Admit it - your profits are based on luck

It is probability based if you can quantify your odds into percentages. And I don't see how you can place a percentage on a chart pattern. If you say "a daily pin bar on the daily EURUSD gives me an 85% success rate" what does that mean?

Are you saying that 85% is set in stone, and will always be that figure?

I'd be very interested in someone finally clearing up this chatter about probabilities and statistics by simply explaining how they do it.

If you don't believe you can trade better than random chance then perhaps you shouldn't be in this business. That's fine, it's not for everybody.[/quote]

It does not matter what you believe, it only matters what you can do. Long term, there is only one profitable strategy...to have a large enough account to withstand massive drawn downs until such time as the true underlying fundamentals of a currency are born out. This can take years in some cases. None of us are George Soros so this will not work for us. Short term, with limited equity, we are all at the mercy of market randomness. You may trade, quite profitably, for 6 months or a year, but if you trade long enough you will be wiped out. You cannot dance with the devil indefinetly without getting burned....unless the devil is whispering in your ear, telling you in advance what moves to make. None of us have access to the type of information that would give us a definable edge for short term trading with limited capital. However, short term success is quite possible. A good trading plan with solid MM, together with a good run of "positive variance" (tdions luck) can put a nice chunck of change in your account. IMHO it is best to know the exact dollar amount you want to get out of the market BEFORE you start trading, and make you trading plan to achieve this goal in a relativley short time period (2 yrs or less).

LOL....I think this issue can be put to rest with some type of demo trading contest...

Tom, I suggest that what could be done is to have the James16 gurus quantify (in potentially programmable terms) the criteria as to what is a 'suitable quality' daily pin bar.

Then we would backtest on EURUSD,D1 using 'vanilla' time-based exit criteria, e.g. calculate P/L if the position is exited, in equal parts, arbitrarily over the next X daily closes. Hence if we choose X=5, then we'd buy/sell 5 lots on entry (assuming entry is immediately upon the break of the pin-bar, but we'd need the gurus to confirm this), and then exit 1 lot over each of the next 5 days.

If (say) 85% of the trades were profitable, then I think the best we could cite is that an 85% success rate was attained using this entry/exit method, within the confidence levels applicable to the sample size; as opposed to saying that "all pin-bars deliver an 85% success rate" irrespective of the entry and exit method - which IMHO is a meaningless statement. [Of course we're talking 'success rate' here, as opposed to expectancy (which is the product of win rate and P/L size)].

Just a starting point for further discussion.......

David

[Edit] Just a thought - different brokers operate in different time zones, hence their daily candles will be different. And P/L is also dependent on broker vagaries like slippage, spread and swap.

Given all of the possible setup/entry/exit/broker variables, I think it's more appropriate to say that "suitable quality pin-bars in themselves deliver some kind of edge" (if in fact they do) as opposed to saying categorically that "they deliver an X% success rate".

Some people are being too absolute about this.

Is luck part of trading? That's 100% true.

Is trading success completely due to luck? That's 100% false.


Yeah, it's true, there is an element of luck. There is nothing you can do (unless you have ungodly amounts of money) to make the price go up or down. For that reason, the outcome of any trade is not completely certain. There is some risk. Even if you trade your system with perfect discipline (you might even have a computer trade it for you), some months you will make a little more, some a little less. You have luck to thank for that.

However, if you ARE consistently making money through trading, you have yourself to thank for that. It requires skill/knowledge/experience/discipline to act in your own best interest (as Larry Levin puts it). For example, not using stops and continuously adding to losing positions is not a good idea. Decisions like that, i.e. how you manage your trades, are the only things you can control in trading. Successful traders are good at managing their trades. That's a skill, but it's a skill of managing risk, managing the uncertain.

BINGO!

Is trading gambling? Yes it is. According to the definition of gambling, it is because there is an uncertain outcome. Of course everything we do in life is a gamble. Nothing is certain. Perhaps the only thing that is certain is pure mathematics.

But traders, just like gamblers, come in two varieties: The successful and the unsuccessful. Both deal with uncertainties. Those who are successful are skilled.

And what is ironic is that the exact same trader can be succeessful one year, and unsuccessful the next. It will be the market determining their success.... based on how she trends and her timing to trend breaks.

What you believe you can do has a direct effect on what you will be able to do.

I don't use daily pin bars. With pin bars the next bar's outcome is 50/50, it's distance you're trading to capture. That is not true of all things.

Want an easy one? Fade a tailed double on the intra-day level (H1 or so). Double top or bottom where the 2nd touch has a sharp tail to it. Why does this work? Because in a random market price shouldn't do that, if it does then it means a large dose of responsive orders has came in. Be flexible on your exits (be attentive), I'll let you do the homework there.

