Lessons Learned Thread

2. The research (Part B)

Kindly do remember before reading further that most part of my research was done prior to on-line trading and some part even before personal computers.

Later, I turned my focus from gambling to stock markets. Here I was not looking for a flaw or statistical method but how to consistently make money without losing.

I soon found out that there is no such thing as zero risk. One has to lose money in order to make some. The research objective now was how to consistently make money in the stock market by losing less and gaining more?

Finding answer to this question was not easy at all. That required studying the whole bloody market, each and every aspect and detail of it. Starting from how market indices work , how stocks are traded and trading reported, what moves the market, how liquidity flows, roles of jobbers, runners, brokers,.......... you name it.

I met several brokers, mutual fund managers, investment bankers, big market players, a person who designed a new stock market index and tested it for nine months before replacing the existing index. Luckily my job with the world's biggest firm of independent accountants provided me all these opportunities. But no one could convince me that they had a fool proof method.

I decided to create one of my own, using all the knowledge and skills gained in those years.

Initially I thought it would take trying five or six methods before my job is done. That was foolish. It took me over a hundred methods to develop and discard before I finally settled for a couple of them. A friend of mine helped me in refining these methods. He was my Hacker, that is, everytime I came up with a method his job was to break it and make it fail. He would brutally test my new method / modification to a method and do his best to show me it doesn't and cannot work. Many times we had to again dig out a discarded method on finding something new or after developing a new concept. That means we repeatedly tested each and every of those scores of methods.


To be continued ........

I'm new to the forum and been reading through things for awhile now to learn more from others. After reading through this thread, I'm very intrigued by your posts! Hope to keep reading more soon!

2. The research (Part C)

One of those methods in its crude form was (please don't laugh that was silly but later it became base of a good system): If one randomly buys stocks of 10 companies there is 50% chance of their showing gain. That means 5 out of 10 companies randomly selected will show gains and rest 5 will show loss. However, if all these 10 stocks are selected after a careful analysis of their financials and future prospects more than 5 will show profit. That is the edge.

One could give over 20 arguments against the above method and all such arguments will be valid. But over the years we refined that basic method to my 1:1 1% R/R with fundmental and technical analysis as the edge.
You got it?

If you say yes, you haven't got it. Let me explain

The basic method talks only about number of trades showing profit and loss i.e. more than 50% of the trades showing profit. The next important thing to consider is how much profit and how much loss.

1% profit or 1% loss. Why one per cent? Why not 1.25% or 2% or 7% or 63%?

Another thing is how many pips?

To be continued ........

keep up the good work !

2. The research (Part D)

These posts are explanations of all four Lessons Learned posted from page one of this thread and written at the request of LarryDarrel. There are so many things to share but trying to limit these dicussions in context of those four lessons learned and to give the background what went into this learing process.

This post and the ensuing paras are very important for someone who wants to know more.

1:1 1% Risk/Reward Method

"If it isn't based on a logic, its not a good system". Whenever I find a new method posted on FF go visit the first page. Immediatey leave the thread if it says enter at certain candle formation, sma/ema cross, talks about 15 pip sl and 30 pip tp, or similar indicators. Why? I find no logic in such systems. Real factors and real people move this market, not lagging indicators, candles or support/resistance levels. However it doesn't mean one should not use technicals. Technicals are just tools or tactics. Like tools alone cannot build you something or tactics alone cannot win a war for you, these technicals only help but cannot achieve your trading objectives.

First step in 1:1 1% risk/reward system is to identify support and resistances. I find this very simple. Just study history of moves on a chart and mark those levels. Bigger the timeframe, stronger the support and resistances.

Second step is to wait when pa hits any support or resitance. Logically, there should be more buying and selling at these points. Sometimes price hits and hangs around at these support or resistances just before a session is about to start or just prior to a key news release. This is the starting point. Price either bounces or breaks through these levels when race starts (session begins or news is out).

