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Is the "system" part really so easy to come by?

  • #21
  • Nov 11, 2005 9:33am Nov 11, 2005 9:33am
Quoting Fijitrader
There are a few other systems around on the internet for free that have stood the test of time. However for most people overcoming their fear and greed is harder. I won't go into all the reasons because I've been getting far too much criticizm lately for long posts.
Please ignore the critics. Make your posts as lengthy as you want. The longer your posts, the more valuable information they contain. You think things through in far more depth than most people and you have the ability to express your conclusions compellingly. And to do that requires longer posts.

Thanks Fiji

Dial

P.S. I promise not to "Censor" your posts.
sxaxlxvxaxtxixoxnxbxyxgxrxaxcxexdxoxtxoxrxgx
  • #22
  • Nov 11, 2005 4:29pm Nov 11, 2005 4:29pm
Quoting highway3000
Can the following de tested ?

1. Any pair
2. Flip a coin to decide entry BUY/SELL
3. 2% of your account
4. stop Loss 50 pips from entry
5. Trailing stop 20pips once it resches 100 pips in profit direction.
if there were no commissions or spreads, then you have a 50-50 shot of being profitable. obviously we do have commissions and spreads so this strategy will not work. its proven by math that you can not win a negative expectancy game, now matter HOW you position size it.
Relax and be happy.
  • #23
  • Nov 11, 2005 5:27pm Nov 11, 2005 5:27pm
Quoting highway3000
Can the following de tested ?

1. Any pair
2. Flip a coin to decide entry BUY/SELL
3. 2% of your account
4. stop Loss 50 pips from entry
5. Trailing stop 20pips once it resches 100 pips in profit direction.
This doesn't quite have enough information. On what bar are you going to enter and what time frame bar are you going to use?

It is straight forward if you want to enter when a random number between 0-100 is less then 5 then go long and greater than 95 go short on a 30 minute bar. If you go long less then 2 and short greater then 98 you will get less trades. So what is you want to do?

Simon
  • #24
  • Nov 11, 2005 11:02pm Nov 11, 2005 11:02pm
Quoting jbamaj
I don't have much trading experience yet. However, I think human nature is what it is in any discipline. There are just some people who want to appear to be "the smartest person in the room."

I'm a preacher. That pretty well means the source material that I use in my "discipline" is basically limited to one book that, in most editions, is around 1,000 pages long. Its been around for a long time and still reads the same way today that it did a long time ago. But you'd never know that from endless books written by authors who claim to have discovered some new teaching or thought from it. I doubt seriously they have come up with something that the mulitudes of authors who have written before them for 2,000 years had not yet discovered. There are just some preachers who are not content to say the same old truths in the same old ways. You can't get noticed that way.

Sounds like that is what is happening above. There's no glory in doing what james16 has been showing in his chart thread, or just using a simple MA system, etc. And for many people that's not enough.

Again, I don't trading well yet, but the best preachers I've ever heard didn't wow me the creativity of their thinking, but with their grasp of the same old "boring" truths that even a child can learn.

I suspect the best traders are the same. Their good because they have a grasp upon the "boring" fundaments of price actions and tried and true indicators, not by their creativity of their "holy grail" system. Am I close?

Jonathan
Hi Jonathan! Your post has been heavy on my mind all last night and all day today. I just had to respond and tell you how impressed I am with the wisdom I see in it. You need to post more often Sir!!

Thank you

Dial
sxaxlxvxaxtxixoxnxbxyxgxrxaxcxexdxoxtxoxrxgx
  • #25
  • Nov 11, 2005 11:31pm Nov 11, 2005 11:31pm
Quoting jbamaj
I don't have much trading experience yet. However, I think human nature is what it is in any discipline. There are just some people who want to appear to be "the smartest person in the room."

I'm a preacher. That pretty well means the source material that I use in my "discipline" is basically limited to one book that, in most editions, is around 1,000 pages long. Its been around for a long time and still reads the same way today that it did a long time ago. But you'd never know that from endless books written by authors who claim to have discovered some new teaching or thought from it. I doubt seriously they have come up with something that the mulitudes of authors who have written before them for 2,000 years had not yet discovered. There are just some preachers who are not content to say the same old truths in the same old ways. You can't get noticed that way.

