In the recent 'aha' thread, I inferred that I'd learned more from reading charts than reading forums.
One major reason why there’s very little information of value in forums is that so much information is recycled, and this is because there’s ultimately only a handful of ways that it’s possible to trade.
Take technical indicators as an example. There are basically two types: trend following indys, and oscillators that show overbought/oversold conditions. First, every indy is somehow derived from the same OHLC(V) values, hence adding extra indys to the same timeframe chart doesn’t really provide independent confirmation. Secondly, we must ultimately enter (and exit) somewhere during a move, and any indy can be calibrated to get us earlier or later into that move. Thirdly, price movement is sufficiently random that no indy, if tested over a large enough data sample, can hope to give a much better strike rate than 50/50. Hence I don't see one indy as being significantly superior to another. All technical tools can be useful (more here and here), but as I once read somewhere: indicators are a symptom, not a cause (very well explained here). In fact, all TA is grounded in the assumption that the past is more likely than not, to repeat itself in some way, in the future.
That brings me to my next point: no method – entry or exit – can offer an edge that’s greater than its ability to find non-random price behavior, and of course it’s impossible to find more non-randomness than whatever ‘inefficiencies’ actually exist; in that sense, there is a theoretical limit to the efficacy of any method. (More thoughts on randomness here and here).The fact is that any heavyweight participant can, at any time, potentially place an order that’s big enough to upset even the most ‘perfect’ technical strategy. That’s one big reason why any ‘holy grail’ thread is almost certain to fit into the ‘too good to be true’ category. Moreover, it’s most likely to be a recycled idea that’s been tested over too small a sample, or one that's being propped up artificially by some kind of unsustainable MM. If somebody touts a method that delivers a profit factor between 1.2 and 1.5, then I’m interested to learn more; but anything greater than 2.0, well, I tend to dismiss it.
Re entries, virtually all conventional trading methodologies fall into two opposite categories: (1) ‘breakout’ (buying strength; selling weakness), i.e. anticipating continued momentum; and (2) ‘pullback’ (buying temporary weakness; selling temporary strength) by attempting to pick a likely reversal point. (Funny how that coincides with the two types of indicators that I described
). The only remaining variation is how early or late one enters each potential move. In general, earlier gets a better price, improving average win size; later (but not so late that the bulk of the move is missed!) gives greater certainty, improving average win rate. Every method is ultimately a delicate compromise between these two ‘inversely proportional’ factors (more here and here).
Exits are actually little more than the mirror image of entries. Again, looking from a ‘first principles’ viewpoint, there aren’t too many options: either we exit at points of likely reversal (profit targets), or anticipate continued momentum (use trailing stops). More detail on exits here, here and here. (With exits, we likewise see those same two inversely proportional factors operating against each other.)
The bottom line is that entries and exits are merely vehicles for adjusting net position; and that to profit in the long term we must be net long when price is rising, and net short when its falling, frequently/heavily enough to overcome costs (more here).
Re ‘MM’, scaling in or out in itself offers no edge. Think about it. Each individual component will either add to, or subtract from, eventual bottom line, and should therefore be traded on its own merit (some thoughts on pyramiding here). The best that scaling can offer is a 'smoothing' effect on the sequences of wins and losses, and therefore improving consistency of income. However, once again, it’s about adjusting net position, and it’s how accurately this is achieved around market reversals that ultimately determines P/L.
Position sizing can’t offer an edge, unless one trades bigger sizes on higher probability setups; if this probability can’t be determined in advance, then variable sizing becomes nothing more than an exercise in hit or miss. That’s one reason why progressive sizing methods like Martingale are effectively worthless. Sizing variations merely redistribute wins and losses, re-balance return and risk, and/or offset one type of return or risk for another. ‘Nedging’ is another example of ineffectual MM. The best we can do with MM is to take small, consistent position sizes, to preserve our capital in an equitable fashion. That is the primary role of prudent MM: managing risk on individual trades, and safeguarding capital against unnecessarily large drawdown (the table attached to this post shows the probability of incurring X consecutive losses within a 50 trade sequence, for a given win rate). While on this topic, there are three types of MM that I flee from, and very quickly: (1) progressive sizing as a means of recovering recent losses; (2) averaging down without limit; (3) no (or excessively wide) stoplosses.
