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The Evolution of a Trader

  • Post #1
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  • First Post: Edited Apr 20, 2007 9:53am Mar 23, 2007 4:15pm | Edited Apr 20, 2007 9:53am
  •  FX Articles
  • Joined Feb 2006 | Status: Member | 313 Posts
At some point, if they last long enough, all traders discover that successful trading is not the inevitable result of a good trading strategy or system. If all we needed was a good system or indicator we would all be successful traders. Yet clearly we are not, far from it, there are very few traders making their living consistently from the markets.

Technical analysis is a vast and well researched subject. Many minds have poured their heart and soul into searching for the holy grail of trading: the system, strategy or indicator that will yield to them unlimited wealth and glory. Yet with all this depth of knowledge readily available, trading profits remain as elusive as ever.


System Vendors and the Holy Grail

If we were to take a scientific approach to evaluating technical analysis we would have to conclude that it is of limited value. System vendors, though, will continue to exploit our desire to believe that there really is some secret knowledge that will enable us to transform into super traders as soon as we expose ourselves to their secrets. It is a very tempting fable to believe in, it offers an answer to our prayers and our problems, it engages our ego (how great to conquer the markets and escape the drudgery of work etc..) and it allows us, briefly, to relinquish the painful self-doubt that we are unconsciously fighting. The system vendors flatter and deceive us in the same way that street sellers sell exclusive, stolen perfume, which is usually no more than bottled water. We are easily deceived when we are told exactly what we want to hear.

Let us pretend that a system vendor really has a system that works as they claim. Let us also assume that his cup truly does ‘runneth over’ and he sincerely wishes to share his knowledge as a way of repaying his good fortune; and finally let us assume that he charges a fee, not for his own gain, but to ensure that his clients really take him seriously. Assuming all this, does it make sense to make his knowledge available in a book or a seminar? We all have discovered that trading is not easy and one of its biggest challenges is following our signals, be they based on an indicator or our intuition. It is so easy to doubt our signal when the moment to act arrives, we hesitate and the opportunity is gone. So having learnt our hero’s strategy we then have to become adept at implementing it, which brings with it a whole host of problems that only become apparent as we attempt to execute the system.

Now the issues that get in the way of implementing a strategy are not issues that any system vendor can resolve in a book or a weekend. In fact the system vendor would have it that all our previous problems with trading result from not having a good enough strategy, which of course is a problem he can easily solve for us. The basic premise of the system vendor is that all the psychological issues in trading, in fact all the problems we have in trading, are a consequence of not having a really good system or strategy.

This I do not believe, it is like claiming that we could all play golf like Tiger Woods if we had a certain set of golf clubs, or that we could achieve the same level of success as Pete Sampras if we used the latest racket. We all need golf clubs to play golf or a tennis racket to play tennis, no question; but they do not determine our success. Tiger Woods would still be a great golfer even if he was handicapped by playing with antiquated clubs, but no novice golfer is going to be transformed into Tiger Woods simply by buying the right equipment. If the system vendor has perfected the perfect trading system and if he has developed the skill to successfully implement this system, surely the most effective method to share his good fortune would be to create a fund that we could all invest in. That way the vendor can ensure that we all receive the full potential of his system without any effort on our part, without us having to overcome the bigger challenge of implementing the system ourselves. Presumably for every client who learns the system only a few manage to implement it successfully, with the fund option every client gets the full benefit of the system; so why not start a fund, a much better way to share the fruits of his good fortune.

The other question that is frequently asked is why doesn’t the vendor display the full results of trading the system? Instead we get comments like ‘97points this morning, thanks a £…grand!’ from a satisfied punter. In order to evaluate the effectiveness of any system we need to be able to see the results of every trade, over a significant period of time, so we can compute the necessary statistics. If a vendor has done so well, why can’t they publish their own verified trading results? Some do, but only in snippets, we need the whole lot; and why not if they have had the results they claim, what have they to lose?

The reason that vendors do not publish their results and the reason that vendors do not start funds is that their systems do not work consistently. They work periodically sure, they can find numerous examples of successful trades, but they do not work consistently. But even if their systems did work consistently they do not publish their results or start funds as they have not been able to overcome the implementation and execution hurdle, they are not good traders. They may be good researchers, good teachers and good sales people, but they are not good traders.

System vendors can teach us how to market products, they can teach us how to write sales letters, they can teach us how to present, they can teach us many things, but they cannot teach us how to trade. They cannot teach us how to trade because they have not learnt how to trade, all their energy has been spent researching and developing systems and the only way to make money from these systems is to sell them.


