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I Had No Idea I Took So Much For Granted

  • Post #1
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  • First Post: Apr 12, 2006 11:59am Apr 12, 2006 11:59am
I decided to write down the rules for my method of trading. Wow, I ran in to difficulties right from the start. I had no idea I took so much for granted in my trading. One just gets used to the way one looks for setups and determines Money management. A few people have asked for more information about my style. Which by the way is just ordinary.

So, I decided to write all this stuff down, so I could just send it out. Well, that has turned in to a project. I am nearly finished and will be happy to post my approach in this forum, I think maybe in a few days.

But, the purpose of this thread is : As I was writing this stuff down I got to thinking, I wonder if other traders have a set of rules they follow religiously or do they tend to become more discretionary over time as they become used to their given methods?

I honestly thought my trades were nearly mechanical, but as I started reviewing them, both the method and the trade setup itself has evolved.

I also would like to ask your thoughts on if you think it would be a valuable tool to update a written set of rules for your trading methods. on a regular bases even if the update is just for your own eyes.

Any thoughts on this would be most welcome.

Thanks SMJ
Thanks for starting SMJ.

I'm looking forward to learning from this thread and hopefully I can contribute too.
BTW, the Factory also has a dedicated section for trading journals in the "Journal Factory" section.
And that's if you want to consider this a journal. Just a minor suggestion anyway. Anywhere you put it, I'm still looking forward to it.

Regards and happy trading,
East
I am not asking about a journal of trades, everyone should be keeping that. What I am asking about, is the need for an actual written set of rules for oneself .

SMJ
Haha.. Won't you look at that. Posted at the same time. Please disregard my suggestion to move to the Journal section..

Regards,
East
Hi East,

I have no preference where is thread is placed, but My focus is not on a journal, it is a written set of self disciplined rules I am interested in...

thanks SMJ


Quoting eastmaels
Thanks for starting SMJ.

I'm looking forward to learning from this thread and hopefully I can contribute too.
BTW, the Factory also has a dedicated section for trading journals in the "Journal Factory" section.
And that's if you want to consider this a journal. Just a minor suggestion anyway. Anywhere you put it, I'm still looking forward to it.

Regards and happy trading,
East
East, ok, I can see we think alike... LOL smj



Quoting eastmaels
Haha.. Won't you look at that. Posted at the same time. Please disregard my suggestion to move to the Journal section..

Regards,
East
As someone trying to develop his own set of rules for trading, I think it is a great idea to try and quantify your trading style into a document of this sort. However, I also think it is impossible to put all of the thought processes that we use onto paper.

I think the real value in undertaking a project such as yours is that it forces you to think about why you trade like you do, and in doing so you might be surprised with what you find. You mentioned your methods have evolved as you have worked on this project - this is exactly what I am talking about.

In working to develop my "system" (and I use that term loosely), I am trying to identify events and triggers which signal a potential trade. However, there will always be the subjective thought process which cannot be quantified, and which, IMHO, separates a good trader from a mediocre one. For example, even if all your criteria are met (MA crossover, divergence, etc...), you may look at a chart and see *something* which makes you pause.

I'd be very interest to see your document - as a very green newbie at forex, I'm enjoying soaking up all the experience that you guys are willing to share. These forums have been a huge help!
-Jim
Quoting lootcorp
As someone trying to develop his own set of rules for trading, I think it is a great idea to try and quantify your trading style into a document of this sort. However, I also think it is impossible to put all of the thought processes that we use onto paper.
How do you think all these automated trading systems work? I recomment trying to write down (as a program for MT3/4 for example) all the rules you use. You will see how the system would work in the past AND what is much more important - to run the tests you will have to DEFINE your rules. Computer doesnt have bad or good feelings or other stuff like "looks good". It just goes as programmed.
I you get the positive results then you reach many goals:
1. you will like and beleive your system even more the now
2. you will probably simplify your system (since feelings cannot be coded) and program only concret rules - and this is the main goal!!! Simple systems perform worser but much much LONGER!
time is money! Z
Quoting Zazzy
How do you think all these automated trading systems work? I recomment trying to write down (as a program for MT3/4 for example) all the rules you use. You will see how the system would work in the past AND what is much more important - to run the tests you will have to DEFINE your rules. Computer doesnt have bad or good feelings or other stuff like "looks good". It just goes as programmed.
I you get the positive results then you reach many goals:
1. you will like and beleive your system even more the now
2. you will probably simplify your system (since feelings cannot be coded) and program only concret rules - and this is the main goal!!! Simple systems perform worser but much much LONGER!
You know, That is exactly where I started. I was using AmiBroker's Automated analyzer when these thoughts about rules came up in the first place.

