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Gone with the wind - We are Weathermen

  • #1
  • First Post: May 25, 2011 1:02pm May 25, 2011 1:02pm
Gone with the wind? Have you ever wondered about the reliability of these so called trading instruments, tools, and indicators (stochastics, emas, mvas, etc.)? These tools are nothing more than simple indicators used to help predict the movement, or change in direction of the price.

A weatherman uses similar tools to predict the weather. And that is essentially what a trader is doing as well. You can't very well predict the random changess in the direction of the wind as you can with the direction of the price. Sure a weatherman can predict stormy weather. As a trader can predict a coming price movement or reversal. However, how many times has that weather prediction been wrong? Even if it was predicted accurately, I'm sure the timing was a bit off. And in the world of Forex trading, timing is key.

Look at it this way. You are standing outside, and it is very windy. The wind is blowing from all different directions: one moment its hitting from the north, then it changes to coming from the south. Simply random gusts of wind that you are feeling. I'd like to meet a meteorologist that can tell me what way the wind will be blowing at any given second. The truth is, no one can predict the random directions of a gust of wind, no more than one can predict the random directions of price "noise" in a currency pair.

My point is this: quit trying to play weatherman. You must simply go with the wind. Meaning that, trade with the wind, or the movement in the price, rather than against it. Keeping it all simple is key to success. Anything in life can be made easy, you simply have to make it easy.
Keep it simple stupid
  • #2
  • May 25, 2011 3:18pm May 25, 2011 3:18pm
I like your post in two ways:
First, your metaphor seems sound: larger patterns are usually better predictable, and if you try it on the scale where you have random noise, it does not end well.
Second, you got me thinking. Maybe I am about to take your post too literal, but my point is still valid:
Traders are -- in a way -- like meteorologists.

Both need to predict the state of a complex system for a given time in the future (e.g. "it's gonna rain tomorrow" or "the Dow is going up").
Both need to do this with a certain precision. If a meteorologist is usually wrong, nobody will use his predictions and pay him. If a trader is usually wrong, he will lose his capital.
Both targeted systems (weather and financial markets) are chaotic systems (chaotic in the mathematical sense, meaning that differences in initial states grow exponentially over time).

I know almost nothing about meteorology. But I do know that the weather predictions have become _really_ good in the last few years. At least if the date is only a few days in the future.

Is there someone here who knows meteorology profesionally or as a hobby?
We could try and investigate if the methods for predicting the weather could somehow be applied to the forex market.
I do not mean the "we'll just name our method after stuff because it sounds cool" method, which seems alarmingly common for forex, but real tests and statistical analysis.
So, weathermen and weatherwomen of the world, unite!
  • #3
  • May 25, 2011 8:02pm May 25, 2011 8:02pm
"Everything should be made as simple as possible, but not simpler." Albert Einstein.

Simply Genius. Why make everything hard and difficult. I mean, trading in its most simplistic terms is either a win or a loss, a profit or not. The price goes up, or the price goes down. That being said, one could assume that it is nearly 50/50, up or down; similar to flipping a coin: heads or tails. Let's keep it simple, and swim down river, not up river without a paddle (much harder). Go with the flow of things. If price is going obviously up, then go long, just don't get greedy. Simple.
Keep it simple stupid
  • #4
  • May 25, 2011 8:42pm May 25, 2011 8:42pm
Quoting Novak
Gone with the wind? Have you ever wondered about the reliability of these so called trading instruments, tools, and indicators (stochastics, emas, mvas, etc.)? These tools are nothing more than simple indicators used to help predict the movement, or change in direction of the price.

A weatherman uses similar tools to predict the weather. And that is essentially what a trader is doing as well. You can't very well predict the random changess in the direction of the wind as you can with the direction of the price. Sure a weatherman can predict...
Ok, so a post like this gets my attention for obvious reasons.

I like the post. Not because I support its conclusions, but because I am diametrically opposed to its conclusions and I think a post like this, makes for startling contrast when juxtaposed with the technical realities of the market.

Any licensed pilot will tell you of the fallibility of Weather Reports. Pilots, especially those with lots of IFR experience, will have an entire library of experiences where the pre-departure weather briefing they received from Flight Service was less than "perfect" en-route. But, no matter how many times Flight Service gets wrong, the FAA mandates that all pilots conducting IFR operations must first receive a weather briefing from an officially designated weather briefing source, before launching on an IFR flight. Most IFR pilots appreciate such services.

So, why should the trader be any different? The Weather Briefer uses special "tools" that yield "real-time indications" of weather for a specific region or a specific local area. Many of the tools uses are "indicators" of what kind or type of weather to expect en-route and at altitude, over a specific region or area. Such tools are capable of reporting on conditions within the atmosphere that have an empirically defined probability for producing certain conditions both on the ground and at altitude. Those "predictions" are always "probabilistic" and not absolute guarantees of what the found conditions will be.

Yet, any IFR pilot will tell you that they'd rather have that, than nothing at all - as flying blind in the "soup" is not only ill advised, but downright suicidal at the core!

So, what about these "useless indicators?"

Think about it for a moment. An IFR pilot flying with souls on-board (passengers), shoots an approach to landing where the cloud ceiling is below 500 ft. That's not the most difficult approach to shoot in the world, but it is just an example. On a basic 5 mile approach, that pilot will spend the entire time in the clouds from altitude, down through the cloud base's upper limit, never once being able to see beyond an inch outside the cockpit glass given the thickness of the clouds. Yet, just like clockwork, pilot, aircraft and passengers arrive just under the cloud base, at or near the 500 ft mark and directly in alignment with the runway center line.

