Gone with the wind - We are Weathermen

Hello JetTrader,

Thank you for the continued discussion.

I think our definitions roughly boil down to the same thing plus or minus a few semantics. Although I have reservations about the need to set a capital requirement on a specific schedule, because trading usually does not lend itself to being the kind of profession where one can state I make [$XX.XX]/quarter/year. Besides adding the unecessary pressure of having to conform with a schedule, individuals may prefer to simply trade the market, knowing that they have a positive expectancy system/methodology, and so the money will eventually come quicker than one knows what to do with it.

For argument's sake let's say that this 7 pip trade was a short which was initiated. In order for price to move down 7 pips, downward liquidity would have to be consumed, pulled or a combination of both in order to get price to trade at this level. There are specific reasons why orders are transacted resulting in the consumption of liquidity, and personally, I find it difficult to assign valid factors to a 7 pip move.

Perhaps you may rely on statistical analysis, or employ the use of high frequency methods, to identify these instances, and that may be your edge. However, I personally feel uncomfortable leveraging the outcome of a trade on a probability distribution, and instead seek only to trade when I can potentially identify factors which will constitute others to consume liquidity, and position myself to act before or in their wake. And those reasons better be damn good. Failure of the trade will be the result of my errors in analysis, or an unexpected, random event eg. (God-forbid) a 9.8 magnitude Earthquake in the U.S.

I did try searching for further information on magnitude and capacity, but could only find this thread, and so I am still ignorant as to its meaning. However, one should note that in taking such micro-opportunities, slippage and commissions may account for a notable portion of the move, as opposed to say a 250 pip move, where the former amounts to less than 1% of the move.

Off the top of my head, let's take a recent example. On March 17, 2011 the USD/JPY spot rate tumbled 5 big handles in the wee hours of the morning, before returning to its prior levels. Did the fundamental state of the U.S or Japan sommersault within the hours in which the event occurred? Was there a technical event which incited participants to act to produce that kind of a move? If you are able to isolate the real reason for the move, you'll see it had very little to do with either Technical Analysis or Fundamental Analysis.

Sure the market is driven by both technical and fundamental components, but to assume that these are the only drivers would result in one foregoing some very profitable opportunities. Additionally a distinction should be made between News Trading and Fundamental Analysis.

Such absolutes may prove a hindrance in exploring new possibilities that evade perception at a cursory glance. However, your analogy with Pluto and Earth shows at least you have a creative imagination.

Again I am ignorant on this concept of Magnitude/Capacity, so cannot comment contributively. However, it sure does sound pretty out of the box to me.

In this analogy, you have concrete reasons as to why your neighbour is doing what he is doing. It seems like a no-brainer when and where to go wait for him and pounce to discuss your Carbon Footprint. This is because you have mapped out his drivers - walking his dog, or going to visit his car on given days. Suppose you create bars or log his movements, and map your probability distributions to his likely movements for the next coming week. Will your bars tell you that he will not be there next week, since he has a new driver - the need to visit his ailing mother out of town? To find out his intentions, you need to go to the source, and find out what's driving him - the information obtained would have you resting comfortably at home for the next week instead of wondering why your probabilities are so off-track as of late.

In my eyes, the two of you are closer than you think because your methods do not discount probable, concrete reasons as to why the market is moving, and use historical data and probabilities to project future events. The simple bars of data omit a large chunk of core information which can be used to assist in determining direction, since it manifests itself off the charts.

I tend to disagree, and believe that the best way to make the determination is to map the DNA of the market, market driver by market driver, empirically. Then you'll definitely have the pulse of the market, and be able to gauge market sentiment accordingly because you can assign logical reasons as to why it's doing what it's doing.

Market drivers are the catalysts that create the bars - bars do not create market drivers.

The same can be said for pulsing the market accurately - you can know with a very high degree of accuracy in some situations where the market goes over proportionally larger periods of time.

Because you know exactly what it's intentions are.

Regards,
xXTrizzleXx

More in-depth:

Let's say he has five (5) different bank accounts with five (5) different banks in five (5) different locations. Now, the coupling of both Time and Location, become extremely important, even though it might appear on the surface that the number of possibilities to be wrong have increased.

Why?