Step 3 is to estimate if it breaks how far it may go or if it bounces how strong would be the bounce (in number of pips). One thing I know is that if it breaks the level it would go very very far but if it does not break the level the size of the bounce would be less than the size of the break. The trend could also change with the bounce but this is irrelevant information for this method and therefore we are not worried if the bounce turns into a big move. There could be a fake breakout, but this is also irrelevant info for this method, not always but most of the time.

Not all the time, but many times price bounces several times before breaking a level. Even if it breaks a level, it first bounces and then snaps back to break. This is exactly what happened in yesterday's nfp. It first penetrated the resistance of 1.4500, then bounced back several pips before turning around and going all the way up to 1.4640 or so. This is exactly the logic for 1:1 Risk/Reward of this method. If one had played for 30 pip bounce with 10 pip sl, would have definitely lost. At the same time if one was playing for a 100 pip break with a 30 pip sl, would have also lost.

Posting a chart to explain this. Kindly remember all these lines on the chart were drawn days if not weeks or months before yesterday's nfp.

The price did not even bounce to the nearest support before going up.

If one was playing this bounce to down, would have set tp just above the resistance below and sl equal number of pips above the entry point.

Entry point is near 1.4500, take profit is the green line and sl is the red line.



Step 4 is calaculate as many lots that give you profit of 1% or loss of 1% if it hits tp or sl. Why one percent? If 60 out of every 100 trades are winners one would net 20% profit (+60% -40% = +20%). But you never know if you lose first 40 trades. Even if you lose first 40 trades in all 100 trades, you would still be in the game with 60% account balance intact.
The maximum consecutive losses I experienced are 52. Therefore don't under-estimate how things can go against you.

Now think if the bouce from the support (green line) becomes your next trade for 100 pip profit or 100 pip stop loss. Again 1% gain. Makng it 2% for the day.

Discussion on this method does not end here, there is much more to share on this method.

To be continued .......

3. Logic of what I believe in (Part A)


Logic behind 1:1 1% Risk/Reward Method

Listed below are some advantages of 1% risk/reward. But before that it will help to learn 1% of what?

1% of account balance just before taking a position. It is vital not to carry more than one position at a time. This defeats the whole purpose of this method.

Advantages of 1% risk/reward

1. Each position is so small that losing a trade doesn't matter much to the total account size. Therefore all trades are stress free letting trader focus and think clearly. Objective decision making is possible, no decsions are based out of fear or greed.

2. On losing a trade, the remaining 99% becomes the account balance and again 1% risk of this latest account balance. For example if one starts with $10,000, the first trade will risk $100. On losing this trade, the account balance would now be $9,900 and 1% of this would be $99. This way a winning streak would generate more and a losing streak would cost less. If its not possible to re-adjust lot size because of lot size restrictions, one can say $100 until account balance decreases to $9,000 and then $90 after that until account balance again gets back to $10,000. That would indeed require winning more trades than lost to break-even but there would be time for a winning streak too. Sometimes weeks past without a losing trade and sometimes no winners in weeks.

3. The most important capital of a trader is his/her Mental Capital. One waits for a big move to recover loss, enters a huge position, everything goes as planned but fear of losing whatever gains made from such huge position forces the trader to prematurely close the trade. Similarly a trader feels pain in closing a position with huge drawdown when over-leveraged. This way loss is a total loss and gain is very small.

4. Market does not make big moves every day. If a trader loses on a big move, the next move of such size may not come in days or weeks. Plus with less margin trader cannot open same size positon and yet again has to wait for move even bigger than the one that sets him/her back. This causes frustration and anxiety, that in its own turn, leads to wrong decisions.

5. It is possible to gain or lose 1% even on 10 or 20 pip move and therefore one does not have to wait for 200 pip move to make or lose money.

6. Even if one goes against a major move, retraces at the supports/resistances in the way provide chances of small bounces and one can trade those bounces. But if one is eyeing at 20% or 30% from a move, cannot take advantage of such small bounces. Since 1% rule is regardless of number of pips involved in a move, one could lose 1% with a 100 pip tp and sl, but can recover that 1% with 15 pip tp and sl.

7. Altough it is very important to keep an eye on fundamentals, with 1% profit or loss, one could also trade purely on the basis of technical tools. However, I rarely take a position against key fundamentals.

