Rethinking EVERY Concept

[daedalus 10]

Well not every concept, but as I just was spinning my wheels in the scalping thread I wanted to start a new thread with new ideas to discuss and keep them separate for those in the future searching and browsing this forum.

 

Basically this search has got me questioning everything i'm currently doing (as its not going to well) and looking at everything I used to scoff at and ignore for ideas to apply.

 

What i've found is that it seems like all of my trades are too "finite" and what I mean by that is i'm killing myself for a couple ticks here and there and the moves typically aren't there on the smaller timeframe to reward proper R:R.

 

As i've said when I started this thread i'm throwing everything i've done out the window and i'm re-evaluating it all. Specifically longer and higher timeframes in the currencies. When I started out I was trading a 4H chart and I had phenomenal account growth with simple pullbacks. I think the thing that worked for me was that when I was entering into a 4H trend I had multiple factors in my favor that I no longer do:

 

- Stronger momentum vs. "noise" signals.

- Follow through would lead to massive winners (>100 pips) vs. my current 6 tick "winner" and thus better R:R.

- Less noise.

- More movement... even the bad signals had opportunity to go 20 or so pips and let me get to par easily.

- Lots of time to get out... if things were looking hairy it seemed like there was a lot of time to analyze the situation and wait and see what price did. If it came back against you it was ok because you could still jump out at breakeven or near it.

- Less "fakeouts".

- LESS SIGNALS.

 

I am beginning to realize a lot of my failure has come from trying to dissect everything down to a finite level where i'm playing for minute amounts of ticks. If something worked on the 4H chart then I was trying to apply it on the 4M chart so I had more signals. The ironic part is I never thought I was the guy who wanted the action... I just wanted a few good signals a day. But in my process to reduce timeframes on every concept I think i've ended up chasing my own tail by producing too many entries.

 

I've stumbled onto two great thread on FF that really peaked my interest. I'm trying to come up with a simple cross application of both and using basic ideas and the broad profitability of higher timeframes to lead me out of my dry spell.

 

They are:

 

http://www.forexfactory.com/showthread.php?t=242404

 

and

 

http://www.forexfactory.com/showthread.php?t=245149

 

Now before MadMarketScientist comes in here and bans me for linking you to another forum please read them if your so inclined and report back for discussion.

 

I find the idea of these massive stacked winners very intriguing as well as the bare bones simple entry method of 3MW method... when you start looking at charts like that in basic pullbacks to an ema or something and using that entry criteria I see a lot of opportunity previously oblivious to myself.

 

I've put SOOO much detail into an entry criteria... maybe its time to go zen on these bastards and simplify EVERYTHING. Worry about the R:R and let the trades appear in the most simple manner.

 

Anyway, like usual probably not the most lucid discussion but i'm eager to hear what you all think like always!

 

Cheers!

 

(I've attached three PDF's of summary's of the two threads if you'd like a quick skim of the "meat" of the ideas)

Building an equity millipede page 44.pdf

Threes Explained.pdf

Threes Explained 2.pdf

[SIUYA 11]

Thanks daedalus

The equity millipede - I like - for some reason it really reminded me of Jim Rogers. While he is a fundamental analyst and sefl confessed terrible trader some of the portfolio management seemed similar. He may keep a net short in something - eg; the EUR, but will also recognize when to build a long, with some small stops, with the idea that the market may turn and he can then ride that. Its the separation of positions into "bundles" that is more portfolio rather than money management.......

See post #47 for an interesting theoretical example.

plus post #53 "you need to know when a good setup is forming for a low risk entry. This is something you need to accomplish first. Position management will come to you when your ready." - an important issue.

 

ultimately it is a matter of running profits for when a large trend occurs...... if no trend occurs, then you will ultimately get chopped up - but you only need one or two large trends to pay for a multitude of losses.

Edited August 11, 2010 by SIUYA

[MightyMouse 12]

Most of the "Market Wizards" that we all aspire to be were longer term trend traders who built positions as the trend developed. There were few scalpers and they tended to be pit traders who where awesome pit traders. A pit trader had a theoretical advantage over a screen trader in that they do not put their order into a queue like we do.