Re psychology, very few methodologies are robust enough to withstand frequent lapses in discipline, but psychology in itself can never provide an edge; it’s not a case of ‘develop the right psychology and you’ll automatically become profitable’. Think about it: if perfect discipline is all that’s required, then every EA would be profitable (more here). And merely trading a live account instead of demo is never going to turn a losing method into a winning one, or a novice into a knowledgeable trader. IMO, two of the biggest causes of ill-discipline are: (1) not having a properly tested trading plan; and (2) trading uncomfortably large position sizes, the remedies for both of which are self-evident. Gil Blake says it all for me; we can make psychology as simple or as difficult as we want it to be. And Dopey posted a good Brett Steenbarger article here. Faulty MM (e.g. overleveraging) and ill-discipline will likely deplete an account more quickly than an impotent entry/exit method, and can therefore mask the latter.
Given that the above is largely an exercise in elimination, what does it leave us with? The answer is methods that are grounded in simple, but robust, principles: exploiting strong and confluent (timeframe-wise) ‘trends’, i.e. overlapping impulsive waves; confluences of multiple S/R types that increase the likelihood of self-fulfilling prophecy (more here); confluences across correlated pairs. Adjusting exits to suit the prevailing conditions (let profits run if price is trending strongly; take profit earlier in a sideways market). Understanding areas of supply and demand, and patterns that signal possible manipulation, i.e. ‘professional’ versus ‘amateur’ activity**. Trading the strongest currency/ies against the weakest (more here). No doubt there are many other robust ideas that I haven’t yet encountered. But the more independent (potential) edges we can stack in our favor, the more likely we are to succeed. From where I sit now, that’s the best possible starting point. The good news is that (1) we can be as selective with our setups as we wish; (2) the (minimum) requirement of an edge is to overcome the '50/50 + spread'; and (3) a small but robust edge, frequently applied, and further magnified by the effect of compounding, can result in serious, exponential gains.
[** My understanding is that the forex markets are driven primarily by: economic sentiment; expectation of technical self-fulfilling prophecy; heavyweight 'professionals' exploiting 'amateurs'; specific actions taken by participants currently in winning and losing trades, e.g. profit taking, 'trapped' traders; and the need to maintain triangular equilibrium. Then there's a large degree of apparent 'randomness' due to the diversity and 'anonymity' of the participants at any given point.]
I remember, not so long ago, when I was a newbie, and I would read and re-read posts by those whom I thought were knowledgeable and experienced traders, desperately seeking out ‘superior’ mechanical rules and techniques for entries and exits. I was crestfallen when their best advice amounted to vague generalizations and 'no-brainer abstracts' like "trade what you see", the importance of ego-free trading, risk management, and consistent execution. More recently, I’ve come to see a reason for this; namely that for these discretionary traders, entries and exits were acquired skills and nuances that had gradually come to be part of their ‘unconscious competence’. Were it possible to easily code this kind of knowledge and experience into EAs, then I expect that many more EAs would be profitable. And it’s also one reason why mentorship – the ability to watch over the master’s shoulder for a long enough period to acquire the same skills and habits – is arguably a good option. My three favorite posts for newbies, discussing the requirements and difficulties involved in becoming profitable, are these: here, here and here (and my thoughts here). And to newbies thinking of buying systems and EAs, some considerations and caveats here. For anybody looking to construct a predominantly mechanical system, there are two 'must read' posts here and here. Newbies looking for help in calculating position sizes, risk, leverage etc, there's info here.
