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Thoughts of a beginner

  • Post #1
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  • First Post: Sep 21, 2005 3:17am Sep 21, 2005 3:17am
  •  Guest
  • | IP
Hi,

As you can gather I'm new at this ;-). First, I want to say this is a great forum as everyone helps eachother, with a high level of friendlyness, so I'm glad to be hear.

I've been reading books and playing with a forex demo account to get the mechanics of trading right as well as trying to spot some patterns and trying a few strategies. I found the amount of advice from books and the net overwhelming, so I took a step back and tried to cut this business back to the bone, and come up with some facts I could be sure of. I expect the following is in the text books somewhere, but anyway, finding out for myself has been a great excercise. Also I don't like to take things on trust, I feel better when I've worked them through myself.

I looked at the situation of a theoretical "ideal market". One commodity or currency pair moving with a random walk, and no house take.

Of course over time, your expectancy of such a market must be zero. To convince myself of this I wrote a little program in C++. First I made the price random walk and checked that whereever I set the stop and limit made no difference to the outcome over time. The price was set to move up or down by a random value between -10 and +10 each cycle.
As you would expect it made no difference.

Next I modelled the addage that trending markets tend to continue by setting a flag to continue or break a trend and playing with the probability that the trend would break. Again, it made no difference. From 0 upto 100% chance that the trend would break each cycle, there was no difference. Still a zero sum game.

Next I tested the addage that you should let your winners run and cut short your losers by chasing a winning trade with a trailing stop. No matter what the trail was, it made no difference.

I think all the above I could have deduced by logic, as there can be no tactic to improve your odds in a 50-50 game.

Next I took a look at the spread. I calculated that with a 5 pip spread and using 100 pip stop and limit you lose 10 times and win 9 times in 20 trades.

It's not quite that, but near enough. This means you need to have a better than 53% guess rate to break even.

If you use tighter stops this increases. For a 50 pip stop either side you need to be right 55% of the time, and a 40 pip stop either side 62%.

My simulation showed that it doesn't matter where the stops are, only the gap between them is important.

I'm unsure how relevant my calculations are to the real world, but I'd welcome any comments.

thanks in advance

dave
  • Post #2
  • Quote
  • Edited 3:47am Sep 21, 2005 3:41am | Edited 3:47am
Well, I am not sure of what you actually did, but I think that you created a small situation to simulate the market, is that correct??

Well, I have a small pdf file for Joe Ross which I want you to read and then post back your opinion

All what I can say in brief before you read the pdf, is that your software or program or computer is seeing what you want it to see. It sees only what you programmed it to see, and that's the greatness of the Human Mind or Brain over computers and all machines.

Thanks,

Nader
Attached File(s)
File Type: pdf 11-BRAIN VS MACHINE.pdf   78 KB | 564 downloads
Ya but still your program does not see the big picture. You only want it to see some things. When a trader is watching the market, he can see the big picture, and when his system says that this trade is a high probability one, he has reasons based on history and similar situations he passed through, and not through 50-50%. It's different when a human being looks at the chart and see the price action. The computer only do mathematics, but the market is not pure mathematics. The market has mathematics, emotions, feelings and many other things that can't be figured out by a computer program.

Plus, the computer can't gain as much experience in trading as human beings do. I believe it's a different story, or else, any expert programmer would have made a computer program which trades for him and make a fortune.

Thanks,

Nader
It seems like tossing a coin would be a similar analogy...basically 50-50. You'd be hardpressed to increase the odds by increasing your knowledge and study.

I believe you CAN increase your odds with knowledge and study in Forex. In fact, I know it's true. I'm hoping with a little more experience, and continued study, I can improve them even more.

In fact, I'm counting on it.
  •  Guest
  • | IP
Quoting SouthernFried
I believe you CAN increase your odds with knowledge and study in Forex.
Let's hope so, otherwise we may as well give up now.
One thing I proved to myself is that you only need to have a slightly better hit rate than 50% to make money, which is good news. All the study and experience is about edging yourself a few extra % onto the win side of the equation.

I think one of the important things is to learn to go for the "copper bottom" trades, and learning to sit on your hands for the others.
I disagree in part of your analogy, no acutally, in whole.

You're right that your odds are a little worse than 50/50 if, and only if, you are entering the market completely blind.

I don't like comparing Forex to Vegas gambling because it's not the same thing. Not by a long shot.

If you're using a proven system to enter and exit the market, you and your system determine the odds. And those odds are constantly changing.

You C++ model of random price flucuations would also be incorrect. While you can say that minor flucuations are random, major trends and even secondary corrections often are forecastable. You can't simulate market movement with a simple C random number generator. If it were that simple, I would have programmed the secrets of the universe years ago.