[thalestrader 14]

Most of the "Market Wizards" that we all aspire to be were longer term trend traders who built positions as the trend developed.

 

A very good point, MM, that is too rarely acknowledged here and elsewhere.

 

Best Wishes,

 

Thales

[sergpato 10]

Excellent start. I am going deeply it to get comments and ideas.

 

Nice,

 

Sergio

[MidKnight 12]

Hi daedalus,

 

Let me start off by saying that for whatever reasons I seem to be in conflict between scalping and a swing'ish style approach. I tend to find the swing trading time frame a lot easier to analyze and get right but due to my own personal hangups and long built beliefs I am also drawn to the 'work' of scalping. I have never been able to make scalping really work for me on a consistent month over month basis, but like a blackhole it still seems to suck me into revisiting it every now and then....

 

I agree with virtually everything you say about larger time frames. I'd also add that IMHO, the real market moving forces in FOREX don't even see the small noise people try to scalp around. Aligning with their actions and time frames makes it a bit easier.

 

I find the 24 hour nature of FOREX difficult to accept for swing trading because I do not want to give up my control to enter and then manage the entry. I sometimes feel that if I could find a way to accept or an approach that manages that somehow then I'd be gladly swing'ish trading the FOREX. But so far I have come up nil.

 

I guess everything I am saying here points to me not yet at peace between not scalping and being more of a swing'ish trader. As usual with trading, everything is a trade-off

 

I like the idea of going all zen too.

 

Finally, thanks for the pdfs and links. I like what the millipede guy is doing to some degree. What I __try__ and implement is to swing trade but campaign based upon my trend model - which is mostly a 4H chart view. This is sort of like his approach of adding more legs except it just gives me a little more control to re-evaluate before going back in. Yeah I know....I sound like a control freak, but I'm not honest - haha. I just feel that if I'm putting orders in at X, Y, Z and walk away or go to bed then I need to put my stops way further back (essentially no stop) and this would obviously not be so good for the famous R:R people love to talk about

 

I have high hopes for this thread. Off to a good start.

 

With kind regards,

MK

[SIUYA 11]

MK - you nailed what is the hard part - the scalping black hole that sucks you in.

We constantly try and capture too much, yet we are constantly reminded by all the great traders - the money is in the sitting and waiting - Patience is often undervalued in trading.

 

Plus the point of a lot of these things is R:R ---- for the time being --- ignore it if you want to sit and run things - you need to free the mind of the idea of the reward. How many times have you heard great traders say they are look for low risk entries, or they just watch what they can loose and they dont mention their reward.... problem is its fricken difficult to sweat drawdowns and the constant break evens.

 

Applying a simple Thales/123/ABC entry with a quick move to break even and then just letting it ride is part of all thats needed.

[KeyToTheCastle 10]

"Most of the "Market Wizards" that we all aspire to be were longer term trend traders who built positions as the trend developed."

 

Adding to a winner, what a novel concept! Probably one of the hardest things to learn how to do in trading (at least it was for me). Think about it...there are a couple of aspects to doing this that make it difficult for most to accomplish. You're in the market, price has moved in your favor...now you're going to add more to your position? #1 Most people look to hop out and book profit never mind add more to their position. #2 Psychologically it's hard for most to add at a price that is worse then their original entry.

 

The key is scaling in and out of positions dynamically rather then using static entry, stop, and target prices. Once I began to trade dynamically not only did it became much easier to add to winners...it also became easier to let the market work for me and produce bigger winning trades.

[zdo 20]

Kudos for Rethinking EVERY Concept. Experience reminds me to let you know about one of its pitfalls. Each style (scalp, swing, trend, etc ) has tenets that do not cross over at all to the other styles. Our minds, in attempts to 'fill the gaps', tend to imagine hybrids that have no chance of realtime success.

 

The link below is pushing this topic dangerously sychological... but it goes somewhat to the conflicts about styles already mentioned (scalp, swing, trend, etc and stay vs. no-stay in positions / keeping or exiting winners, etc.)

