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The Foundations Of Trading Success

  • #21
  • Feb 20, 2011 2:55pm Feb 20, 2011 2:55pm
Quoting Custos
I tend to like systematic approaches, since they cancel out a lot of the "required" psychology. If you got a working system, the only trait you need is discipline in carrying out the signals again and again and again.
But there is still a lot of psychology in systematic approaches.

One of the big things you see over and over on these forums is the "I have to be right all the time" syndrome. It's in the "systems" threads: 80, 90, 100% successful trade rates (claimed, anyway) are what get the attention. It's in the interactive threads: "I held through 150 pips against me, but it finally came back and I 'won' the trade."

Systematic approaches, particularly 'following' or 'positioning' strategies, often are built with expectations of 70% losing trades, but with a Pareto distribution of single-trade P&L. Market makers on options floors and futures pits often sustain such levels, and go to their homes in Barrington Hills or Lake Shore Drive or Greenwich every night at ease with the world and a little bit richer month after month.

That takes real psychological fiber to sustain high percentages of losing trades. That's one reason why those strategies lend themselves to automation: not only is it then 'out of your hands', but many bad trades are made out of, well, boredom and the need for the adrenalin, as well as feeling of having been wronged and needing some "revenge trades."
  • #22
  • Feb 20, 2011 3:13pm Feb 20, 2011 3:13pm
Quoting medici
Finally, as I stated initially, the main purpose of the thread is to provide the beginner or developing trader a foundation for successful trading, and to hopefully save some from the mad goose chase from system to system. And for those traders following is definitely the way to go.
True, true. And if you prevent just one goose chase, that's a few hundred hours of someone's life you've saved. I personally hold Mark Douglas to account for a lot of that, but that's a different story.
  • #23
  • Feb 20, 2011 3:31pm Feb 20, 2011 3:31pm
I am not a systematic trader, i need to use my instincts and experience to decide to trade or not, this requires me to be totally focused and in a mindset that is free from stress, pain or euphoric feelings. I like many spent my fist year relentlessly looking at charts looking for some great way to trade, i completely ignored my own mind.

These days i am more and more of the opinion that constantly monitoring myself is a lot more important than any form of market analysis. "am i fit to trade?" is a question i need to amswer every time im at the market if the answer is anything other than yes!! then i must stop untill it is. any form of distraction or pain, totally destroys my ability to make objective decisions.

believing in uncertainty is another hurdell for traders to overcome, the unknown to the right of a chart is such a hard thing to get used to. Until one totally accepts that its impossible to know whats un-know-able, its impossible to trade successfully.

I am always amused by the number of people in forums, who are some of the top posters, in some of the busiest threads, who use the words "will", "has to" or "must". --"price wont reach x.xxxx today", "we must retest this support before we move higher" "we have to turn here because elliot wave says so" Price doesnt have to do NOTHING, to use the words "will" etc, we need to know the future and no one knows the future. Perhaps people are just showing off, because when their right some people will think their great traders. idont know, i would not take the risk of using these words.
  • #24
  • Feb 20, 2011 4:32pm Feb 20, 2011 4:32pm
Quoting bug
So in fact what you are saying is that by taking a trade based on divergence, for example, we are not really anticipating a change in direction, but rather following in the direction of momentum. In a H&S pattern, which is commonly known as a reversal pattern, the same underlying logic of weakening momentum is demonstrated. In neither case are we expecting a reversal, we are just following momentum.

What I described above is relatively new concept to me and I'm not sure if what I wrote is what you meant. Let me know if I'm on the...
Momentum and lack of momentum, the latter being ordinary, routine, such as a channel. I'd much rather trade the latter, as the former's risk can be intimidating.
  • #25
  • Feb 20, 2011 5:19pm Feb 20, 2011 5:19pm
Quoting ha-pattern
Momentum and lack of momentum, the latter being ordinary, routine, such as a channel. I'd much rather trade the latter, as the former's risk can be intimidating.
I think we have a different understanding of what momentum is. When I speak of momentum, I have in mind the classical definition of momentum.

Momentum (finance):
In finance, momentum is the empirically observed tendency for rising asset prices to rise further.

Momentum (technical analysis)
Momentum and rate of change (ROC) are simple technical analysis indicators showing the difference between today's closing price and the close N days ago.

http://upload.wikimedia.org/math/0/d...df75fbea22.png

Rate of change scales by the old close, so as to represent the increase as a fraction,

http://upload.wikimedia.org/math/b/3...2860626c6b.png

"Momentum" in general refers to prices continuing to trend. The momentum and ROC indicators show trend by remaining positive while an uptrend is sustained, or negative while a downtrend is sustained.

End of wiki quotes.:nerd:
The definition that I go by ensures that there is always momentum present unless the market is totally flat. From your post I can imagine that you define momentum as a move with a strong impulse, a move that would send price to one side of Bollinger bands if one had them on a chart. I don't know why this definition has stuck with people (I've seen plenty of people who define momentum as a strong impulse) or where it came from but I hope that it's clear now what I meant when I spoke of momentum in the post you quoted.

