Lagging Indicators -vs- Leading Indicators

Why do people persistently follow lagging indicators and then wonder why they have lagging results? And, do leading indicators product leading results? And, by the way, what does a "good trade" look like anyway? Sometimes, you'll hear someone say, "that was a darn good trade." What does that mean and how is a "good trade" really defined over the long-term? For that matter, what does a bad trade really look like?

In this thread, I hope to explore one of the most important questions that any trader should be asking:

- How do I know what good and bad trades look like?

- What does a lagging indicator really tell me about the market?

- What makes a leading indicator different and when can I trust it?

- Am I trading "on purpose," or "just to make a profit?"

- What does success as a trader really look like?

- Can I really go from $5k to $100+m as a private individual trader?

It seems to me after all these years, that people are still doing the same things, over and over and over again, while expecting a different result.

- Trading a lagging indicator, just because it is there!

- Trading a lagging indicator, just because divergence was present!

Think about it. All other reasons for trading a lagging indicator can be fully contained by either one of these truisms. But, is that enough information for trading a lagging indicator with long-term success? I don't think so, and in this thread, I hope to make it clear that the term lagging indicator, is solely based upon that which simply cannot and does not exist. Yet, when people traditionally trade a lagging indicator, they actually believe (incorrectly) that what they are trading has been actually confirmed by the market, which is absolutely not true.

So, what's left to trade?

The trusty Leading Indicator!

- When you trade a leading indicator, you are actually trading that which can be mathematically derived as having a specific probability ranging between low, medium or high.

- When you trade a leading indicator, you by definition will always be in position before the market.

- When you trade a leading indicator, you by definition will always have probabilistic control over your risk, because you will always have a clearly defined stop level that is not merely guessed at, but probabilistically derived as a key component of the indicator itself (built-in risk control).

- When you trade a leading indicator, you are by definition taking a contrarian position with respect to lagging indicators.

- When you trade a leading indicator, your results are immediate with respect to the time-frame selected (one of my favorite bi-products).

More on that later.

First, what does a good trade look like? Simple, a good trade is any trade in which the trader walks away without losing capital. But, a good trade, while never a bad trade, is not always an optimal trade and optimal trading is what separates the men from the boys and the women from the girls.

So, what does a bad trade look like? Even more simple. It is one where the trader walks away with less trading capital than they had before they entered the position. Losing capital is never fun, but hey - it is going to happen, even to the best traders. But, a losing trade, while never a good or optimal trade, should not ever become a catastrophic trade where irreparable damage is done to either the trading account, or the trader's psyche.

So, clearly, the key to successful trading, is to make more optimal trades, than bad trades and zero catastrophic at any time. Doing that, places the trader on the correct side of the equity curve. But, how? How is this accomplished in a world of Bucket Shops, unreliable trading platforms and an apparent failure rate of nearly 95%! Seems like a very daunting challenge, but success is not merely wished for, it is planned and strategized as a matter of routine business for the wise trader.

The key to long-term trading success, is to consistently link good trading decisions with good money management, without becoming jaded or allowing ego to push the confidence level to the point of psychological disconnect from the realities of calculated risk. If you can manage that bundle, then you can be a successful trader, long term.


On my next visit to this thread....

 

1. Defining the scope of a good trade
2. Managing the psychology of a bad trade
3. Creating a path towards growing capital on a routine basis

Until then, take a look at this video but be sure to lower you speaker volume (warning!) to something you care withstand without driving yourself crazy. The key to using leading indicators is to understand that come and go in the form of patterns, dependent upon the frequency of inputs into the market at any given time. Change the frequency, alter the emergent pattern of the market and vary the trade expectations.

The thing to understand here, is that embedded within the dense fog of what appears to be random market chaos, there resides a very structured universe containing many different patterns that repeat with varying degrees of regularity and uniformity. Failure to understand this phenomenon about the markets, is failure to optimize good trades. And, after all, it is the optimization of good trades that lead to long-term trading success.

i disagree.

leading = predicting= b/s
lagging= past= b/s

price simply cannot be predicted.
so work on what you can control and what you DO know

flexibility, understanding of the market and market structure, and learn to manage risk, maximize profit. know yourself and know the market.

i agree with redlion. understanding price action, i.e. candlesticks and trendlines, and proper risk management, is the key. i rely on fundamentals for a broad analysis of the market as well. indicators....not so much, except for the occassional moving average, which i've found can sometimes be useful for understanding a support/resistance level.