But, how is this even remotely possible when the visibility was absolute zero inside the cloud layer?

Well, it is called a Precision Approach and it would not be possible without the careful use "instruments" and an entire system built upon "technical tools" that give the pilot precisely what he/she needs to arrive over the runway threshold on the precise glide-slope, angle of attack, angle of bank, sink rate, pitch attitude and airspeed sufficient to make a safe landing - regardless of the lack of visibility on the way down the pipe.

Can we replicate this as traders?

The good news is that we don't need to. The pilot has no choice but to operate his/her aircraft with this level of precision. If that pilot breaks out under the cloud base and finds him/her self 500 ft over a body of water, or worse, they find themselves just 3,000 ft from the 31st floor of a commercial building directly off the nose of the aircraft, then that pilot has a problem to correct immediately. But, as a trader, you only need to be precise enough to cut out a sufficient number of pips on each trade, without absorbing an excessive amount of MAE.

If you are hanging on for dear life trying to capture every ounce of that 220 pip move, you'll probably never realize that inside that singular move, there was the possibility to capture far more pips, at a higher trade frequency by being both Long and Short at the right times within the larger move. Higher rates of precision in trading can be obtained with shorter trade intervals given the natural tendency of the market to move sideways, before major moves either Up, or Down for longer periods of time.

The key is not to blame technical indicators (those useless IFR instruments). The real key is to learn how to use those technical indicators when you "fly the markets." Of course, before you can do that, you have to learn which instruments (indicators) are appropriate for your mission.

Simply put - bring the right tools for the job. And, don't even think about flying blind in the soup!

I'll modify a very well know quote that pilots are all too familiar with and one that traders should get to know:

"There are old pilots and there are bold pilots. But, there are precious few Old Bold pilots."

Likewise:

"There are old traders and there are bold traders. But, there are precious few Old Bold traders. Use the tools that give you an edge."
  • #5
  • May 25, 2011 9:02pm May 25, 2011 9:02pm
Quoting JetTrader
Ok, so a post like this gets my attention for obvious reasons.


Yet, any IFR pilot will tell you that they'd rather have that, than nothing at all - as flying blind in the "soup" is not only ill advised, but downright suicidal at the core!

You are correct, flying blind would be very dangerous. My dad actually flew commercially for Northwest, and a few other airlines for a 16 year career. Unfortunately, he wasn't able to hold his first class medical to continue flying, which ended his career as a pilot in 1999.

He too knows the importance of instruments for flying. For example, your altimeter displays your current altitude. Without it, you would have no exact idea of your position. And imagine if you'd happen to be in a big mess of fog, then it would be suicidal to fly without the instruments.

However, I'd like to point out an ancient method of predicting the whether that our fore-fathers, and ancestors before us have used to predict the weather. And this method is simply called: "eye-balling it". Meaning that you simply glance at the sky, or look for stormy clouds. We can see far, but not farther than radar.

Technology is great, but I don't think it will ever surpass the human mind, at least not within our lifetimes.

Remember, keep it simple. By glancing at a Forex chart, anyone could tell you what way it's moving; whether it be up or down. Even a five year old could tell us that.

Although, I still believe you are right about using instruments. They should be only used as a guide, or a reference. Not a way of life to determine every move. Just as the weatherman predicts 50% chance of rain, my indicator predicts a chance of price reversal, and neither the trader nor the weathermans indicators will be 100% correct, unless you use old faithfull "eye-balling it" to see for yourself.
Keep it simple stupid
  • #6
  • May 25, 2011 9:15pm May 25, 2011 9:15pm
The image below is of the EUR/USD on a weekly time frame. The main inicators I use is simple lines (trend lines). As you can see below, I change the the lines as necessary. The blue lines represent a large downtrend channel on the weekly scale. Whereas, the red and yellow lines reprent an uptrend on the daily scale.

Although, I may use some more historical indicators as well, just as a reference of course. Sure the indicators can predict the future, through the assistance of historical data, but they can never predict the date: otherwise we'd all be rich by now! Just like I can predict the an inevitable tsunami in the near future, but I do not no the date.

Attached Image (click to enlarge)
Click to Enlarge Name: eurusd.png Size: 23 KB
Keep it simple stupid
  • #7
  • May 25, 2011 9:49pm May 25, 2011 9:49pm
As a professional pilot, I have to disagree with the your statement that wind is random. It is in fact, not random at all. Wind goes from high to low pressure and is affected by Coriolis effect and Surface friction on the ground. Near the ground, it flows against the isobars (lines of equal pressure) and aloft it flows parallel to the isobars. You can even predict the speed by the distance of the isobars. Just like in forex, with the right signals, you can predict the general direction and speed of the wind.
  • #8
  • May 25, 2011 9:59pm May 25, 2011 9:59pm
Quoting Novak
"Everything should be made as simple as possible, but not simpler." Albert Einstein.

...If price is going obviously up, then go long, just don't get greedy. Simple.

I agree with the shortest distance between any two points being a straight line: simplicity, defined.

However, how does the trader know when "price is obviously going up...?" In other words, when does the trend stop being your friend and starts to become your enemy? If trading were that simple, everybody would be an expert over night.