Learn through experience

Learning to trade has nothing to do with researching and developing systems anymore than designing golf clubs has to do with learning to play golf. Trading, like any endeavour, any skill, is learnt through doing. We learn through trial and error, through having experiences and evaluating and learning from those experiences; and of course, our learning is accelerated if we have the support and advice of someone who is further along the path of development. The skills of trading are to do with execution, and implementation, the doings of trading. The problems we all experience in our trading, problems that are popularly referred to as the psychology of trading, are the challenges of trading, it is these problems we surmount as we develop our trading skills. The skills of execution are the equivalent of the basic shots and strokes that make up the games of golf or tennis. There is no point having a strategy in tennis if we can’t execute the complement of strokes we need to be able to play. Knowing that we need to hit the ball deep and move our opponent from one side of the court to the other is of no value if we cannot hit the basic shots.

There is no point having a trading strategy if we can’t trade and no novice trader knows how to trade. The problems we all experience in trying to make money trading stem from the fact that we do not yet have the skills of a trader. If all we needed was a system we would all be wealthy; no, we need to become traders.

If you have read the Market Wizard books by Jack Schwager, you will notice that each of these very successful traders has a different approach or system, yet they are all successful. Their approach is not the common factor that determines their success. The common factor amongst them is their trading skills. What are these trading skills and how do we develop them in ourselves? - that is the million dollar question. We need to look to ourselves for the answers, what are the problems that we experience, what are the behaviours that result in our lack of success and our failures? It is overcoming these behaviours that move us along the path of the trader.

The basic rules of trading are cut your losses short and let your profits run, a losing trader is not doing one or both of these. When we have learnt to ruthlessly cut our losses and have the restraint to run our profits, only then are we traders. And it is during the process of our development, as we demythologise the market, that we start to have the observations and make the distinctions that lead us to evolve and refine our trading strategies. If we could have the strategy of a successful trader delivered to us on a plate would it be of any value to us? I don’t believe so; in the same way we could not implement Tiger Wood’s strategy, or Pete Sampras’s, because we do not have their skills, so we could not implement another traders strategies without their skills. We must develop as traders first and in so doing we will naturally evolve our own unique style and approach to trading success.
Developing Trading Skills

To develop these skills we need to get our feet dirty, plunge into the markets and have experiences. These experiences are all good; they are the feedback we need to gauge our current state of development.

Without feedback we have no means of progressing. When I first started to play tennis I did not go straight into a competitive game and try to win, I started by learning the basic skills of tennis, the forehand, the backhand and the serve. As a novice it was normal, expected even, for me to hit the ball repeatedly in the net or hit it sailing out; this just indicated that I needed to work on these shots. Imagine taking this approach to trading. Lots of losing trades is to be expected for the novice trader, it is the first feedback, which reinforces the fact that the first skill of trading is to cut losses short. A novice tennis player needs to learn to control the ball so that it lands in the court; the novice trader needs to learn to control his losses. This is how we learn; it is a constant cycle of trade – feedback – adjust. So what are the practical steps for going about the business of developing trading skills?

If you are new to futures trading there are certain facts you need to know. This information will be covered in most good introductory books and seminars. When you have the practical information you need, open a trading account and start trading. As a novice it is helpful to trade a simple, logical system. This appears to contradict the stance I took against system vendors above, but what I am talking about here is a systematic way of having a view of the market. My objection to the system vendors is that they maintain that their system is all that is required to be successful, whereas in reality it is the ability to implement a system or strategy that determines success. As your trading skills evolve, your ability to read the market will evolve; but until then you will have no valuable opinion, so a simple, logical system will give you a reason to buy or sell.

In giving introductory seminars I have in the past demonstrated a couple of workable systems, which are a good starting point. In attempting to trade these systems two things happen; firstly you find out the issues you have that you need to resolve in order to progress as a trader; and secondly in the course of trading the system you start to make observations and distinctions that will enable you to be more discerning about picking trades. The issues that you come up against are the feelings that arise that prevent you from executing your system flawlessly. You need to neutralise these feelings so that you are no longer a victim to them.


Get help


I believe that to have some sort of support while developing as a trader is vitally important. A trading coach, for want of a better phrase, will help you to navigate when you feel lost, and will give you an objective perspective when you are wallowing in doubt and uncertainty. As a novice floor trader I found the support of my backer essential in developing trading discipline. Support does not have to come from a professional coach, two traders could support each other, or a novice trader could seek out a mentor.