Sounds like that is what is happening above. There's no glory in doing what james16 has been showing in his chart thread, or just using a simple MA system, etc. And for many people that's not enough.

Again, I don't trading well yet, but the best preachers I've ever heard didn't wow me the creativity of their thinking, but with their grasp of the same old "boring" truths that even a child can learn.

I suspect the best traders are the same. Their good because they have a grasp upon the "boring" fundaments of price actions and tried and true indicators, not by their creativity of their "holy grail" system. Am I close?

Jonathan
Wow. This is good stuff. Puts a lot a things in perspective, not just trading.

This will have me thinking all weekend long.

I agree, diallist, its prophetic to say the least.

Jim
Indicators show the past. Price Action "Indicates" the future.
  • #26
  • Nov 12, 2005 11:27pm Nov 12, 2005 11:27pm
[quote=fijitrader]
Quote
It is not just a matter of finding a system with a positive expectancy. It has to be a system where YOU personally have a positive expectancy for the system. There is a difference.

FT

Hi FT,

By this, are you essentially trying to divide the mathematical from the psychological in a trading system? My understanding of expectancy is that by definition it only looks at the actual results given by the following formula:

Expectancy = (Probability of Win * Average Win) - (Probability of Loss * Average Loss)

Could you elaborate on what you mean by the trader needing a positive expectancy? Is it issues like potential drawdowns that are too large for some people to handle or were you thinking of something totally different?

Speaking of expectancy, could you somehow tie that back into a position size formula by going beyond just simply saying e.g. "1% risk"? If one system gives you a higher expectancy than another as per the formula above, it would stand to reason that you could risk a bit more using the first system (all things, like trading frequency, being equal).

Maybe all of this will be covered in the PF?
  • #27
  • Mar 14, 2007 3:15pm Mar 14, 2007 3:15pm
Early last summer I programmed a coinflip strategy and tested it with TradeStation. There rules were simple:

1. Enter at 3:00am EST (8:00am GMT, i.e. London's open). I chose the London open because it's generally a very volatile time where big moves can be expected.
2. The direction (long/short) is chosen randomly by a coinflip. For my program I had the computer generate a random number between 0 and 1, if it was above 0.5 then I went long, if it was below 0.5 then I went short. So essentially this is a coinflip.
3. There was a 25-pip stop.
4. Hold the position until 12:00pm EST (5:00pm GMT, London's close). Then exit at market.

Oh...and I tested this with GBP/USD.

Results? Well I ran the simulation over 5-years of history (I think it was hourly data) and I did this test 10 times...it was basically a Monte Carlo simulation. I should have run many many more of course, but I was at work. Now in the simulation I started with a $5000 account.

Guess what...surprise surprise! Exactly 50% of the time it worked. lol That's right 5 out of the 10 times the account grew over the five years to something bigger. Some times the account doubled but more often it was up like 8-fold. In some cases the $5,000 grew to almost $80,000. The other five times the account was shot, lost all the money eventually at some point in the five years of simulation.

What does this mean? Well if you think about it that still means it's profitable...I mean let's say you did this 10 times with 10 separate accounts of $5,000. Total losses = 5*$5000 = $25,000. But total gains were much higher...something like $200,000. So you would net about $175,000. This was all without compounding/scaling the lot sizes.

In short: Yes. It can work...well some times. But I still want to use that system. Hehe

-mathematician
  • #28
  • Mar 14, 2007 4:06pm Mar 14, 2007 4:06pm
Does any system last? Or is the market too dynamic such that it eventually "learns" your "edge" and washes it away?

Wouldn't it be nice to have a simple system that consistently works for years? Or at least long enough for you to grow your capital to the point of retirement. I do think there are systems that work; that actually work for a reason and that people in fact get rich trading those systems consistently.