TED Blog | The surprising science of motivation: Dan Pink on TED.com

 

All the best,

 

zdo

[cornhusker 10]

I highly encourage what you are trying to do here, but you need to wipe the slate further. Stop thinking in terms of time-frames, and every other common TA garble. Many folks watch price bounce around their charts day after day, even year after year and they take things like TA too seriously. It's all a trap really.

 

Do yourself a favor and put yourself in the shoes of a bank trader ( I see you trade FX). What kinds of things is a bank trader going to be concerned about? Is he going to buy because price has fallen 61%? Is he going to sell because price is just about to 'hit' the 100SMA? Are his eyes glued to a price chart all day long? What in the world is he up to? What kinds of risks/opportunities does he face? A little different angle: how were all the futures pit traders ever profitable down in the pits without precious price charts? How were they making trade decisions? Try to break on through to the other side, and when you do you'll be so far ahead of the curve you won't know what to do with yourself; break off the chains of retail trader thinking.

 

Keep up the good work and go big red,

 

Cornhusker

[daedalus 10]

If you're ever in Omaha i'd love to pick you're brain!

[Kiwi 16]

Something to think about.

 

Markets move because of power + motivation. Big speculators have both. Typical bank traders as described by Cornhusker (do you watch the Big Bang Theory?) often don't.

 

I've known a couple of guys who manage trading in banks well enough to hear the truth. One was currently employed at one Australian bank but it was his second bank trading role. The other was in London but before that he'd been a Tokyo bank. Here's the thing: most banks make all of their "trading" money by taking it from the customers as generous spreads. Their actual trading is a loser but they consider it necessary to maintain contacts and knowledge required to optimally sex their customers.

 

You need to understand the banks that are active profitable speculators or the true commercial speculators not the typical fx involved banks. And if you talk to your average bank trader don't be surprised if he paints that picture (even when its bs) because he wants to appear to be a big swinging dick - its like asking a salesman how its going - even in a recession it will be going great.

[macdfx 10]

Kudos for Rethinking EVERY Concept. Experience reminds me to let you know about one of its pitfalls. Each style (scalp, swing, trend, etc ) has tenets that do not cross over at all to the other styles. Our minds, in attempts to 'fill the gaps', tend to imagine hybrids that have no chance of realtime success.

 

The link below is pushing this topic dangerously sychological... but it goes somewhat to the conflicts about styles already mentioned (scalp, swing, trend, etc and stay vs. no-stay in positions / keeping or exiting winners, etc.)

TED Blog | The surprising science of motivation: Dan Pink on TED.com

 

All the best,

 

zdo

 

Interesting video..here's the YouTube version for your immediate gratification:

 

[ame=http://www.youtube.com/watch?v=rrkrvAUbU9Y]YouTube - Daniel Pink on the surprising science of motivation[/ame]

[cornhusker 10]

Something to think about.

 

Markets move because of power + motivation. Big speculators have both. Typical bank traders as described by Cornhusker (do you watch the Big Bang Theory?) often don't.

 

I've known a couple of guys who manage trading in banks well enough to hear the truth. One was currently employed at one Australian bank but it was his second bank trading role. The other was in London but before that he'd been a Tokyo bank. Here's the thing: most banks make all of their "trading" money by taking it from the customers as generous spreads. Their actual trading is a loser but they consider it necessary to maintain contacts and knowledge required to optimally sex their customers.

 

You need to understand the banks that are active profitable speculators or the true commercial speculators not the typical fx involved banks. And if you talk to your average bank trader don't be surprised if he paints that picture (even when its bs) because he wants to appear to be a big swinging dick - its like asking a salesman how its going - even in a recession it will be going great.

 

Alright, Kiwi, replace bank trader with "big speculators." My point is simply that trading is not the flashy video game or weekend word puzzle it's made out to be. Everyone gets caught up in all the old price data, abstract statistics, joe blow TA, ect, but none of those things move the market. I don't want to sound as if I'm ruling all of that stuff out, some of it can be useful, but it's peripheral to whats really going on.

 

To illustrate this, lets look at EU and yesterdays strong bearish move. What caused EU to drop like it did? Leave fundamentals out of the answer and explain it in the context of orders, asymmetric information, adverse selection, fear, and greed. I leave logical things like FA out because I consider it pre-trade stimuli; fundamental info is aggregated into price later down the chain of events via orders and quote adjustments.