Newbies inevitably ask the question "what returns are realistically possible?". I posted some thoughts here and here. When I first began my study of trading, I assumed that the ‘Holy Grail’ would be a system that maximized return while minimizing risk. Now I realize that, everything else being equal, to increase return one has to in some way increase risk, and that the ultimate system is one that balances return, drawdown and consistency of income, in a way that rests comfortably with a trader's temperament, financial objectives, and lifestyle.
On forums you’ll invariably find conflicting opinions, as folk post what works for them; but when used in a certain way, and under certain market conditions. Trade with the trend, trade counter-trend; take profits early, let profits run; trade short timeframes, trade longer timeframes; and so on (more here). All of this should tell us at least three important things: that absolute methodological truths are rare; that there are different, and supposedly opposing, pathways to profit; that finding a genuine edge involves some real finesse, and is very dependent on context. Many posts seem to be driven by an ego that says "my way is the only possible way to profit" or (among the naysayers) "if I can't find a way to make this profitable, then nobody else can".
Of course the above is merely my opinion – take from it whatever you will – but I'd like to think that it cuts through many widely believed myths, and forum related BS. Although it’s taken me almost 4 years to come to these realizations, I now see much of it as being little more than logic and common sense. What I respectfully suggest that you do, is to use this post as a benchmark for comparison with other methods and ideas, as you encounter them; if what I've written seems incorrect, irrelevant, or inappropriate with the way that you trade yourself, then hopefully the comparison will give you added insight as to HOW or WHY your own approach works profitably.
I hope that you've found this post helpful.
Good luck, everybody, I wish you all many pips.
David
____________________________________
[EDIT]
I get a number of PMs asking me about my trading method. For whatever it's worth, I've explained its basis here, here, here and here. There are examples of the types of chart-based setup that I look for here, here and here. Of course it's very much a discretionary work in progress; one never stops learning.
____________________________________
Indicators by Hanover:
Recent Strength
Recent Prices
Recent Candles
Recent SR
Recent News
Daily Lines/Boxes
Display Info all pairs
Spaced Lines
____________________________________
Other possibly useful posts:
MT4 navigational tips and techniques
List of MT4 br0kers
Darkstar on Market Structure
Free web-based TA resources
One major reason why there’s very little information of value in forums is that so much information is recycled, and this is because there’s ultimately only a handful of ways that it’s possible to trade.
Take technical indicators as an example. There are basically two types: trend following indys, and oscillators that show overbought/oversold conditions. First, every indy is somehow derived from the same OHLC(V) values, hence adding extra indys to the same timeframe chart doesn’t really provide independent confirmation. Secondly, we must ultimately enter (and exit) somewhere during a move, and any indy can be calibrated to get us earlier or later into that move. Thirdly, price movement is sufficiently random that no indy, if tested over a large enough data sample, can hope to give a much better strike rate than 50/50. Hence I don't see one indy as being significantly superior to another. All technical tools can be useful (more here and here), but as I once read somewhere: indicators are a symptom, not a cause (very well explained here). In fact, all TA is grounded in the assumption that the past is more likely than not, to repeat itself in some way, in the future.
That brings me to my next point: no method – entry or exit – can offer an edge that’s greater than its ability to find non-random price behavior, and of course it’s impossible to find more non-randomness than whatever ‘inefficiencies’ actually exist; in that sense, there is a theoretical limit to the efficacy of any method. (More thoughts on randomness here and here).The fact is that any heavyweight participant can, at any time, potentially place an order that’s big enough to upset even the most ‘perfect’ technical strategy. That’s one big reason why any ‘holy grail’ thread is almost certain to fit into the ‘too good to be true’ category. Moreover, it’s most likely to be a recycled idea that’s been tested over too small a sample, or one that's being propped up artificially by some kind of unsustainable MM. If somebody touts a method that delivers a profit factor between 1.2 and 1.5, then I’m interested to learn more; but anything greater than 2.0, well, I tend to dismiss it.