But I'm not so sure that any system will continue to work forever. The forex is almost a zero-sum game, i.e. your win is someone else's loss. The forex isn't like the stock market where if everyone does their part with honesty and diligence (the investors providing capital to the firm, the managers acting in the best interests of the investors and truly growing the wealth of the firm through sound management)...then everybody can win. In the forex you litterally have to be better than the other traders. It's a jungle out there. That's what makes it so exciting, so fast-paced, and so difficult.

I don't believe in the EMH (Efficient Market Hypothesis), at least not the way it's taught in textbooks. I think it is possible to beat the market, to achieve above average returns, at least for a while. I do however think that eventually every working system must die. With so many interested parties involved and each one looking to take advantage of market moves, it's no wonder why. I'm not surprised that the classical technical patterns that work well in other markets don't work very well in the forex. I mean if there are logical places to put your stops in a pattern, then it's no secret and the big boys will come in and try to stop you out to make a quick buck. So what is normally supposed to be a clean breakout signal becomes a choppy mess of false signals..a game of double, triple reverse psychology. "I know where your stop is." "Oh yeah? Well I know that you know, that's why I didn't put it there." "Well I know that you know that I know...that's how I really know where your stop is." etc. In this sense I can see that the market will eventually wash away any profitable system, but not instantaneously as the supporters of EMH seem to believe.

So I'm starting to develop the following axioms about the forex:

  1. Buying and selling orders are what ultimately move the market.
  2. You cannot predict future price moves any more than you can predict whether or not there will be more buyers or sellers.
  3. It is possible to have a temporarily profitable strategy.
  4. Eventually every profitable strategy will die, i.e. will suffer huge draw downs cancelling its profits.


These axioms lead me to the following implications:

  1. Don't try to predict price directions (because that's impossible), try to predict sensitive zones where high volatility is likely to ensue.
  2. You must have a high reward/risk ratio (because you can't predict prices and your success rate will likely be low). Tight stops are key, and I'll show some math illustrating that in another post.
  3. If you get stopped out but price hasn't moved much beyond your stop, it is genereally a good idea to try the same trade again at the same price because those trying to stop you out have now made their money.
  4. If price is moving against you considerably, it is generally a good idea to reverse your position. If you're correct in that this will be a highly volatile area then accept that you guessed wrong on the direction, reverse your position and catch the move.
  5. Whatever strategy you come up with will probably need some modifications over time. The trick is to know when you should stick with it and when you should modify it.


Basically I think it's just a matter of catching the occasional big move that will more than make up for many losses. Catching the move I think is more or less luck because it's extremely difficult to model the market. But you can increase your odds of taking home some money for the day by: trying to find the sensitive zones where a big move will occur (which way? who knows?), trying again when you get stopped out instead of quitting altogether, and reversing when you see that you are wrong.

Just some thoughts.

-mathematician

  • #29
  • Mar 14, 2007 4:53pm Mar 14, 2007 4:53pm
Quote
its only when you take a scientific approach to system developement that you realize how hard it is to find a system with a real edge.
Good point. But also of note is that the relative difficulty in development leads to high profitability of truly outstanding systems for those looking to grab the brass ring.

Also, great posts by mathemetician.
  • #30
  • Mar 14, 2007 5:43pm Mar 14, 2007 5:43pm
This reminds me of something in one of the Market Wizards books. I'll have to paraphrase, cause I don't remember the exact quote, but it was something like

There are a million profitable systems. All of them are very hard to find.

In other words, with all the chart/candlestick patterns, indicators, time frames, etc., there should be many profitable strategies. Some are robust enough to keep working, while others will eventually fail or only work in limited conditions. Finding them isn't easy, though. Long-term profitable systems make up a very small subset of all possible systems.


