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Inescapable Truths

  • #81
  • Nov 8, 2009 8:48am Nov 8, 2009 8:48am
@ runkarn,

I think the point of any thread, which is not located in the "SYSTEM" category, is there to help develop market consciousness. Coincidently, these threads serve a much greater purpose than the system threads do... although, the system threads have their place.

@ mathematician,

Thanks, for the compliment. Some of the things I mentioned in that deleted post will fill in the blanks for my otherwise cryptic writing. Sorry I'm not very straight forward when it comes to discussing markets. If I was more direct about it, nobody would get an ounce of benefit from it... and I definitely would not be having any fun.

To the chart:
You are correct... it is going up. Do you see doubt brewing in buyer sentiment on that chart? No price pattern required... it's there as plain as day. Start building your "position". Keep the sizing small, and add your orders as buyers start closing theirs to secure profits.
  • #82
  • Nov 8, 2009 9:38am Nov 8, 2009 9:38am
Quoting mr.marketz
@ runkarn,

I think the point of any thread, which is not located in the "SYSTEM" category, is there to help develop market consciousness. Coincidently, these threads serve a much greater purpose than the system threads do... although, the system threads have their place.

@ mathematician,

Thanks, for the compliment. Some of the things I mentioned in that deleted post will fill in the blanks for my otherwise cryptic writing. Sorry I'm not very straight forward when it comes to discussing markets. If I was more direct about it, nobody would...




But what purpose does this consciousness serve us?


A1. It's a zero-sum game


Does it prevent me from making money? What if I was not aware about it?



A2. Banks and brokers are profitable in the long run.


Does it prevent me from doing the same?




A3. Banks have much better resources than individual traders.


Does it prevent me from making money?





There are similar threads here at FF which focus on how difficult trading is. How brokers manipulate, how indicators fail, how chart patterns fail, how 90% of all people fail, how platforms are rigged etc etc...


From my point of view, nothing fails, its the trader who fails and the reason he/she fails is not because of some rigged platform, corrput broker, bank trader or not even because 90% of eveyone else fails.


I have only on suggestion to anyone reading this. Do not focues on these "issues". Focus on yourself.
  • #83
  • Nov 8, 2009 9:45am Nov 8, 2009 9:45am
Quoting nubcake
heh, i think i'm the second post in that thread!

i think the problem with keeping it simple is that to do that requires being aware of simple things that aren't obvious from what we are given with all the distracting bells and whistles. like i said previously, maybe the real down to the bone thing we need to know to profit in forex is something completely whacky like how many goats are alive in tibet. that's a pretty simple concept, but to come to the point of realising it is not so simple
If I show you something simple, you'll probably think, "What's the big deal?" On the other hand, if I show you something complex, you'll probably think, "Dang, that guy's a genius" and hang on my every word. This behavior can be observed in the threads.
  • #84
  • Nov 8, 2009 10:06am Nov 8, 2009 10:06am
To me, the benefit of understanding the market on a very conscious level, makes it tangible. Otherwise, the market is always a big mystery... and big mysteries don't pay. At some point one has to define what the market is (right or wrong), and what it's capable of... and possibly even more important - what you're capable of ... and then, simply face the music.

I would think that to do the above successfully, a good dose of awareness would be mandatory. This stuff is key. More a mind thing, way less a numbers game...

This isn't rocket science, folks. The whole thing is pretty F'in simple. People lose because they're under capitalized, greedy, and impatient. If you trade small, the market gets even smaller. The rest is just minor details.


MM
  • #85
  • Nov 9, 2009 3:14am Nov 9, 2009 3:14am
Quoting mr.marketz
This isn't rocket science, folks. The whole thing is pretty F'in simple. People lose because they're under capitalized, greedy, and impatient. If you trade small, the market gets even smaller. The rest is just minor details.
I love it!
  • #86
  • Nov 9, 2009 3:44am Nov 9, 2009 3:44am
Quoting mathematician
The following are inescapable truths about trading (in my opinion). These are very important facts that cannot be avoided and should not be ignored.