In summary:


* We need to have the knowledge of the rules and tools of the game.
* There is no system or strategy that will turn a novice or losing trader into a consistently profitable one.
* Don't waste money on systems, they have very little value in themselves.
* Systems, though, are an effective starting point to develop from, but be aware that no system confers the skills to apply it, these must be developed over time.
* Trading is a game of skill, these skills are developed through experience, feedback and the ambition to evolve.
* Finding some form of support will speed up our progress.


Malcolm Robinson is a former LIFFE floor trader who now trades his own account as well as providing educational material for futures trading.
  • Post #2
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  • Mar 23, 2007 4:31pm Mar 23, 2007 4:31pm
  •  superdezign
  • | Joined Feb 2007 | Status: Silly broker, pips are for kids | 455 Posts
What an excellent read!

Thank you!
 
 
  • Post #3
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  • Mar 23, 2007 5:00pm Mar 23, 2007 5:00pm
  •  denonline
  • | Joined Mar 2006 | Status: Member | 43 Posts
very good article...
 
 
  • Post #4
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  • Mar 23, 2007 6:16pm Mar 23, 2007 6:16pm
  •  crl212
  • | Joined Dec 2005 | Status: Member | 13 Posts
* Trading is a game of skill, these skills are developed through experience, feedback and the ambition to evolve. (great line)

In our " I want it all and I want it now lifestyles" anything that takes months or years to learn seems to empty our accounts rather quickly. Give me a system that I can plug and play while I shop for my yacht!
Like some people I assumed my stock trading experience would work well in the forex. Not a chance.
Proper money management and leverage will keep you in the game the rest of your life. If you dont learn that early you will end up like the majority of traders (broke).
 
 
  • Post #5
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  • Mar 23, 2007 7:07pm Mar 23, 2007 7:07pm
  •  tdion
  • Joined Nov 2005 | Status: EURUSD Quant FREAK | 3,197 Posts
At this point, I am a 100% mechanical and unimaginative trader. My EA contains a fully backtested system from 6 years of data. I am waiting for the market to prove my system wrong.

I'm not arguing the article, just challenging it a bit.

Quoting Editor
Disliked
At some point, if they last long enough, all traders discover that successful trading is not the inevitable result of a good trading strategy or system.
Ignored
 
 
  • Post #6
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  • Mar 27, 2007 8:07pm Mar 27, 2007 8:07pm
  •  Mina
  • | Joined Mar 2007 | Status: Member | 181 Posts
Money managment !!!
 
 
  • Post #7
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  • Mar 27, 2007 8:46pm Mar 27, 2007 8:46pm
  •  irusoh
  • | Joined Jul 2006 | Status: Stupid MQL Tricks Master | 288 Posts
I started trading forex last July and being a computer programmer by trade, I quickly discovered the wonderful field of mechanical systems to be implemented through expert advisors. I experimented with EAs until December and to my utter dissapointement could not build or find a system to my satsifaction. Even if they make some money, they all encounter prolonged drawdowns (few months) and this is not why I would be trading forex. So I reversed my style 180% and started prowling on this forum looking for succuss stories aside from EAs. After 2-3 months I kind of developed my own methods which are sort of fuzzy being part intuitive, part technical, but completely manual. Currently I am gaining expereince trading a real account in small chunks, increasing as I progress.
At this point I believe this the only way to really become successful in this field.

Great Article.
 
 
  • Post #8
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  • Mar 29, 2007 2:32am Mar 29, 2007 2:32am
  •  Gwan
  • | Joined Feb 2007 | Status: Small is beautifull | 1,368 Posts
since i don't want negative swap, i do one way trading.
since i don't want stop loss, i calculate the margin to acomodate the bigest loss in a decade.
since i can't calculate the profit taking and entry point ,for each trade i just fix it to few pips interval.

walla, i eliminate reason for loosing & confusion
 
 
  • Post #9
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  • Mar 29, 2007 5:47am Mar 29, 2007 5:47am
  •  tdion
  • Joined Nov 2005 | Status: EURUSD Quant FREAK | 3,197 Posts
Gwan that is very interesting.... you trade multiple pairs this way? What do you do when the trend is against the positive swap position?

Do you use an indicator/trendline (or your eyeball) to determine a favorable trend before entering?

Thanks.