Yeah, I am also wondering which kind of leading indicator you talk about. Cause I never saw a truly leading indicator. Everything is derived from price and since price itself is lagging, all the indicators which are based on price are also lagging.

I guess you are going into harmonical patterns. I must say I didn't research them yet, so can't say something qualified at this point about them. I personally suspect that harmonical patterns like all the other patterns are just random occurences. But I am always glad to be proven wrong.

best regards

a big boy bank isnt going to buy and sell becuase price has made a pretty pattern...

surely?!

A leading indicator that i always follow is time. Price will usually breakout at certain times of the day.. be it market open, market close, overlapping sessions, news release..you can expect momentum to increase during those times.

You are the only one here that has posted something worth continuing a discussion about. Yes, Time, is one of the Big Four (4) factors that any really good trader takes into consideration. But, more importantly, you have set "Time" into the framework of a Pattern, which tells me that you have the Mind of a Trader and not just the downloaded trading platform that anybody can get their hands on. Not many people, have the Mind for trading - that is, the ability to construct ideas outside the box.

Cudos to you!

To the rest of you who have replied thus far, you can run a search for my posts to find the rebuttal and the technical corrections to what you have posted here in error. Search for the words: "There are no secrete patterns.." to locate my rebuttal. I won't belabor the point here. Instead, I'll move on.

Lesson One:

 

1. Defining the scope of a good trade

It is impossible to define the scope of a "good trade," without first defining WHY you are in the business of trading. Some got into the business just to generate a few extra dollars above the mortgage. Some got in to compensate for the lack of growth in a 401k. Some got in because their next door neighbor was doing it. Some saw a late night infomercial that promised them an easy road to riches by trading the markets. Yet, there are those who got into the business of trading because they believed that trading would someday replace their current career/job as their primary source of income.

However, precious few initially get into the business to become million or even billion dollar private fund traders/managers. That desire is not typically planted in the mind of the trader until they have reached a level of success where they can actually see themselves managing/trading large accounts. At that point, the trader knows that the sky is the limit.

But, before the sky can be the limit, the limits of the sky must be learned. And, that is one of the essential components of understanding what a "good trade" really looks like. It is not enough to merely make pips on a trade, but to make pips according to a specific schedule. Thus, making pips on time matters the most, because that guarantees a specific level of equity growth on a specific date (or date range) certain in the future. Having this understanding is critical to your long-range success as a trader.

- Am I striking revenue targets on time?

- Are my future equity requirements being met with today's rate if revenue growth?

- Does my trading output reflect a recovery rate that is fast enough to make-up lost ground upon each bad trade where I lose equity?

None of these questions can accurately be answered without knowing WHY you are in this business. It is the WHY that sets the stage for everything you do in this business as a trader. There is no more important a question for the trader than, WHY am I in this business? Because, the answer to that question is what determines your capital needs. And, unless or until you know your capital requirements, you can't possibly know whether or not your trading regimen is par for the course that you've established. So, if you have not done so already, or if you have not done it in a long time, figure out and/or re-evaluate WHY you are here.

Why trade? Why not start-up a new Restaurant, Health Club, Auto Repair Facility, Aircraft Maintenance Facility, Flight School, Air Taxi Service, Regional Airline, Barber Shop, Grocery Store, Private School, Construction Company, Architectural Firm, Bowling Alley, Car Wash, Pet Hospital, Courier Business, Custom Golf Club Business, Wine Making Business, etc. Why trade? Most people probably don't stop at 1:30am when that infomercial is making promises, to ask themselves this question, but it is the first most important question to ask.

