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Towards the making of rational forex traders....

  • #1
  • First Post: Oct 29, 2010 4:28pm Oct 29, 2010 4:28pm
Insight #1: The Myth of "scalping"

The insights/opinions found within this thread originate largely from the premise that if we can properly define a problem within the context of a well-structured question, then inevitably an answer will follow sooner or later. With that in mind let's tackle the subject of "scalping".

Question #1: Why do you and I trade forex?
Answer #1: To generate profits.

Question #2: How are profits most efficiently generated within the context of financial markets?
Answer #2: By consistently pursuing and periodically taking profits that are larger in size than the initial risk involved in taking a trade. The greater the discrepancy between the average size of ones profits compared to ones losses, the more efficiently profits are generated.

Question #3: What is "scalping"?
Answer #3: The purposeful pursuit of small profits within the context of short periods of time. Profits are roughly equal to initial risk at best, and many times are less than initial risk.

What becomes apparent if we compare Question/Answer #3 with Question/Answer #2? It should be that "scalping", as it is practiced by most traders, is diametrically opposed to generating trading profits in an efficient manner. Why would we be interested in purposefully structuring our business inefficiently?

Before writing this post I thumbed thru the forums and looked at many of the scalping systems offered and being discussed among us. Here are some direct quotes I found regarding the subject of stops (i.e. initial risk) used with some of these gems:
1. "Trading this methodology is not going to give you a 1:1 R/R. Scalping is built on probability theory as mentioned."
***************
What kind of R/R profile will it give us then? It seems that lofty terms such as "probability theory" have lulled this particular trader into not having to assume the responsibility of researching and testing this system to come up with this vital information. Is this rational?


2. "Contrary to popular belief I'm not a friend of setting a Stop Loss. May be to set a stop loss perhaps 5 pips above the last candle or at the counterpart upper or lower Band of Bollinger Band."
*****************
If you are not a friend of stop-losses, then it is a certainty that you are not a friend of trading profits either. Words like "maybe" and "perhaps" have no place in a rational trader’s trading plan.

Many of the proponents of scalping hark on the fact that they are most comfortable with the short hold-times of most trades and that this style of trading "fits their personality". However, in my own pursuit of consistent profitability as a trader I studied and modeled many traders. And there is one characteristic that all of them share and it is this: All profitable traders adapt and become comfortable with being and doing that which makes them uncomfortable. I suggest you read that last sentence again, as it truly is one of the keys to becoming a successful trader. So if you find yourself defaulting to inefficient behaviors as a trader simply because you cannot handle the discomfort, unease, and uncertainty that results from efficient action ( i.e. taking small frequent losses, longer-term hold-times as profits run, etc…) then you may need to rethink whether you are cut out for this business or not.

More Insights/opinions to follow…….
  • #2
  • Oct 29, 2010 5:11pm Oct 29, 2010 5:11pm
Quoting alkemi
Insight #1: The Myth of "scalping"

The insights/opinions found within this thread originate largely from the premise that if we can properly define a problem within the context of a well-structured question, then inevitably an answer will follow sooner or later. With that in mind let's tackle the subject of "scalping".

Question #1: Why do you and I trade forex?
Answer #1: To generate profits.

Question #2: How are profits most efficiently generated within the context of financial markets?
[u]Answer...
So just because scalping is not in line with your own beliefs about how profits are generated, it is not a viable strategy?
Stubbornly persistent
  • #3
  • Oct 29, 2010 6:14pm Oct 29, 2010 6:14pm
Quoting alkemi
if we can properly define a problem within the context of a well-structured question, then inevitably an answer will follow sooner or later.
I would agree to this quote and highlighted "well-structured question".

You managed to ask the questions and thus answered them. Though they are poor questions (not well-structured questions). And when you ask poor questions, you will get poor answers.

Here are your questions:

 

  1. Why do you and I trade forex?
  2. How are profits most efficiently generated within the context of financial markets?
  3. What is "scalping"?


