Plutonite's Trading Manual

Hello folks!

Now that I'm back in civilization, this comes as promised to many who asked via pm and elsewhere: the uber-duper astrology, crystal ball-ish voodoo chartists' planetary motion-based , starry-night-on-the-beach way of making lots and lots of money . After trading some very large lot sizes for friends during the past weeks (and trading live myself for nearly a year), I think I've gained enough confidence to come out here and actually talk about this thing, which is really nothing new as everything I write here has been tried before, except perhaps with the wrong understanding of how this "combination" can be applied.

This is going to be a very short series of articles on mathematical/probabilistic reasoning, market psychology and other means by which I judge the positioning of the currency pairs, as well as other markets like S&P futures..etc. I have traded virtually since back in college, when my comp.science/engineering/geek colleagues and I discovered the wonderful market that the liquidity-thirsty players have let us into. It is a paradise, is it not? You make a trade, and the market gives you a 1:1 chance of making money using hundreds of times the cash you have in the bank. But how much it will move, and for how long, you do not know...cue hundreds of trading books and schools..etc.

By the first few months I had completely exhausted the indicatoroctisis that everybody goes through, and soon (being a software guy by trade) understood the shortcomings of programmatic trading in a market where randomness is key. Every day in the global economy is different, the combination of conditions is infinite, and those who do make some money off a market "hole" will never really get rich.

After much losing and winning and hair pulling, me and my friends split, one half went and did a martingale type thing (which has doubled their money but which cannot be compounded; i.e stuck with around $10000 a year max in profits) and I went and did my own little bit of thinking with the others (who pulled out). I will not talk about my profits or post trades here for now, but praise God, I've done pretty well especially during the past 3 months, over hundreds of trades, meaning that there is a clearly consistent methodology at work.

Below, we will have one essay on probability, another on psychos and maybe another on how to use other things as well in our discretionary reasoning. Most of our trades will be for large pips, usually double the daily range of the pair at hand. We shall not scalp or shoot for 10 pips, for that is the work of the dirty little rats that roam the forex tunnels. The sewage off the investment factories gets dumped on them always, and they are forever despised. Also, we will always take into acount the general direction of the market on the same timeframe that we trade (H4 usually), because the trend, ladies and jelly-babies, is your most beautiful of friends.


Hope you guys enjoy it, and learn how to trade with this info over a long period to see for yourself the difficulties and rewards. I expect to learn from you as well, because all the little tricks of the market I read here on this great forum. Now get some coffee please. Discipline is great, and intelligence is king. Here we go.

Hi,

Thankyou for sharing your thoughts, cant wait to read your next post.

-D-

Part A: Mathematics

Take 50 pebbles in your hand. Stand on a pavement next to a long ruler, and thrown the pebbles gently with one gesture of your hand. What do you get? On the ruler scale, the pebbles are scattered randomly over a range (forget the horizontal scattering, lets concentrate on one dimension). Now these numbers - the distance of each pebble from you - is a random variable..something which cannot be determined beforehand. But take an average of these distances, and compare the distances from the average..what do you see?

I'll tell you, because you are oh-so-busy and won't do it for yourself, you little bum. You will realize that the pebbles are generally closer to the mean distance then any other, because that's the definition of the mean. By the well-known Law of Large Numbers, as you produce more and more pebbles from the same distribution(throw of your hand), the "clustering" around the mean becomes more likely. They converge on their mean, in other words.

In fact, probability theory allows us to make some very strong, provable statements about random numbers despite the fact that they are random events.
One of these things, called the central limit theory (also very well known to statisticians) tells us that the variance of these pebble distances (or yes, very smart of you, closing prices of candlestick bars..etc) is very limited to the mean. "Variance" is calculated with a simple iterative formula, and the well known and beloved Standard Deviation is just the square root of that. In theory, a normal distribution would have more than 95% of the random vairables within 2 standard devs of the mean.

So why is this interesting? Well, think of this..if you threw those pebbles all at once and you slowy took a survey of about 47 out of 50 distances..imagine you found 5 pebbles that were already at 2 standard deviations away from the mean so far. Now before you look at the rest, you can practically rest assured that they will be closer to the mean than the 5 outliers, because of the nature of "randomness". Since you've already reached the normal limit of numbers that have strayed from the mean, the rest should (provably) be closer. Do you see the dollar signs now? Good, now get some more coffee.

And for more on this great stuff, please read:
http://en.wikipedia.org/wiki/Standard_deviation
http://en.wikipedia.org/wiki/Central_limit_theorem

Part A, level 2: The Markets

Now the markets are a much more complex part of life, because the distribution of the random numbers here (we will consider closing bars to be random, i.e we will assume we know nothing about them at all) is continuously changing with market sentiment. Even worse, we are not variance limited in the same way because we have a natural bias called the "trend" - a general direction determined by local economic conditions. This sucks, and in a major way, because now we can't just say the same things about the bars as we can about the pebbles, we need to take into account these things as well, and because this "sentiment" is usually funamental in nature, varying according to global conditions every day, we are doomed to use a combination of "drivers" like strong unexpected news with the general direction of the market (trend), in order to make high probability statements about the chart.