Once you know WHY you want to or should trade, you then have to put a Price Tag on the future, but identifying the specific dollar amount necessary to satisfy the WHY. For some it will be the building of a new house on several acres. For others it will be the development of a new business enterprise or concept. Some will want to create a non-profit organization that does good in their own community or around the world. Others, might want to build a 200 foot Yacht and set sail for ever major port of call on the globe. Some will want to start a new foundation that conducts cancer research on behalf of children. Others will want to put every grandchild, nephew, and school age family member through college.

Whatever your 'WHY' looks like to you, put a future price tag on it and make it real. That may require some study, or some research into the full cost of producing your WHY moment.

The absolute first step in determining what a "good trade" looks like, is establishing the proportionality of: WHY = X Dollars. Believe it or not, just knowing that tiny little equation places you one step ahead of all others in this business who never once took the time to figure out their WHY value.

I don't have a problem with sharing WHY values. My personal WHY = $1 billion. Figure out what your personal WHY values is and get used to seeing it. Make it firm and make it real.

************

The next step in defining a "good trade," is to develop an understanding of what the market will yield and how frequently it will yield it. A "good trade" gets you to your WHY moment in the least amount of time necessary, but the market will yield only that which it is capable of yielding.

The essence of any traded market's yield potential lies within its Average True Range for any given Time-Frame, or Bar of Data (OHLC). ATR, is one of the most overlooked derived values from real market data that I know of. Everybody knows about it, precious few people have learned how to capitalize on it, or why it is so important to tactical trade management.

Know the ATR in all time-frames for every currency pair you trade. If you are good with Excel, or with your trading platform's indicator language, then constructing a dynamic extension of the ATR, will allow you to know the very first principle in all of trading: Capacity. It is both logically and physically impossible to extract from the market, any profit that exceeds the market's Capacity. A common sense dictate that determines maximum yield potential for any given time-frame or bar of data (OHLC).

A "good trade" is one that maximizes as much Capacity from the traded Time-Frames or Bars of Data (OHLC) as possible. Not a trade that merely makes "some" pips, but a trade that extracts from each bar of data, the maximum Capacity Yield. This branches off into a much deeper and technical aspect of the way trade, so I won't be going too far into this particular subject. Just know that a "good trade" always attempts to maximize and optimize the yield on the market's Capacity. For reasons that probably won't be fully understood at this particular stage, this portion of the definition of "good trade," is a super critical aspect to understand going forward. And, it is a principle of trading that you build upon.

The yield on market Capacity, is inextricably tied to the trade performance that tracks towards your 'WHY' value. Failure to maximize the yield on market Capacity, is failure to minimize the time to your 'WHY' value. Again, another common sense precept.

***********

The next step to defining a "good trade" is the production of a Money Management Model. Notice I said, Model, not Strategy. The MM Strategy is derived from within the MM Model. You need a Model, before you can extract and implement the appropriate Strategy that meets the needs of your 'WHY' value. Are you starting to see the consistent thread, here? Everything I'm discussing comes right back to WHY you got into this business in the first place. Too many traders lose complete focus on why they are trading.

Why is having a Model important?

It is the flight plan that you file when you take-off as a Trader who is trading on purpose, and not just to make "money." Lots of people make money while trading - fewer people ever reach their WHY moment. The Model establishes the Trading Schedule, or more appropriately, the Revenue Schedule. Good traders don't think in terms of making money, they think in terms of generating consistent revenues on time and on schedule. You are not just a Trader, you are also the Senior Project Manager and the Chief Financial Officer. You MUST start thinking about your trading the same way you would about running a legitimate business enterprise, because guess what - you are running a legitimate business enterprise.

You need to calculate/build/design (using Excel ideally) a Money Management Model. That model will consist of the following Inputs and Outputs.