With all that being said, I agree with you in terms of rather trading a calm market that doesn't jump around like a junkie on crack. The risk of running into a crackhead, just as with trading explosive moves, can be intimidating.

Medici, I hope I didn't get too technical here. I just had to do a little explaining to get my thought across. I'll stay away from the technical side from now on as per your request in a previous post.
If you don't risk, you don't ever have to lose.
  • #26
  • Feb 23, 2011 2:42pm Feb 23, 2011 2:42pm
Yes, that's right. It's not a system, it's a state of mind, so the only place it could be possibly be found is within yourself. In case you go looking for it, here's what it's like:

Responses to the market are automatic. Trades are entered and exited without any sense that decisions are made. Wins and losses don't cause emotional reactions, and the process of trading is stress-free and fun.

This requires that you have a high degree of self-awareness. You know your motives not just superficially, but at the deepest level. Do you really want to trade, or do you just want an easy way to make good money? If you want to trade, why?

This requires that your approach to trading be highly planned. You need to know the ins and outs of your trading system in terms of all relevant measures of risk and reward.

While highly planned, your system needs to be fully aligned with your gut feeling reactions to the market. Indeed, it's a matter of complete integration between cognition, perception and instinct. Some people's system is to trade based on gut instinct, whereas others have the gut instinct to follow a mechanical system. What's it like for you?

And that's only the beginning. You need to put in the work of an elite performer. You must put in the time, and here time is measured in years, before you get a sight of the Holy Grail. You need to have the confidence of Michael Jordan, who was cut out of his high-school basketball team but still did ok in the end.

Are you starting to get the picture? Do you realise that the talk of 10000 hours screen time may be underestimating things? Or maybe you really have the talent for this? Are you as talented as Michael Jordan? Apparently, there's still work to be done:

Inserted Video


If you put in the work, then maybe you and the market can dance like this:

Inserted Video


And if you think that it isn't a dance, but that you can observe the market at a distance and make your own decisions, take a look at this:

Inserted Video


Still think trading is for you? Want to find the Holy Grail? Stay tuned for the next post with some thoughts on that.
  • #27
  • Feb 23, 2011 3:54pm Feb 23, 2011 3:54pm
Quoting triphop
True, true. And if you prevent just one goose chase, that's a few hundred hours of someone's life you've saved. I personally hold Mark Douglas to account for a lot of that, but that's a different story.
Mark Douglas...the guy admits he can't trade - how can he then set out on a career as a trader mentor and coach?
  • #28
  • Feb 23, 2011 3:56pm Feb 23, 2011 3:56pm
Quoting highlander2
I am not a systematic trader, i need to use my instincts and experience to decide to trade or not, this requires me to be totally focused and in a mindset that is free from stress, pain or euphoric feelings. I like many spent my fist year relentlessly looking at charts looking for some great way to trade, i completely ignored my own mind.

These days i am more and more of the opinion that constantly monitoring myself is a lot more important than any form of market analysis. "am i fit to trade?" is a question i need to amswer every time im at...
Hello John,

Very insightful comments, and very much in line with my latest post. Thanks for sharing, and looking forward to hearing more from you!
  • #29
  • Feb 23, 2011 4:00pm Feb 23, 2011 4:00pm
Quoting DramaKing
I used my first year trying to understand all the indicators. Which indicator worked best with what other indicator. Intraday, 5min TF, 15min TF, lots of bells, whistles and MetaTrader scripts. Lots of feelings, ups and downs.

Then I turned everything off. Went up to daily. Logging in a couple of times a week to a couple of times a month. Now I only have one EMA to remind myself of checking the trend. Also checking the individual currency index at TimingCharts.com to better understand the trend.

But itīs like what you said. Itīs a bit like...
Sounds like you've found your way, but can you be a drama king in the markets?
  • #30
  • Feb 23, 2011 4:08pm Feb 23, 2011 4:08pm
Quoting medici
Mark Douglas...the guy admits he can't trade - how can he then set out on a career as a trader mentor and coach?
Excellent point.......my thoughts exactly!!!
  • #31
  • Feb 23, 2011 4:10pm Feb 23, 2011 4:10pm
Quoting medici
Sounds like you've found your way, but can you be a drama king in the markets?
No... itīs a lot less boring than watching Wall Street But a lot more satisfying when you make it work!
"White collar crime deserves a blue collar beating!" - 8fingers
  • #32
  • Feb 23, 2011 4:18pm Feb 23, 2011 4:18pm
Quoting Troikaone1
Excellent point.......my thoughts exactly!!!
While we're at it, let's topple some more people off their pedestals. Next to get my push is Nick Taleb...
  • #33
  • Feb 23, 2011 5:38pm Feb 23, 2011 5:38pm
Quoting medici
Hello John,

Very insightful comments, and very much in line with my latest post. Thanks for sharing, and looking forward to hearing more from you!
Thanks, and thanks for your posts as well they are excellent.