There's a hundred others, too. Times and places and ways price isn't behaving randomly. Factor in time and location and you add additional ways to improve your returns. Do a study of volatility and 3-bar reversals on the H1 chart. If you can't figure out a way to beat random w/ that, there's nothing more I can do.


Really? That's the only one? I don't give a jack about the underlying fundamentals or the long term trend. I also don't tolerate massive draw downs. There are most certainly non-random patterns in the short term markets.


There are a lot of unskilled traders out there. We're all just chasing alpha.

Links you should read:
http://en.wikipedia.org/wiki/Alpha_(investment)
http://en.wikipedia.org/wiki/Beta_coefficient

The counter-posit being that there are traders who's historical performance beats the market averages.

According to Popper, there are two types of theories. Those that have been disproven and those that are yet to be disproven. Trying to argue with someone who is aware of this is like sweeping leaves on a windy day. I assume that tedion is aware of this and is stating that a trader is only profitable until they cease being profitable which could technically happen at any point. This is all very well but you could spend your time worrying about things that could happen or just realise that a trend is a trend and trends have to do certain things to continue, certain patterns have to repeat and certain things will always occur at tops and bottoms. There are statistical inferences that have been reliable up to this point and that is all that can be said, not 'this strategy has been profitable, therefore it must be profitable in the future'. Yep, each trade is a gamble, so don't stick your life savings on it, but if you test a straegy over the long run and it produces positive results then there is a high probability that it will produce positive results in the future. A successful trader one year is more likely to be successful next year than a trader/strategy that was not successful the previous year.

Yes, there will be variation. And here's hoping that the variations work out in your favour (luck).

"It will be the market determining their success." I think determine is a bit too strong of a word here. That makes it sound like the trader has nothing to do with it. Success is certainly affected by what the market does, but success is also affected by what the trader does.

Even if the trades are being executed by a program that you wrote, you still did that. You chose the rules of your system and you programmed them. That's a skill. Take some credit for your work. After all, you're not just randomly smashing keys on the keyboard are you?

Don't get me wrong, I'm not saying it's completely skill. There is an element of luck too. Again, there's no need to be so black and white about it. To put it in computer science terms: Success is not just (skill) xor (luck). Success comes from both (skill) and (luck).

Well, just from the top of my head: there are a number of points while this is at best only partially true ;-)

> you are nothing without your better half: the market.

As a trader this is true:http://www.forexfactory.com/images/icons/icon14.gif no market - no trader


> the market. She is your dance partner.

Nice image but somehow wrong.
As a trader I'm at least to a some % (might it ever be so small) part of 'the market'.


> She is your dance partner. You don't control her. She controls herself.

As I'm a tiny or bigger part of the market - I write a tiny or bigger part of the dance.

And as a trader I have a very huge influence in the dance: as I decide if I want to dance - how long I want to dance, when I want to dance - and to some extend which dance I'm prepared to dance.


> Admit it - your profits are based on luck (thread title)

To some extend this might be true BUT NOT with the first line posted by tdion:

So it matters how skilled you are..... it matters how exceptional your trading aptitude.... it matters how much experience....



* I do NOT believe in pure luck in practical trading (which would implicate an absolute randomness of the market which I at best can accept pure theoretically)

http://www.forexfactory.com/showpost...&postcount=112

I guess the biggest problem I have with threads like this is that is sounds too much like "I can't do it, so none of you can!"

Bullshit.

As far as the contest is concerned, I'm down....but demo wouldn't prove anything. It's got to be real money, real psychology. And not some 250 dollar account. It's got to feel real.

As far as it always being 85% success rate, what kind of question is that? Is anything truly absolute? For example, I once shorted a USD/CHF daily pinbar at a perfect spot. SNB did surprise cut in the middle of the night. Guess what? That's what a stop is for.

There's a pivotal question here:

Do we sit here and worry about absolutes? Or do we just trade, and keep making our monthly profits? I choose the latter.

Remember, it's never the WHY, it's the WHAT that matters. If I am profitable, it's ok that it's impossible. Like the lowly bee.....by all human standards he's too fat to fly. Luckily for the bee - he doesn't know any better.

Clock

So, no condoms?

What I meant to convey is that belief has nothing to do with the truth of the matter. One may believe quite earnestly that the moon is made of blue cheese, but that belief has no bearing on the moon's physical compostion. One may believe, quite fully, that their skill as a trader can lead them to fame and fortune....but the market does not care what they believe. Eur/Usd, for example, will go today where it will go. What someone believes about it, or their ability to forecast, has no bearing on its destination.