Input:

- Starting Balance
- Cost Basis %
- Target Net Gain %
- Target Net Pips
- Leverage
- Margin Requirement %

Output:

- Lots Traded
- Max Draw Allowed
- Set-Back on Failure
- Cost Basis Cash
- Gross Revenue
- Withdrawal Amount
- Net Revenue
- Trade Balance
- Account Balance
- Notional Value
- Per Pip Value (PPV)
- Time to Revenue (TR)

This is a solid starting point for a Money Management Model (what I call a Revenue Model for Trading. From that model, you adjust the inputs based on your money management Strategy. As you can see, the very first input is the 'Starting Balance' and that is followed by 'Cost Basis %' which simple means the percent (%) of your 'Account Balance' used to make each trade. Obviously, for the very first trade you make, the 'Cost Basis %' will be derived from the 'Starting Balance'. From that point forward, all other 'Cost Basis %' calculations will be derived from the 'Account Balance'.

The 'Target Net Gain %' is simply the net gain per trade in percentage form, such as 20%, used to establish output values for the model. The 'Target Net Pips' is simply the absolute value of the net pips per trade used to establish output values for the model. The 'Leverage' and 'Margin Requirement' should speak for themselves and are likewise used to generate output within the model (where, Leverage is expressed as a whole number and Margin Requirement is expressed as a percentage %).

Once you have these Input values, the Output values can be calculated automatically by your spreadsheet.

The 'Lots Traded' and "Max Draw Allowed' should speak for themselves, where 'Max Draw Allowed' is expressed as a whole number representing a specific number of pips allowed. I designed my model to calculate a 'Max Draw Allowed' value that equals the same number of pips required to trigger a margin call, which leave me maximum room to tweak my Money Management Strategy at a later time. The 'Set-Back on Failure' is a whole number representing the total number of previously successful trades that would be lost, if the current trade fails. Thus, the term "set-back" is used to show how far back the Money Management Model gets pushed, if the current trade fails.

Personally, I don't like to see 'Set-Back on Failure' values greater than 2.0, which means that if the current trade fails, it will set my revenue growth back a maximum of two (2) trades. If I only make one (1) trade a day, then my total 'Set-Back on Failure' in that case would be two days worth of profits lost.

The 'Cost Basis Cash' value simply represents the cash value of the margin used from your Account Balance to execute the trade. The 'Gross Revenue' (expressed as a dollar value) represents the total profit taken on the trade in cash. Remember, this is a forward looking Model, not a balance sheet. So, there will be no plus or minus designations, as the Model only makes projections of future equity growth towards your 'WHY' value. The 'Withdrawal Amount' is the total cash expressed as a dollar value, removed from the Account Balance on each trade (if you so desire). This value also denotes the unstated reinvestment amount which is always implied. In my personal Model, I have a stated output value of 10% a my 'Withdrawal Amount', which implies a 90% reinvestment amount that goes directly into the 'Account Balance' for the next trade. The 'Net Revenue' is simply 'Gross Revenue' minus 'Withdrawal Amount' expressed as a dollar value.

The 'Trade Balance' (expressed as a dollar value) is simply the 'Net Revenue' plus the 'Cost Basis Cash'. I simply add back the 'Net Revenue' to the 'Cost Basis Cash', to derive the new 'Trade Balance" for each trade. The 'Account Balance' (expressed as a dollar value) is simply the 'Net Revenue' of the current trade, added back to the previous 'Account Balance', which establishes the [u]current[/b] 'Account Balance'. That's how I calculate current (running) 'Account Balance' in Excel, your method may vary, just as long as you are tracking the real-time 'Account Balance'.

The 'Notional Value' expressed as a dollar amount, is equal to 'Cost Basis Cash' times 'Leverage' expressed as a whole number (not a ratio). So, if my 'Cost Basis Cash' = $100,000.00 and my 'Leverage' is 50:1, then my model's 'Notional Value' would be: 100,000 x 50, which equals $5,000,000.00 'Notional Value' per trade. The 'Per Pip Value' expressed as a whole number, is the net gain or loss upon a 1 pip move in the market.

The easy calculation for this is simply to multiple 1 pip times the 'Notional Value' and then express the result in dollar format. So, to continue the example, if 'Notional Value' = $5,000,000.00, then your 'Per Pip Value' or PPV equals: $5,000,000.00 x .0001, or $500 (+/-) per pip. Note: Some brokers and intermediaries attempt to add a premium on top of the new FDIC regulator requirement for 2% accounts, such that your actually 'Cost Basis Cash' value may indeed be slightly higher. Some brokers and intermediaries calculate the Margin Requirement ('Cost Basis Cash'), by calculating the following: 'Notional Value' x 'Margin Requirement %' x Ask Price. Obviously, check with your broker/intermediary for specifics.