Quoting Gwan
Disliked
since i don't want negative swap, i do one way trading.
since i don't want stop loss, i calculate the margin to acomodate the bigest loss in a decade.
since i can't calculate the profit taking and entry point ,for each trade i just fix it to few pips interval.

walla, i eliminate reason for loosing & confusion
Ignored
 
 
  • Post #10
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  • Apr 23, 2007 9:40am Apr 23, 2007 9:40am
  •  Gwan
  • | Joined Feb 2007 | Status: Small is beautifull | 1,368 Posts
in usd jpy eg: 118.84 price is almost equal with 10100 pip in gbp-usd
or if in micro lot 10100 pip = $101

so if i trade 1 micro lot with $102 equity (multiplied as necessaary), theorically i can hold the position for eternity (lol) unless america is suddenly destroyed by something , or gone from the history.....,
(a better scenario? union of nation that erased the pair which force us to close the position?)
so with that tiny "fail proof theory" even forex can be an investment ......
(and some say "yeah rite" )

if it goes against me, i put another position, it may looks like martin gale, but with that asumption that "fail proof theory" it is 0.001% "dangerous"


Quoting tdion
Disliked
Gwan that is very interesting.... you trade multiple pairs this way? What do you do when the trend is against the positive swap position?

Do you use an indicator/trendline (or your eyeball) to determine a favorable trend before entering?

Thanks.
Ignored
i feel de ja vu.... seem like i've said it before.......
ps: to make it profit more than just it, increase the trading frequency, not the lot .
 
 
  • Post #11
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  • Apr 23, 2007 1:39pm Apr 23, 2007 1:39pm
  •  zek132
  • | Joined Mar 2007 | Status: Forex Sceptic | 191 Posts
Great post.

In regards to EAs, yes, they can work, the question is for how long?

Best regards,

Vlad Zapletin
 
 
  • Post #12
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  • Apr 27, 2007 10:47am Apr 27, 2007 10:47am
  •  Bytebodger
  • | Joined Apr 2007 | Status: Burning pips since 2007... | 340 Posts
Quoting tdion
Disliked
At this point, I am a 100% mechanical and unimaginative trader. My EA contains a fully backtested system from 6 years of data. I am waiting for the market to prove my system wrong.

I'm not arguing the article, just challenging it a bit.
Ignored
I'm not sure that your position is contradictory to the author's. The most rudimentary of systems tells you when to open a position - that's it. It doesn't say anything about exit strategy, SL, TP, etc. I have no doubt that your EA can be consistently successful but if it is, I'm certain that it is not nearly so rudimentary.

Perhaps the next step up in "systems" would be that which tells you when to open AND close a position, with perhaps some additional suggestions for setting SLs.

A full-fledged "system" would be as complete as possible - showing the best times to open and close a position, where to set SL and TP levels, and - here's a biggie - how many contracts to open and when to close them. In other words, how to feather in or out of a position.

Without knowing anything about your EA, I would guess that it probably covers most, if not all, of those elements. If it does, then it is an EA which encompasses much more than a rudimentary system. Rather, it automates the sum result of trading knowledge - knowledge which you've probably gained through more painful, manual experiences. At a minimum, I can guarantee it is knowledge that others gained when they were developing the EA.

If you're like many of the other EA-traders out there, you may have tweaked it to your liking. And if this is so, those tweaks would all represent the sum of your trading knowledge.

I think the author's point is that so many people just look for a chart, or a combination of charts, that at some point flashes a big green "BUY HERE" sign and then later on flashes a big red "SELL HERE" sign. Such rudimentary systems typically fail over the long haul unless they are accompanied by a generous dose of trader knowledge. Of course, if you have managed to bake much of that "trader knowledge" into your EA, then your EA may be effective as a standalone tool - but it still represents a greater body of trading knowledge.
 
 
  • Post #13
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  • May 23, 2007 1:44am May 23, 2007 1:44am
  •  davidtong
  • | Joined Jul 2005 | Status: Member | 9 Posts
what a good post. Thank you.
 
 
  • Post #14
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  • Last Post: May 28, 2007 7:00pm May 28, 2007 7:00pm
  •  4XWeezal
  • | Joined Jan 2007 | Status: Member | 419 Posts
an ea can be programmed with any kind of indicators imaginable and any kind of time frame.. I don't believe in market psycobabel. A trader needs to manage all time frames from the minute/tick up to the 4 hour...If you can't, you will get your lunch eaten by elliot wave!
 
 
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