Stating The Obvious and The Quest For Wisdom

The last year of my ‘trading life’ has consisted of a lot of research, contemplative thinking, and a back to the basics mentality. In this thread I’ll probably do a lot of stating the obvious kind of stuff, but after putting in a few years at this now, I feel that this basic stuff is worth spending some time with.

Here is a very basic truism to start. The market’s performance dictates your returns. By market performance I mean the combined action of all participants to move price from point A to point B. As a trader, you are completely dependant on others to move price away from the price in which you hold a position in the market. You will not profit or incur loss if people don’t continue to trade (other than the loss of the spread and interest payments, oh and liquidity --you’d never see your money again if you were the last person to trade). The simple point is that you are dependant on others. To make money in trading, you simply must be in the market going the right direction before other traders are willing to pay more than you paid for your currency.

The point or goal of trading is to make your money grow. Duh, right? (of course there are utilitarian traders, but I’m talking about speculators here). Trading is just a way of investing. It baffles me every time I hear someone say “I’m not an investor, I’m a trader!”
I guess ‘trader’ just suits the ego that much better and investors like Buffet are boring and don’t know what they’re doing.

Okay, so back to the market’s performance. Your equity curve which hopefully extends up and to the right is correlated with the underlying market. EUR/USD appreciates 20%, you’re super rich, and so you buy 1 billion USD worth of Euros @ Parity (1.0000), using no leverage and you park them in your bank account to earn interest while price rises in the FX market. One year later EU is now trading @ 1.2000, you’ve lined up new investments and you need to trade back into greenbacks. You now have $1,200,000,000 USD. You profited a cool 200 million, i.e. you made 20% on your unleveraged funds (forget about interest earned for simplicity’s sake). The 20% return seen in your equity curve is perfectly correlated with that of the normal market returns in EU. The simple point is that the market IS your equity curve either positive or negative. Now lets bring leverage into the picture.

So you’re not rich but working really hard towards that end. You have $10,000 and want to invest it via leveraged trading. You, just like the rich guy, buy EU at parity. You have your funds with Oanda and they allow leverage up to 50:1, you think that’s nuts but you are willing to leverage your trade @ 10:1 or 10% margin. So your $10K USD now becomes $100,000 and because Euro and the USD are at parity you are now long $100K Euros. A year later, you are very pleased to see EU trading @ 1.2000, and your wife won’t get off your back about that new mini van she’s wanted. So you trade out of your long position @ $20K profit, or a 200% profit. Your equity curve reflects a 200% return when the market only appreciated by 20%. This is of course due to your use of leverage. Instead of explaining leverage simply as having the ability to trade more money than you have in your account, leverage magnifies normal market returns by the factor of the leveraged rate you are using. So in this example we were using 10:1 leverage, so 20% movement in the market multiplied by 10 is 200%. If you were willing to incur the risk of using 100:1 leverage, those returns would have been 2,000%. Plug in your own numbers, same idea. I’m probably boring most of you, but thinking about leverage in this way helps me to better understand what’s really happening when I use it.

This is a great time to talk about losses. As I said earlier, the point of speculating via trading is to invest, or make a return on your money. The moment you take a loss of any size, you are no longer investing but divesting your money. This includes the moment you open a trade and pay the spread. Until the trade turns positive, you’re losing. FXPetra and others have written about this here on FF, where they shed light on the negative expectancy seen in trading. This is a very important and serious issue that anyone serious about trading must carefully consider. The main implication here is that every trade you open begins it’s life as a loser. If your trading style is short term and you’re making several trades a week/day whatever, the question becomes how many losing trades can you turn into winners? How many of those trades will end as a realized loss? Do you see the very real and scary statistics creeping in? If you find yourself in this type of position and you can’t seem to figure out why your equity curve is going sideways (or worse), it would be wise of you to spend some quality time thinking about this issue and working to fully grasp and understand the idea. Once you truly understand the problem, ask yourself how many of your winning trades could have turned into very big winners. You’d be surprised how many of them would. If any of you were short EU just a few weeks to a month ago while tinkering with the market, how would your trading be different if you’d just left them alone? If the market is willing to pay you significantly more on your trades, why not take it up on the offer?

