Clemmo's Trading Odyssey

The plot thickens as I just noticed the indicator requires a bar 3 break to close after the break. This makes a lot of the entries late. Enough that a recent test gives a decidedly workaday win rate of 59%. Is this just another candlestick pattern rabbit hole?
Much more testing needed. Story of my life.

The Investment Secrets of Warren Buffett and George Soros by Mark Tier

I got this book from one of those 'lending libraries' in my neighbourhood. I love those things. I also got the other book I've recommended so far in this journal from one of those libraries - Man's Search for Meaning - by Victor Frankl. If you haven't read my other blog posts you really should; I'm pretty great.

In exchange for some pulp fiction novels I picked this up with the lowest of expectations due to the baiting title and generic-sounding premise. However I was surprised to discover that many of the principles already mirror the ones that I've set for myself and the whole book is full of generalized good advice. General advice is the kind of trading advice that most traders don't wan't but ironically, it's often the only type of advice that's of any value since most trading systems are so tailored to the personality and circumstances of the system designer (and therefore contain a thousand un-verbalized imprecisions that are mentally filled in without the author's conscious realization) that trying to follow them is futile and results in disaster even if the system is fundamentally sound. I don't know if I already wrote about my adventures following a popular author on Seeking Alpha. Whoo boy. Don't do that.

Since I got this book for free and clearly the universe wanted me to obtain its wisdom, I now offer freely what I got out of it, but I highly recommend you get this book even if you just borrow it from a library (once they re-open).

The book starts off with an examination of mental habits and identifies the four features of a mental habit. The example they use is about meeting people in public (wallflower vs social butterfly or pick-up artist, really) but what I noticed is how much this process is just like taking a trade.

1. There's a belief. The example for the social butterfly is "all people are interesting". The example for the wallflower is "I'll probably get rejected" or "only some people are interesting".
2. There's a mental strategy. Most books about habits call this 'the trigger' and that's what we call it in a trade too. For the butterfly the mental strategy is to hear their inner voice saying "isn't this person interesting".
3. There's a sustaining emotion. Habits wouldn't be hooking if they didn't make you feel some way. Bad habits make you feel temporarily good, and good habits make you feel good long-term. For the butterfly they feel excitement and curiosity about meeting someone new. If they were depressed or preoccupied with problems they wouldn't feel like talking.
4. Associated skills. Eye contact, making small talk. Listening and making the other person feel important.

Ok, the book didn't do a trading version of this but I will.

1. Belief. I believe AUDCAD is going to go up by a certain amount before it comes down. My reasons for believing this aren't very important.
2. Trigger. I wait for the market to prove me right by seeing that AUDCAD makes a new higher low a few times.
3. Follow-through. Either AUDCAD does what I expect so then I move my stop loss to break-even or it doesn't, so I exit.
4. Trade management. If I get the expected behaviour I add on to the trade or adjust my stop as price moves toward my expected target.

Do this often enough and it becomes an unconscious process. When you're starting out it's OK, maybe vital, to pay attention to each step.

Clearly the most important part of this, initially is the set of beliefs that a trader holds. And Tier outlines '7 deadly sins' (deadly beliefs) of investing/trading. You will see these sins in action every day on forums and in forum posts. In fact, 3 of these sins are repeats/duplicates because Tier wanted seven but you only need four.
7 4 Deadly Sins Beliefs of Trading:

1. Forecasting. Believing that you have to predict the market's next move to be profitable. I've been guilty of this, probably most have. However I've never found a reliable forecaster or forecasting system. People who seem to be able to predict the future for a while inevitably crash and burn (Nate Silver).
2. Believing gurus (or systems or 'inside information') have the answers. "If I can just find the right trader or the right system then I'll be profitable". I already explained why following someone else's system probably won't work, but the same goes for gurus. Even if they have something that works for them it might not translate. You need to internalize some of your own principles without anyone's help. Also, most of the readily available advice isn't worth the price. As Al Brooks says (and this might be his only good piece of advice) "Usually in trading, those who know don't talk, and those who talk don't know."
3. Diversification. Modern portfolio theory was developed to sell products to retail investors. Real profits don't come from hedging bets or following an index. You read about this all the time in 'Market Wizards'. Most of the best traders and firms only invest in a dozen or so issues, tops.
4. Believing you have to take big risks. While Soros' bet on the pound might have seemed like a crazy gamble he claims that he was able to cover it, and when Buffett buys ALL of a company's stock, it might seem foolhardy but they've done the legwork. So really the risk is minimal, and good traders are risk averse, thinking first about what they can stand to lose, not what they stand to gain.