 

I invite anyone to take a crack at the question.

 

Regards,

 

Cornhusker

[Moyyim 10]

Something to think about.

 

Markets move because of power + motivation. Big speculators have both. Typical bank traders as described by Cornhusker (do you watch the Big Bang Theory?) often don't.

 

I've known a couple of guys who manage trading in banks well enough to hear the truth. One was currently employed at one Australian bank but it was his second bank trading role. The other was in London but before that he'd been a Tokyo bank. Here's the thing: most banks make all of their "trading" money by taking it from the customers as generous spreads. Their actual trading is a loser but they consider it necessary to maintain contacts and knowledge required to optimally sex their customers.

 

You need to understand the banks that are active profitable speculators or the true commercial speculators not the typical fx involved banks. And if you talk to your average bank trader don't be surprised if he paints that picture (even when its bs) because he wants to appear to be a big swinging dick - its like asking a salesman how its going - even in a recession it will be going great.

 

 

Yep... I was a "Senior Dealer" (FX) for a very small Bank in London and previously worked for the large German.... The "easy money" is in the spreads and its often said most Banks lose at purely speculative trading - FX is often just provided as a "loss leader" for other business

 

Cheers

[cornhusker 10]

Yep... I was a "Senior Dealer" (FX) for a very small Bank in London and previously worked for the large German.... The "easy money" is in the spreads and its often said most Banks lose at purely speculative trading - FX is often just provided as a "loss leader" for other business

 

Cheers

 

Thanks for chiming in. To be more clear about the FX market, the banks do indeed make most of their money by their dealing operations. It is the large speculative funds that help determine the direction of price changes, but the banks are a crucial part of the equation. When mr bank dealer learns he has traded with mr. hedgefund, he immediately adjusts his quotes (shifts liquidity) while others in the market see this and seriously consider adjusting theirs. Some do, some don't. Those who don't will also trade with mr hedgefund, or one of his followers and regret it because they have nobody to trade with to offset their bad inventory. In the midst of this, fear moves all the liquidity to a place where the orderflows are more two-sided again, because as we've said, banks like their spread income. The first bank dealer could have speculated on what he learned from trading with mr hedgefund, many dealers do.

 

This is the essence of trading, it will never change. Even in our age of robot traders, and computers gone wild, it's the same game. Trading is really about reading the other players and working to understand who's informed, who's not, and who's bluffing. It's an art really.

[MidKnight 12]

At the start of the year I had the opportunity to have dinner with a senor FX trader for the ANZ bank (they account for over 30% of all NZD transactions). He was a very nice UK chap, really warm and friendly buying drinks non stop for the table (damn those bank bonuses!). Anyhow, the guy told me that the majority of the bank profits generally come from their FX trading division and as has already been said it comes from the spread and the fact that they do front run large client orders. Also quite a lot comes from structured products too. I tended to envision it a little bit like being in the pits - they can see the order flow and play accordingly.

 

Later on the guy gave a talk on something and made a prediction that the pound was going to rally. This was in about Feb 2010 and with hindsight we all know what has happened. Goes to show ya though, these guys have no idea where the market is really going. Embrace the uncertainty of the markets - everyone must face it.

 

With kind regards,

MK

 

PS: On a separate topic, I've read about 1/2 of that millipede thread that daedalus posted and there is really really good stuff in there I think. I'm testing his 'legs' approach across 13 pairs for the year to date.

Edited August 13, 2010 by MidKnight

[cornhusker 10]

I tended to envision it a little bit like being in the pits - they can see the order flow and play accordingly.

 

 

That's exactly right.

[MightyMouse 12]

Alright, Kiwi, replace bank trader with "big speculators." My point is simply that trading is not the flashy video game or weekend word puzzle it's made out to be. Everyone gets caught up in all the old price data, abstract statistics, joe blow TA, ect, but none of those things move the market. I don't want to sound as if I'm ruling all of that stuff out, some of it can be useful, but it's peripheral to whats really going on.