Instead, you should be asking questions such as(IMO):

 

  1. What are the list of requirements to become a successful trader?
  2. Do I possess these qualities to succeed? If not, how and am I going to develop them?
  3. What sacrifices and commitments do successful traders make to become successful?
  4. Have I understood scalping right to its bone, that I can identify ALL of its strong points and weak points?
  5. What makes other succeed at scalping and others don't? What is the defining factor?
  6. What are the list of skills required to trade a system, and do I possess them. If not, how do I develop them?


The most important question of all:

 

  1. How can I prove it wrong?

  • #4
  • Oct 29, 2010 6:21pm Oct 29, 2010 6:21pm
Quoting alkemi
InAll profitable traders adapt and become comfortable with being and doing that which makes them uncomfortable.
This is an excellent point and the second epiphany I had while structuring my current trade plan. Regardless of the win %, I still experience a great deal of emotional pain and uncertainty when pressing the Buy or Sell button.
  • #5
  • Oct 29, 2010 6:42pm Oct 29, 2010 6:42pm
Quoting alkemi
All profitable traders adapt and become comfortable with being and doing that which makes them uncomfortable.
Quoting Slack
This is an excellent point and the second epiphany I had while structuring my current trade plan. Regardless of the win %, I still experience a great deal of emotional pain and uncertainty when pressing the Buy or Sell button.
I see what you are saying Slack, but think of it this way. If you are uncomfortable about public speaking and you somehow overcome that fear, anxiety, pain by placing yourself in an uncomfortable situation... at the end of the day it doesn't make you great speaker. And becoming a great speaker (profitable trader) require other technical knowledge and skills.

I agree, we need to place ourselves in those uncomfortable situation to overcome those barriers. But, I guess what I am saying is that it isn't enough for us to succeed in this game. I wish that once you overcome those barriers, that your system is a profitable one
  • #6
  • Oct 29, 2010 7:52pm Oct 29, 2010 7:52pm
Quoting CrucialPoint
I see what you are saying Slack, but think of it this way. If you are uncomfortable about public speaking and you somehow overcome that fear, anxiety, pain by placing yourself in an uncomfortable situation... at the end of the day it doesn't make you great speaker. And becoming a great speaker (profitable trader) require other technical knowledge and skills.

I agree, we need to place ourselves in those uncomfortable situation to overcome those barriers. But, I guess what I am saying is that it isn't enough for us to succeed in this game....
100% agree. Was only trying to highlight the psychological aspect. When I first started trading, one of my main goals; although I didn't fully realize it at the time, was to minimize that "uneasy" feeling. I wanted surety, certainty and positive expectation on every trade. Why, because feared loss.

I think one of the major hurdles; again, mentally speaking, is the realization that trading (properly) is a very unnatural thing. You cannot/should not the expect the normal psychological trigger action/reaction based on what we perceive as positive feelings.

But, at the end of the day, +$ is what counts.
  • #7
  • Oct 30, 2010 1:44am Oct 30, 2010 1:44am
Quoting Slack
100% agree....
I just finished reading "The Decisive Moment" by Jonah Lehrer. I strongly recommend it.

In it he talks of a study that was done on some bank traders who were doing very short term trades and pushing 100's of millions around. As a group they were successful (at least during the time frame of the study). They wired them up to monitor their heart rate, sweating, etc (how they got the ok to do this kind of baffles me, to be honest).

What they found was that these experienced traders always got nervous before and during trades. Their pulse increased, they started sweating...they were just plain nervous. But they were able to execute.

I'd say the common belief is that traders need to overcome their emotions in order to succeed. I certainly believed this at one time. But over the last 3 years I realized that I'm not a damn Vulcan, I'm a human being, and emotions are as much a part of me as rationality and logic.

For years, I've taken great pride in the fact that I'm logical and rational. I'm the only person I've ever known to score a perfect score on the analytical section of the GREs, back when they still used that. I always thought that was part of my edge in trading, that I could out-think most people and that I wasn't as susceptible to emotions, which I've viewed as a necessary evil most of the time, and not just in trading.