Quoting merlin
SoyYoConBonete, you are one of the first people ive heard make this point. i agree 10,000%!

personally i feel that the "emotion" part of trading is made out to be harder than it is, and the "gaining an edge" part of trading is made out to be easier than it is.

controlling emotions, following the rules of the system, staying consistent....that is all very easy for me.

finding a system with an edge is incredibly hard, though. for every 50 systems i program, i MAY find one that is tradable. and even then, that one system may break down in a couple months.

my guess is that when people underestimate the difficulty of finding a system with an edge, what is really happening is that they are being fooled by the back test results. if you dont have a STRICT process for developing your systems, one that keeps hindsight out, you can come up with great systems all day. any monkey with a keyboard can do that. its only when you take a scientific approach to system developement that you realize how hard it is to find a system with a real edge.
  • #31
  • Mar 14, 2007 6:28pm Mar 14, 2007 6:28pm
So I mentioned that I think a high reward to risk ratio is key because I think it is very difficult (impossible?) to consistently predict the future price move. In other words, expect to be stopped out a lot, so make sure your wins really count. Let's consider a likely story:

There are two traders both trading the same strategy. Sir Risks-A-Lot likes to have wide stops, he hates getting stopped out so he is sure to give price plenty of room to wiggle around before the eventual move. On the other hand Timmy Tightstop likes to keep his stops really tight, he doesn't mind getting stopped out, he just tries again.

"You're crazy Timmy Tightstop," said Sir Risks-A-Lot, "You must get stopped out all the time!"

"We'll just see who the crazy one is, Risks-A-Lot," said Timmy Tightstop.

Both traders, as I said, are trading the exact same strategy. In fact, they are both looking at the same setup and enter in the same direction at the same price. They also follow the same money management rules: I.e. they both risk about 2% of their account on each trade...In this case they both have accounts with the same amount of capital.

Now Sir Risks-A-Lot gives a lot of room for his stop, he placed his stop 60 pips away from the entry price. For a 60 pip move against him, Sir Risks-A-Lot could afford to buy 10,000 units (so that a 1 pip move is equal to $1). On the other hand, Timmy Tightstop had a 20 pip stop...his account is the same size so Timmy could afford 30,000 units (he's making $3 per pip).

Two hours into the trade Timmy Tightstop gets stopped out. "Ha ha, I told you man! Should have given it more room to play with," said Sir Risks-A-Lot. So Timmy lost 20*$3 = $60 on the first attempt...but he got right back in there and placed a limit entry order at the exact same price.

At the end of the day the currency pair moved 200 pips and they both go out at the same price because they're using the same strategy.

Sir Risks-A-Lot said: "Great trade today, eh Timmy? Too bad you lost those 20 pips...I got my full 200 pips and didn't lose any."

"True," said Timmy Tightstop, "I lost 30 pips then I made the 200...but how many $ did you make? I made 200*$3 = $600, minus the $60 loss. I took a net profit of $540 today. How'd you do?"

"Oh...geez...I see what you mean. I made 200*$1 = $200."

-mathematician
  • #32
  • Mar 14, 2007 6:41pm Mar 14, 2007 6:41pm
Quoting mathematician
So I mentioned that I think a high reward to risk ratio is key because I think it is very difficult (impossible?) to consistently predict the future price move. In other words, expect to be stopped out a lot, so make sure your wins really count. Let's consider a likely story:

There are two traders both trading the same strategy. Sir Risks-A-Lot likes to have wide stops, he hates getting stopped out so he is sure to give price plenty of room to wiggle around before the eventual move. On the other hand Timmy Tightstop likes to keep his stops really tight, he doesn't mind getting stopped out, he just tries again.

"You're crazy Timmy Tightstop," said Sir Risks-A-Lot, "You must get stopped out all the time!"

"We'll just see who the crazy one is, Risks-A-Lot," said Timmy Tightstop.

Both traders, as I said, are trading the exact same strategy. In fact, they are both looking at the same setup and enter in the same direction at the same price. They also follow the same money management rules: I.e. they both risk about 2% of their account on each trade...In this case they both have accounts with the same amount of capital.

Now Sir Risks-A-Lot gives a lot of room for his stop, he placed his stop 60 pips away from the entry price. For a 60 pip move against him, Sir Risks-A-Lot could afford to buy 10,000 units (so that a 1 pip move is equal to $1). On the other hand, Timmy Tightstop had a 20 pip stop...his account is the same size so Timmy could afford 30,000 units (he's making $3 per pip).

Two hours into the trade Timmy Tightstop gets stopped out. "Ha ha, I told you man! Should have given it more room to play with," said Sir Risks-A-Lot. So Timmy lost 20*$3 = $60 on the first attempt...but he got right back in there and placed a limit entry order at the exact same price.