If/when I start making videos again I'll post summaries of the rest of the chapters, but some of the lessons are identical to lessons I've already posted in 'babypips rehab" and 'first principles' on my YouTube.

I am laying down some knowledge over in The Finance Book Club. So far crickets, which means it's among the top most useful threads on ForexFactory according to the theorem.

And speaking of knowledge, is there any edge in a 1 bar break strategy with even R:R? So far, not really.




A more interesting question: what about a 3-bar break strategy? Does adding bars to the break requirement change the percentages, and up to how many? If the answer is no, no, and infinite, what does that say about the ability to make forecasts base on candlesticks (at least ones based on simple rules)?

The devil is in the Details
Look at how much confusion is caused by a simple mathematical problem like the Monty Hall problem. It’s not just that people have terrible statistical intuition but that they make many misinterpretations based on

1. Insufficiently detailed/verbalized/described starting/foundation conditions
2. Insufficiently accurate details

Then disagreements pile up and become emotional (the Vos Savant vs critics issue) and thanks to endowment effects, choice bias, the mistakes become entrenched, or if correct, one can construct an incorrect argument with the correct result.

Given this, what chance does one person have to trade another man’s trading system and understand all its unspoken (unrealized) subtleties? A trading system is vastly more complex than a 3 door probability/information theory thought problem. It has vastly greater points of failure and unknown unknowns.

More than ever I’m beginning to realize that when it comes to trading well, it’s all about attention to detail. You can create a broad set of rules, but then there are exceptions, and exceptions to those exceptions, and so on. You need to internalize a lot of ‘fuzziness’.

Incidentally this is also what makes trading fully automated systems difficult. Unless you are ready and willing to step in frequently and address multiple issues with your human (trained) brain, you need to be one helluva coder to get the logic around human-level competence. Many are skilled coders, fewer are skilled traders, how many are both?

Being a new guy a was not allowed to like this post (???) Anyway just wanted to highlight it for myself. excellent analogy

Excerpt from a system description I'm working on.

"This brings to mind something fundamental about risk scaling. If our account and time allowance were infinite we would simply leave all trades open until they reach our profit target. If we wish to trade with absolute minimum risk we would make our profit targets as small as possible, and the ratio between winning and losing trades as small as possible (maximum offsetting) but then we run afoul of transaction costs."

So a lot of the details of a trading system need to be constructed to match our expectations for return rate over time, and time underwater, amount of drawdown we can sustain compared to potential profits. An ideal system would/should scale risk up as it can be taken up.

"Most people don't think simply enough." - Jim Keller

From this interview


Another good quote:
"Progress disappoints in the short run, but surprises in the long run."

Grid Necrosis - In grid systems (and maybe most systems) when you attempt to offset losing trades with winning trades you end up ‘chewing out’ the middle of the grid with closed trades, and leaving expensive losing trades at the top and bottom of the range of whatever time horizon you’re trading. This is the opposite of [redacted] and generally to be avoided. Since offsetting might be a fundamentally flawed way of thinking about handling risk, maybe simply having a pool of maximum open trades and closing one before being allowed to open another is a good idea?

Anatomy of a confusing (and probably bad) system

NB: This is not mine!

I found this in my files, probably collected back when I was investigating everything, and for a lark decided to see what I could make out of it. The first thing I notice is that it has a lot of rules. I mean, I've seen way more complicated setups here and elsewhere, (been guilty of a few myself) but there are still enough moving parts here to make my alarm bells ring.

Long trade setup example

Ok, here are the rules for a long trade.

1. Place a 50 SMA
2. Find the lowest high of the past five days, label it LH5
3. Place an ADX(14)
4. Place an ATR(10)
5. Identify a swing low which is classified as "Any low with at least 3 higher lows than the Swing Low day low and 3 higher highs than the Swing Low day high on both sides of the Swing Low day" which I translated as "a low with 3 higher lows and 3 higher highs on either side of it". I'm also going to assume, that if such a creature doesn't materialize naturally (as it usually won't) that if its low is not eclipsed within 4, 5, 6 days or whatever, that as long as you eventually got those 3 higher highs and 3 higher lows it still qualifies.