Like others here, I've spent years "working" on myself. Because I have money, I've been able to spend lots of it on shrinks, life coaches, trading coaches, books up the ass, CDs and whatever else caught my eye. It was all in the goal to "control" my emotions when trading. After years of this, I've finally come to the conclusion that it's a fruitless task.

There are two types of anxiety: debilitative and facilitative. (I learned this many years ago in grad school, but seemed to forget about it in my trading quest). Debilitative is what we most commonly think of when we think of "emotions and trading". This is the type that makes you do stupid things such as revenge trading. It's dangerous because it can make you freeze (not pull the trigger), or just lose total control.

Facilitative anxiety is good for you because it's what makes you prepare, double-check, and tread carefully. All athletes, performers and successful traders have this. They recognize it for what it is and they welcome it because it keeps them sharp. Complacency in any endeavor is disastrous, eventually.

I guess the point of this rambling post is that feeling nervous is normal. As Lehrer points out, we need to think about how we think. For me, my trading journey has certainly made me wiser in many ways. I guess I needed to take the route I did because of the beliefs I've held for so long. Maybe some of you won't need to, and some won't want to. It's all up to you.

I've spent years trying to accomplish something that was impossible, and not necessary even if it was. We're humans, not machines. Our emotions exist for a reason. Yet the age of reason gave them a very bad reputation and for hundreds of years now they've been neglected and ignored when it comes to making decisions. Yet, everyone of us relies on them to make decisions all the time, whether we admit to it or not.
  • #8
  • Oct 30, 2010 2:19am Oct 30, 2010 2:19am
Great post, Dopey. And, thanks for the book recommendation... looks like an excellent read even if that author looks like he's 15 yrs old
  • #9
  • Oct 30, 2010 3:25am Oct 30, 2010 3:25am
Quoting alkemi
Question #2: How are profits most efficiently generated within the context of financial markets?
Answer #2: By consistently pursuing and periodically taking profits that are larger in size than the initial risk involved in taking a trade. The greater the discrepancy between the average size of ones profits compared to ones losses, the more efficiently profits are generated.
I don't think you can generalize it like that. Objectively, profits are generated when;

Inserted Code
Risk / Reward * Lose% / Win% > 1
After factoring in spread and commissions.

A system with 4:1 R/R can be profitable, the only thing that counts is the edge over the needed win rate. You can break even with 20% win rate and 1:4 R/R ratio or with a 80% win rate and 4:1 R/R.
  • #10
  • Oct 30, 2010 10:42am Oct 30, 2010 10:42am
Quoting Dopey
Like others here, I've spent years "working" on myself... It was all in the goal to "control" my emotions when trading. After years of this, I've finally come to the conclusion that it's a fruitless task.
Another of many great posts by Dopey.

One thing that I noticed after watching the old documentary "Trader" from the late 80's? about Paul Tudor Jones... he was jumpy and nervous often.

At that point in time, he was still quite successful with at least a couple hundred million under management, even though it was 20+ years ago.

When he was calling orders in to the floor/pit, his legs were bouncing all over the place, and sometimes he was practically yelling into the phone.
Definitely, not the super-cool, emotionless, serene trader that I imagine Ed Seykota to be.

He trades with a lot of emotion (or at least used to), and is arguably one of the best traders of modern times.
  • #11
  • Oct 30, 2010 11:30am Oct 30, 2010 11:30am
Quoting alkemi

Question #1: Why do you and I trade forex?
Answer #1: To generate profits.
Very simple question and answer, but it is one that caught my eye for several reasons. During my journey in this business, I realized at one point that I had lost track of the obvious. Yes, of course I am always trying to make a profit, but am I actually doing what I NEED to do to generate profits, or am I continuing my obsessive pattern of trying to come up with a mindless system that will make profits for me?