It certainly goes with out saying defined rules are a prerequisite of an automated trading system. In my own case, I have become much more successful over the years, but not necessarily from a purely mechanical stand point. I have changed and so have my rules... That is why I am asking for thoughts on updating a set of rules, not a journal or a computer automation.

Why do you believe that simplification is the goal and that "feelings should be removed from the decision process? I honestly have no agenda here I am just curious why we as traders have made this our montra.. The market is made up of people with feelings and emotions and should not a rule based system take that in to account?

thanks SMJ
Quoting Zazzy
How do you think all these automated trading systems work? I recomment trying to write down (as a program for MT3/4 for example) all the rules you use. You will see how the system would work in the past AND what is much more important - to run the tests you will have to DEFINE your rules. Computer doesnt have bad or good feelings or other stuff like "looks good". It just goes as programmed.
I you get the positive results then you reach many goals:
1. you will like and beleive your system even more the now
2. you will probably simplify your system (since feelings cannot be coded) and program only concret rules - and this is the main goal!!! Simple systems perform worser but much much LONGER!
See, I tend to think the other way. While I'm sure there is validity in trying to create a fully automated system, I just don't trade that way personally. I have rules which tell me when a potential trade is setting up. After I receive that signal, that is where I look at the other, non-rule-based factors. I am learning to use things like candle formations, price action, etc... to add or subtract validity to/from the signals I receive.
My goal is not to fully automate my trading, because I don't feel that works for the way I trade.

I'm sure there are many people here who are just looking for some indicators they can program into a system and let it run. For me, all the fun, excitement, and learning comes from making my own subjective judgement calls on a potential trade and figuring out why I was right or wrong. For me, this is a critical part of the learning process I would not want to eliminate.

-Jim
Quoting smjones
...
The market is made up of people with feelings and emotions and should not a rule based system take that in to account?

thanks SMJ
Hi SM,
I would edit that to read...

A percentage {small} of the market is made up of people with feelings and emotions and should not a rule based system take that in to account?

And take into consideration that the small % of traders that do trade with feelings are those that are often referred to as the 95% that eventually go bust.

**Note. There is a difference between Feelings and Instinct.**
eg.
The market is so high I Feel it must go down.
Without thinking about it you recognize a H&S Top by Insinct.
Hi Bemac,

Perhaps you have misunderstood what I said, or I did not make myself clear. I said that the market is literality made of people trading. whether or not they are trading with programs. Someone wrote the program with their own biases and beliefs about what was needed to make a profit. When I trade, If I only use a mechanical approach I am leaving out this other part that is inherent in the markets. However, my actual question was should we try to update in writing our rules for trading on a regular basis? And if so, how do we take in to account that discretionary part of the trading process that everyone seems to use.
I am not concerned about the people who "trade with feelings" the 95% that fail. I think that is beyond the scope of my statement. What I am saying is that markets are moved by emotional beings. and is there a way to have a rule based system that can take that in to account. I am not sure there is. Until such a rule based system can be devised, rules will evolve and discretion will be a part of the trading process...

Thanks SMJ

Quoting Bemac
Hi SM,
I would edit that to read...

A percentage {small} of the market is made up of people with feelings and emotions and should not a rule based system take that in to account?

And take into consideration that the small % of traders that do trade with feelings are those that are often referred to as the 95% that eventually go bust.

**Note. There is a difference between Feelings and Instinct.**
eg.
The market is so high I Feel it must go down.
Without thinking about it you recognize a H&S Top by Insinct.
Quoting Bemac

**Note. There is a difference between Feelings and Instinct.**
eg.
The market is so high I Feel it must go down.
Without thinking about it you recognize a H&S Top by Insinct.
Good distinction, Bemac...What I mean in my prior posts about the subjective nature would be better labeled instinct after reading your post.

So, I have my rules, but the instinct which I am trying to develop sometimes cause me to override a signal based on what I see on the charts.

Does that make any sense? As a newbie, I have trouble expressing some of these concepts sometimes.

-Jim
Maybe intuition is even better as a concept (vs emotions)? I always have strange associations when I hear the word "instincts" :
Quoting smjones
Why do you believe that simplification is the goal and that "feelings should be removed from the decision process? I honestly have no agenda here I am just curious why we as traders have made this our montra.. The market is made up of people with feelings and emotions and should not a rule based system take that in to account?
Profit is the goal! It is much easier to make a million within two years then within one year. To make the system work for two years it must be simple enough to fit the chart in the long run.