At the end of the day the currency pair moved 200 pips and they both go out at the same price because they're using the same strategy.

Sir Risks-A-Lot said: "Great trade today, eh Timmy? Too bad you lost those 20 pips...I got my full 200 pips and didn't lose any."

"True," said Timmy Tightstop, "I lost 30 pips then I made the 200...but how many $ did you make? I made 200*$3 = $600, minus the $60 loss. I took a net profit of $540 today. How'd you do?"

"Oh...geez...I see what you mean. I made 200*$1 = $200."

-mathematician
I agree mathmatician, call me crazy but most of the time I trade without a stop but; and I say but; there's alot more to it ( pretty analytic before I take a trade and very cautious) the bottom line you have to have enough in your account to withstand a drawdown for worst case scenerio if you over leverage it will kill you cut and dry and I think thats what alot do they over leverage there account and place sl to tight.. Just my 2 cents....Valerie....
  • #33
  • Mar 14, 2007 6:48pm Mar 14, 2007 6:48pm
I think you missed my point...I'm saying that the tighter stop is better. Timmy Tightstop made much more money than Sir Risks-A-Lot, even though Timmy got stopped out once and Sir Risks-A-Lot didn't get stopped out at all...and it's precisely because Timmy could afford to use high leverage, because of his tight stops.

But hey, what ever works for you...that's what's important.

Quoting amaruenterprise
I agree mathmatician, call me crazy but most of the time I trade without a stop but; and I say but; there's alot more to it ( pretty analytic before I take a trade and very cautious) the bottom line you have to have enough in your account to withstand a drawdown for worst case scenerio if you over leverage it will kill you cut and dry and I think thats what alot do they over leverage there account and place sl to tight.. Just my 2 cents....Valerie....
  • #34
  • Mar 14, 2007 6:51pm Mar 14, 2007 6:51pm
Quoting SoyYoConBonete
However, some facts seem to contradict that view, starting with the very book by Van Tharp. He almost disregards the system aspect (mentioning, of course, that a system should have positive expectancy) to the point that in one chapter he goes something like "hey, you want a system? here ya go one", and proceeds to explain the "Foolish Four" strategy for stock trading. After reading this I immediately went to www.fool.com in order to read more about the strategy, and guess what... the very developers of the system have found that it doesn't work, because it was based on some bad data.
The vast majority of all the technical analysis authors NEVER show you a working trading system, let alone the backtest. They just fill pages and pages with the same boring stuff over and over again : "you must have discipline" blah blah blah... "discipline is the key" blah blah blah... "control your emotions" blah blah blah blah...

Then they just put a nice catchy title on the book, like "high probability setups" (yeah sure) and there goes your $75.

All those authors seem to have a PHD on "how to make money selling un-tested, non-backtested trading system books and still get away with it"
  • #35
  • Mar 14, 2007 6:55pm Mar 14, 2007 6:55pm
There are a number of reasons why most of traders are unsuccessful. On my opinion the most common reasons are:

  1. Most of the trading “systems” fail because they are designed to trade different “models” rather than the market itself. Each and every “model” – is something artificial, unique and inflexible like a tailor dummy, and in order to trade a certain “model” there should be a system, tailored pretty much like a fine suit to fit a particular “model”. Obviously, the same suit will never fit all the people. Since no “model” can replicate accurately the whole market, then a failure is inevitable. The solution would be to use not “systems” but rather loose “methods” initially created as “one size fits all” and then custom tailored to a specific market situation when required.
  2. Every engineer knows that any mechanical device will get broken or will malfunction sooner or later. The more complex the device is the sooner it will happen. So, the trading method also must be simple enough if you want it to last longer.
  3. Most of traders are simply ignorant. They enter the business before completing their education and often fall victims of different market related myths and wrong assumptions from the very beginning. For example, I never understand statements like “I’m a technical trader but in my job I also use some fundamental analysis”. Being a trader like that is the same as being “half pregnant” because the very main basic principal of TA is that “The market discounts everything”. If it’s true then no one needs FA to trade the market, but if it’s not then the entire TA is a fake. You should either believe and trust TA in general and use it to your advantage or you shouldn’t and then FA is a way to go. Separately, but not together.