So am I arguing for a longer term and less frequent trading approach here? For retail traders, yes, for my dealer, no. But you want to aggressively trade and rapidly compound your profits so you’ll get rich quick like that excel spreadsheet told you- you would be at just 20 pips per day. That’s got to be easy you tell yourself and you hurry off looking for those easy pips. Why then after 1,2, 5+ years of trading are you not a multi millionaire? (I concede to those of you who have actually made it happen, if anyone actually has as a retail FX trader that overtrades according to my definition and started with less than $10K). It goes right back to the question I asked in the last paragraph, how many losing trades can you turn into winners? If you go back a few more paragraphs you’d see the answer is effectively zero because you are dependant on others to do this for you. So the question would cohere more with reality if we took you out of it: What percentage of your losing trades will be made winners by the activity of other market participants? Remember, 100% of your trades are losers to begin with. Bring leverage into the picture and think about the acceleration of losses it brings. Couple leverage with overtrading, and it’s not hard to see why so many traders bite the dust.

I mentioned that it would be alright if my dealer/broker continues to trade as often as he wants. This is because he’s on the other side of the coin. His trades usually start out as winners because he makes the spread and then offsets the trade with opposite orderflow. Sometimes he will lose, but based on the positive spread, he is operating in the realm of positive expectancy and will profit over the long run. He also aggregates and infers fundamental information from his orderflow that he can speculate on, front run, you name it. He is simply operating from a different place in the market and it makes sense for him to make multiple trades.

Many of you know me as a fib freak. I started my journey here at FF right around the time Skunny started his “Indicator Free Trading” thread. Being the naive moron that I was, I was quick to drink the Kool-Aid. I bought into the idea that there must be some fool-proof technical oriented way to trade. In retrospect, this is a very silly thing to pursue. Not even the dealer who trades with positive expectancy wins every time without fail. Pursuing the Holy Grail (searching for obscure/secret/hidden technical patterns) will cost you a lot of money and could put years between you and profitability. Now that I got that out of the way, is there value in technical studies? At this point in time, my answer to that: sometimes. How many times? It’s really hard to say. All of us who have been around for a while know that when you take trades based on technicals alone, the focus on money management becomes intense. This is due to the same factor I’ve been mentioning. You are dependant on other traders to move the market in your favor.

Technical studies to me are just points of reference. I don’t care what it is, trend lines, MAs, fibs, S/R, pivots, ect, they simply put our nerves at some ease when it comes time to putting money on the line. The goal/purpose of TA is to find a statistically significant edge that increases the probability of turning a losing trade into a winning one. That’s the bottom line. Because there is no holy grail based in TA, your treatment of the trades that become winners (and all the losers) will define the reward and losses you derive from your trading endeavors.

I apologize if this has been a complete bore; I just wanted to condense all of my ‘out there’ trading thoughts into one place. There may be more to come, maybe not. Feel free to agree/disagree with me. If you have some insights you’ve learned from your trading experience that you feel would help newcomers and the community in general, please share; even if you think you’re stating the obvious.


Thanks for bearing with me,

Scotty B

I'm getting this weird deja vu feeling...I'm pretty sure you have done this before scotty...

Good luck with your continuing journey.

Hmm. Maybe. These are views I've been settling into more and more as of late and just felt like sharing them.

Nice Post!

Long Tails with positive interest is one way to play.

I think it's true what you wrote - you really can't beat the market. Its returns consist of what is possible - if we are with it. And really, there is no need to try and outsmart it or fade it or to turn losing trades into winning ones as you put it.

In the end I think it comes down to what questions we ask, as to what answers the market gives us. Many take for granted or as assumptions the definitions we hear about the market. For instance, what is the trend? I have read lots of books on the subject or that talk about trends but none of them describes the term in a scientific or statistical manner. Is trend really just a fantasy or does it exist? We think we see it on charts but is it really there and can it be first defined then exploited? Or is it just a grand illusion when we hallucinate on the charts? I'm working through the first question now and it's a fascinating discovery process. Perhaps I'll start my own thread at some time in the future to discuss where this journey has led me and my conclusions. Either that or I'll write a book on the subject because there doesn't seem to be any good information on what exactly a trend consists of in statistical market terms.

Apologies for intruding on your thread. carry on!

Nice post, Scotty! A lot of points resonate with me, especially those about trades starting out at negative expectancy, and also the fact that the market is always in control. Here are some of my garbled thoughts, FWIW, hopefully more-or-less on topic. Hastily assembled as it's almost 3 am here and I'm about to head off to bed.

An imaginary chart generated by a fair coin toss (heads=uptick, tails=downtick) will produce 'trends', but no trading system will be able to profit long term from this data, due to its random-walk nature. So, for me, the question, by way of comparison, becomes: do real markets 'trend' for long enough, frequently enough, or in a less than totally random manner, to make a shift from negative expectancy (due to spread) to positive expectancy possible? If so, then a strategy of somehow cutting losses quickly, and letting profits run, would seem to become viable.

Taking this one step further, are there occasions where real markets behave non-randomly (e.g. at S/R, or OB/OS extremes), so that – if we carefully and selectively choose our entries - we can exploit this?