I have a very simple way to check out whether my system is simple enough. I change the parameters and make a new backtesting. If the results are similar - the parameter is ok. If changing a variable X from 8 to 10 significantly changes the result - forget this filter. MT4 has an optimalisation feature - it works great!

Feelings are really good for the friends of the trend. I didnt manage to write even a single trend-following automated system making profits in the long run. But I believe that for range traders feelings are not the right advisor to listen. I dont state I am absolutely right. I just think so.
time is money! Z
Quoting lootcorp
For me, all the fun, excitement, and learning comes from making my own subjective judgement calls on a potential trade and figuring out why I was right or wrong. For me, this is a critical part of the learning process I would not want to eliminate.

-Jim
look, some systems require some human support, some work better. My system works bad if I start to make my instant improvements. That probably means I have week intuition But I can live with it so long my system works without my intuition.
time is money! Z
I do not seem to be getting my point through. I am not talking about feelings. I am talking discretionary trading.

Thanks SMJ

Quoting Zazzy
Profit is the goal! It is much easier to make a million within two years then within one year. To make the system work for two years it must be simple enough to fit the chart in the long run.

I have a very simple way to check out whether my system is simple enough. I change the parameters and make a new backtesting. If the results are similar - the parameter is ok. If changing a variable X from 8 to 10 significantly changes the result - forget this filter. MT4 has an optimalisation feature - it works great!

Feelings are really good for the friends of the trend. I didnt manage to write even a single trend-following automated system making profits in the long run. But I believe that for range traders feelings are not the right advisor to listen. I dont state I am absolutely right. I just think so.
SM - great thread here. when you get your rules solidified you should have someone write code to backtest it. usually backtest results are a bunch of BS, but thats because people find the good backtest report by testing a thousand parameters and trading what looks good (ie predicting the past, see my article). anyway, there is this one kind of backtest that i DO trust, and thats when an experienced trader, who has developed trading skills through experience with discretionary trading, writes down the rules to thier system and does one and only one backtest. if that backtest comes out good, thats a great sign. there was no fiddling with the variable or predicting the past, just pure clean testing of a system.
Relax and be happy.
I had not thought of the one and only one backtest. It will take me a few more days and then I will do just that and come back and report the results, good or bad. If I am not absoultly honest about it, I aint going ta learn nothin... good idea... I will get back to you...

SMJ


Quoting merlin
SM - great thread here. when you get your rules solidified you should have someone write code to backtest it. usually backtest results are a bunch of BS, but thats because people find the good backtest report by testing a thousand parameters and trading what looks good (ie predicting the past, see my article). anyway, there is this one kind of backtest that i DO trust, and thats when an experienced trader, who has developed trading skills through experience with discretionary trading, writes down the rules to thier system and does one and only one backtest. if that backtest comes out good, thats a great sign. there was no fiddling with the variable or predicting the past, just pure clean testing of a system.
I think I get what you're asking, but after much trial and error I don't think it's possible without a more complex neural network or something that can think through and compare different sets of information in realtime and I'll try to explain my experiences. Tell me if this sounds familiar when you started to try and come up with a few discretionary rules:
So the short answer I think would be no. Discretion isn't something that is simple and is therefore hard to narrow down. The most common problem you will run into is that a discretionary filter will most often override a larger rule that your system is dependent on, and therefore you would need a dicretionary rule to govern the discretionary rule and the complication becomes obvious and never ending. You will also miss some "normal" trades that were filtered out from a discretionary, rule and catch others because of the same rule. So you'll either loose some trades because of a non-discretionary loose rules system but still be profitable, or use a discretionary filter and depending on how many normal trades it ends up filtering out, might not end up being profitable. So just because it's hard to do, and I have not been successful at doing it yet, does not mean it is not possible. And yes I will continue my persuit. BUT if you're looking for some friendly advise here it is: If you have more than three discretionary rules in addition to your original system..stop! because you'll end up with ten more later and have wasted a lot of time Also, don't get too excited about a set of rules until they work on more than one pair, you'll find often times they won't which is frustrating after you've put in the time. Only form your discretionary rules around constants. EXAMPLE: when basing a rule off of price action it doesn't make sense to say that 10 pips before "X" happens is a filter. The strength of 10 pips on one pair's volatility could be 25 pips on another. However, basing something off of a fraction of that pair's daily range for instance, would be a constant for that particular pair.

I know this probably sounds like ramblings from a forex kook (newbie in surf lingo) but I tried to keep things vague while trying to address the problem I think you're trying to get at.

If you want to discuss specifics get ahold of me.

Jax-
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