Before we go any further, a trend is nothing mysterious, although in a ranging market the trend is neutral and we are very happy, mathematically at least. If you want to know what the general direction is, bring up a H4 chart with about 2-3 months of data on it or like 150 bars. This is the market bias, if it is clearly going up or down, then it is "trending".

How's that coffee going? Next chapter coming up, extra cream. PS: tea is way better than coffee, which can and will turn you into a useless junkie. Drink tea, tea is good.

You're most welcome.

Best Regards,
-P

BTW, I will post some charts when I'm done with all the talking, so all those who love the lovely colorful charts are going to be happier than happiness itself. And if what I am writing doesn't make sense for some reason, it's probably because you are lacking in grey matter, dear reader, but please let me know anyways.

This sounds very interesting...............looking forward to reading your thread.

T4K

I still waiting your next post

Regards, Core

I am presently giddy with caffeinated anticipation!!!

Excellent! I see at least one trader with immense potential

PS: thanks everyone, post is coming don't worry.

Best Regards,
-P

Plutonite,

The suspense is killing me. You have me at the edge of my seat.

TimeFreedom

I have a nice pot of tea ready to read on

It is July 4
Plutonite has taken a Holiday

Part A, level 3: Applying the Mathematics

"The only obstacle to knowledge is the illusion of knowledge"

I hope you guys digested the "nasty" theoretical stuff as well as possible, but really it was necessary to show you this reasoning in order to demonstrate how FEW the assumptions are that we make about the market.

In fact, this "what exactly are you assuming here" stuff is central to modern science and mathematics, because during the early 1900's people realized that the biggest mistake you can make is state something as a truth without understanding the assumptions you are making. Only when you remove all prejudice and make things "as simple as possible", in the immortal words of Einstein, can you begin to see how foolish you were. Everything we know today about the world is owed to this Enlightenment. In fact, everything we realized we don't (and in some cases can't) know is also owed to it, and that is more important.

With the above articles, we dealt with the market as being completely random, and we made certain statements about random numbers taking into account the ideas of market bias(trend) and changing sentiment, which we will now discuss.

To use a standard deviation channel (bollinger band..etc) we have to agree on the number of events/pebbles/candlestick bars to use in our calculations. The more the better, of course, but unfortunately the "distribution" here changes arbitrarily with strong fundamental events, so we usually cannot have a representative set of more than 2-3 weeks of data, i.e 50-60 bars on a H4 chart. For this reason we draw the well-known SMA bands (aka bollinger) with a 55 period (50 is good too). The number of deviations should be 2.0 but we want to get an early warning and catch more trades so we use 1.8. The "Bands" Custom Indicator in the Metatrader platform will let you do this.

Now look at the charts with this on, watch for a trend and look what happens when the price deviates against the trend to the deviation line.

Oh yes, and make more tea.

my tea is steaming.

Standard deviation, tick

probability distribution, tick

next..... tock.


edit: BTW I like your avatar picture, what is it?


update: Tea gone cold.

I put it up as a joke because I didn't have time to explain all this before, so I called it astrology and infuriated everyone on the boards, who were usually pretty amazed that it actually worked while I seemed to be joking. I'm a total goof you see.

Original version from here:

http://en.wikipedia.org/wiki/Image:Universum.jpg

Wow, really, an impressive thread.

It seems like Pluto is giving some serious reasoning behind the logics of making trades. It's rare to see such a good reasoning for a trading system or describing the general laws of market mathematically.

*bookmarks the thread*

*gives a rating of hi5-stars*

Will follow this thread with utmost attention, cause this definitely looks interesting

Pluto, you're HILARIOUS!!!!!!!!!!!!! I totally enjoy your humor and style! But I'm looking forward to you coming "back to earth" for us mere mortals...those with "less grey matter" (who can't help that because we were born that way, but look up to those of you with higher intelligence...lol!) I appreciate your giving credit to God earlier as well...every good thing comes from above from the Father of lights with Whom there is no variation or shifting shadow...."

Seriously....our tea pots have boiled over and all the water has deviated from the pots....I know it's a holiday and all but puhhhhhhhh-leaazzzzzzeeee....keep it coming!

Pip Meister

oh right maybe thats why god couldn't care less about the children being blown into little pieces in iraq and the starving in africa because he's helping us make some pips and jennifer lopez win her next award!

Nice thread Plutonite, food for thought. Looking forward to it's development.

Nice avatar Cryten, Demonoid??

M