Because, of the amount of cash he typically (empirical historicity - research) deposits or withdraws from each bank at each location. So, the "Magnitude/Capacity" of his deposits and/or withdrawals at any particular bank, has the net effect of telling you the Time that he will emerge at a different bank within his circuit of banks. It does not tell you directly which bank will be next. However, it does not need to, because you know that he has a history of showing up at each bank.

So, as he moves from bank to bank, conducting his business, the probability for his arrival at the next bank goes up geometrically. The Timing on when he makes his move to the next bank, depends on how much he's depositing or withdrawing from his account(s) at the current bank.

So, the deposit/withdrawal amount, indirectly implies arrival time at the next bank.

There are only Five (5) bank locations in all of trading - regardless of the market. If I can't rob him at Bank 1, I'll wait to rob him at Bank 2. If I miss him at Bank 2, I'll rob him at Bank 3. If I miss him at Bank 3, then I'll rob him at Bank 4. Unless he decides to break with the historicity of his normal banking routine (which he can absolutely positively do when he wants to), I have a better than 90% probability of being able to rob some portion of his Magnitude/Capacity/Deposit/Withdrawal at Bank 5. The probability of doing that grows non-linear the more banks he leaves in his wake.

One way or another, I am going to rob him. Whether he likes it or not. He knows it, but he can't stop it unless he decides to skip one or more of the banks, or unless he decides to significantly reduce the size of his deposit/withdrawal. When he does that, I can detect it rather quickly and then make the decision to simply skip him and rob someone else instead, who has not reduced the size of their deposit/withdrawal.

Since none of these guys do any major banking on Saturday/Sunday, I get the weekend off, too.

It is legal and there are no moral or ethical questions that are relevant, so I have no problem with this kind of robbery. Sometimes, occasionally, I get hit over the head by the guy and he ends up robbing me, but those instances are far few and in-between these days.

Sometimes, he walks into the bank carrying a huge bag, but he does not stay long enough to make a full size deposit/withdrawal. Of course, I walked in before he got there and jump all over him to rob him, but he's too fast and gets out of the bank before I can get a grip on him. That's when I have to pay the bank a "fee" - the cost of doing business, of course. He then jumps into his fast Ferrari and speeds away, leaving me holding an empty bag.

Of course, there's always the next day where my chances of robbing him cleanly are still way in my favor. Why? Because, he will never know which bank I'll pick before he gets there. That's part of my edge. I get to chose the Location he always gets to chose the Time.

So, I do what any good bandit does. I simply hang out in Locations where I know he must go eventually. When he arrives - I tell him that this is a hold-up and then I take some of his money. Of course, this guy has more money then I'll ever have, so it does not hurt him all that much. Besides, he knows that there are enough people out there that either don't know anything about his banking schedule, or who have very poor bandit skills. So, he's getting away with murder every single day in the markets. All I'm doing is exacting a little payback.

I hope that clears it up a bit.

this is starting to sound a bit like what i've heard of arbitrage. curiouser and curiouser.

Absolutely, no problem!


Make no mistake about it - professional traders/highly successful traders, set Revenue Goals as a matter of SOP. This defines the distinction between those who run their trading activities as a Business and those who do not. Imagine trying to run a legit business on a long-term basis, without a Revenue Plan! That's financial suicide.

Is there pressure on Nike to turn a profit this year? You bet there is and it should be. Is there pressure on any PGA Professional to generate enough revenue this year to pay the bills and make a living? You have to know that there absolutely exists that kind of pressure. Its all part of doing business. Oh, but you say: 'The PGA Tour Professional' is not running a business. Oh, yes he is running business and in many cases, its a multi-million dollar enterprise. The best of the best are making millions per year on tour purse alone, not to mention the PR side of their golf prowess. Anyone who has the need to produce profits, needs to treat their activities like a business. That means executing a well researched business plan, within a reasonable business model and having well integrated Revenue Model in particular.

What's the pressure of doing that? I've got a better question: What's the pressure of NOT doing that, for someone who makes a living as a trader?

The pressure is greatest when you know you need to net capital gains, but you have no plan and no model to compare your performance to. On the other side of the coin, this is where higher accuracy trading pays-off. The accuracy is what affords you the ability to produce a Revenue Model. If the accuracy is too low, there is little to no positive expectancy and thus, little to no need for such a comparative model.