Setup rules

1. 50SMA is going down (curious for a long trade, but ok)
2. Point 3 low < a swing low (point 1) which I interpret to mean the next swing low, if it is lower than than the first swing low you found is point 3. Note that point 2 is not defined.
3. LH5 > (point 1 low - ATR10 * 0.5) Now this rule is a real headscratcher. The lowest high in the past five days must be greater than point 1 (the first swing low) MINUS the value of the ATR daily ten periods, halved. I can understand wanting the lowest high in the past five days to be higher than the last relative extrema (swing low) as that would identify that price is rising. However what is the purpose of taking the ATR value (on most instruments it's not more than 50-100 pips) and halving it and subtracting it from the point 1 low? I guess it's saying that the LH5 needs to have not descended too much, as long as it's within the midpoint of the average trading range, it's still good? It's not clear if the ATR to be calculated is the one from the LH5 bar or the point 1 bar, but..anyway. My example (below) still qualifies.
4. ADX14 > 20 Ok, I guess you don't want volatility to be dead, not that it means anything as it could easily die down later.
5. Close > LH5 The close price of the setup day must be greater than the LH5. Well, mine isn't. I also can't find any on EU this year. Does that mean I should abandon this setup and find another? Can I wait and enter when the close is greater than LH5? It seems to me you don't really need more than this for a workable system. What is the rest of it telling you?

Entry and Exit orders

1. Entry: Buy at close of setup day + ATR10 * 0.2 Limit. So put a pending buy order (stop not limit actually)
2. Initial stop: Sell at point 3 low * 0.995 Stop - so exit just before the point 3 low.
3. Trailing stop: Sell at LL2 * 0.995 stop. I guess LL2 means 'lower low' 2. so sell just before the 2nd lower low is broken (downwards). A liberal stop.
4. Profit target exit: Exit 1/2 position at entry price +2 ATR(10) limit. Place a pending order to take half off after 2 ATR. I'm not a fan of partial exits myself, but this is fine.

I could not find any setups in the past year that perfectly matches all the described requirements which means either this takes a couple of trades a lifetime or I need to read between the lines. I found something that almost qualifies in recent history and marked it as point 1 as they have. Of course, this type of imprecision is exactly the kind of thing that a charlatan can use to say 'ah, but that's not what I meant by...' and dismiss any criticism as amateur error.

The alert reader will notice that my example trade actually succeeds, provided some patience, but since I can't find exact matches for the detailed setup here, the other examples I can show that fail, could all be dismissed as inadequate. And this is the problem.

If you have a system that trades on the daily time frame and it only trades once per season. Even if it is profitable in the long term, is it of much value? I guess it could be if you trade big volume and have the discipline to see it through. What I wonder though is how any of the component elements of the system add to its success?

1. Does the downward pointing SMA tell us that this is a retrace ready to reverse? hint: it doesn't
2. Does the lowest high of the last five days, exceeded by a new closing high tell us that price is reversing? hint: it might actually. Would be worth marking up a chart and checking that out.
3. Does the ATR tell us anything? Well it does add padding to the pending buy (a last ditch failsafe I suppose) and I'm not sure what function it had with the point 3 condition.
4. Does the ADX tell us anything? hint: no.
5. Will the trailing stop and profit target conditions add value to this system? Not if it doesn't trade, and even then, likely no.

The additional complexity added to this system is, I think, designed to reassure the neophyte trader that this system is 'SMRT' and is the type of thing they should consider purchasing or getting trained about.

Obviously I'd be curious if anyone trades this or something like it and can tell me if I'm a fool. I know I often am.

This is from something called 'marketmastery' and if you go to their website it redirects to something called 'profitsrun' which has a video that is just about the saddest thing I've ever seen. A bunch of silver-haired retirees looking at notes about ATR and Keltner bands, with formulae based on God knows what. If you want to make more money investing, start by not wasting it on gurus trading on traditional technical analysis nonsense.

Solomon's Paradox

Attached Image (click to enlarge)

I haven't done one of these (analyst evaluations) in a while. Most of them end the same way, either random or as a fairly good reverse indicator.

Recently, I summarized some notes about the trader education of the Tickmill analyst, Patrick Munnelly and I was actually enthusiastic about some parts of his approach, which is rare. I've done over a dozen of these and most of them are big disappointments right off the bat. It seems the adage that 'traders trade and pretenders talk' is mostly true.

The most interesting part of his approach (that I know about)is his use of cyclical (multifractal?) time to develop targets in addition to cyclical price. The rest of it seemed like traditional subjective TA that I am currently eviscerating over in the finance book thread and I didn't give it too much thought after that. However now that I've started going over his track record, it seems there might be more here than meets the eye.