Think about the numbers of our industry:

- The business starts with a 50% chance of success.
- You can only lose (not including spreads/commissions) in one direction.
- We are in a business with the highest capitalization rate in the world.
- There is no larger market in all the world.
- Easy access: Connect from home to a $4 trillion a day market.

Yet,

- 95% don't make it.

That's an amazing paradoxical theme. Such an "easy button" business on the surface, yet so many fail. So, identifying those markets that are "obviously" going up, or down, seems to be a very difficult thing for many to put into practice, given the industry statistics on survivability.

E=mc^2, I 100% agree, is absolute simplistic genius. However, have you seen any of his translated mathematical derivations of E=mc^2. If you have, then you know that simplicity was not always Einstein's strong suit! The real point here, is that in typical human fashion, the way you usually make things "simple," is by methodically reducing the inherent complexity down to its absolute essentials.

I would place the complexity of the financial markets (most of them) right up there with Astrophysics, Aerodynamics, Rocket Science and Cellular Biology, just to name a few of the technical standards. It is no less complex to make highly accurate projections with very high probability over extended periods of time. Most traders don't do this. Most good traders produce moderate to high levels of accuracy over very short periods of time, if that much.

Highly accurate, highly probabilistic projections to a specified target level over extended periods of time, is very difficult to master in the high-frequency trading business. To try to accomplish such a task without the use of technical tools, is highly problematic to say the very least. You need empirical data, empirical evidence and a proven framework from within which high probability projections in price behavior can be made with a high level of confidence and technical acuity.

Of course, if one believes that concluding a trade at break-even or better 63% of the time while using money management to mitigate the failures, is considered highly successful trading, then who am I to argue, as long as the equity curve is steeply sloped upward. However, if that equity curve has little to no upward slope and the same 63% accuracy in trading is the result, then the problem is not with the money management strategy, it's with the methods used to derive the probability that a good trade was imminent in the first place.

Show me a trend that never ends and I'll show you a market that is about to undergo significant correction with a very high degree of probability - unless that market is grossly rigged - in which case, we should not be involved anyway.

Thus, it must be therefore be all about the probability and the technical tools that one brings to derive that probability. Einstein, himself, would probabilistically have it no other way.

To really drive home the point, can anyone truly imagine Einstein, being a Fundamental Trader? Einstein, if he were a trader, would be the biggest proponent of Technical Analysis that there has ever been in the market to date. Make no mistake about it, LOL!

I mean seriously. Can you imagine Trader Einstein, sitting down with his morning tea, reading an NFP report for anything other than relative entertainment, or some kind of passing ritual as he waits for the economic report's anomalistic effect to subside before he re-enters the market on technical probability? Can't you just hear the interview that Trader Einstein would give, as he talks to an Anchor on Bloomberg Technical Analysis, about his thoughts on Fundamental Analysis -vs- Technical Analysis and what he personally prefers as a successful trader?

Of course, the assumption here, is that Einstein, would be a successful trader. I for one (if I was a betting man) would not bet against Einstein, being highly successful in this business. It sure would be an interesting interview to watch, that much is certain.
  • #9
  • May 25, 2011 10:50pm May 25, 2011 10:50pm
Quoting Novak
You are correct, flying blind would be very dangerous. My dad actually flew commercially for Northwest, and a few other airlines for a 16 year career. Unfortunately, he wasn't able to hold his first class medical to continue flying, which ended his career as a pilot in 1999.
I hate to hear about pilots that are forced away from a career over a medical, but I'm sure he still enjoys part 91 flying, nonetheless - or at least I hope he still enjoys GA flying.

Quoting Novak
However, I'd like to point out an ancient method of predicting the whether that our fore-fathers, and ancestors before us have used to predict the weather. And this method is simply called: "eye-balling it". Meaning that you simply glance at the sky, or look for stormy clouds. We can see far, but not farther than radar.
The average person doesn't know the difference between a cumulonimbus, stratocumulus or altocumulus cloud formations. Also, how does the person standing on the ground know anything about barometric pressure, humidity or relative temperature, without having instruments to take those measurements, so that they can have some idea of what to expect from what their eyeballs are telling them about what they see? Typically, the real in-climate weather doesn't like to show its true face until after a front passes. But, if the individual trying to eyeball it, can't see the overlying warm frontal occlusion, then they won't be able to detect the possible severity of the precipitation or the winds that are likely to follow such atmospheric events.

So, in reality, isn't eyeballing it, just a little bit like licking one's finger and sticking it in the air to see which way the wind is blowing? Of course, I have heard legend of people actually being able to trade this way - or by using the migration of Elephants in Africa, to predict the direction of the next big market move (no kidding - somebody actually does this).

Quoting Novak
Technology is great, but I don't think it will ever surpass the human mind, at least not within our lifetimes.
Technology is Applied Information. The systematic application of derived knowledge, is Technological Adaptation. A wheel, is technology. So, is the pen. So, even the Fundamental Trader uses "technology" because they are merely applying information for a specific purpose and to enable a specific function and/or outcome. The Fundamental Trader often times does not want to admit, that they are in reality, a form of Technical Trader. Of course, that would be a certain violation of the sacrosanct order of the Fundamental Trader, to admit such a thing. Heresy! Off with your head, for even mentioning it!


Quoting Novak
Remember, keep it simple. By glancing at a Forex chart, anyone could tell you what way it's moving; whether it be up or down. Even a five year old could tell us that.
I've glanced at a million of them and I still can't tell merely by glancing. Studying? Yes. Glancing, I'm going to have to actually see somebody do that consistently before I accept it as normal causation for long-term profitable trading.