Its about the Mental Framework the trader brings to the business. The more organized the mentality, the greater the chance of long-range success. Buckshot trading, leads to buckshot results a higher percentage of the time.

The other very important issue here, is the fact that the trader (if they are wise) can then use the Revenue Model to better focus their research on those things that will produce the kinds of results that keep the revenue flowing as close to model as possible. The model is 100% perfect - its a model. Results will be better than modeled or less than modeled. If less than modeled, then the trader has something to reference in their attempt to redress the weaknesses in their trading.

This aspect of trading is a huge subject, typically ignored by novice traders, but experienced traders know that revenue targets actually have the capacity to help them find better trading ideas. Again, a rather large subject to unfold completely, but not without its common sense components.


If the model calls for 7 pips, or 70 pips, or 70 times 7 pips, then that's what the model calls for, because that's what the embedded equity target requires. So, the validity of the number of pips obtained on any given trade, is not subjective - in fact, it is very objective and relevant to the model in which it is attached. One trader's 7 pip move, is another traders 70 pip move. Depending on the model, they can both have relevance. This, again, highlights the benefit of Revenue Model based trading, as opposed to winging it.

In a nutshell, that's it.

What are "factors," if not inputs to an algorithm designed to produce net pips?

See - we oftentimes hear of people who say that they don't believe in Black Box Trading, when they themselves use a Black Box without even knowing it! No wise trade decision can ever be made, absent some form of technical analysis. The one who thinks that he's a Fundamentalist, believing that he's located "fundamental factors" within the market or economy that will drive price in one direction or another, is in reality doing nothing more than making trade decisions based upon logical inputs from an outside source - whether market or economy.

The key phrase here, is logical inputs. When you distil any Decision based System down to its absolute essentials, you will find the absolute necessity for logical inputs, in order to produce a desired outcome, or to produce some kind of output. Even further, when you reduce the logical input that comes from the economic data, market data and even the gut instinct of the Fundamental trader, all of those inputs get transformed in the human brain as fundamental "Yes," or "No" statements that are then compiled, again by the human brain and then pushed through a Decision Making Matrix.

That decision making process, even though it takes place inside the human brain, is still a systematic problem solving process with Branch Logic in the form of Trade Logic. It does not matter where the external stimuli comes from. As long as the Fundamental trader uses input to formulate a decision about being Long, Short or Flat the market, that trader is using a "Box" to trade with - make no mistake about it.

Some people simply have Boxes that are Blacker than others! Some Boxes are gray in color, white, blue, purple, turquoise, yellow, green, red, burgundy, orange; some have stripe patterns, swoosh patterns, dot patterns; others metallic in structure, foam, rubber, plastic, aluminum, or of fabric construction. Some are Big Boxes, others are tiny boxes. Some have Boxes within Boxes. Others have Boxes, within Boxes, within Boxes, within Boxes, within Boxes, etc. Some are Pandora's Boxes. Others prefer to call them Cubes, or Cube Networks. Some prefer to call them Neural Cubes, or Neural Networks. While another might call his a Decision Support System, or DSS.

Regardless, whether Technical or Fundamental trader, you always take external input and push it through a logical matrix of decision analysis BEFORE pulling the trigger on any trade. That by any definition is a systematic approach to trading the markets.

We all use a system, whether we like it or not, or whether we know it or not.


We have subdivided our markets into Bars of Data across specific Time-Frames from seconds, minutes, hours, days, weeks, months and years - including all other "custom" time-frames in-between. Each time-frame has a high and a low. That's its most fundamental component of Magnitude, from which its Capacity is calculated. ATR starts the process, but there are other measures (that I've created) that help to more accurately measure any instruments true Magnitude and Capacity.

It is simply the measure of the market's ability to move, without regard for direction. It is non-directional.

But, it had everything to do with both!

On this particular day, it was Reuters reporting of G7 news - which by definition is Fundamental, because the news involved G7 Banks and their speculated intervention in the Yen. The FX market then interpreted that news to mean that Japan would being to repatriate Yen back into the country to help rebuild in the wake of the Tsunami. So, why is this considered Fundamental? Because, why else would the Japanese be interested in repatriation of the Yen, unless it was to rebuild not just their country, but their economy and to support their GDP. Why did the market respond so strongly? Because, Japan's economy just happens to be the third largest in the world.