What about the implications of the carry trade? Prior to the recession, the differential between interest rates in NZ and Japan exceeded 7%. If one held a trade for a long enough period (usually a few days), the positive swap exceeded the spread, creating positive expectancy from even randomly made entries and exits. If (assuming that interest rates were an overriding fundamental factor) this also caused appreciation in the appropriate currency pair (e.g. NZDJPY), then this paid a handsome additional bonus, by merely riding the resulting trend.

The longer a trader's outlook, the less significant spread becomes. For example, if one is attempting to trade 200 pip moves, then a 4 pip spread equates to 2% negative expectancy. If one is trading 20 pip moves, then a 4 pip spread equates to 20% –EV.

I've been using a strength meter to determine which pair(s) to trade. If we look at the daily and weekly plots in the first attached screenshot, we see that EUR and GBP have been the heaviest falling currencies, while CAD and AUD have been the strongest rising. Presumably this means that there are underlying fundamental reasons why the respective economies are strong or weak, that are driving these 'trends'. The second screenshot shows that we'd have made a handsome profit shorting (for example) GBPCAD over the last little while, and without the need for a technical strategy that delivers any form of entry/exit timing. The strength indicator is derived directly from price, and is therefore no more a leading or lagging indicator than price itself. This brings us back to the question in my second paragraph: do economic 'trends' like these last long enough, on average, to make a 'let profits run' strategy viable?

Now let's think about timing entries, starting with a style similar to James16. What about candles, and S/R? How often do outside bars or engulfing body candles, following a pullback, herald a resumption in the prevailing trend? How often does price bounce back from areas of supply and demand, for example? Is there potentially exploitable 'non-randomness' there, and if so, can we somehow fashion a way of timing our entries to exploit it, and thus create a measurable edge? Can other candle types (dojis, hanging men, inside bars) give us clues as to whether a trend is weakening or strengthening? What happens, on balance, following a particularly large candle?

So far we've talked longer term only. Can we somehow find pockets of non-randomness in intraday movements, and – if so – compound our edge by aligning these with the aforementioned long term direction, and pair selection? Can we use key levels to find low risk entries (i.e. in a similar way to DIBS, which uses inside bars), that defy the implied equilibrium (inverse proportion) that exists between win rate and RR? When price starts to trend intraday, and larger-than-normal candles push price to a new level, how often does it re-visit the previous level? Are there S/R-based patterns that provide visibility, or confluences of different S/R types (candle highs/lows, pivots, trendlines, key fibo retracements, round numbers, ...) which combined with momentum candles, OB/OS, and possibly oscillator divergences, that can somehow deliver an edge in their own right? What about statistical measures, like average daily, or average session, moves? Can we use something like an ATR-derivative indicator to avoid unproductive, non-volatile periods? I don't have definitive answers to the last set of questions, yet; this is an area that's I'm still very much experimenting with.

If one believes claims like this, which seems to point back to eohater's journal, then it would seem possible to somehow find an edge in intraday moves (and if I understand correctly, he trades only GBPUSD). Anyway, that's one heartening example that intraday vagaries are conquerable.

Well, heading into my fourth year of my forex journey, the above is where I'm currently at. I can not conclusively prove the long term viability of any of these ideas (and doubtless there are much better ones that have thus far escaped me). But my whole approach is based around the concept of stacking independent (potential) edges. The good news is that even a tiny (but robust) edge, compounded frequently enough, has the potential to create massive gains. I believe that the best a trader can do, is to get as many seemingly independent (or at least semi-independent) variables in his favor as possible, and then take the plunge, letting the market do its darnedest. That is the risk involved in trading; one either chooses to embrace it, or look for an alternative means of income.

Hey FX,

Thanks for chiming in bud. Yes you're right about what we do with definitions. Often times it is not enough to just memorize a series of words. You really have to get behind the words to grasp whats going on.

One simple truth about the market is that price will always deviate from your entry price either positively or negatively after a given amount of time. It is these deviations that make profit and loss possible, this will happen no matter where or when you enter.