Quoting Novak
Although, I still believe you are right about using instruments. They should be only used as a guide, or a reference. Not a way of life to determine every move.
Well, if they are not used as a way of life for the Technical Trader, then he's not too technical at all. He's merely tossed up some technical indicators on a chart, just to 'feel like' he's on the right track, but probably not truly understanding what they mean, how to use them properly, or why they are significant or important to his trading. In fact, for that kind of trader, the one who adorns his charts like a December 25th, Christmas tree on steroids (you know what I'm talking about - the charts that can be seen from Columbia, from the North Pole because they shine so brightly at night), I'd rather see him ditch the indicators and stick his finger in the air - he'd probably be far better off.

Actually, I'd like for that trader to take your advice and realize that learning the power of just one indicator, can pay huge dividends over the Fourth of July chart, exploding in a variety of color and a dazzling light show. I mean, some of these charts are amazing to behold and make for far better viewing pleasure than any New Years Eve fireworks party that I've seen. In fact, this 4th of July, I'm going to find the newest Forex Forum I can find and sit back with a glass of red wine to view all the super spectacular light show that some of these charts provide - all free of charge, of course!


Quoting Novak
Just as the weatherman predicts 50% chance of rain, my indicator predicts a chance of price reversal, and neither the trader nor the weathermans indicators will be 100% correct, unless you use old faithfull "eye-balling it" to see for yourself.
Seriously - when my trade signal predicts a 50% chance of the market going Long, I don't allow that signal to even come to screen. No trade signal in my system that is below a 90% probability, is ever allowed to see the light of day on my screen. I simply code them to be suppressed, so I never even see them. I'm interested in 93% to 99% probability in a trade signal and not a percentage point lower. Anything lower and I start to get suspicious of the trade. If it is between 93% and 99%, I enter the trade with minimal stress or worry and a good degree of confidence in the outcome.

A 50% trade signal, just won't pay the bills. That level of probabilistic risk is a Peto Bismal trade signal and I simply can't live that way. The stomach problems (and I've been down this road) are serious and real. Not being able to eat because you can't get your food down. Persistent heartburn, sleeplessness, headaches caused by high stress, personality disorders and mood swings, etc. All of that stuff is for the birds. So, to avoid all of that, I simply code the system to never display a trade signal below 93% to 99% probability. If below, the system displays the trade signal as "Off" - period. And, when the system is "Off," I'm not in the market.

Those stress levels are far more manageable and realistic. I used to eat an entire bottle of Tumbs every two weeks without a rock solid technical analysis based system - no joke. I don't play that game anymore.

Eyeballing it? Eyeballs and Maylanta, is a lifestyle choice. But, it does not have to be that way. I think there is a very good chance that Einstein, would agree.
  • #10
  • May 25, 2011 11:22pm May 25, 2011 11:22pm
what's the reason behind 93% being the cut-off point?
Congratulations ScalaFX for coming out of the closet!
  • #11
  • May 25, 2011 11:32pm May 25, 2011 11:32pm
Quoting nubcake
what's the reason behind 93% being the cut-off point?
Was just about to question the same thing.

Also, while a 93%-99% probability method is quite a feat, it is also possible that the trader with a lowly 50% probability, who is willing to accept the risk, can have warped Risk:Reward ratio that rewards them handsomely for accepting said risk. They are both means to an end - the final door of profits, so it would not be wise to completely dismiss one over the other.

You may find some interesting stuff in the places you are least willing to look.

Your posts are also very well-thought out. I respect that.

Regards,
xXTrizzleXx
  • #12
  • May 25, 2011 11:37pm May 25, 2011 11:37pm
Quoting Novak
Gone with the wind? Have you ever wondered about the reliability of these so called trading instruments, tools, and indicators (stochastics, emas, mvas, etc.)? These tools are nothing more than simple indicators used to help predict the movement, or change in direction of the price.

A weatherman uses similar tools to predict the weather. And that is essentially what a trader is doing as well. You can't very well predict the random changess in the direction of the wind as you can with the direction of the price. Sure a weatherman can predict...
Bob Dylan says the same thing, but in fewer words: 'You don't need a weather man to know which way the wind blows!'
Doing what you like is Freedom. Liking what you do is Happiness.
  • #13
  • May 25, 2011 11:44pm May 25, 2011 11:44pm
Just a few comments:

Quoting JetTrader
However, how does the trader know when "price is obviously going up...?" In other words, when does the trend stop being your friend and starts to become your enemy?
Said trader needs to simply find a logical reason for price to go up. If the market conforms to his reasoning, all that is left to do is assign an entry and an exit to capitalize on the movement.

Quote
The real point here, is that in typical human fashion, the way you usually make things "simple," is by methodically reducing the inherent complexity down to its absolute essentials.

This is a powerful quote, and I believe it is a hurdle that traders go through on their route to profitability - first enshrouding themselves, hitting the brick walls, exertion, exhaustion - even desperation, until it all clicks. It's smooth sailing from the point of clicking, as all that remains to do is to form a neat package, which succintly embodies all the knowledge that has been accumulated, to the point where the process becomes routine.


Quote
It is no less complex to make highly accurate projections with very high probability over extended periods of time. Most traders don't do this. Most good traders produce moderate to high levels of accuracy over very short periods of time, if that much.