Lastly, the 'Time to Revenue' is simply a whole number value that represents to total Time to the current 'Account Balance' value. In my Money Management Model, there are 20 active trading days per month on average, which obviously excludes the weekends each month. So, my 'Time to Revenue' (TR) values are calculated by taking the number of the trade being executed today, and dividing that value by 20. This gives me a rough event horizon that I can look at down-range to figure out where my 'WHY' moment lies in the future, based on the variable Inputs to the Money Management Model. The Money Management Strategy comes in varying the Input side of the Model.

cont...

The next step in defining a "good trade," is the Optimization of the Money Management Strategy. I've given you the outline and definition for the Money Management Model, now you have to tweak that model according to the value associated with your 'WHY' moment. Everything comes back to 'WHY'.

With your model now created, you can launch the model with a 'Starting Balance' value, followed by playing with the inputs for:

- Cost Basis %
- Target Net Gain %
- Target Net Pips
- Leverage
- Margin Requirement %

The rest of your spreadsheet will Output all the values including the real-time 'Account Balance'. That will show you the 'Time to Revenue' target, which in turn shows you WHEN you can expect your 'WHY' value in the form of capital appreciation over time. Obviously, the Model is flawless, which is what a model should be, but trading in the real world will come with losses and that's why the model has the output value for 'Set-Back on Failure', which tells you how many previously successful trading opportunities you can expect to lose upon a failed trade. This is why no Money Management Model should be without a similar feature.

Let's say that your personal 'WHY' requirement sets an equity target of $750,000.00 and that your 'Starting Balance' is $50,000.00. Simply adjust your 'Target Net Gain %', 'Target Net Pips', 'Leverage' and your 'Margin Requirement' to find out roughly how many consecutive successful trades you need to make in order to reach $750k. This is where the tweaking and optimization of your Money Management comes into play.

The common mistake made in working out a good MM Strategy, is that many people get stuck on making 'Lots Traded' or lot size, a major issue when that should not be the focus. Let the Model dictate what your sizing should be, based upon your MM Strategy which includes all the Inputs to the MM Model, not just the ego factor which tells many people to trade more than they should. Or, the ultra conservative factor, which causes many to trade far less than they should. Having a good MM Strategy, pulled from a correctly built MM Model, helps you zero in on the important factors that most effect equity growth and revenue.

**************

The next step in defining a "good trade," is to take the optimized 'Target Net Pips' per trade value and work that [b]backwards into the building of your trading system or trading strategy. This is one of the most incredibly important things that any trader can do, because this is what binds your Trade Production with Money Management.

You hear people all the time talking about Money Management, but you almost never hear or see people defining precisely how to integrate your Money Management with your Trading System. Most traders have a MM Strategy that is not connected in any way to the production of their Trading System or Trading Strategy. The capability of your Trading Trading System/Strategy, is directly proportional to the level of conformity that you can expect to your Money Management Model. A common sense observation.

The 'WHY' value is what lead you to your 'Target Net Pips' per trade value, which in turn is what will guide your research into Leading Indicators that contain the appropriate Yield Capacity to satisfy the 'Time to Revenue' value. A small paragraph, but a very important concept to understand. [re-read the last paragraph several times as necessary, but don't fail to understand its weight or significance going forward]

That's the key. Finding and locating Leading Indicators that fit the Model and NOT attempting to force the Model to fit the indicators. This is precisely what 90% of all new traders attempt to do. They think (incorrectly) that they are actually engaging in "Money Management" by forcing arbitrary trade profile numbers into poorly constructed trade signals that don't have any logical linkage to a Money Management Model (the Output values seen above). This is a tragic error and all to often, fatal over time.