I had to take a good look inward and re-evaluate my intentions and why I am so intent on trading forex. The root of this started becoming apparent to me. It was all about control for me. Not being content with my financial situation at the time, and being constrained with work, this is what fueled my obsession, this is what blinded me from reality. The reality being that I cannot control the market, I cannot put it in a box, the only thing I can do is react to it. Once this realization truly sets in, I can truly trade to generate profit without focusing whether or not I am right or wrong, and it's only then that I can focus on what is currently happening in the market, thus allowing me to properly react.

I wish you the best in your endeavor. Don't give up, eventually it will pay off.
  • #12
  • Oct 31, 2010 9:34am Oct 31, 2010 9:34am
Quoting Dopey
I just finished reading "The Decisive Moment" by Jonah Lehrer. I strongly recommend it.....
Great points! Thank you for your contribution.
  • #13
  • Oct 31, 2010 9:41am Oct 31, 2010 9:41am
Quoting Intu
Another of many great posts by Dopey.

One thing that I noticed after watching the old documentary "Trader" from the late 80's? about Paul Tudor Jones... he was jumpy and nervous often.
Seeing that documentary was eye-opening for me as well. I expected to see a trader performing with Zen monk-like calm. When I saw how crazy his process was I actually felt pretty good about where I had gotten to in my own trader. But at the end of the day, profits are what matter and he has plenty of those.
  • #14
  • Oct 31, 2010 10:00am Oct 31, 2010 10:00am
Quoting sergiu
So just because scalping is not in line with your own beliefs about how profits are generated, it is not a viable strategy?
Exactly. Whether you want to believe it or not, we all trade our beliefs about markets. You could not or would not trade a system or methodology completely at odds with your beliefs about markets, even if it were proven to be profitable. I personally know a few profitable scalpers, but they are a rare breed. Very rare when one looks at the number of profitable scalpers compared to fledgling traders pursuing scalping. There are probably fewer edges available to a scalper than any other form of trading. Especially when you start factoring in things like the impact of spreads and slippage. Whose bottom line is impacted more by spreads:
A trader averaging 5 pips per trade, or the trader averaging 200 pips per trade?
  • #15
  • Oct 31, 2010 10:10am Oct 31, 2010 10:10am
Quoting CrucialPoint
Instead, you should be asking questions such as(IMO):

 

  1. What are the list of requirements to become a successful trader?
  2. Do I possess these qualities to succeed? If not, how and am I going to develop them?
  3. What sacrifices and commitments do successful traders make to become successful?
  4. Have I understood scalping right to its bone, that I can identify ALL of its strong points and weak points?
  5. What makes other succeed at scalping and others don't? What is the defining factor?
  6. What are the list of skills required...

...

As I see it , you simply prefer the more circuitous route. All of the above points are contained in and would be brought to light by an indepth examination of the question: How are trading profits most efficiently generated?
  • #16
  • Oct 31, 2010 12:03pm Oct 31, 2010 12:03pm
Quoting alkemi
As I see it , you simply prefer the more circuitous route.
I actually prefer the fastest route (who doesn't ).

But in a field where you are against the world's best of the best... you better know every bits and pieces, every nuts and bolts, every detailed aspect of what makes a successful trader.

Only by knowing and understanding fully ("knowing it like the back of your hand" per se) can one only gain the true confidence in himself and in his system. To confidently march into the unknown, the uncertain, misty future and be fully prepared for uncertainty. Because that is the type of environment we all thread upon, into the land of big profits and large sums of money.

Hmmm... maybe I'm wrong, but I guess you are also right. That at the end of the day, your bank statement will tell you if you are profitable or not.
  • #17
  • Oct 31, 2010 12:06pm Oct 31, 2010 12:06pm
Quoting Dopey
I just finished reading "The Decisive Moment" by Jonah Lehrer....
Nice one - well written and not a perspective I've heard before - will also check out the book.
I've got my pips - go get yours!
  • #18
  • Last Post: Nov 1, 2010 12:18am Nov 1, 2010 12:18am
Really good webinar on the psychology aspect of trading: http://www.screencast.com/users/Mark...f-8e2ffb611537
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