Munnelly also produces blog posts with a combination of market analysis, fundamental summaries, and trading ideas. Just go to Tickmill's website and you can look him up. I should note that there are two types of analysis to judge. There are his daily market reports which produce a type of objective forecast using a Tradingview feature.



Then there are his trades of the day (or the week) that make similar forecasts but also give us the advantage of entry, target and stop levels. Of the two, the latter is easier to evaluate, objectively. So far at least, it also seems the called trades are more accurate, but that could just be simple chance.

Is it all just good luck? I note that he doesn't seem to do these 'trades of the day/week' anymore, though he still publishes forecasts on his blog. Curious.

After one week month he produced this tally.

There are a couple of oddities here. First, it seems like they didn't try to distinguish between the loss trades and the winners. Usually that would make me suspicious. Are they trying to make it seem like these were all winning calls? What's amazing though, is that this actually underreports the real results. One of the trades, listed as a 100 pip loss was actually a win as far as I can tell. So this monthly period produced a 1400 pip gain, with only 2 losing trades out of 15. I went ahead and checked them all. It checks out.

I should temper this by saying the daily market forecasts where he produces a possible future for a variety of instruments (including gold) are not as impressive, and if I draw out the lines for the forecast price path and the actual path it starts to look like a spider's legs, which is the visual shorthand for randomness.


hairy spider's legs

It's also possible some losing trades got cut later (always a danger) or this was exceptionally lucky, or Munnelly has skills I haven't seen in any public forum before. He is mostly ignored (at least on his blog) so it passes Clemmo's theorem. I intend to check the rest of his material and see if I can uncover the secret sauce. If this is interesting to you let me know, otherwise I'm happy to keep the ending for myself.

update: now that I look at the dates there is some concern that some trades may be missing. He posted in September on the 24, 25, 26, 27, then missed Monday 09.30, posted in October 2, 4, 8, 9, 11 and 16. That's quite a few missing weekdays. If he was still posting trades regularly I could check to see if any get removed after the fact.

What is the appropriate amount of time to wait before freaking out after a broker deletes your account history and removes your entire balance? Asking for a friend.

I've said it before and I'll say it again, broker risk is the biggest risk in forex, if you know how to trade. Anyway, there are so many alternatives, there is no need to waste time with a tricky broker. I don't mind paying a couple hundred in transfer fees to get away from them and lambaste them on forexPeaceArmy.

Back from an island holiday that would have been impossible before I became profitable. Thank you Forex, and ForexFactory!

Something that reminded me of the relative value of most indicators.

https://www.britannica.com/topic/col...roblem-1917157

The 'Collective Action Problem' is something that I've understood subsconsciously for a while, but didn't have a name for until recently. It is very apparent in the way that the supply-side industry sells products and services to new traders, and the way that new traders behave when they approach the business of trying to learn a profitable way to trade.

If you have time to read the article, I recommend it, but if not, I'll briefly try to define it. It's hard to get a group of people to act, even if that action is in its own interest. You see this with labour unions, where any worker would benefit if a union was formed and then used its power to collectively bargain for higher wages. Yet, many people will not join a union, not just because they've been brainwashed by capitalist propaganda, but because union dues are a cost, and if other workers form the union and get the higher wages, they'll benefit without having to contribute. This is 'free-riding'.
David Hume, the Scottish philosopher pointed this out in 'A Treatise On Human Nature' and Mancur Olson popularized the problem in 'The Logic of Collective Action'. Both books are worth reading, though you can skip Olson's crazy math.

One way that the CAP affects new traders is that they will only form 'unions' to learn how to trade if there is very little cost, and so this is a perfect opportunity for swindlers, and brokers, to offer that 'service' at no cost, knowing that retail traders will eventually hand over their excess profits in the form of losses caused by trading on misinformation or a fundamental misunderstanding of how markets work. What do I mean by a union in this context? Well, this forum is one. It's got a low barrier to entry, it's free, and you can try your luck with any of a hundred different trading philosophies. This forum's interactions are fairly high with lots of members communicating and exchanging ideas. You can share tips, advice, but the level of collective cooperation is very low. In the end every retail trader faces the market more or less alone.

Another example is the way that trading robots get made and sold. They are almost always the efforts of a single person whose main interest is in selling the robot, not generating trading profits, therefore they are invariably low quality. This is because CAP prevents a group from trying to secure the services of competent professionals.