So whats behind a trend? Net orderflow. This is relative depending on which price you begin your measurement. Common sense would say to look from the last swing high/low price. So lets look at EU as an example. Back on November 25, 2009 price made it's highest relative high @ 1.5145 (on my platform). Right now price is trading at 1.3570. So we are looking at a price change of -10.4% What does this mean? The predominant action of market participants has been selling. Put another way, liquidity was consumed more at the bid than the ask as an initial market action. This is true because dealers let their customers determine which side of the market they will trade on. If I sell to my dealer, I am short and he is long. If EU is trading 1.3570 bid and 71 on the ask, I am -1 pip and he is +1 pip. The dealer is hoping another trader will come along and take his offer @ 71 before price changes, thus netting him the spread and transferring his inventory risk to the trader who bought @ 71. The main concern of the dealer is to discover prices that produce 2 sided/balanced orderflows so he can sit back and collect the spread while he provides liquidity to the market. When dealer's orderflows become unbalanced, he changes his quotes until he finds prices that attract two sided flows again. To do this he will lessen the liquidity he provides per price, thus accelerating price changes to quickly find new buyers in a price decline and sellers in an upmove. He does this to limit his risk; he does not want to accumulate large long inventories in a falling market. Like I said, the only solution is to thin out the liquidity he is providing on the side of his book he is seeing an imbalance in until he discovers balanced prices. SKFX once mentioned that price often consolidates then spikes, consolidates then spikes. Consolidation areas are areas of balanced flows, spikes are price discovery and quote adjustment. (this is my understanding, correct me if I'm mistaken, guys).

Because I want to avoid creating or promoting some system, I just want to simply point out and reiterate that orderflow determines the trend. The implication of the orderflow is value rejection. If you see that EU is declining, 10.4% currently as I stated, how much sense does it make to become a buyer? Sure you could capture a retracement if you can efficiently do so, but you're gonna have to be good, really good if you do it often because you are buying rejected value. This is why traders are so fond of pullbacks. Pullbacks in a trend often times represent discount pricing. There are probably a million and one ways to trade pullbacks, I'm just pointing this out.

Hey Hanover,

Thanks for your contribution here. I personally flipped a penny like 1000 times a while back when I was studying trend-lines. I charted it and for fun I'll attach it to this post.

I read the Market Wizard books a while back and one of the main things that many of those successful traders had in common was their long term approach. Going back to EU, it's been trending for 2 months now coming down off of 1.5. I won't be surprised to see 1.25 in a couple more months. EU always has some large trend it's working on, usually in 2500pip increments or to the respective .25 price points. I beleive that these huge trends should be fairly easy to jump into. All you really need is one good trade. If you want to complicate things and add to your trade as the trend extends itself, go for it, I'm just saying that ridiculously awesome returns can be attained simply, especially if you have the the use of leverage at your disposal.

(a note to everyone reading..Please don't refer me to Wayne Jackson's thread, I'm aware he's a trend guy, but I'm approaching this slowly and trying to be as thoughtful as I can about what I'm going to do with my own cash )

After doing this for three years now myself, I don't like the prospect of sitting- glued to my computer all day every day. I'd much rather spend time with my wife and daughter (who will be 3 months old next week ). If you have to trade your life and the majority of your time away to make lots of money is it really worth it? To me, no way! I beleive that part of being a good trader involves being a good trader in more aspects of your life than when you click buy or sell. If you're trading away your life to gain money, are you really gaining anything at all? There has to be balance in life. This is why I'm so passionate about finding a moderate and balanced way of trading.

Everything you mentioned Han, has a good potential of working. I'll say it one more time, all you need is one good trade and a trend. Once you have a fish on the line, set your stop to BE. If the fish gets away, cast again until you get a runner.

I think the hardest part about trading simply is the battle we have with ourselves. We feel that if we are trading in a simple manner that we are undermining our intelligence. This is why we love to make things complicated until we get to the point where we are in perpetual trading frustration. Has anyone ever noticed that the longer you're involved with trading, the harder it gets to trade? It's a blow to the ego to trade in a simple manner, but I beleive it's the way that makes the most sense when you bring the rest of your life into the equation.

Sorry Hanover, I'm going off on all sorts of tangents, the shotgun style chatter isn't all aimed at you. Again though, thanks for sharing your thoughts.

More thoughts to come later,

Scotty B

Lol I like the Wayne Jackson note

If one cannot identify a market move before it happens -more than 50% of the time with a 1:1 RR on average method- how can one profit? Not knowing what will happen in the future, to me, is the same as the randomness of a coin toss. To know, or be able to reasonably believe that something has more chance of happening than not, requires you to have a reason for believing it.

Bad reason's (IMO) include:

1. These MA's crossed
2. The trend is up/down
3. This price was supported/resisted last time
4. The Xfib drawn from points Z and Y indicates sausages

These reasons are not relevant to the current reality of the market. Price doesn't accelerate upward or downward BECAUSE of a technical study and because something happened in the past doesn't make it likely to happen in the future.

Reasons are difficult for us retail traders to find; how important is this news? Most economic reports or news items wont change a market participants view of a currencies value.

