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Attachments: How certain can you be that you have an edge?
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How certain can you be that you have an edge?

  • Poll

  • How certain are you that you will profit and are you currently profitable?
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  • #1
  • First Post: Jun 9, 2009 8:25pm Jun 9, 2009 8:25pm
I love studying psychology and I’ve devoted my life as a trader to studying its role in a trader’s performance as well as its role in a strategy to profit from the markets. I’d like to start a discussion on this and learn from what you all have struggled or triumphed over as well as contribute what my studies have shown.

[Don’t read the following until you polled. Otherwise it may bias the result!]

Anyway, something that I’d like to share is the turning point that I had during my trader development. I remember my first trade being a winner of a measily 20 pips that was levered up enough to make my heart race faster than the bullet trains wizzing past my apartment in Tokyo. However, my overconfidence was fleeting, and after developing some risk control my account drifted down slowly for years. Eventually I came across something that I thought to be an edge and I was actually profitable for a couple years. However, market conditions changed and I lost money and confidence. It wasn’t until I came across the realization that my confidence was based on the wrong thing that I turned my trading around. When my sense of certainty came from learning to understand how markets actually worked (i.e. the decision making patterns of its participants) and my ability to adapt to change, the correlation between my level of certainty and my account P/L diminished. I owe a lot of this to my friends at fixed income and derivatives desks at banks and lots of reading, and it changed everything for me.

I’m opening up this thread for you all to share any epiphanies you’ve had regarding certainty, and even struggles you are currently having, so please share your thoughts!

-Kris
  • #2
  • Jun 9, 2009 10:13pm Jun 9, 2009 10:13pm
Hello Kristdm, I am by no means a pro and my overall trading experience is also limited. But I am making money by trading and making it consistently for quite some time doing a same thing. So I guess* my system contains some kind of an edge .
While in college I was a gamer and played in various competitions. I remember when I used to practice for a tourney, I can not know what kinds of players will be there and what would be their strategies. The only thing I knew was what my mistakes were in the previous tournaments and what can I do to rectify them. After some time I developed a general sense of strategy and was able to cope with plenty of new challenges. That time I was not able to figure out why I was among some of the few who were able to do that, but now I probably have some idea.
As a newbie in financial world (1yr 2 months old) I have no idea how the markets actually work and what are the major factors affecting the overall system but I am trying to understand while experimenting with my little strategy. Right now I have no idea it is the edge sharp enough or I will have to change drastically with time, but I like what I do.
The only way to get smarter is by playing a smarter opponent.
  • #3
  • Jun 9, 2009 11:06pm Jun 9, 2009 11:06pm
Quoting NewFX
While in college I was a gamer and played in various competitions. I remember when I used to practice for a tourney, .

was it cs ? u ever made to wcg ?

edit:
i checked u r in india too ! we might have met
To Live is the rarest thing in the world , Most people exist , that is all
  • #4
  • Jun 10, 2009 1:55am Jun 10, 2009 1:55am
Quoting kristdm
When my sense of certainty came from learning to understand how markets actually worked (i.e. the decision making patterns of its participants) and my ability to adapt to change, the correlation between my level of certainty and my account P/L diminished. I owe a lot of this to my friends at fixed income and derivatives desks at banks and lots of reading, and it changed everything for me.
Interesting topic Kris!

It's not clear if the above was a good thing or a bad thing for you, I'm assuming good? And do you mean you developed a feeling of certainty or that understanding and accepting uncertainty changed everything for you?

Learning how the market works is interesting for sure but how much it can help our trading in practical terms is debatable in my opinion, after all we only have a very limited amount of information to go on when it comes to other participants decision making processes, particularly of the market-moving institutional traders and large players. The way they think and their motives for doing what they do is far from clear, much the same as a good poker player they rarely give much away about their hand or their next move unless it's for their own benefit.

I think my eureka moment came when I realized the pure simplicity of trading, the essence if you like. Although the market and it's participant are extremely complex I believe trading itself is a relatively simple process, we overcomplicate it because we have a preconceived notion that it must be difficult otherwise everyone would be doing it, and on top of that an alleged 95% lose money so it simply must be hard!

I'm not a great proponent of all the psychobabble about self-analysis and 'knowing ourselves', I don't think it makes a jot of difference to our trading performance, whereas practical things like a simple strategy, money and risk management, and the discipline to follow our 'rules' without wavering is really all we need. Why overcomplicate what is in essence a very simple process?

As regards having an edge, didn't someone once say "if you don't know your edge then you probably haven't got one"?