Quote
Highly accurate, highly probabilistic projections to a specified target level over extended periods of time, is very difficult to master in the high-frequency trading business. To try to accomplish such a task without the use of technical tools, is highly problematic to say the very least. You need empirical data, empirical evidence and a proven framework from within which high probability projections in price behavior can be made with a high level of confidence and technical acuity.

Perhaps this should be approached from another angle. What if most traders fixating on the need to be able to make highly accurate projections was actually a contributor to their plight? Perhaps what is needed is a logical means for the market to let you know when to exit, instead of projecting ahead of time when the move will end.

Regards,
xXTrizzleXx
  • #14
  • May 25, 2011 11:51pm May 25, 2011 11:51pm
Quoting mojo6911
As a professional pilot, I have to disagree with the your statement that wind is random. It is in fact, not random at all. Wind goes from high to low pressure and is affected by Coriolis effect and Surface friction on the ground. Near the ground, it flows against the isobars (lines of equal pressure) and aloft it flows parallel to the isobars. You can even predict the speed by the distance of the isobars. Just like in forex, with the right signals, you can predict the general direction and speed of the wind.
But, what you just posted Mojo, is more techno-babble. Isobars? The wind following the contour of Isobars and the ability to predict wind speed by using Isobars? That's just useless techno-babble!

Can't you see that Isobars, Coriolis Effect and Surface Friction are nothing more than "useless technical terms" that really don't tell you anything at all about the tail-wind, head-wind or cross-wind component that you need to subtract or add from or to your airspeed to obtain your true ground speed, or how much rudder you might need to use on approach or take-off, or what cross-wind component to use en-route?

In fact, why even calculate a cross-wind component? Who needs that stuff anyway. Just point your airframe in the direction of the heading that takes you to your next waypoint and just fly that heading. But, why even do that? Heck. Who needs waypoints in high-altitude RVSM operations anyway! Just use a good ole fashion magnetic compass and don't worry at all about the "tool" of standard magnetic deviations - who cares! Just fly the magnetic heading indicated on your compass - that will certainly get you to where you want to go, no problem.

When you arrive and Approach asks you to reduce your airspeed down from 380kts to 200kts, just pay the individual no attention whatsoever. Why? Because systems and protocols don't matter and the technology used to drive safety in those systems don't matter either. In fact, just so you can get on the ground faster, why not increase reduce your altitude AND increase your airspeed to 500kts at the same time! That ought to get you on the ground a lot faster, that's for sure. Heck, why not! Its a simple concept, right. Increasing your airspeed in Class B to 500kts, must get you to your destination faster. How could it not do that!

Just go ahead and bust the FAA airspeed restriction in Class B, as you make an overhead 270-degree turn over the field to bleed off all that excess energy before turning to final and landing directly in the wake turbulence of an A380 that took off just two hundred feet behind your touchdown spot - seconds ago! Wing tip vorticity on an aircraft with a max landing weight of 860,000lbs at a horizontal range of 200 feet and a wing surface area of 9,000+ square feet? Who cares what that wake wingtip vorticity looks like! Its all technical mumbo jumbo anyway and we all know the technical stuff does not matter.

Ah, yes. And, when you get that ramp visit from an FAA Officer after your "taxi-back" down the runway you just landed on without the approval of Tower, just tell the FAA that you don't have any use for technicalities, as the aircraft that was cleared to land on that same runway is forced to execute an emergency missed approach because the pilot saw your aircraft taxing directly into his touch-down zone in the opposite direction. Yep - I am almost 100% certain that will get you off the hook, with no FAA hearing to follow regarding the permanent revocation of your license.

Of course, as a professional pilot, I'm sure you see the humor in all this and I know you appreciate the concept of well designed systems, rules and protocols that mitigate risk to the highest degree possible. Surely, this would be the case.

Its funny how in other mission critical endeavors or professions, technology is welcome. But, in the mission critical environment of trading, some have the view that technology is taboo. I find that irony very interesting. Maybe that trader does not yet understand just how mission critical trading really is. I've never understood the ability of some, to throw a wing and a prayer at trading, while not batting an eyelash in the entire process.
  • #15
  • May 26, 2011 12:35am May 26, 2011 12:35am
Quoting nubcake
what's the reason behind 93% being the cut-off point?
Just a personal comfort level. I've moved it up over the years. When all I had was 63%, that's what I went with. But, that included a lot of Tums and warm milk to settle the stomach.

When I broke the 70's, it felt the same way it did when I finally broke 90 in golf. Still, there was too much Peto Bismal involved. The breaking of 80, felt like breaking 80 in golf. I felt like real progress was being made - that somehow, if I got really good, I could possibly make a living doing it - both golf and trading. Then things got really hard.

Breaking 80% in trading, is very much like breaking 80 in golf. I noted how similar the two really were years ago - the correlation up to that point was pretty spot on. I'd practice more in golf, but the scoring become more difficult. Tee shots became more critical, but the second shot from the fairway into the green is the first thing that separates the really good amateurs from those on the PGA Tour. In trading, getting to 85%, took almost as long as going from 70% to 80%. Getting from 85% to 90% in trading, took 200% as long as it did to go from 70% to 85%. Breaking 90% in trading seemed to take forever. 93% to 97%, seems to be the sweet spot for my system and it took nearly 10 years total with periods of time off.

Trying to go from 93%/97% to something higher, would be the Grail. But, quite frankly, I would have to come up with a concept that my brain now considered completely foreign. It would have to be something truly revolutionary - a concept that's different by any measure. Some thing truly genius. I have no idea how to produce that kind of new idea or concept with the brain I have.