I've had a lot of, what could be called "aha", moments over the last six months or so. And I have learned things about myself.

Onething occured to me over the past couple of days. There were several setups in the markets the were almost good trade setups for me. probably about 5.

I did not take any of them, yet as we speak, all have either made over 2:1 or are in decent profit.

Now Im not saying this to make out im some great trader, everyone will experience this sort of thing. They are seeing the setups and not acting on them and they turn out winners.

By the way these were not good setups, they second rate. thats why i did not take them, not because i was afraid. I even have the log in my diary, where i took a screen shot and wrote down my reasons for not trading.(this really helps me)

But when a string of 2nd class setups come off in a row that the trader doesnt profit from, it will cause all sorts of problems, an attitude will develop that will cause us to make mistakes, this will be along the lines of- "I cannot miss the next trade! the next time I see a chance Im taking it"

This will mean the trader will start jumping on so-so trades just to avoid being left out. I think everyone will have felt this, and you all know what happens.

This is the problem that discipline creates, you will have to avoid trades that are not up to scratch, yet many of these will work. But we know that taking every so-so trade setup that comes along is not profitable.

I come back to self analysis again, if I feel like I need to take the next trade, just "so I dont miss out", im not fit to trade. Tonight I just felt a tiny bit of frustration creeping in so I got the hell out of the house for a few hours.

I hope Im in-line with what you want this thread to be about medici.

John
  • #34
  • Feb 24, 2011 3:09am Feb 24, 2011 3:09am
Has anyone investigated how to apply power laws http://en.wikipedia.org/wiki/Power_law to volume and/or price? http://web.mit.edu/newsoffice/2003/powerlaw.html
http://www.mendeley.com/research/pow...-stock-prices/
  • #35
  • Feb 24, 2011 5:31am Feb 24, 2011 5:31am
Quoting purley
Has anyone investigated how to apply power laws http://en.wikipedia.org/wiki/Power_law to volume and/or price? http://web.mit.edu/newsoffice/2003/powerlaw.html
http://www.mendeley.com/research/pow...-stock-prices/
About a year ago I did some modelling, based on Didier Sornette's power law model for crash prediction, to predict the end of strong trends in currencies - with some interesting results - but haven't pursued it further.

Sornette has made quite a few accurate predictions. For more about him, see for example:

http://online.wsj.com/article/SB1000...057646044.html

http://www.technologyreview.com/blog/arxiv/23839/

Way too technical for this thread though, I am afraid. If you want to pursue it further, I'd be happy to discuss on a separate thread.
  • #36
  • Feb 24, 2011 9:51am Feb 24, 2011 9:51am
Quoting medici
Mark Douglas...the guy admits he can't trade - how can he then set out on a career as a trader mentor and coach?
Its quite depressing to hear that one of the icons of trading psychology cant actually trade, is this really true?
  • #37
  • Feb 24, 2011 1:48pm Feb 24, 2011 1:48pm
Quoting highlander2
Thanks, and thanks for your posts as well they are excellent.

I've had a lot of, what could be called "aha", moments over the last six months or so. And I have learned things about myself.

Onething occured to me over the past couple of days. There were several setups in the markets the were almost good trade setups for me. probably about 5.

I did not take any of them, yet as we speak, all have either made over 2:1 or are in decent profit.

Now Im not saying this to make out im some great trader, everyone will experience...
Another very valuable post! Thank you very much, John

I totally agree with you about the focus on self-analysis.

The background to this thread was that somebody suggested that the original post about "follow, don't anticipate" be given better exposure than at the back of a thread that's gone to sleep.

So I thought that I'd post it together with a couple of posts related to it. That's all.

Inspired by your focus on mental factors, I wonder why most people are focused on systems, indicators, entries and exits - rather than the factors that make them all happen.

Could there be a thread/community where the focus is on the mental factors rather than technical issues?
  • #38
  • Feb 24, 2011 1:53pm Feb 24, 2011 1:53pm
Quoting highlander2
Its quite depressing to hear that one of the icons of trading psychology cant actually trade, is this really true?
This is an inference from what he's shared over the years. He blew out big time and went into personal bankruptcy when he was a futures trader, which many successful traders have done as well. But since then everything he's called "my own trading" sounds like average Joe managing his 401k. That's what I meant. In addition, lots of what he's saying sounds very iffy, to say the least, based on my experience.

Brett Steenbarger, on the other hand, I have the greatest respect for.
  • #39
  • Feb 24, 2011 2:12pm Feb 24, 2011 2:12pm
My trading got better as I've managed to conquer my mind, as soon as I identified bad habits and stopped repeating them, trading got a bit better.
  • #40
  • Feb 24, 2011 2:18pm Feb 24, 2011 2:18pm
Quoting ssnakezor
My trading got better as I've managed to conquer my mind, as soon as I identified bad habits and stopped repeating them, trading got a bit better.
Same with me. The big steps forward in my trading have been about psychological factors rather than technical.

So why is everybody talking about indicators and systems?
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