Remember, Yield Capacity could care less what kind of MM you use! Yield Capacity is not beholding to your theory about Money Management! It could care less. It is your Money Management Strategy that must conform and adhere to what the market will give you through its Yield Capacity. Until this rich lesson is thoroughly learned, the trade will never be able to join the ranks of those who are consistently profitable in all three (3) market conditions: Bullish, Bearish and Horizontal. This is why I said earlier that it is crucially important to understand the distinction between a Money Management Strategy, and Money Management Model. The Model remains fixed, while the Strategy is essentially the "software" that drives the Model. Your Trade Signals must conform to the Model, but your Strategy must conform to the expected Yield Capacity of the market. Signals follow the Model, as the Strategy follows Yield Capacity. This is a highly crucial point to fully understand before going forward, because it will definitely impact the type and kind of trade signals that you build and/or design.

That's how you define the scope of a "Good Trade!" It is one that adheres as closely as possible to the MM Model projection for future 'Account Balance', optimized and based entirely on the maximum Yield Capacity that the market will allow. (we'll get into more detail on how I use ATR later)

Next time....

I'll talk briefly about the positive psychology of handling bad trades and the roll of the 'Set-Back on Failure' output within the MM Model. I'll then talk about creating that path towards growing capital routinely.

Until then - I hope at least one of you found this first lesson beneficial and somewhat useful. In the meantime, I think this video is a great example of what happens when you don't understand the difference between Money Management Strategy -vs- Money Management Model. This should be somewhat instructive, although not exactly what I'm modeling here. It also highlights some of the clear distinctions between Fundamental Trading -vs- Technical Trading.

I'll have a go at some of your questions:

In this thread, I hope to explore one of the most important questions that any trader should be asking:

- How do I know what good and bad trades look like?
If you follow your trading plan its a good trade regardless of the win or loss result.


- What does a lagging indicator really tell me about the market? it tells you what has happened in the market till this point of time. A good example of a Moving average is Dynamic support and resistance.

- What makes a leading indicator different and when can I trust it? Momentum indicators like Stochastic and CCi are often said to lead price in comparison to lagging indicators. You can trust it if it's part of your strategy which you have validated to provide an edge in the market.

- Am I trading "on purpose," or "just to make a profit?"
You are trading your beliefs and you hope to make a profit.
In time you will either go broke trying to make a profit or will indeed succeed and join the minority in making consistent profits.

- What does success as a trader really look like?

Read Market wizards

- Can I really go from $5k to $100+m as a private individual trader?
Is that a serious question or a fantasy you have?

It seems to me after all these years, that people are still doing the same things, over and over and over again, while expecting a different result.- Trading a lagging indicator, just because it is there!

You have just described the definition of Insanity.
Nothing wrong with lagging indicators if you have a trading plan based around them.

- Trading a lagging indicator, just because divergence was present!
As with everything else that will work some of the time too.

Define: Trading Plan.

If 'good trade' = 'blown account', merely because a "Trading Plan" was followed to the point of equity depletion, then the definition itself is ultimately useless.

Many have gotten caught-up in the use of words and phrases revolving around the trading business, without really having an understanding about the logical conclusions drawn by the words they use. Setting Trading Plan = Good Trade, is one of those prime examples that all good traders have learned to stay away from, because it does precisely what I warned about above.

Forcing a "plan" into a "bad trade" because of the adherence to the axiomatic standard: "regardless of the win or loss result.", will ultimately cause the trader to never be able to optimize equity growth over time, because essentially what the trader ends up doing, is giving more weight to the "plan" as opposed to the "results" and that has obvious built-in flaws, most of which are so obvious that they don't need to be identified, here.



And, that's the fatal flaw in the typical understanding of your basic lagging indicator. Mathematically, this definition would be in error. Conceptually, (again, we love to use words and phrases in trading where the true meaning is never really understood or less than optimally understood) if the indicator is lagging, then by definition it does not have the capacity to reveal anything about: "this point {in} time."

The reason for that has to do with the required inputs to the lagging indicator itself. Its periodicity requirement means that no output is possible outside of its calculated range. This is why it always lags mathematically. By definition, it cannot calculate a future periodicity - so lagging output is the only thing it can provide and that eliminates any information about: "this point {in} time." So, from a purely mathematical standpoint, all lagging indicators are inferior in this regard.