However, if it does happen, I am 100% confident that the new concept or idea will NOT come from within the trading world. Here's what Einstein, said:

"No problem can be solve at the same level of consciousness that created it." - Einstein.

So, if I want 99% all the time - then getting as far outside the box as possible is an absolute must, according to Einstein. I favor Physics, but Cellular Biology is something I find very interesting as a starting point for new discoveries. I also find the behavior of Ant Colonies, to be rather interesting as well. Oceanic Science, would be another area of interest, as well as a more in-depth look at Meteorological Science. Volcanology, might prove somewhat interesting, too. Notice, that all of these have "live" rhythmic core tenets as major feature. They are all Systems at their respective core.

At the very least, if I fail, I automatically get more educated about our planet. Never a bad thing, you know. I have some in-chart time-series theories that I'd like to work out, before I branch out into undiscovered country.

It sort of makes you feel like the captain of a star ship, going on explorations of deep space in search of things that you don't even know exist. Fun!

The Super Hedge Funds have been employing PhD's in mathematics, computer science and economics for billions of years (seemingly) to build predictive computer based models that run against the Box. Well, if Einstein, is right - then my models will need to run outside the Box, yet provide some insight into what might be happening inside the Box.

Maybe, the answer is not that far away. Maybe it won't be found in Kilimanjaro, or deep inside a North Atlantic Sea Shelf. Maybe outside the Box simply means outside the currency markets, but inside other markets. Or, quite possibly, the missing link resides at the bottom of a good study of the Active Transport process of molecules within endothelial cells. Who knows where the answer resides, really. 99% is a pretty tough nut to crack open.
  • #16
  • May 26, 2011 1:22am May 26, 2011 1:22am
Quoting xXTrizzleXx
Said trader needs to simply find a logical reason for price to go...
Maybe one day I'll write a book titled: The Implosion of a Friend - Ooops, I mean, Trend.

Its a somewhat catchy title that might attract some non-traders looking for help with relationships, or traders looking for help with trading and relationships, LOL!

What we have not defined yet, is what a good trade means to the trader. Not all traders need the 100 pip single shot miracle each day. That kind of trader needs to be stone cold accurate on whether or not that trend will continue, or they'll end up inside a 400 MAE going the other direction, playing psychological games with themselves on the subject of retracement back to the entry level. Not a very nice game to play.

Other traders don't need the massive single pip kill shot and look to make many low absolute value trades on smaller time-frames. So, a "good trade" to one trader, might not need so much emphasis on trend continuation than another. For some people, sitting inside the same position for days, is reckless behavior - for others, its par for the course. Therefore, trend continuation analysis is essential for longer-term traders and can be beneficial to shorter-term hyper intra-day traders.

Having said that, to say that something is trending, is to also say that trend continuation has a high probability - otherwise, there is no point in declaring the price behavior a trend.

Now, if there are readily identifiable linear components to a trend, then identifying it as such goes up geometrically. Those components can be technical or fundamental. However, I've witnessed on more than a few occasions, that fundamental drivers of a trend can break down in a heartbeat - right at the point where the trader defined trend continuation. The same can also be said about technically driven trend components.

Thus, trading Projections comes with a built-in guarantee that the trader need not be concerned with the trend entirely, because whereas trends require the continual setting of multiple higher highs, or multiple lower lows on larger time-frames (a very key point), Projections only require Movement in a particular direction across much lower time-frames that do not lend themselves well to be called trend identifiers.

And, this gets to a much more important factor in all good trading: Capacity, or Magnitude. Those factors in juxtaposition to the definition of a trend, open up far more doors of opportunity for the trader to exploit the natural inter-trend movements within the market. Leaving trend trading, a relic notion of the past.

In other words, show me a currency pair that is "trending" with low Magnitude, or low Capacity, and I'll show you a very dangerous (super high risk) trend trade to make. Trading the "trend" can be lethal, if one does not fully understand the Magnitude, or Capacity of the pair involved in the trending process.

Show me a high probability Projection based on Magnitude and/or Capacity, and I'll show you an extremely low risk predictive trade to make.

I'm a Magnitude/Capacity trader, because that's where the highest probability for continuation exists in the market. Trends are yesterday's news, read and unfortunately traded like tomorrow's headlines. Magnitude/Capacity, is your best friend because they like to pay the tab and they hardly ever ask you to go Dutch. Only occasionally will they stick you with the entire bill - but to nowhere near the same degree or frequency as the trend. The trend will stick you with the bill, make you pay for parking, and then bill you a surcharge just for the privilege of taking it out for dinner.

I've been stood-up by the trend too many times. Left standing at the alter holding a diamond ring and dreaming about the warmth of the trend's touch every night as I go to bed. Only to wake-up the next morning, rolling over and finding the trend no longer in my bed. Skipped out at night on my like a cold hearted lover on the take.

No more broken heart trend dreams for me.
  • #17
  • May 26, 2011 2:16am May 26, 2011 2:16am
This is piquing my interest. Here are some of my thoughts:

Quoting JetTrader
What we have not defined yet, is what a good trade means to the trader. Not all traders need the 100 pip single shot miracle each day.
This is very important. I can guarantee that you would balk at my consideration of a good trade, and there is a high probability that your definition of one would have me shrugging my shoulders. It's the superposition of these interpretations of what exactly consitutes a good trade, that essentially forms the speculative component of the market, as traders pass on positions from one to the next, based on their objectives and varying time horizons. Let's take a good trade to be broadly defined as one which was taken as part of a system/methodology of positive expectancy, so that it is independent of pip values.