There are also lots of other reasons for failures, but those enumerated above are the main ones.

  • #36
  • Mar 14, 2007 6:55pm Mar 14, 2007 6:55pm
Quoting mathematician
I think you missed my point...I'm saying that the tighter stop is better. Timmy Tightstop made much more money than Sir Risks-A-Lot, even though Timmy got stopped out once and Sir Risks-A-Lot didn't get stopped out at all...and it's precisely because Timmy could afford to use high leverage, because of his tight stops.

But hey, what ever works for you...that's what's important.
It works for me even though everyone preaches against it but needless to say I have a mental stoploss and I do admit when I'm wrong and take my loss I don't go into it blindly, I guess I'm somewhat like a poker player I don't want to show my hand until it's time but also when I'm away from my computer I have a safty net. Sorry I missed your point I guess it just depends on the trader whatever he/she feels comfortable doing....Valerie....
  • #37
  • Mar 14, 2007 7:12pm Mar 14, 2007 7:12pm
Quoting mathematician
I think you missed my point...I'm saying that the tighter stop is better. Timmy Tightstop made much more money than Sir Risks-A-Lot, even though Timmy got stopped out once and Sir Risks-A-Lot didn't get stopped out at all...and it's precisely because Timmy could afford to use high leverage, because of his tight stops.
This is good advice to consider, but not always true. Spreads and commissions do factor into this. When doing backtesting, factoring in zero cost for spreads/comm then what you say is virtually always true. Factor in those cost and trading tight may cause bigger drawdowns thus reducing leverage safely available and total profits. My advise is take your system and backtest and optimize it and see what stops would have made the most profit. I guess it's all relative to what tighter means to you. There is an optimum, and tighter than that is bad.
  • #38
  • Mar 14, 2007 7:15pm Mar 14, 2007 7:15pm
Quoting SoyYoConBonete
After reading some ...
I think people like to concentrate on emotions, discipline ect because its the easiest part to do and the most glamorous. Like those fighter jet movies, the pilot is way cool because his is so calm and cool, there really isnt any mention of the 1000s of flight hours that they went through. The reason he is calm and cool is he knows he has a good chance of making it. Likewise its easy to have discipline and be emotion free if you *know* you are going to make 2% a trade on average because you found your edge.

Finding a system with an edge is tough. You need to react to the market differently then 90% of the other people. Of course the more people that use the same system the less people there are for that 90% pool.

The way the markets spreads are set up inherent way money management works (if you lose 20% you need 25% to make it up) you need to be right 60% or make 1.5x more then you lose each trade. That is one heck of an edge, Las Vegas has an edge with 0.5% and they are happy, your looking for a 10% edge.

It can be done, you just need to put in the time to research your edge. Also, ignore the books, remember those who cant teach.
  • #39
  • Edited 10:23pm Mar 14, 2007 7:27pm | Edited 10:23pm
Quoting merlin
if there were no commissions or spreads, then you have a 50-50 shot of being profitable. obviously we do have commissions and spreads so this strategy will not work. its proven by math that you can not win a negative expectancy game, now matter HOW you position size it.
Not quite true, simply because the Forex market is NOT random.

It has already been proven that you can make money with a random entry (buy/sell a currency pair if coin is head/tail) IF, and only IF, your exit is not random. An exit based on a volatility trailing stop for example will make money in the long run, even if the entry is totally random.
  • #40
  • Edited 10:23pm Mar 14, 2007 7:38pm | Edited 10:23pm
Quoting Keys
My advise is take your system and backtest and optimize it and see what stops would have made the most profit. I guess it's all relative to what tighter means to you. There is an optimum, and tighter than that is bad.
Absolutely!

Given a specific trading system, one and ONLY one stop (example 33 pips) will give you the most profits.

This is also true for limit target, there is only one optimum limit target.

Of course discretionary traders and traders without a system do not have a clue what these optimum stop/limit are.
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