So, while radiation may be still leaking in Japan (News), and while the G7 Banks toyed with the idea of intervention in the Yen (News), the market moved because of the speculation about a fundamental shift in Yen flowing back into Japan, which equaled: USD Short and JPY Long. Why? Because, the Japanese would by necessity need to sell off USD (in the aggregate) to bring home the JPY. So, the market decided to get out in front of that "decision."

Even more importantly was the ensuing rally in the USDJPY, that started just before 5:00pm Eastern that same day. That rally happened for a very specific technical that have a tremendous amount to do with the USDJPY's Weekly Magnitude and Capacity. Wednesday, is typically "moving day" in the currency markets and most Highs or Lows are typically established by then. So, there was the confluence of two very technical events at the time the G7 news hit the fan and became "old news" to the market.

Each week, there are typically two (2) to three (3) breaks of the Monday High or Low for an FX pair and/or that pair will typically fulfill its Weekly Magnitude - whichever comes first. Capacity, is simply the degree to which Magnitude has run its course - the inverse of Magnitude. When the Magnitude is fulfilled, Capacity takes over and the market likes to begin its move in the opposite direction, or move horizontally. That is precisely what enabled the 563 pip mid week rip to the upside just before 5:00pm Eastern.

After Magnitude said: "I'm done," and Capacity said: "I agree," everybody seemed to forget about the G7 - nobody seemed to care anymore. Coincidence? Hardly.

Embedded in the Technicals of the market, you will find all of the Fundamental drivers. That's why I favor the Technicals - they wrap the Fundamental drivers as inputs, naturally.


Actually, that's an excellent point, because I don't make that distinction. Think about what you are saying for just a moment.

Why would the G7 news broke by Reuters, be considered "Trading the News" - which is what a lot of people call it? What was at the core of the Reuters report - was it not the G7 Banks? And, what did that report entail - was it not that the G7 Banks might intervene? What would make the G7 Banks intervene - would it not be concerned about Japan's economy? And, aren't all economic concerns, Fundamental concerns?

The talk of G7 Banks possibly intervening was directly attributable to the G7 Banks concern about Japan's GDP going forward, at least in the short term. Any concern about GDP, is by definition a concern about the economy. And, in this case we are talking about the third largest economy in the world.

The nuclear radiation might have been the catalyst, but like all catalysts, it does not participate in the resulting chemical reaction. It was the fear of Japan's GDP that caused the talk of intervention, which caused the market speculation, which precipitated the drop in the USD against the Yen during that particular hour. News, yes. But, driven by economic concerns, real or not. That's why I place all news into the Fundamental sphere of influence, where I think it rightfully belongs. It is merely the catalyst for what people interpret as having an impact, negative or positive, on the Economy.


Not, if all news is the catalyst for changes in beliefs about the Fundamentals, where the market reacts to perceived changes in those Fundamentals. It is not the "news" that they are reacting to, its the interpretation of what the news means for the Economy. The bottom line is whether or not the Fundamentals will change, based upon the news being reported. The G7 makes its decision based on the Fundamentals that it perceives. The news players in the market then make their decisions about whether or not the G7 actions will fundamentally alter the course of the currency. Two separate entities - both making decisions based on an interpretation of the underlying Fundamentals, one way or another.

With a Technical approach, the Fundamentals are already baked in.

If, I only researched a few weeks of his normative behavior, then I won't have any empirical data on the historicity of the rate of change in drivers that are normative for his behavior. So, good Technical Analysis also concerns itself with understanding the historicity of anomalistic events, such that even those have a probability associated with their occurrence, allowing the system to account for periods where changes in market behavior are imminent.

This gets us to the other side of statistical analysis in trading. I call it the: Performance Vacuum. This is quite simply the tactic of using the numerical inverse of the Accuracy Rating of each Trade Signal in your system and then calculating the probability for successful trades that immediately follow a failed trade. Many people trade through the failures, because they know that on the other side there will be a run of successful trades.

However, if you have a good system that is well balanced in terms of statistical performance, then you can trade only a portion of the successful period, then discontinue trading until a failure appears, or a period of failures appear (depending on the performance balance of your system), and then re-start trading operations through the next successful period, etc.

