The adding to losers but not winners reveals you don’t think the markets are random. )

 

I think they are random but with certain traits, for example, they cannot go below 0, and they will always go up and down, I just don't know when or for how long. So I say they are "random" because they can reverse at any point and go in a new direction for any length of time.

 

I also think you point out the obvious advantages you have – your edge (but many others wont have) in trading this method - patience, a large account, and an ability to sit through large drawdowns. Most cant do that and it also means that your system really cant be backtested as it involves a lot of discretionary traits.

Picking the right instrument, stock indexes are generally mean reverting and made up only of survivors.(lets say you had been shorting gold, or buying the Japan indexes over the years, or selling oil when it went from 20 to 120, then 120 to 30 with the issues of backwardation/contango etc), I will be interested to see how you determine you are wrong and exit the trade.

 

So far I haven't shorted a position long term. The markets seem to have a slight upward bias over time (not individual stocks, but the indexes). I would not, for example, start shorting SPY, because what happens if it went to 200, or 400, or 1,000? Is it going to go to 1,000? I have no idea. I can't predict price. There is a hard limit to how low it can go (0) but not a hard limit to how high it can go.

 

So in your example, I wouldn't sell oil on its way from 20 to 120.

 

yadda yadda.....this is not meant to be an attack.

 

None taken. I encourage feedback because it helps me think and analyze stuff.

 

As for fib, MA s or any thing similar – agree - there is nothing magical about them, but they provide a framework for patience rather than punting IMHO, and if you find that one pullback level has a greater measure of success over another then all the better for using it.

 

Yeah, that's one thing I've considered before. For example, take Bollinger Bands, and say you using them to trade mean reversion (ie. going long when price touches the bottom band). Is there anything special about a Bollinger Band? Of course not. Price often goes back up after it touches the bottom band, but it has nothing to do with the fact that it touched the bottom band, it just happens because price tends to go back up after it has gone down, and touching the bottom band just means price has been going down for a bit.

 

Same thing with an indiciator like RSI. When RSI gets to "overbought" that doesn't mean anything, it just means price has been going up for a while. All RSI does is tell you how much price has moved relative to what it was doing a certain number of bars ago. Also, for a fun exercise, if you code a chart to label the candles when RSI becomes "overbought," you will see that about 50% of the time price reverses, and about 50% of the time price continues to go up. The market doesn't respond to RSI, RSI just tells you what price is doing relative to what it was doing.

 

Same thing with CCI. All CCI does is tell you how far away price is from an MA. If CCI goes from negative to positive all that means is price just crossed over an MA. It doesn't mean price is going to keep going up (because crossing an MA doesn't mean price is going to keep going up).

 

But all these things provide specific points at which people think about entering. So I guess it at least helps them decide. As I've said, there's nothing special about a fibonacci retracement other than the fact that it's a specific point, but you could use any retracement level, too.

 

If you are entering on a Fibonacci retracement, all that means is price has retraced a little bit. It might retrace more or it might go back up, but at least you have a specific point you are looking at to enter.

 

I like to enter when price pulls back because it gets a better entry price. Plus, usually if I buy when price is going in a upward trend, it ends up reversing right after I buy. I have heard the markets are set up such that the majority of players are wrong. Or, it could just be that it's all random.

 

There's nothing specific about that point, however.

 

......as an aside - when you say everything else is crap or does not work for you, i hope you also realise that this too has its downsides and will not work for many people except through dumb luck. You do realise that most people, even those who have never read an investing or trading book do the opposite even when they are trying to do what you say anyways....its human nature.....so this like any method may work for some people, but for most my guess is they will fail even if it works for some others.

 

Agreed. That's why the first sentence in this thread said this isn't for everyone.

 

I know most people do the opposite of what they want to do. I held on to some losers when I started out because I was waiting for them to reverse.

 

You know how when you buy a new car and you are so careful because you don't want it to get a chip, but then after the first chip you're like whatever, it has a chip now so I don't care anymore? I sometimes wonder if new traders should open an account and specifically try to lose money just to see how it feels. Of course, trying to lose money with a losing system is just as hard as trying to make money with a winning system (not including commissions), but that's another topic, too.

 

It certainly does not have an edge apart from those that you list, and these are personal and not able to be replicated by everyone. So when you criticize others for not backtesting it is too easy to say something is crap but then fail similar methods yourself, even though you admit its not for everyone. Point being – this system falls into the same criticisms you level at other systems, so most of what you say maybe be equally regarded as ‘nonsense’ by some.