Here's my list. Feel free to add your own.
........
Mathematician,

There was an effort to list down few basic trading principles. Maybe you find them relevant for this thread.

http://www.forexfactory.com/showpost...0&postcount=45

Following was the final product based on the principles mentioned in the link above

http://www.forexfactory.com/showpost...5&postcount=46
The Thief of Wall Street
  • #87
  • Nov 9, 2009 3:54am Nov 9, 2009 3:54am
Quoting Chicky
Mathematician,

There was an effort to list down few basic trading principles. Maybe you find them relevant for this thread.

http://www.forexfactory.com/showpost...0&postcount=45

Following was the final product based on the principles mentioned in the link above

http://www.forexfactory.com/showpost...5&postcount=46
That's great! Yes, I find them highly relevant. Thanks!
  • #88
  • Nov 9, 2009 1:55pm Nov 9, 2009 1:55pm
Quoting mathematician
You said you typically trade tick/1m/5m. Then you said you would scalp tick and 1m if you thought you could profitably. Do you mean that you trade tick/1m, just not profitably? Or do you mean that you trade them profitably, but it's not scalping. If so, what style of trading is it?

Another question. For each pair you trade, about how many trades do you make per day on these shorter time frames?
I trade off of 5m predominantly, I could trade without the 1m/tick charts. The 1m/tick charts are for trying to get the best entry I think I can get and are pretty much entirely discretionary (there's a few behaviors in particular I'm on the lookout for) within the scope of what is going on on 5m.

I only trade one pair, EURUSD, and trade between 0 and 4 trades a night usually, depending on what's going on. I trade more in a rangebound market assuming the range is large enough.

Pivot points are the only lines or drawings on my charts. I used to put S/R lines on my charts, but it's become intuitive and was always partionally discretionary to begin with so I don't put it on my charts anymore but I still 'see' it.
  • #89
  • Nov 9, 2009 2:58pm Nov 9, 2009 2:58pm
I don't know why everybody say Forex is a zero-sum game It's not. A zero-sum game would be stock exchange. There definitely someone else will buy from you to make some profit. If he does or not it's his business.
Let's take an example: a man works half a year. After half a year he has in his bank account, let's say 60.000$. He wants to go on holiday in Europe so he needs euros. Bank will exchange $ to euros. I buy that man's dollars. In the meantime I make a profit from my short-trade. Somebody from Europe wants to go and visit USA. He needs $. I close my short which means I'll buy euro and sell dollar. He buys $ from me and I sell euro to him. Who lost here?

First man, after hard working for half a year can finally go in Germany. Yes..he could have had a better price for euro but that wasn't his purpose.
The third man will go in the USA.
I made some money from speculation.

Not all banks that have orders in market are looking to make some profit. Thay may just want to exchange a currency to another because need that currency at that time.
So it's not a zero-sum game.
  • #90
  • Nov 18, 2009 9:01am Nov 18, 2009 9:01am
Quoting Pollux
I don't know why everybody say Forex is a zero-sum game It's not. A zero-sum game would be stock exchange. There definitely someone else will buy from you to make some profit. If he does or not it's his business.
Let's take an example: a man works half a year. After half a year he has in his bank account, let's say 60.000$. He wants to go on holiday in Europe so he needs euros. Bank will exchange $ to euros. I buy that man's dollars. In the meantime I make a profit from my short-trade. Somebody from Europe wants to go and visit USA....
Hmm...interesting. Good point. But I think it might still be a zero-sum transaction:

The average guy goes to a bank so he can convert his money from his domestic currency into a foreign currency. The bank will exchange it for him at an exchange rate that is not optimal. They will take the current interbank FX rate (as determined by the spot forex market), and they will add a huge spread. (If you look at the spreads in a typical currency exchange booth, like you might see in a tourist area of a city, they have spreads that are hundreds of pips.)

So let's say the man gives the bank $1000. Then they give him some euros. They are giving him less than $1000-worth of euros. So the man loses some value and the bank gains it. Zero sum. Of course that's just the cost of doing business. That's how he pays for the service. In other words, that's how the bank profits from it. I assure you, banks are in it for the profit; they would not do it for free just to help someone out.
  • #91
  • Nov 18, 2009 10:30am Nov 18, 2009 10:30am
1. One needs to embrace risks, and know how to take calculated bets.