Does a (read carefully) change in price change what participants think the price should be? It shouldn't do. A price movement that has no identifiable reason screams of an opportunity to trade against it; at least for those who have their finger on the market pulse (institutional traders/Value traders).

The main problem when looking for real reasons to trade is that you probably wont find any

This is panning out to be a classic thread in the making. Here are some posts by TheRealThing that also touch on the subject of the reality of holding a position for the long term.

http://www.forexfactory.com/showpost.php?p=2108541&postcount=504
http://www.forexfactory.com/showpost...7&postcount=30


I was inspired recently to look at something on demo, which was just to put on a trade with random entry on a pair with a high yield difference and came up with GBP/AUD (With some help from Kathy Lien). I just plan on holding this trade open and collect the interest on 1 lot which is about 10 bucks per day. This is just a personal experiment so I can experience this and see where it leads. Sure, nothing original here, but looking at this weekly chart says to me I could have been collect interest on this pair for a very very long time. [Being up 700 pips is kinda sweet too]

I guess IF you can do 2 things 1) Have a big enough stop & 2) get the trend right, the money will follow. Collecting $10/per day interest adds up in a month/years of trading for doing nothing but holding a trade open.

At least that is what I've been looking at after 1.5 years of trading (I still consider myself a noob). This is my first "Fundamental Trade" I think would be fair to call it that.

Learning a lot from you folks, keep up the good work.

.

The area of psychology is the least talked about and most scoffed area of trading, but personally I believe it is just as important as any other area of trading. I have no idea how "beginners luck" works in the universe or if it is a 'reality', but I can honestly say when I knew zero zip zilch nada and just looked at a blank chart I put on winning trades. OH, look how easy this is! Cha Ching! Well, it doesn't take long until that little fantasy gets squashed like a bug.

Several things I believe about trading and one I'll share here. If you don't know who you are as a person or what kind of person you are before you start trading, you're going to find out. I can imagine for some people this is devastating and for others a sort of enlightenment.

Anyways, I lost track of where I was going with this, LOL. But to answer one of your questions regarding it seems to get harder to trade as time goes on, maybe it is works like this for the 5%: Starts off easy, gets impossibly difficult, then gets easy and you trade happily ever after. At least that seems to be the pattern I've noticed.

Maybe I'm just too early in my development to get what you are are getting at, but I try hard to understand your point of view. I honestly don't get where you are coming from. The impression I get from your posts is that is it futile to trade to make money. You speak a lot about what trading isn't, but I don't hear much about what you think IT IS. So, in your opinion what IS the reality of trading? I ask because your perspective seem so different from mine and I am genuinely interested in understanding how you see the world of trading.

Take everything Leon says with a grain of salt. He's been at this a long time without much to show for it so far so he's in a very frustrated place.

This site is wearing thin . Same old shit repeated over and over.
I'll tell you how to trade to make maximum profit . Believe it if you like if not , fine.
1) You need a reference point from which price moves. eg an ma, a trendline, pitchfork anything, as long as you can use it to see where price is relative to it.

2) Apply your reference point to a time frame which allows you to monitor the trade 24 hours a day. I use 4hr but 8hr is probably better. I actually think that smaller time frames will make more money BUT you have to stare at the screen for 24 hours which is impossible.
3)When the price is at a MAXIMUM ( DETERMINE THIS BY WORK, WORK AND MORE WORK STUDYING HOW PRICE MOVES RELATIVE TO YOUR REFERENCE POINT) from your reference point, look for some sort of trigger that tells you price is moving down.
4) From your studies you should have a good idea of what the MINIMUM from your reference point is. Keep at least a portion of your trade on until this point.
Going long is obviously opposite.
5) Risk an absolute maximum of 1% of what your comfortable with losing in total , per trade. If you have more money to trade with, risk 0.5% or less per trade. This is better.
6) If the trade starts to move in your direction start moving your stop, just a little bit at a time and try to get to BE without being stopped out. Depending on your experience you may take a small ,profit as the trade moves in your direction. You MUST be 100% comfortable with a FULL LOSS. Any loss less than this should make you happy.

I will answer any questions you may have in a non specific way, so that you have to work it out for yourself. Like I did.

Hehe poor Scotty his thread is dying a slow death.

What was the point in you posting that?

I do not understand the need for traders to be right more than 50%. With the expectancy (win/loss size ratio) I have based on soon 100 trades, I can have a success rate below 40% and still end up in profit after a set of trades.

You are doing very well Aediaz and I like that you let others see your progress on fxbook.

If you can get 40% winners you're doing very well. You're right, it's expectancy that counts. In other words, over a large sample of trades, winners - losers =+ve.