And if the market were random, the 1.5 trillion in currency movement per day would not be nearly so large.

My suggestion prior to really trading, study up on what the market is before you determine what it is not. If you've already determined that the market IS NOT a winning game, that IS what it will always be for you.

Good luck with it.
Capital Preservation is key to long term wealth accumulation
  •  Guest
  • | IP
Quoting MuddBuddha
I disagree in part of your analogy, no acutally, in whole.
I guess I didn't explain myself well enough then, as I don't disagree with you.

Let me try again.

Take the poker analogy, or any game of skill+luck. First thing to do is totally understand the odds and mechanics of the situation. Strip the thing back to its bare essentials. That was all I wanted to do and nothing more.

That's a starting point. On top of that you add the knowledge and skill to improved on that slightly less than 50-50 chance you have. All I wanted to do was know the odds as a starting point, and then how to improve on them with skill.

I don't think I ever tried to imply that the market is totally random, otherwise what's the point of trading???? You may as well go to Vegas.

Maybe the fact that I resorted to a C++ program created confusion? I could have worked out all the above with a pencil and paper, I just wasn't so confident in my knowledge of stats that's all.

Thanks to everyone so far for the insights. ;-)

dave
Quoting SouthernFried

I believe you CAN increase your odds with knowledge and study in Forex. In fact, I know it's true. I'm hoping with a little more experience, and continued study, I can improve them even more.
I agree. The reality of this market is that you create and influence your odds to a remarkable degree. I think, and don't anyone take this the wrong way, that "striping it down to the bare essence" to determine your raw odds before going in is a strange and pessimestic view.

I wouldn't want to start anything by knowing how screwed I could be prior to beginning. Normally reward is a better motivator than risk.
Capital Preservation is key to long term wealth accumulation
  •  Guest
  • | IP
Well, to me it's quite the opposite. It gives me a feeling that here is the statistical basis to start from. The fact that I only need to improve my batting average by 3% to start to gain makes me feel quite optomistic!

Like I said, I'd be a fool to enter a poker game without some idea of the odds of how the cards will fall.Which doesn't mean that a skilled player can't win a poker game. Quite the opposite, the more knowledge you have the better.


I guess we're all different in how we aproach stuff.
Quoting narafa
Well, I am not sure of what you actually did, but I think that you created a small situation to simulate the market, is that correct??

Well, I have a small pdf file for Joe Ross which I want you to read and then post back your opinion

All what I can say in brief before you read the pdf, is that your software or program or computer is seeing what you want it to see. It sees only what you programmed it to see, and that's the greatness of the Human Mind or Brain over computers and all machines.

Thanks,

Nader
Hi Nader,
Which of Joe Ross' books is this chapter from? I've considered buying his books, but they are pricey and I don't know which one to get first. Any suggestions?

Thanks

Dial
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  • Post #11
  • Quote
  • Edited 7:03am Sep 22, 2005 6:45am | Edited 7:03am
Quote
Strip the thing back to its bare essentials. That was all I wanted to do and nothing more.

That's a starting point. On top of that you add the knowledge and skill to improved on that slightly less than 50-50 chance you have. All I wanted to do was know the odds as a starting point, and then how to improve on them with skill.
Your logic is good sounding logic. However I think the point that MB is trying to make is that there are ways to begin understanding the market that can create unpleasant obstacles. If I read him right I believe that he is speaking from a "trading psychology" point of view. There are ways to enter the trading world that are psychologically advantageous and ways that put you at an immediate disadvantage that can be very difficult to undo once pursued as a way to get started. While MB may not be able to articulate what he is trying to get across in a way that get's past your beliefs about the correctness of your reasoning I think he may have an excellent point. Trading is art, science, intuition, creativity, logic, and also tends to bring out from people just exactly the opposite kind of behavior that would make them successful. A successful and seasoned trader will often sense a problem and attempt to communicate about it but the attempt may be completely lost on the person to whom it is communicated. Don't let that happen just because someone may be speaking from a psychological point of view and you may be listening from a quantitative or statistical point of view.

FT
  • Post #12
  • Quote
  • Edited 7:49am Sep 22, 2005 6:59am | Edited 7:49am
Quoting davespink
Well, to me it's quite the opposite. It gives me a feeling that here is the statistical basis to start from. The fact that I only need to improve my batting average by 3% to start to gain makes me feel quite optomistic!

Like I said, I'd be a fool to enter a poker game without some idea of the odds of how the cards will fall.Which doesn't mean that a skilled player can't win a poker game. Quite the opposite, the more knowledge you have the better.