 

To illustrate this, lets look at EU and yesterdays strong bearish move. What caused EU to drop like it did? Leave fundamentals out of the answer and explain it in the context of orders, asymmetric information, adverse selection, fear, and greed. I leave logical things like FA out because I consider it pre-trade stimuli; fundamental info is aggregated into price later down the chain of events via orders and quote adjustments.

 

I invite anyone to take a crack at the question.

 

Regards,

 

Cornhusker

 

Cornhusker,

 

I think I like the way you think and I would be interested in why you think the EU fell yesterday.

[cornhusker 10]

Cornhusker,

 

I think I like the way you think and I would be interested in why you think the EU fell yesterday.

 

Because when size trades, or everyone wants to trade at once, the liquidity then disappears too; not because it's all consumed as if it were just sitting there static, but because the bids were extremely thinned out and/or canceled. The market was offered down until buyers came in and a new working range was established. I'm not saying no trades happen in between, but for all intensive purposes the market quickly flocks to a new zone in which dealers can buy and sell in approximately equal volumes again. This is how fundamental information is impounded into a market. Those with the most working capital are the ones who can afford to do good research (so we hope), they then trade and the market responds accordingly. I'm making it sound simple, and in a sense it is, but there is a lot of strategy and trickery that goes on that makes the market very difficult to read.

[SIUYA 11]

Ah finally..... while it has been known by some for a while it has always amazed me by the amount of people who think there is a global conspiracy of bank traders who know everything and make all their money trading...... There are very few real speculators or true traders.

Most take the clip, most are market makers or client order operators, or managing structured products. So when you see any investment bank reporting that its trading division made money on 95 days out of the last 100, it feeds this image. You cant actually delve into many of the internal divisions and see who makes what, and with all such endeavors, the internal workings have everybody claiming they made the money, and they forget the brand of the bank and the associated products which brought in the clients. A lot of it maybe be about the definitions of a trader v speculator v broker v operator, but think about it this way - its all marketing and perceptions.

The bank traders push the idea that they make the money, so they get the bonuses, they like to feed their own egos, the banks also like the idea of a gun trader, management will attach themselves to them (until they blow up). Also in order to attract the clients, the banks push the idea of trading as a way to make instant riches, so they get them to pay them commissions, and trade their products. (imagine if a car seller said, statistics show 95% of you who actively purchase our product will crash!)

if 95% of traders loose money, do you think the banks have a monopoly on most of the good traders - just so they can give them 10% of what they make....

(hedge funds are a slightly different story - but the internal workings here can also be similar)

This is not meant to be a rant, but its good to see it brought up and its topical as its a concept a lot of retail traders(and even bank employees) dont get, and I am glad its been brought up by others.

 

As an example to think about - the investment banks are meant to divest themselves of their trading divisions - how many people do you think that will cause to leave the banks, how much will it affect their profits..... far far less than many would like to guess at.

[SIUYA 11]

Cornhusker - why the EU dropped.

Actually I did not see it, as I was doing other things, however while in the thread of re thinking concepts, one of the the things I have always thought about which may give food for thought and actually agrees with Cornhuskers idea.....

while everyone gives a variation of "markets fall because there were more sellers than buyers, more aggressive sellers etc etc"

think about it in terms of the market will go down as there are no buyers at certain levels, or up as there are no real sellers. Its a little bit semantics but this can be particularly true when many of the participants setting the price levels are market making (spreaders).

As a theoretical example try an think of what would happen if a market opened for 5 mins, then closed for 55 mins, then opened again for another 5 mins, then closed again for another 55 mins...... what would happen.

[BlowFish 10]

Aww cornhusker you answered your question before everyone else had a go. Markets as liquidity matching mechanisms and trading as the search for, and provision of liquidity provides a pretty robust conceptual model. Things like supply and demand support and resistance and various market profile concepts can all be thought of in terms of liquidity. Incidentally If banks are making most money from customer order flow it is in their interest that the market trades where the most liquidity (order flow) can be found.

 

Another interesting thread daedulus.

[SIUYA 11]

Another related concept as food for thought. - Psychology and scalping v longer term trend following......