This can help to boost the overall accuracy rating of the system, but it does have its mathematical limitations and it is one reason why I am stuck between 93% to 97% accuracy. Eventually, that loop will close in on itself and the ability to predict the next "failure cycle" becomes geometrically more and more difficult - to the point of Russian Roulette. That's when the system slams its head on 97% and then gets pushed back down to near 90%, before working its way back up to 93% on average.

So, statistically, this kind of repetitive feedback on the performance data that I get from my system, tells me that the Performance Vacuum technique does work. It is an internal system with a negative performance curve that bottoms out when the accuracy rating reaches the 97% level. At that point, I know a streak of bad trades is coming. Down at 90%, I know the exact inverse is coming. If I keep doing that through several cycles, I reach a point where predicting the outcome of a trade drops to well below 70%.

When the system produces a Trade Signal that low in probability, I simply tell the system to turn "Off" - don't even bother showing me the Trade Signal, because that type of trade has a notorious history of not working out. Once the Trade Signal probability value increases to 93% again (after a period of time), I re-enter the market on every signal up to/through 97%.

So, I have these normal cycles of being able to produce a good probability value and then I have these anomalistic cycles where the Vacuum effect kicks in, which is where I have coded the system to simply turn the Trade Signal output "Off."

It keeps me riding the crest of the wave and suffering fewer wipe outs. Simply impossible without obtaining and analyzing good performance numbers from your system and absolutely impossible for any Fundamental trader who does not believe in using systems to track this kind of data at all.

Good technical systems simply afford a higher degree of flexibility, which is totally contrary to what most people are told about the so-called "rigidity" of technical trading. Its not rigid at all, if executed properly. It is the epitome of true freedom in trading.


If the bars of data contain the drivers, then by analyzing the bars of data, you are analyzing the drivers as well. If the drivers change, so to do the bars of data that capture their essence. The bars encapsulate everything the drivers do within the market and make it possible to see the technical nature of the rate of change in the market drivers.

As a Technical trader, I don't care what drives the market as much as I care that I am able to measure the movement of the market with a level of accuracy that conforms to the requirements of my Revenue Model. As long as the market drivers produce fuel for the Revenue Model, I really don't need to worry too much about anything else. All anomalistic driver behavior is contained within the bars.

It is up to the trader to figure out how to extract that information from the bars of data. That's where creativity in researching, designing, engineering and testing such systems becomes important.

Funny you should mention that.

I was playing around with ProTrader yesterday (www.protrader.net) and found that the platform had a component built into it called the: Arbitrager.

http://protrader.org/sites/default/f...arbitrager.jpg

Have not tried it yet - don't know if it works partially, or as advertised. I'm not affiliated. However, I am rather interested to seeing how well it both locates opportunities, executes trades and most importantly, reverses them in a timely fashion, which is what's necessary in any Arb moment.

I will assume that its best when you your "Source" is a different intermediary than your "Destination." Else, your intermediary might cry foul and start to jerk your deposit withdrawals around by making claims against the accuracy of your trades.

I think (if I am not mistaken) that I've even read in some Client Agreements, that Arb transactions are disallowed on a policy basis with the intermediary (broker). So, double check that as well. However, the beauty with platforms like ProTrader, is that fact that you can access multiple trading accounts from multiple entities through the same platform. Not revolutionary, but typically you need an Institutional platform for that, though there are a couple of other retail FX platforms that offer as much. Again, as usual, do your own homework.

I'm going to try it just for the entertainment value alone. If it works smoothly (precious few things do in this industry), then I'll use it on the side, depending on how profitable I can be with it.

I may even become an Arb guy - gee, who'd a thunk it.

JetTrader,

I am keen to respond to your posts and thank you again for the discussion. This is something quite rare here on Forex Factory.

I however will have to delay said response to Thursday night, for I am very tied up with school and exams, which will be done by then.

Until then,
xXTrizzleXx

Great post, now I know why I vouched for you earlier.

I get the feeling we are at similar points in our understanding of the markets.

I know given the right person with the right discipline levels systematic technical trading can acheive those 90% plus winrates.

Thanks for all the posts and discussions going on here guys. I'll try to respond to some of them tomorrow.