 

This system can be backtested, and I've been posting 100% of my trades with live calls for years (something other people who share systems never do). For backtesting, just use mechanical add points and position sizing. You can use retracements or just specific levels (eg. every 10 SPY points). Target profit is initially the previous high before you started adding, but after a certain number of adds you lower the target profit (or, technically, you can make it the previous high since we know now that SPY has retested its historical highs but I never assumed that would be the case in real time and so I exited my positions before then because I had no idea how high SPY would go.

 

It's only suspicious when people say "backtesting is useless, don't bother trying to backtest my system, but please keep paying me a monthly fee and buying my books and courses... but don't backtest them... oh and I don't post live trades, just trust me that it works from the after the fact charts."

 

I encourage people to backtest this if they are interested. Forward test it, too, or just follow my trades and check up on the progress every few weeks.

 

Every system has holes and just because others may or may not be doing it means nadda despite protestations or encouragements.

 

Looking forward to more thoughts…..

 

Thanks for the feedback.

[MightyMouse 12]

Bernanke did not "provide a floor". The fact that the world financial system did not completely collapse provided a floor, as this is pretty much the only concievable scenario (ie. one of a doomsday type) where the S&P goes to Zero.

 

As the OP acknowledges, such a scenario would leave all of us with bigger things to worry about than a blown account.

 

I am sure that countless competent fund managers were scooping up equities at exactly the same time (some using leverage) - did they know what they were doing? Were they just lucky? Maybe if you take the stance of the OP - that price is random - then "lucky" is the best that you can hope for?

 

An interesting exercise for confronting ego - how do you react to each of the following?

 

- "You just got lucky, that's why you made money . . ."

- "You made that money because you know how to trade . . ."

 

BlueHorseshoe

 

Blue,

 

Bernanke did not make central bank purchases in the market. He did buy treasuries and MBS which had the hopeful impact of forcing money into the markets, which would increase the equity of publicly traded companies, which would allow them to borrow more at lower rates to invest in plants and factories. My Bernanke market support statement is a matter of speaking.

 

I am brilliant when I have a winning trade.The market went in the wrong direction when I lose.I am not a level headed zen master who is indifferent to wins or losses. I wouldn't do anything that I didn't get a charge from.

 

The truth is that I have a healthy respect for the elements that are not in my control. Luck is one of them.

[ericcse 10]

A close friend of mine has been trading a very similar method for 5 years now. Though he doesn't use hedges, just avg down when market goes against him, cover when the market pull back. The main idea is to take advantage of all the smaller moves along with the big move, he called it "dance with the market". Though he recently retreated claiming the potential risk is too big for him to take right now.

Can't wait for the next installment, I would love to hear more about how you calculate/control the risk.

[SIUYA 11]

I agree with your comments RE pros and cons of this and any other approach and how it may or may not be suitable for others . . . Confused about your Mean Reversion comment though - Mean Reversion is a product of Random Distribution - but we're not going to have another coin-flipping discussion

 

Also, regarding backtesting . . . if you want the general flavour of this rather than whatever specific criteria with fibs etc the OP apparently relies on . . . Buy SPY after 2 Down Years . . . Buy SPY after 2 Down Months following 2 Down Years . . . Buy SPY after 3 Down Days after a Down Month following 2 Down Years . . . Cut it any way you like: it's always better to buy it when it's falling if you have a mechanism - zero leverage - to weather the drawdown.

 

BlueHorseshoe

 

Re mean reversion and random - exactly my point - the system is mean reverting and hence not random - and also has other limitations based on various intrument criteria...thats why i dont think there is a lot of randomness about the system. It seems simply based on what goes down usually goes back up. The entires, exits and direction of trade are not random, nor is there any real relevat debate about if the data is random...thats all.

 

Re Backtesting - yes. same old story if you can hang onto a lot of different things, or diversify enough. That is why i am interested in the criteria for when something is considered a bad trade. What happens if you buy at the wrong levels and get stuck never exiting as it never retraces enough. same old story....

ed_ina cloud says it all...." If I’d stayed with it then it would have come back." - hindsight and stupity are wonderful things.

 

This also goes to the idea of the edge - if the edge is discipline, and patience they then require discretion, and there are biases and context. So unless you have hard and fast rules and dont apply extra discretion each back test will be different. Different strategy same problems even if we can appreciate the point 122b....is trying to make re gurus and others.

[DbPhoenix 42]

I wonder how long it's going to take for someone, anyone, to go through 1a's posts on ET with a pad and pencil and figure out just how much he made over the past four years.

 

It will be illuminating, particularly with regard to "mean reversion".

[SIUYA 11]

ET phone home - never heard of it.

 

is that where we would find...

1a2b3c.....

"This system can be backtested, and I've been posting 100% of my trades with live calls for years (something other people who share systems never do)."

 

if this has all been said and done before elsewhere are we just going to be mean reverting?

or is it all just random in which case who cares?

and why move to TL - is it because we are such noooice people.