I meant more in terms of general success. Sure it's stupid to 'believe' that I can predict the future. That's insane and is a sure path to failure.

However I do believe that I can be successful at trading. If I did not have that belief I would not be successful, in the long term, hands down.

Really is there such a thing as a skilled trader? I see it more as someone who is very skilled at managing risk.

Well I can't compete with Clock's wit. But this thread was not for being a crybaby and saying "I can't." Of course you CAN, with some help. My custom EA is trading a large account (over 10K) and obviously I think it could be profitable or I wouldn't waste my time.

And if you are profitable every month, that's a special thing because it is very rare to find somebody doing that, especially today.




Jimmy, can you define "risk managment" as it applies to forex? I am very keen on hearing your response.

Tdion,

My view of position risk management is based on something I have read about Soros. It has been said in several books I have read, that he forms a hypothesis, enters a position based on his hypothesis, and gets the hell out if circumstances dictates his hypothesis is no longer valid.

Since a hypothesis is nothing more than an educated guess, how a position is managed once entered is much more important than the entry system itself. Of course there are things to look for that might increase probabilities in our favor when it comes to choosing a position to enter, but when it comes down to it not one of us can predict what the market is going to do next. So really, were tossing a coin on entry, and then doing our best to manage the position to tip the odds of success in our favor over the long run.

That's why I have a problem with the the idea that a position should be entered, a reasonable stop loss set, and then let the stop take us out of the position. That sounds like a trading system for someone who does not want to manage a trade, or does not have the discipline or emotional control required to effectively manage a position, either a winner or a loser.

But to me risk management has many more levels than just that of position risk management;

1. Acquisition of Knowledge - while there may not be any knowledge available that will ensure success, it would be ignorant to think one can be successful at this game without putting in the work required to attain as much knowledge about trading as possible. This includes things like the effect of psychology on traders (your opponents), how the markets are structured, any correlations between different markets, rules of the game (contract between you and your broker and the possible effect on your risk exposure), and many more things I probably am not aware of yet. For example, it's more risky to try and drive a race car at the limit without a good knowledge of physics as it pertains to the effect it has on grip. It's less risky the more knowledge one acquires, and those who really understand are the ones that win.

2. Understanding of Yourself - Understanding what pushes your buttons as an individual is vital to controlling your total risk. Finding out your weaknesses that will have a negative impact on your trading, and working on fixing them. Finding out your strengths as an individual and utilizing them to have a positive impact on your trading. An example might be whether or not your a morning person or a night owl. If you feel groggy and have a hard time getting going in the morning, trading when you get up increases your risk exposure every time you do it, and could really have an effect if you do it consistently over long periods of time.

3. Risk Capital Risk Management - sounds redundant, what I mean is a person should have a plan for there total available risk capital that reduces risk exposure to catastrophic events. I don't mean portfolio diversification (which I think is a crock). What I mean is having a plan in place that will allow you to remain in the game if your broker goes under. Or if your bank goes under. Or you get sued. Or you lose your temper and self control and blow an account in a 36 hour trading marathon.

4. Trading System - a trading system suited to exploit your strengths and limit the risk exposure of your weaknesses. To me this is the least important. But at the very least your system should alert you to situations where the probabilities lean more in your favor. Where you can get into a position and reduce the risk of that position to break even as quickly as possible (I'm going to get shit on for saying that but it makes no sense to me to hang out and wait for a trade to 'go my way' or get stopped out). I use stops, sure, but emergency stops only, and very rarely will a stop get hit, I will cut the position long before it goes that far against me.

I had an amazing December, and a terrible January, and the results this month were a direct result of two character weaknesses, quick temper and lack of discipline (lack of discipline in cutting losers quickly). Sim trading my style on the weekends has proven my poor performance for the week before was nothing more than character flaw problems. So my risk management plan is lacking in the personal area (a serious problem to be sure), but I feel my position sizing and entry system are working well enough to not be a detriment to my overall risk management plan.

In case anyone is wondering, I was up 20% on my first trade of Jan. decided to let Fap Turbo trade for me, and when I got up the next morning my account was down 7%. That pissed me off in a way psychologically that has really effected me for the entire month. Meeting a weekly goal on 1 day and losing a bunch the next day as the result of a stupid decision I made really ate at me all month long.

Jimmy Jones

Nicely thought out post.

Not enough people are even aware of that next layer of risk management that you describe in point #3.

"a person should have a plan for there total available risk capital that reduces risk exposure to catastrophic events. I don't mean portfolio diversification (which I think is a crock). What I mean is having a plan in place that will allow you to remain in the game if your broker goes under. Or if your bank goes under. Or you get sued. Or you lose your temper and self control and blow an account in a 36 hour trading marathon."