(related to the post by Midknight and KeytotheCastle, and the milipede plus Zdo will like this)

 

The scalping black hole we get sucked into (while it can be done, and is a method to make money, its not for everyone, and yet, the scalping black hole is an apt description for those who know its not for them, and yet constantly are pulled back into it)

 

Think about this (and I am paraphrasing/taking from "Stumbling on happiness" - Daniel Gilbert here)

Why its so hard to sit on winners.....

Delays are painful. When people imagine the pain of waiting, they imagine it will be worse if it happens in the near future than in the far future and this can cause odd behaviour......

example; most people would rather receive $20 in 1 years time than $19 in 364 days time, and yet will generally choose $19 today rather than wait for $20 tomorrow. In economic theory this is irrational as the expected waiting time between receiving 19 and 20 is the same in both case, hence changing what we would chose is irrational.

 

The point is - waiting for tomorrow (or one day) now is more painful than waiting for tomorrow (or one day ) in one years time. Even thought the pain of waiting one day in both cases should be the same.

 

(think about it this way - people will pay $1 now to avoid the pain of waiting, but will not if the payoff is in one year time as they think its so far away)

 

This definitely contributes to the lack of patience of sitting on a winner.... many would rather pay to take profits. its comforting - or less painful. We want instant gratification (?). Our immediate imagination is possibly our worst enemy.

 

One way to get around this is to set the stops at breakeven, and then give it to someone else to manage..... out of sight out of mind. So the concept is not so much on money management, entries exits, etc..... the normal stuff, but in tricking ourselves by deceiving ourselves even more than we already do everyday. ( a related experiment I have always wanted to try (or variation of) is have one person always put on longs, another always only put put on shorts, another just takes trades off at a stop loss or BE - separate them all. )

 

This however does not get over the issue of adding to winners but is clearly related. Every time you put on a new buy or sell after the very first day you do a trade in a particular instrument it is likely to be at a higher or lower price than the original trade. So first you need to get over the issue of it being a trade that adds to a position..... every trade should be a new trade that stands on its own merit.

 

Now this is slightly different thinking from the general concept of many trades either being a "series of trades", it also is different to any martingdale strategy, or the idea of averaging in.......

Also if adopting the millipede example......having no idea of the reward element of the R:R concept..... and hence letting the market decide, maybe just maybe Dr Van Tharp has actually done many traders a disservice by popularizing the concept......(maybe he works for the broker conspiracy and they just want us to day trade more and pay extra commissions)

 

It seems to me often the concepts that we traditionally/continually look at or focus on for trading are actually doing more harm than good (better money management, better entires, exits, indicators, more focus, more discipline, new trading idea)...... a bit like continually asking how to make a horse/car/plane go faster rather than asking why we are trying to go somewhere and is there an easier alternative than traveling. The issue is not in new trading ideas, but rather in ways to avoid thinking or tinkering too much.

 

(thankyou and Damm you Daedulus - for some reason this thread has struck a chord.)

[daedalus 10]

Awesome discussion gents!

 

I thought I would chime in on what i've been reading and researching. I've ended up down a road I never thought I would walk.

 

I ended up stumbling onto the 101 basket trading thread after reading more and more of the author of the M W thread and his "hedging" strategies (which really aren't hedges at all).

 

Heres the original 101 thread: Simple Trading Method with trader101 @ Forex Factory

 

And heres an interesting more recent revival and re-evaluation of that idea (goes a lot into explaining the core ideas and was very helpful in getting me to understand some of the logic): T101 basket trading system - math analysis - Forex-TSD

 

There is a strange simplistic logic about this idea. Do any of you have experience with this strategy? It seems like a lot of people are able to generate a LOT of pips with it in a short amount of time but as the 2nd thread builds on, it still requires some kind of signal in general terms whether or not to buy or sell all the pairs.

 

Anyway, i'm only partially through the first thread so there is a lot to learn but for me, this is something I never thought to look at and its generating a whole lot of ideas I never considered before.

 

Cheers!

T101 rules made easy v3.pdf

Edited August 13, 2010 by daedalus
Added 101 .pdf for easy explanation