The other problems associated with lagging indicators is not necessarily inherent to itself, rather inherent in the trader's routine misapplication of such indicators, not really knowing how to optimize their use across multiple time-frames. That's another thread in and of itself.

On the surface, the lagging indicator appears to be telling you what the current market is doing "this point {in} time." However, in reality, it does not have the mathematical structure to ever provide such information. Thus, it can only tell you what the market has done in the past, at [u]some distance away from and behind[/u[ "this point {in} time." For the trader, especially the active trader, this distinction is not without a difference, or serious consequence.


Unfortunately, this is another Popular, not so coincidental misunderstanding about the so-called "Momentum" indicator class. If the truth really be told about them, they are actually, incorrectly named. They should really be renamed to Accumulation Indicators. Or, Relative Acceleration Indicators. However, I won't devolve into that debate.

The momentum indicator class, is really no different than most of the 40+ year old trend following TA in existence today, in that it takes historical data and periodicity as inputs to an equation for a series of values that are forever trapped in the past. The incorrect assumptions typically made about the MOI class, is that they are "predictive" of market turns based on the eclipse of a positive value or a negative value within a pre-determined range of indicator values.

The problem here, is that such a theorem fails to account for the very thing that ironically the market produces naturally: Dynamic Bullish or Bearish Momentum. This is why for example, you often times see a Stochastic indicator exceeding the upper range (indicating a higher probability for a turn to Bullish market behavior), yet yielding nothing more than a slight retracement to Bullish, before blowing past the actual market High and on to even further Bullish dominance.

This typically leave the Stochastic line plot flattened or squashed above the traders technical Short Zone for prolonged periods of time. A very frustrating thing that we've all encountered more than once as we learn the limitations of the current set of Momentum based indicators.

As far as trusting your leading indicator, as long as it has been validated to work within your system, I 100% agree. However, it must lead and not lag the market, like so many average based calculations that get called Momentum Indicator.

As long as the belief is predicated on that which is empirically proven, or substantiated, then trading on belief is not a bad idea. Trading on empirical evidence, is closer to the ground and allows for optimization of the trade signal. It is always easier to optimize that which can be quantified, whereas a belief may or may not be quantifiable or measurable. But, I assume you obviously meant only those beliefs that are mathematically confirmed as having empirical relevance, so I won't labor on that point - we most likely agree.




Schwager, is one of the best books to read for inspiration as a trader. Turning $30 thousand dollars into more than $80 million dollars (as Schwager reveals that Marcus did), has got to inspire just about every trader out there in the market. However, the book also makes my point for me - that while being inspired by other successful traders is an important thing, THE most important thing is that the trader reaches THEIR goal and not necessarily the bar of production that another raised.

This gets to the heart of taking the time to evaluate and/or re-evaluate how the trader derives what I call their own 'WHY' moment (above) and then building a Model predicated on precisely targeting the 'WHY' value on schedule. But, certainly, Market Wizards is well worth the read for any trader.



Was it fantasy or reality for Michael Marcus. In my Revenue Model, the difference between $80 million and $100 million, is less than 29 trades. However, the difference between $100 thousand and $100 million, is considerably a much longer time span. If one has actually read the book "Market Wizards," then I would expect that individual to already know the difference between a serious question and fantasy.

Of times, one man's fantasy, is another man's strategic initiative. I'd re-read the book, "Market Wizards." Maybe you skipped over the chapter containing the Marcus story, or the Tom Baldwin story, who now runs about $2 billion a day in the Bond Market. $100 million is really a paltry sum to one who manages $2 billion. So, I intentionally kept the number low enough to be at least marginally acceptable by the readers of this particular forum. However, my personal "WHY' value extends well beyond the $100 million level as a matter of strategic concern.




The operative (missing) word was Optimization. People have been trading the lag for decades and doing quite well with it. What I'm interested in conveying to the new trader is the concept of optimizing revenue growth over a specified period of time, using leading indicators. Essentially, NextGen trading. Yesterday is gone and tomorrow is not promised. All we really have is today, so optimization is essential.