On the other hand I may have totally misunderstood the theme of the thread and poll, in which case disregard everything I've just said as irrelevant
  • #5
  • Jun 10, 2009 3:07am Jun 10, 2009 3:07am
Oh....this kind of discussion can be endless...lol

My own experience is such....

-I hate rules...the more I have them, the more I will want to break them.
-I just switch on the computer and try to figure out how to win base on what is on the screen. I start everyday on a clean slate.
  • #6
  • Jun 10, 2009 3:35am Jun 10, 2009 3:35am
Firstly I agree with pipmuts points.

The way in which i know that i have an edge is by looking at my statement on my mt4 platform and noting a PROFIT FACTOR of greater than one. I do all my testing manually by taking the trades but many run EA's etc first and if this produces a positive profit factor than this can be comforting knowing that the system has an edge.

Some of the things that Have really helped me have been

 

  1. SITTING as stated in reminiscence of a stock operator " it was my sitting that made my money"
  2. Being able to sacrifice profits to eventually receive the big gains. The longer I trade the more important I think this is, if you are prepared to do this you sometimes find yourself riding a huge trend and this is the one that pays your way.
  3. The way one ultimately makes large profits as a trader is by having large size in a market that is going your direction and keeps going.

This is my favorite statement, not sure who made it but they really got it and my belief is this is the key to trading. A robust system that can place you in this situation.

Just my thoughts
Trade Well

Perry

  • #7
  • Jun 10, 2009 3:59am Jun 10, 2009 3:59am
90%, given the assumption that central limit theorem will guarantee my results coverage to a Gaussian distribution.
The breaking of a wave cannot explain the whole sea.
  • #8
  • Jun 10, 2009 4:59am Jun 10, 2009 4:59am
Quoting Craig
90%, given the assumption that central limit theorem will guarantee my results coverage to a Gaussian distribution.
WOW, hey Craig sounds fair enough even though I have no idea what that means.

Trade well

Perry
  • #9
  • Jun 10, 2009 5:44am Jun 10, 2009 5:44am
Quoting perryg
WOW, hey Craig sounds fair enough even though I have no idea what that means.
Me either but it sure sounded impressive, I'll have to remember that one
  • #10
  • Jun 10, 2009 6:56am Jun 10, 2009 6:56am
I dont know what is happening in the market. What makes it move or where it will turn. I do have a 4hr chart and I can see that it has a general direction from on side to the next.... low-&-behold, if I open the 1hr chart it has the same patern. I place my trade in that direction with protective stop losses and wola.... after giving the trade some time to mature I have profit.It would be nice to know why the market moves and all the ins and outs, but for know, while still having a day job, this is enough for me.
  • #11
  • Jun 10, 2009 7:35am Jun 10, 2009 7:35am
Thanks Kris for starting this thread!

This is very important topic for me and I am sure I will make quite some posts here as long as this thread doesn't degrade into something ugly.

On a sidenote: a central lmit theorem is descibed here:
http://en.wikipedia.org/wiki/Central_limit_theorem
  • #12
  • Jun 10, 2009 7:41am Jun 10, 2009 7:41am
You poll asks if you are "certain" you have an edge. This to me is a loaded question. In a game where the entire outcome is UNcertain it is difficult to say that you are "certain".

Mathematical models of probability are all fine and good but the market seems to defy "the math". I agree that an understanding of its participants, the one who drive the market, is essential, but I would dare say next to impossible as the number of combinations of participants is infinite. As Math is a finite science attempting to apply finite rules would seem arbitarty and arrogant.

Most of us trade using technical analysis...this means we interpret cetain pattern in the market that we find repeat on a regular basis. Then we look at how many times those patterns are profitable and extrapolate a mathematical 'edge". No edge is 100% accurate because the participants in the market are never the same. Thus do you really have an edge...and how can you really be "certain".

I agree with Pipmutt that you keep it simple, follow your pattern and keep a tight rein on the downside risk. This is no dark deep psychological mystery. Applying a "soft" science to an world with an infinite number of combinations, would seem to me just as arbitrary and arrogant.

Why is it "necessary" to understand the market or its behavior when it is clear that cannot truly be accomplished, at least in the vein of your intitial comments. What seems to me more productive is to find a pattern that repeats, and exploit it. Who cares WHY the pattern exists...just exploit it and be constantly vigilant for new patterns. No pattern lasts forever.
  • #13
  • Jun 10, 2009 7:56am Jun 10, 2009 7:56am
Forex is uncertain, and I hope it remains so. My edge is in the form of neural analysis (PNN). I can't tell whether this 'edge' will remain an edge for long but so far for past 2 years, it has been working marvellously. Artificial intelligence is the way to go...
Adaptive autotrading is the future...
  • #14
  • Jun 10, 2009 2:39pm Jun 10, 2009 2:39pm
Your Eureka moment is key! I completely agree that traders overcomplicate things.