Google for "zurich axioms", and you'll find a free ebook with a set of principles providing a practical philosophy for the realistic management of risk.

Another truth:
2. Investment is a form of trading (just of a higher timeframe), and is not necessarily safer.

Ask those who bought in 1929 - they would have taken 25 years till 1954 before they broke even. And those who bought at the Nasdaq 5000 peak (in the year 2000) and the Nikkei 39,000 peak (in end 1989) could take several generations before they breakeven.
  • #92
  • Nov 18, 2009 10:49am Nov 18, 2009 10:49am
Quoting mathematician
A1. It's a zero-sum game:
You're right about this. In order for one to gain, another has to lose. The leakage to the brokers in the form of such things as spread, stop hunting, and deviations from true market price (if there is such a thing) constitutes what I call the house advantage--just like a casino. But markets have something a casino doesn't have: market history. That's an important difference and is the essential point in your Axiom 4 regarding market movement and the bit about the odds being against you mentioned in T2.

Quoting mathematician
A2. Banks and brokers are profitable in the long run.
They're profitable in the short run as well. In the immortal words of Randolph Duke "Whether clients win or lose Duke and Duke takes its commission."

Quoting mathematician
A3. Banks have much better resources than individual traders.
Unless the individual trader works for a bank or large financial institution or has information that's as good as what they have. It's more about information than deep pockets, though it often takes deep pockets to get the information.

Quoting mathematician
A4. (The Golden Axiom) Price moves in waves.
This is misleading. The concept "moving in waves" suggests some kind of regularity. The market has very little of that--at least none with any real predictability. Sometimes the market can move in regular, almost sinusoidal waves (Elliot waves, for instance), but rarely and never reliably. The only "wave" that applies to the market is waveform. The market is a waveform the way audio is a waveform, but the market waveform is broadband noise. And to make things even more complicated there is never a zero value (unless a currency pair equals zero, which it never can unless both currencies drop to zero value--in which case the pair would cease to exist). This means there is wide range of frequency components from ultralow to very high to keep things interesting or, for some, to kill an account or at least to prolong agony.

Quoting mathematician
T1. We can't all win.
You're right that we can't all win. But to say that you steal money to do so is to deny the game. People who play the game agree to put their money at risk. It is a game of odds, no question, but to suggest that theft is required to win suggests that the game is unfairly weighted in favor of some players in a hidden way. It doesn't have to be. Sure, for most retail traders who have access to very limited market information, the odds against them go up compared to others with better information. But some traders--even lowly retail traders--find a way to better their odds. Whether it's worth the effort is up to the individual.

Quoting mathematician
T2. As an individual trader, the odds are stacked against you.
Yes the odds are against you as a function of the aforementioned leakage, but, market history can make a difference. There are ways of playing the game to improve the odds. There are ways of analyzing the chaotic market both technically and fundamentally to improve the odds of winning. You can't say that about a roulette wheel; trending, momentum, and fundamental market conditions don't apply there.

Quoting mathematician
What about A4?
Again, the market is broadband noise. It is primarily chaotic, not regular. Any trading strategy that has a chance to profit over time has to take this into account.
  • #93
  • Nov 18, 2009 11:20am Nov 18, 2009 11:20am
Hi santana... I mean natanas.
Thanks for your input!

Quoting natanas
This is misleading. The concept "moving in waves" suggests some kind of regularity. The market has very little of that--at least none with any real predictability. Sometimes the market can move in regular, almost sinusoidal waves (Elliot waves, for instance), but rarely and never reliably. The only "wave" that applies to the market is waveform. The market is a waveform the way audio is a waveform, but the market waveform is...
Yes, I worded it poorly in my original post. I shouldn't have said "waves"; that word implies too much order and regularity. If you'll look in my explanation just after that sentence, I said that by "moves in waves" I simply mean doesn't move in a straight line. There was some discussion about this early on in this thread, but it was cleared up. I'm not talking about sine waves or anything that beautiful.