Re entries, virtually all conventional trading methodologies fall into two opposite categories: (1) ‘breakout’ (buying strength; selling weakness), i.e. anticipating continued momentum; and (2) ‘pullback’ (buying temporary weakness; selling temporary strength) by attempting to pick a likely reversal point. (Funny how that coincides with the two types of indicators that I described
). The only remaining variation is how early or late one enters each potential move. In general, earlier gets a better price, improving average win size; later (but not so late that the bulk of the move is missed!) gives greater certainty, improving average win rate. Every method is ultimately a delicate compromise between these two ‘inversely proportional’ factors (more here and here).Exits are actually little more than the mirror image of entries. Again, looking from a ‘first principles’ viewpoint, there aren’t too many options: either we exit at points of likely reversal (profit targets), or anticipate continued momentum (use trailing stops). More detail on exits here, here and here. (With exits, we likewise see those same two inversely proportional factors operating against each other.)
The bottom line is that entries and exits are merely vehicles for adjusting net position; and that to profit in the long term we must be net long when price is rising, and net short when its falling, frequently/heavily enough to overcome costs (more here).
Re ‘MM’, scaling in or out in itself offers no edge. Think about it. Each individual component will either add to, or subtract from, eventual bottom line, and should therefore be traded on its own merit (some thoughts on pyramiding here). The best that scaling can offer is a 'smoothing' effect on the sequences of wins and losses, and therefore improving consistency of income. However, once again, it’s about adjusting net position, and it’s how accurately this is achieved around market reversals that ultimately determines P/L.
Position sizing can’t offer an edge, unless one trades bigger sizes on higher probability setups; if this probability can’t be determined in advance, then variable sizing becomes nothing more than an exercise in hit or miss. That’s one reason why progressive sizing methods like Martingale are effectively worthless. Sizing variations merely redistribute wins and losses, re-balance return and risk, and/or offset one type of return or risk for another. ‘Nedging’ is another example of ineffectual MM. The best we can do with MM is to take small, consistent position sizes, to preserve our capital in an equitable fashion. That is the primary role of prudent MM: managing risk on individual trades, and safeguarding capital against unnecessarily large drawdown (the table attached to this post shows the probability of incurring X consecutive losses within a 50 trade sequence, for a given win rate). While on this topic, there are three types of MM that I flee from, and very quickly: (1) progressive sizing as a means of recovering recent losses; (2) averaging down without limit; (3) no (or excessively wide) stoplosses.
Re psychology, very few methodologies are robust enough to withstand frequent lapses in discipline, but psychology in itself can never provide an edge; it’s not a case of ‘develop the right psychology and you’ll automatically become profitable’. Think about it: if perfect discipline is all that’s required, then every EA would be profitable (more here). And merely trading a live account instead of demo is never going to turn a losing method into a winning one, or a novice into a knowledgeable trader. IMO, two of the biggest causes of ill-discipline are: (1) not having a properly tested trading plan; and (2) trading uncomfortably large position sizes, the remedies for both of which are self-evident. Gil Blake says it all for me; we can make psychology as simple or as difficult as we want it to be. And Dopey posted a good Brett Steenbarger article here. Faulty MM (e.g. overleveraging) and ill-discipline will likely deplete an account more quickly than an impotent entry/exit method, and can therefore mask the latter.
Given that the above is largely an exercise in elimination, what does it leave us with? The answer is methods that are grounded in simple, but robust, principles: exploiting strong and confluent (timeframe-wise) ‘trends’, i.e. overlapping impulsive waves; confluences of multiple S/R types that increase the likelihood of self-fulfilling prophecy (more here); confluences across correlated pairs. Adjusting exits to suit the prevailing conditions (let profits run if price is trending strongly; take profit earlier in a sideways market). Understanding areas of supply and demand, and patterns that signal possible manipulation, i.e. ‘professional’ versus ‘amateur’ activity**. Trading the strongest currency/ies against the weakest (more here). No doubt there are many other robust ideas that I haven’t yet encountered. But the more independent (potential) edges we can stack in our favor, the more likely we are to succeed. From where I sit now, that’s the best possible starting point. The good news is that (1) we can be as selective with our setups as we wish; (2) the (minimum) requirement of an edge is to overcome the '50/50 + spread'; and (3) a small but robust edge, frequently applied, and further magnified by the effect of compounding, can result in serious, exponential gains.