Quote
Having said that, to say that something is trending, is to also say that trend continuation has a high probability - otherwise, there is no point in declaring the price behavior a trend.
Quote
Now, if there are readily identifiable linear components to a trend, then identifying it as such goes up geometrically. Those components can be technical or fundamental. However, I've witnessed on more than a few occasions, that fundamental drivers of a trend can break down in a heartbeat - right at the point where the trader defined trend continuation. The same can also be said about technically driven trend components.
It would thus be a worthwhile pursuit to identify the factors or components that constitute a trend, and gauge the probability of continuation of these factors instead. As long as the factors are playing out, for some forseeable time in the future, then it is a fair enough assumption to assume that the trend will continue. Trend components do not have to fall squarely under the categories of technical or fundamental; this is thinking inside the box.

Quote
Thus, trading Projections comes with a built-in guarantee that the trader need not be concerned with the trend entirely, because whereas trends require the continual setting of multiple higher highs, or multiple lower lows on larger time-frames (a very key point), Projections only require Movement in a particular direction across much lower time-frames that do not lend themselves well to be called trend identifiers.
Indeed, a built-in guarantee can do wonders for the psychology, and for the equity curve, and so taking some of the risk off the table at what one constitutes a projection point is most times a good call. I say most times, because taking profits off the table too early, at least in my experience, regrettably leaves large amounts of pips on the table, which could have added favourably to the bottom line. Turns out that in most cases these pips could have been banked by exercising patience, and holding on to the trade to reap greater rewards, as the trend-constituting factors play out. Ironically, this is when the majority of other traders are cashing in their profits.

Quote
And, this gets to a much more important factor in all good trading: Capacity, or Magnitude. Those factors in juxtaposition to the definition of a trend, open up far more doors of opportunity for the trader to exploit the natural inter-trend movements within the market. Leaving trend trading, a relic notion of the past.
By capacity I'm assuming you are talking about further market positionning capacity?

Quote
In other words, show me a currency pair that is "trending" with low Magnitude, or low Capacity, and I'll show you a very dangerous (super high risk) trend trade to make. Trading the "trend" can be lethal, if one does not fully understand the Magnitude, or Capacity of the pair involved in the trending process.
I acknowledge this fact too. Is it not ironic that this is the point when most traders jump in to try and ride some of the move? The point is not to simply just latch on to an ongoing move, but to find methods to position oneself to get in at the start of the move, preparing to liquidate when the trend becomes 'too good of an opportunity to pass up'.

Quote
I'm a Magnitude/Capacity trader, because that's where the highest probability for continuation exists in the market.
Once again I'm assuming that by capacity, you are referring to the ability of the market to maintain further positionning capacity. I agree that low capacity situations provide favourable conditions for initiating a trade, but they do not circumvent the fact that the market has particular reasons it needs to move. Being in a state of high capacity alone will not provide an effective means of providing information as to what the market may possibly do next.

Thanks for the discussion,
xXTrizzleXx
  • #18
  • May 26, 2011 3:40am May 26, 2011 3:40am
Quoting xXTrizzleXx
Let's take a good trade to be broadly defined as one which was taken as part of a system/methodology of positive expectancy, so that it is independent of pip values.
I define a good trade as one that consistently moves the needle on the equity curve meter, closer to the trader's previously defined capital requirements, on a specific schedule, likewise defined by the trader. Otherwise, people are just making or losing money in the markets, with no rhyme or reason behind the gains or losses. Success, has to be defined as the movement towards a specific capital requirement over time and on schedule. If there is no End Game, then there is really no way to define success.

So, if one nets 7 pips per trade and doing so moves the needle on schedule to a specified capital requirement, that 7 pip trade was a total success by any definition. How much of a trend does one need to amass a whopping 7 pips per trade - answer: Not much at all. How much Magnitude or Capacity does the trader need to amass those same 7 pips per trade - answer: Enough to cover the spread, slippage, commissions (if any) and any manual entry errors made by the trader, without blowing a hole in an MAE level that is too risk adverse to a 7 pip trade.

Scale that definition up or down depending on the trader's capital requirements. Most people scale up out of greed, but doing so means that you had better be a Guru at trading the trend, or your MAE becomes excessive, abhorrent and counter intuitive to controlling risk.

Quoting xXTrizzleXx
Trend components do not have to fall squarely under the categories of technical or fundamental; this is thinking inside the box.
If you can name any component of market behavior that falls outside of either Technical or Fundamental analysis, I'll write you a check for $1 million dollars on the spot.

The market's price behavior is driven by both technical and fundamental components - the only two broad spectrum components in existence for any traded market. People either trade on the News/Economy (fundamental), or they trade on the Numbers/Data (technical), or they try to do both simultaneously and price will move as a direct result of both concurrently. Unless one can show me that price actually moves because Pluto has a wider orbit than Earth, than all price behavior can be defined as a function of both technical and fundamental components as defined above.


Quoting xXTrizzleXx
Turns out that in most cases these pips could have been banked by exercising patience, and holding on to the trade to reap greater rewards, as the trend-constituting factors play out. Ironically, this is when the majority of other traders are cashing in their profits.
Ah, but you see, this cuts to the chase and makes the point about Magnitude/Capacity of the market.