It is the "some of the time too" component of that sentence that creates the reason for this type of thread. Correct optimization takes "some of the time too" and turns it into: most of the time as well.

Thanks for the input into this thread - you were a good sport!

Before I get to the usefulness of the 'Set-Back on Failure' output of the MM Model, or why there is a need for properly handling the Negative Psychology of Losing Trades, I thought that this short video series would be a good primer for jumping forward in this thread.

This is Jack Schwager. Jack, was extremely fortunate when he landed the opportunity to personally interview several of the top Traders in the history of the markets. The markets traded by the people who he interviewed varied widely, but the fundamental aspects of that made the people he interviewed successful over long periods of time, remained the same. If you have not seen the full video: "Winning Methods of The Market Wizard,"

I would strongly recommend that you attempt to secure a copy for your own personal trading library. You should be able to locate an .avi file somewhere on the net. If not, you can still purchase it from Amazon.

Winning Methods of The Market Wizard:

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I'll continue with Lesson #2 later.

I won't be continuing this thread, or on this forum. Sorry.

Puedo preguntar por que? I guess I know why, but...

Good luck in your endeavors.

Pepe

right when i had a question too :S

You don't support lagging indicators.. yet you use ATR

and you use ATR to calculate your "Capacity"

so your using a lagging indicator to calculate the maximum capacity.. then planing to go out and get as close to this lagging capacity as possible


and yes ATR is a lagging indicator.. it averages out over a period.. it lags... has to do all those calculations out.. what your seeing is past averaged volatility.. its not current or leading volatility..

probably pretty close but not close enough when your going to put that as your cap.. the flaw is.. in theory if your right and that is the true maximum capacity of the market..

then when your ATR shows a higher volatility then current.. you overshoot trying to capture too much when its not there... your optimization turns into a catastrophic trade (well possibly.. but its like trying to get 3 twinkies from one packet... you get the point)


!?!

That's the problem with trying to outsmart the OP.

Re-read the thread. I don't use ATR - I use a different calculation and a different algorithm to produce both Magnitude and Capacity. Without giving away my formulations, I told another to "start" with ATR, and with some outside the box thinking, he could derive additional formulations that would essentially extend upon ATR to obtain something that ATR itself is incapable of supporting.

I did not come here to 'learn' this subject - I came her to teach it. But, this thread is not interesting enough to garner replies, so the lessons won't be given here. There is a reason why 95% "Fail" and part of your post exemplifies that reality.

Fail? Yes, massive "Fail" on your part for not asking questions that you obviously did not know the answers to, before jumping to conclusions about failure.

I haven't failed in this business in almost 4 years, on top of a 6+ year learning curve where I paid my dues with lots of failures. My days of perpetual failure in this business are perpetually over. (funny)

Ok - that was the last one for this thread. I won't be pulled into anymore cheese eating sessions.

No dude.. you re-read your own thread..

you never say "start with"..(or imply that either) you talk up ATR like its the absolute answer..

In a matter of seconds you went from how the ATR is the most important thing in the world to how you don't use it

Your very whitty.. but so full of bullshit.. I was very respectful and simply brought up some error in your thinking.. and your response is something of "NO I'M RIGHT YOUR WRONG" and very defensive.. you got so defensive to try and argue your case when I brought up a valid and solid question and concern to your statement.

"That's the problem with trying to outsmart the OP."

Pretty big ego dude.. I was never trying to "outsmart" you.. I'll tell you what 6 years of military police has taught me.. that you are lying about something.. you have clear indications of what we are trained to look for when people lie.. in fact some of the clearest I have ever seen.

I as well am done bringing up logical and solid contributions.. I guess you came here to teach and not learn.. I understand chewing bubble gum and walking at the same time is hard

you act like me when I first came to this forum.. always trying to be right and so full of your own bullshit...

As a post note.. your entire article was very solid about Money Management.. what I meant is your full of bullshit in your recent defense to the irrational pieces I pointed out.