Quoting natanas
You're right that we can't all win. But to say that you steal money to do so is to deny the game. People who play the game agree to put their money at risk. It is a game of odds, no question, but to suggest that theft is required to win suggests that the game is unfairly weighted in favor of some players in a hidden way. It doesn't have to be. Sure, for most retail traders who have access to very limited market information, the odds against them go up compared to others with better information. But some traders--even lowly retail traders--find a...
Ok, I don't literally mean steal because, as you say, everyone is a willing participant. They know they are putting their money at risk. Although some definitely feel as if they were robbed when they lose a trade.
Quoting natanas
Again, the market is broadband noise. It is primarily chaotic, not regular. Any trading strategy that has a chance to profit over time has to take this into account.
[/quote]
Yep. That's what I meant by "the Golden Axiom" (4).
  • #94
  • Nov 18, 2009 11:23am Nov 18, 2009 11:23am
Quoting TraderT
1. One needs to embrace risks, and know how to take calculated bets.

Google for "zurich axioms", and you'll find a free ebook with a set of principles providing a practical philosophy for the realistic management of risk.

Another truth:
2. Investment is a form of trading (just of a higher timeframe), and is not necessarily safer.

Ask those who bought in 1929 - they would have taken 25 years till 1954 before they broke even....
I downloaded that ebook, "Zurich Axioms." I've only read the first page, but I'm already very intrigued. I'll have to sit down and read it when I get a chance. Thanks!
  • #95
  • Edited 4:38pm Nov 18, 2009 3:05pm | Edited 4:38pm
Interesting thread. I've only just 'discovered' it, and am still working my way through the latter posts.

About randomness. Let's say that, purely for the purpose of creating a benchmark, we generate an imaginary price chart by tossing a fair coin repeatedly; heads is an uptick, tails a downtick. That chart will occasionally exhibit 'trends' and other TA-like phenomena, but ultimately it's a random walk, and hence these phenomena are meaningless, in terms of having any predictive significance. Rightly or wrongly, then, I take it for granted that every possible (entry/exit) strategy used to trade that chart must necessarily have a long term statistical expectancy of zero. That includes cutting losses, letting profits run, scaling in or out, and/or pyramiding. It's effectively akin to assuming that random games (e.g. roulette) can not be beaten.

From that I conclude that the only way to profit in forex is to identify a recurring, non-random aspect of price behavior, and devise a suitable system of entry and exits that exploits it. This 'edge' does not need to be complex or 'sophisticated', merely 'robust' enough in its nature to withstand the test of time. If it is also sufficient to overcome costs, we have attained positive expectancy, and leverage and compounding will eventually make us wealthy, at a rate proportional to our trading frequency. All trading systems make the assumption that an aspect past behavior is more likely, than not, to repeat itself, as we move forward.

A 'cutting losses, and letting profits run' strategy assumes that prices 'trend' (i.e. move far enough, on balance – please excuse the vagueness of the term) in some way that's qualitatively different from a coin toss. Even more so with pyramiding, which takes this concept one step further. It follows that these strategies are going to work brilliantly in a 'trending' climate, and fail just as spectacularly during 'sideways' conditions. Hence, and if I may continue to speak in abstract, generalized terms, the question becomes: how frequently do each of these conditions occur (which ultimately expresses itself as win rate), and/or how effectively does the strategy inflate the winning trades relative to the losing ones (which equates to average win size, or 'R:R'). The product of these is expectancy.

Put another way, the closer that a generated sequence of prices approaches a random walk, then the closer that win rate and R:R, of any trading methodology, will approach a perfect inverse proportion to one another, i.e. zero expectancy.

Finally, a thought about 'trends' (i.e. the approximately continuous movement of price in one direction). If a trend is equally likely to start at any point, and equally likely to end at any point, then that's merely another way of describing a random walk. As is the seemingly widely held notion that, at any given point, there is exactly a 50/50 probability of the next tick being an uptick or a downtick.

I tend to think in simplistic, straight lines. Rightly or wrongly, the above seems self-evident to me, and I can only continue to think along these lines until somebody convinces me otherwise.
  • #96
  • Nov 18, 2009 3:41pm Nov 18, 2009 3:41pm
@David: Best post I've seen here in ages, it neatly sums up the job of the trader. Idea -> Measure -> Implement.
The breaking of a wave cannot explain the whole sea.
  • #97
  • Nov 18, 2009 4:07pm Nov 18, 2009 4:07pm
Quoting hanover
Interesting thread. I've only just 'discovered' it, and am still working my way through the latter posts.