Quoting xXTrizzleXx
By capacity I'm assuming you are talking about further market positionning capacity?
Its simple - substitute ATR. ATR is not the fully story behind Magnitude or Capacity, but its a good starting point that gets ignored far too often by some traders. There are other measures that I use for calculating the true Magnitude/Capacity of the market, but essentially all you want to know is how large or small will the "next bar" of market data be, in relationship to the "previous bar" and what's the probability for it to be larger or smaller than the "bar after the next bar." That bar can be from any time-frame, standard or custom.

To fully derive that, calculations of historical bars of data must be undertaken in such a way that reveals the true status of the market's Magnitude/Capacity, which is something that gets beyond my desire to disclose in the open. However, starting with ATR and thinking outside the box about measuring OHLC market movements relative to ATR, will give the trader a pretty good Magnitude/Capacity Indicator of their own.


Quoting xXTrizzleXx
I acknowledge this fact too. Is it not ironic that this is the point when most traders jump in to try and ride some of the move? The point is not to simply just latch on to an ongoing move, but to find methods to position oneself to get in at the start of the move, preparing to liquidate when the trend becomes 'too good of an opportunity to pass up'.
A good Magnitude/Capacity Indicator resolves most of these issues.


Quoting xXTrizzleXx
Being in a state of high capacity alone will not provide an effective means of providing information as to what the market may possibly do next.
In fact, that's precisely what a good Magnitude/Capacity Indicator does well, if an only if it is designed correctly and understood fully. Magnitude is one side, Capacity is the other and they both operate in multiple dimensions of the exact same bar of data.

Each bar of data has its own mapping. To discover that mapping requires that one think outside the box and in a very unorthodox fashion about market behavior. It is not revolutionary, but it is fairly uncommon for traders to view bars of data this way. Once you know the historical map on any given bar from any given time-frame, then you have a framework for determining true market Magnitude/Capacity.

With that information alone, one can build a trading system that gets near 77% accuracy to a specified target. I had that in the 4th generation of code that made up the system I use. Today, that same system is now in its 8th generation of code, with additional elements that go beyond Magnitude/Capacity for generating probability maps on bars of data.

What I do is not traditional or conventional TA by any stretch of the imagination. I've essentially created a different kind or type of TA, basically. While Magnitude/Capacity are both non-directional, ironically (very ironically) they provide directional probability information about the market within a bar of data.

Its very simple on the surface. If you know that your next door neighbor likes to walk his dog past your house at 5:30pm each evening, Monday through Wednesday, but on Thursday and Friday walks in the other direction and you want to catch him as he walks by to ask him about his new Electric Vehicle, you would never walk out to the curb on Friday at 2pm, looking for a conversation to ensue about Green Cars as he passes you by. He won't be there - he'll be headed in the opposite direction. Conversely, you won't hit the curb at 5:45pm on Wednesday, looking for a conversation about reducing your Carbon Footprint, because likewise, he won't be there as it will be too late to catch him. But, if you show-up on the curb directly in front of your house right around 5:28pm on Monday, then you get to walk with him around the neighborhood as you get the information you were looking for about Green Cars. Or, if you wait, and show up on the corner in the opposite direction on Friday at about the same time, you can also get that information you need.

In other words, a Magnitude/Capacity driven map of bars of data, provides you with information (ironically) about probability direction, even when they are not dedicated directional directional indicators. This is the point about going outside the box. How many traders know about the wealth of directional information contained in simple bars of data? Not many. Instead, most "technical traders" are looking for a cross on some EMA to determine when the time is right to enter or exit the market.

The best way to make that determination, is to map the DNA of the market, bar by bar, empirically. Then you'll have the pulse of the market, its heartbeat and its respiratory rate. It won't tell you where the market is going all the time, nor will it tell you where the next jackpot 1,000 pip move will come from. But, having mapped the bars of data precisely, you can know with a very high degree of accuracy, where the market goes over smaller, shorter and more compact time-intervals. That's where the precision comes in. Its like shooting an LPV approach into an airport that would otherwise be near unserviceable to precision approach traffic to lower threshold minimums.
  • #19
  • May 26, 2011 4:03am May 26, 2011 4:03am
Quoting JetTrader
If you know that your next door neighbor likes to walk his dog past your house at 5:30pm each evening, Monday through Wednesday, but on Thursday and Friday walks in the other direction and you want to catch him as he walks by to ask him about his new Electric Vehicle, you would never walk out to the curb on Friday at 2pm, looking for a conversation to ensue about Green Cars as he passes you by. He won't be there - he'll be headed in the opposite direction. Conversely, you won't hit the curb at 5:45pm on Wednesday, looking for a conversation...
Ive been doing some tests with a fellow trader in regards to framing routine movements of price within specific time intervals, based on interconnected OHLC points.

So far its showing interesting patterns although not conclusive enough yet.

The tests goal is to show us ways whereby we can position ourselves at key times to take advantage of high probability directional movements.

Like you say, if one is to stand outside his (for example) bank, from 7am-7:25am, one will begin to see reocurring patterns both in cars passing by and people going/arriving.

Considering markets are composed of similar behavior such reocurring patterns should stand out like a sore thumb.
  • #20
  • May 26, 2011 4:22am May 26, 2011 4:22am
i like that there is someone whose text doesn't make me feel like i need to take a shower and see a therapist after reading it.

i, finally, have a new idea to test. probably leads nowhere but at least it's new.
Congratulations ScalaFX for coming out of the closet!
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