[** My understanding is that the forex markets are driven primarily by: economic sentiment; expectation of technical self-fulfilling prophecy; heavyweight 'professionals' exploiting 'amateurs'; specific actions taken by participants currently in winning and losing trades, e.g. profit taking, 'trapped' traders; and the need to maintain triangular equilibrium. Then there's a large degree of apparent 'randomness' due to the diversity and 'anonymity' of the participants at any given point.]
I remember, not so long ago, when I was a newbie, and I would read and re-read posts by those whom I thought were knowledgeable and experienced traders, desperately seeking out ‘superior’ mechanical rules and techniques for entries and exits. I was crestfallen when their best advice amounted to vague generalizations and 'no-brainer abstracts' like "trade what you see", the importance of ego-free trading, risk management, and consistent execution. More recently, I’ve come to see a reason for this; namely that for these discretionary traders, entries and exits were acquired skills and nuances that had gradually come to be part of their ‘unconscious competence’. Were it possible to easily code this kind of knowledge and experience into EAs, then I expect that many more EAs would be profitable. And it’s also one reason why mentorship – the ability to watch over the master’s shoulder for a long enough period to acquire the same skills and habits – is arguably a good option. My three favorite posts for newbies, discussing the requirements and difficulties involved in becoming profitable, are these: here, here and here (and my thoughts here). And to newbies thinking of buying systems and EAs, some considerations and caveats here. For anybody looking to construct a predominantly mechanical system, there are two 'must read' posts here and here. Newbies looking for help in calculating position sizes, risk, leverage etc, there's info here.
Newbies inevitably ask the question "what returns are realistically possible?". I posted some thoughts here and here. When I first began my study of trading, I assumed that the ‘Holy Grail’ would be a system that maximized return while minimizing risk. Now I realize that, everything else being equal, to increase return one has to in some way increase risk, and that the ultimate system is one that balances return, drawdown and consistency of income, in a way that rests comfortably with a trader's temperament, financial objectives, and lifestyle.
On forums you’ll invariably find conflicting opinions, as folk post what works for them; but when used in a certain way, and under certain market conditions. Trade with the trend, trade counter-trend; take profits early, let profits run; trade short timeframes, trade longer timeframes; and so on (more here). All of this should tell us at least three important things: that absolute methodological truths are rare; that there are different, and supposedly opposing, pathways to profit; that finding a genuine edge involves some real finesse, and is very dependent on context. Many posts seem to be driven by an ego that says "my way is the only possible way to profit" or (among the naysayers) "if I can't find a way to make this profitable, then nobody else can".
Of course the above is merely my opinion – take from it whatever you will – but I'd like to think that it cuts through many widely believed myths, and forum related BS. Although it’s taken me almost 4 years to come to these realizations, I now see much of it as being little more than logic and common sense. What I respectfully suggest that you do, is to use this post as a benchmark for comparison with other methods and ideas, as you encounter them; if what I've written seems incorrect, irrelevant, or inappropriate with the way that you trade yourself, then hopefully the comparison will give you added insight as to HOW or WHY your own approach works profitably.
I hope that you've found this post helpful.
Good luck, everybody, I wish you all many pips.
David
____________________________________
[EDIT]
I get a number of PMs asking me about my trading method. For whatever it's worth, I've explained its basis here, here, here and here. There are examples of the types of chart-based setup that I look for here, here and here. Of course it's very much a discretionary work in progress; one never stops learning.
____________________________________
Indicators by Hanover:
Recent Strength
Recent Prices
Recent Candles
Recent SR
Recent News
Daily Lines/Boxes
Display Info all pairs
Spaced Lines
____________________________________
Other possibly useful posts:
MT4 navigational tips and techniques
List of MT4 br0kers
Darkstar on Market Structure
Free web-based TA resources