I wonder what would happen if a group of traders, by nature a fairly heterogenous group with few 'cross-cutting cleavages' worked collectively to actually trade well? It seems like it should be possible, but in the forums I've frequented I mostly see a tendency towards groupthink and repetition of some tired maxims.

However there are some promising approaches that can be found here and there, and one of the best 'signals' for detecting them is the 'smallness' of the community. Generally speaking, small threads, ones that peter out over a short time, and/or have few followers and fewer contributors, are of greater value than ones with many, though this is definitely counterintuitive. Also small threads are the majority of all threads, so it's not enough to say that just because no one's following it, there is something worth reading.

Trying to decide what's worthwhile and what isn't is time-consuming and this is itself a cost, a barrier to collective action, since evaluating trading strategies would be far more efficient if done as a group. Naturally the only 'solutions' to this problem that are well known at least, are the ones provided by brokers, like eToro, ZuluTrade, and Darwinex. Find a profitable trader, presumably using a profitable system, and you'll also profit! Sounds good, right? Easy, and easy money.

It rarely works out that way though, as most of the traders at the top of the list are using a number of barely secret methods for falsely boosting their performance (a good subject for a future post) or they are simply the beneficiary of survivor bias (lucky). Undoubtedly there are some good traders and systems buried in the crowd, but how would you find them? Again, I'd start by looking at who is putting up decent numbers and getting ignored.

If you've been watching the Robinhood / GameStop drama unfolding with amusement, as I have, statements like this from the NYT will make you chuckle.

" “Brokers are now ‘protecting’ customers as a facade so that they can appease their institutional backers,” one individual trader told Bloomberg."

This is exactly why your leverage was reduced from 1:888 to 1:100 or 1:50. The liquidity providers are tired of losing to canny traders. The problem with a level playing field is the barons will actually have to deal with risk and they DON'T LIKE IT.

I can't justify buying GME right now but if you do, I salute you. Heck, let's make video game stocks the new dot coms. When they crash the publishers will be forced to make something good to recover or cede the space to indie devs.

On Uncertainty or the Technical Capability Paradox
As I’ve mentioned before, it seems that there are two main groups of losers in trading, esp. Forex trading. The first group is desperate, broke, generally poorly educated, often resident in a so-called 'third-world' country. They quit early, either giving up or being unable to continue after trading with impossibly underfunded accounts. The second group is almost the polar opposite, technically savvy, mathematically literate, even brilliant to the point of being a ‘Quant’, hyper-educated and analytical, with plenty of time in their leisure-filled evenings to tinker with AI, algorithms, EAs, etc.

The first group fails for obvious reasons. The second group, not so obvious. In fact, my data for supporting this theory is thin to non-existent, but I am drawing on anecdotal observations from forums and from the fact that a lot of ‘quants’ are now selling (overpriced) courses as a means to get by. There doesn’t seem to be a flood of ‘Renaissance Technologies’ / James Simons clones making the market purely efficient based on neural nets and AI. Why is this?

I’ve pointed to the fact that the market likely isn’t deterministic - it can alter as alteration finds. Also, the fact that smart analytical people have trouble with uncertainty. If a solution can’t be found by crunching mountains of data and analyzing it with a clever algo, then there simply isn’t a ‘solution’ (for them). Contrast this with a (sensible) gambler’s approach which is to treat the situation as mostly random, find favorable odds when possible, and avoid blowing up for as long as possible. This isn’t a satisfactory solution for desperados or quants, who both want to crush it. And in the end, how many poker players, even among the most successful, end up retiring rich? It seems maybe, fewer than you’d think. The game gets harder to play over time, due to competition. Adversity (and uncertainty?) is not something you can overcome with Math?

The real reason that the second group of traders rarely makes a living out of it though, I suspect, is that trading is difficult, risk-filled, and offers fewer emotional and financial payoffs compared with coding, teaching, consulting, or maintaining a corporate day job. Therefore after a few initial failures most of group 2 make a rational choice to pursue more lucrative ventures and never look back.

https://www.nytimes.com/2021/03/21/b...ck-market.html

I've been bullish on just about everything up 'til now. Knowing the market's insatiable appetite (maybe I should say preference) for new money, I at least expect rough times ahead for this new crop of 'investors'. Stay safe, everyone.

1. Why your trading system is probably too complicated
   1. https://www.zmescience.com/science/news-science/our-brain-is-hard-wired-to-make-life-more-complicated-rather-than-simple-heres-a-simple-lifehack/