About randomness. Let's say that, purely for the purpose of creating a benchmark, we generate an imaginary price chart by tossing a fair coin repeatedly; heads is an uptick, tails a downtick. That chart will occasionally exhibit 'trends' and other TA-like phenomena, but ultimately it's a random walk, and hence these phenomena are meaningless, in terms of having any...
I'm glad you like my thread. I hoped it would generate some interesting discussions.

Have a look back in this thread, around the part where we are talking about randomness a lot. I posted a link there to a site that shows how to profit from a random walk. I know prices don't really move in a simple random walk, but I think you'll find that website most interesting as it has a lot of implications on your last post. I know when I first saw it, it blew my mind.

For me it really emphasizes an important point: Good trading is not about predicting where prices are going. It's about taking a position and managing it.
  • #98
  • Nov 18, 2009 4:45pm Nov 18, 2009 4:45pm
Quoting hanover
Interesting thread. I've only just 'discovered' it, and am still working my way through the latter posts.

About randomness. Let's say that, purely for the purpose of creating a benchmark, we generate an imaginary price chart by tossing a fair coin repeatedly; heads is an uptick, tails a downtick. That chart will occasionally exhibit 'trends' and other TA-like phenomena, but ultimately it's a random walk, and hence these phenomena are meaningless, in terms of having any...
You're not taking into account the fractal nature of the market. Prices don't follow a typical bell curve distribution. Markets have a "memory". And because they have a memory, continuation is more likely than change. Most changes are not small. There are a great many more "large prices changes" on the whole than what simple Brownian motion would call for. Under Brownian motion regression to the mean would be easily achieved, but under a fractal price distribution, "regression to an extreme" is more likely.
  • #99
  • Edited 6:55pm Nov 18, 2009 5:15pm | Edited 6:55pm
Quoting Lionstrike
You're not taking into account the fractal nature of the market. Prices don't follow a typical bell curve distribution. Markets have a "memory". And because they have a memory, continuation is more likely than change. Most changes are not small. There are a great many more "large prices changes" on the whole than what simple Brownian motion would call for. Under Brownian motion regression to the mean would be easily achieved, but under a fractal price distribution, "regression to an extreme" is more likely.
I apologize if my post created the impression that I believed that price movement was a random walk. If that was the case, I would have given up on my quest of becoming a profitable trader many years ago.

As I said, the key is to find aspect(s) of non-randomness. Given that markets have a memory (creating support and resistance zones), and that continuation is more likely than change (creating 'trends'), we can potentially construct a profitable system around this non-randomness. None of this would be possible on a (hypothetical) chart that had been created by a coin toss.
  • #100
  • Edited 5:33pm Nov 18, 2009 5:22pm | Edited 5:33pm
Quoting mathematician
I'm glad you like my thread. I hoped it would generate some interesting discussions.

Have a look back in this thread, around the part where we are talking about randomness a lot. I posted a link there to a site that shows how to profit from a random walk. I know prices don't really move in a simple random walk, but I think you'll find that website most interesting as it has a lot of implications on your last post. I know when I first saw it, it blew my mind.

For me it really emphasizes an important point: [b]Good trading is not about predicting...
Many thanks, I found the link back in post #57.

I suspect that the concept is a cleverly constructed illusion, whose basis is that price is equally as likely to rise 1% as it is to fall 1% (a geometric progression).

If we base the upward/downward steps on an arithmetic progression, i.e. a rise or fall of 0.01, and then sum the final column, the overall expectancy is zero (which is what I would expect).

So which is true:
that price is equally likely to rise X pips as it is to fall X pips
OR
that price is equally likely to rise X% as it is to fall X%

Is price movement best approximated by an arithmetic, or a geometric, function? I have no idea.
_______________

A lot of folk would agree that exits (trade management) is more important than entry (forecasting).
I've posted my thoughts on this before, e.g. here and here.
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