I guess we're all different in how we aproach stuff.
Again your logic sounds good but the psychology behind your approach may be too linear. In trading it can be very expensive to confuse knowledge with skill. Also your statement sounds very misplaced when it comes to trading. Some knowledge is essential yes. However "the more knowledge you have the better" is a very misleading idea in trading and can work against you. Trading is not much like poker either when it comes to the psychology of it.

Yes we are all different in how we approach things. Almost all are wrong in how they approach trading and a few last long enough to overcome the damage they did in how they approached it. Some of those who succeed try to help others to avoid those pitfalls and fail at that but not necessarily because they were wrong.

FT
First of all, the market moves are not completely random, maybe it is to many, but for many experienced traders, it isn't. You know when the market seems random to experienced traders, they will find them usually on the sidelines, or not there at all.

Another thing, a poker game is a game of probability, and a skilled player can consistently win over time with risk and money management.

The black jack is one of the games which relies heavily on probability, skills, and very little about luck. In black jack, you can always change the probability you are going to win and/or the probaility that your opponent can beat you.

The market is the same. You are in constant attempts to accumulate probabilities to your favour and decrease the probabilities that you lose.

Thanks,

Nader
Quoting diallist
Hi Nader,
Which of Joe Ross' books is this chapter from? I've considered buying his books, but they are pricey and I don't know which one to get first. Any suggestions?

Thanks

Dial
I am not sure diallist of the name of the book. You can download the chapters by going to http://www.trading-naked.com/joe_ross_.htm

If you want, I can email them to you, they are not too big, I think 4 or 5 MB.

Thanks,

Nader
Quoting narafa
I am not sure diallist of the name of the book. You can download the chapters by going to http://www.trading-naked.com/joe_ross_.htm

If you want, I can email them to you, they are not too big, I think 4 or 5 MB.

Thanks,

Nader
I checked Joe Ross' website and he has 8 books and as diallist said they are pricey. Has anyone read any of them? Are they really good? Which one(s) do you recommend most?
  •  Guest
  • | IP
Thanks again for all the input to all of you.

I'll try to understand how having to much knowledge can be a handicap. I'll think that one over some.

In the end it doesn't matter if my anaylsis is right or wrong, if it gets in the way of success, then it's not a good idea.

dave
Quoting narafa
I am not sure diallist of the name of the book. You can download the chapters by going to http://www.trading-naked.com/joe_ross_.htm

If you want, I can email them to you, they are not too big, I think 4 or 5 MB.

Thanks,

Nader
Thank you Nader. I went to the website you provided the link for and found the book. I appreciate your help.

Dial
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If I was a fund manager and I needed to sell a large block of, let's say Amazon stock, I guess I would use an algo which would sell chunks when there was enough liquidity in the market and around a certain price. It is a passive order, but would appear to be executed aggressively and would form a resistance on the chart untill I had unloaded all the stock I needed to.
As these chunks of stock get sold, I'm trading them for USD. I'm buying USD not because I am necessarily bullish USD. If you're buying EURUSD at the same time as I'm selling Amazon, is it possible I am buying the USD you're selling?
It's bad luck to be superstitious
Quoting zoo
If I was a fund manager and I needed to sell a large block of, let's say Amazon stock, I guess I would use an algo which would sell chunks when there was enough liquidity in the market and around a certain price. It is a passive order, but would appear to be executed aggressively and would form a resistance on the chart untill I had unloaded all the stock I needed to. As these chunks of stock get sold, I'm trading them for USD. I'm buying USD not because I am necessarily bullish USD. If you're buying EURUSD at the same time as I'm selling Amazon,...
I see some conversation on threads I really like regarding order flow in terms of volume delta (passive/aggressive) volume, depth of market and time of sales ect, but what about order flow from a macro perspective from one asset class to another asset class. When consider where the counterparty to your trade could be coming from a number of different possibilities, you have to wonder if counting wave or looking at Fibonacci levels really makes any sense?
It's bad luck to be superstitious
Quoting zoo
{quote} I see some conversation on threads I really like regarding order flow in terms of volume delta (passive/aggressive) volume, depth of market and time of sales ect, but what about order flow from a macro perspective from one asset class to another asset class. When consider where the counterparty to your trade could be coming from a number of different possibilities, you have to wonder if counting wave or looking at Fibonacci levels really makes any sense?
Not trying to get passionat people off side if it is working for them, but perhaps it is the traders "instinct" after much screen time and sensible risk management that is really working and these technical analysis are just a placebo which help pull the trigger.
It's bad luck to be superstitious
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