Regarding your question, it was a good thing. It caused me to realize that my future performance didn't depend on my past performance so losses didn't cause me to lose confidence and then more on the next latest and greatest strategy after that.

I want to make it clear that this thread is not so much about psychology as it is about saving yourself from going down the wrong path because of your assumptions.

The point I'm trying to make is that even if you've been consistently profitable for a year or two, it doesn't mean it will continue unless you know that your wins are edge driven and not probability driven.

I didn't mean that we need to understand everything that market's participants have been doing and why, but rather to understand how the market works and to recognize when things change. I don't want to crowd this post with a whole explanation of my "method" but most of it is common sense (I hope!).

Thanks for your question!

Quoting pipmutt
Interesting topic Kris!

It's not clear if the above was a good thing or a bad thing for you, I'm assuming good? And do you mean you developed a feeling of certainty or that understanding and accepting uncertainty changed everything for you?

Learning how the market works is interesting for sure but how much it can help our trading in practical terms is debatable in my opinion, after all we only have a very limited amount of information to go on when it comes to other participants decision making processes, particularly of the market-moving...
  • #15
  • Jun 14, 2009 8:53pm Jun 14, 2009 8:53pm
Hi Gspajon,

I agree with you that there are an infinite number of variables affecting price at a given time, but what I'm stressing is that the information that the majority focuses on at a certain time is important. The information vs. noise ratio is highest when price movement is caused by the majority acting with the same story.

What I would like to highlight in your quote was the statement: "No edge is 100% accurate because the participants in the market are never the same." I completely agree and I think this is something that more of us should be aware of. It's probably the reason that technical analysis isn't very profitable to many traders.

Lastly, I find the exploitation of patterns regardless of the reason for that pattern existing to be dangerous, because 1) there is no necessity for that pattern to continue after it is formed and 2) the pattern may be an illusion (the human mind forms patterns and recognizes all the times something works, but ignores when it doesn't work).

All the best,

Kris Matthews

Quoting gspajon
You poll asks if you are "certain" you have an edge....
  • #16
  • Jun 14, 2009 9:12pm Jun 14, 2009 9:12pm
LOL.. 67% of traders here responded that they're winning and they're certain that they have an edge.


Now either ForexFactory is inhabited by the brightest forex minds only, or someone lied to me when they told me that only 2% of forex traders make it!


LOL!



edit: btw, while the poll's results obviously have no validity, it does clearly show why most traders have their acc wiped: who would believe that they're losing AND that they have no "secret edge", but would keep on trading and seing his acc vanish? if he keeps trading, its because he thinks that he has an edge and will win, of course.
freedom
  • #17
  • Jun 14, 2009 9:22pm Jun 14, 2009 9:22pm
Quoting jordanknight
. Artificial intelligence is the way to go...
  • #18
  • Jun 17, 2009 9:39pm Jun 17, 2009 9:39pm
I was also surprised by the results. Apparently we have a good deal of profitable traders here. Would anyone care to share in one phrase what type of method they use? I'm curious to what degree technical traders are certain of their ability, because of the low signal to noise ratio of markets, which generally increases uncertainty.

(I am a global macro trader by the way)

All the best in your trading,

Kris Matthews

Quoting equilibrium6
LOL.. 67% of traders here responded that they're winning and they're certain that they have an edge.


Now either ForexFactory is inhabited by the brightest forex minds only, or someone lied to me when they told me that only 2% of forex traders make it!


LOL!



edit: btw, while the poll's results obviously have no validity, it does clearly show why most traders have their acc wiped: who would believe that they're losing AND that they have no "secret edge", but would keep on trading and seing his acc vanish? if he keeps trading, its because...
  • #19
  • Jun 18, 2009 3:13am Jun 18, 2009 3:13am
Quoting Fx1618
I do have a 4hr chart and I can see that it has a general direction from on side to the next.... low-&-behold, if I open the 1hr chart it has the same patern.
Plus I use 5% off my Equity one trade at a time, Compounding as I go....

Place a 5&10 EMA on both and see for yourself
  • #20
  • Jun 18, 2009 3:26am Jun 18, 2009 3:26am
Quoting Fx1618
Plus I use 5% off my Equity one trade at a time, Compounding as I go....

Place a 5&10 EMA on both and see for yourself
hi fx,

What pair(s) do you focus on?
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