8. If you miss a major move, so what? You missed only 1% and that you can make on a small bounce.

To be continued ......

great point sir
thanks other lessons too

3. Logic of what I believe in (Part B)


Logic behind having an edge

It would be illogical trying to give a logic for having an edge. However, just want to mention that my research conlcuded that whatever statistical methods and calculations you apply (martingales or semi-martingales, or reverse martingales whatever), they won't produce an edge by themselves, they simply cannot.

Study of fundmentals or underlying conditions is the real edge. An edge that gives traders the confidence and skins thick enough to stick to their positions when market temporarily moves against them.

Many times, market takes its time to do the right thing. The time from now and when market starts doing what it is supposed to do shakes confidence of many. Some consider this manipulation, some think its stoploss hunting or squeeze, and some feel market is random.

Please don't confuse underlying conditions with day to day news. Underlying conditions are those conditions that move the market in a big way in thousands of pips.

Unfortunately there is no short-cut to the process of assessing the underlying conditions. It requires constant study of what's going on this planet. This requires hard work but worth it. Taking first step in doing this analysis would look difficult, but if one keeps on adding little by little every day, this becomes easier.

Then there are technical edges. These edges are very small and therefore require consistent application. If one deviates from this consistency or keeps on changing position sizes very frequently, this edge is lost. if one takes chances on break-outs, should always take a chance of a breakout. Most projects are abandoned when success is only inches away. Prudent traders don't do this mistake. One should consider the risk before jumping in and not when off the diving board. If one has a system that generates 60 wins out of 100 trades, should not get disappointed after few losses or get carried away on spotting an "exceptionally good" opportunity. Anything is possible, therefore ALWAYS rely on your method if you think its a sound one. Again, keeping your position sizes small will help in sticking to your system.

To be continued ......

3. Logic of what I believe in (Part C)


Logic behind understanding market behavior

Decades ago as a teenager I heard a phrase that this market moves like a wall clock's pendulum, to and fro or up and down. This concept in my subconcious mind made me a counter-trend trader, a situation that took years of work to come out of. For many years I believed that what goes up is bound to come down. However, this is true to a great extent because this market moves in cycles.

In early 2007, did a study on monthly charts of almost all currency and commodity pairs. It was strange to note that all these pairs for many years maintained their trends without a significant retrace. Then from late 2007 or early 2008, we saw such a volatile movements that disturbed everyone.

The cycle completed. MARKET MOVES IN CYCLES.

Then there are short term cycles, up and down movements. Two pips up, seven pips down, 15 pips up, 23 pips down, so on and on and on .......

It is therefore very important for a trader to understand how market moves, what factors make it move, how much movement to expect, when movements occur, what to expect from Asian session, what happens just before London open, how market reacts when Asia closes during London session, why spread suddenly widen for a minute on Asia close, why this sudden increase did not happen on Friday the nfp day, why many times all gains during London session completely reverse just prior to NY open, if market went up during London session will it go down during NY session, what if NY session continues mementum developed during London session, will it touch Pivot after NY close and before Asia opens, how movement in equities affect currencies, if market starts picking a direction in late NY session does it mean London will push it further in the same direction, what is the truth about week-end gaps, why Friday is a crazy day, if London moves in one direction during a whole week will it show retrace on last day of the week, what happens during low liquidity times, if an intervention is due will it take place friday afternoon or middle of the week, etc, etc, etc.

Our fundamental analysis and technicals will help only if we also know truth in and answers to the above and like questions. Therefore it is important to understand market behavior and place trades accordingly.

How to do this? The answer is: Experience. I normally take note of such situations and then try to write the answers i.e. why market behaved this way.

To be continued .....

3. Logic of what I believe in (Part D)


Logic behind "If a trade gives stress, somthing is wrong with Money Management"

I don't know about others, but number one killer of my profits and primary reason for my losses was fear. Kindly note there is a difference between thrill and fear. If you are riding a roller coaster, it is thrill, not fear. This thrill will change to fear as soon as you find something wrong with the safety system of roller coaster.

No matter how much efforts you put in, no way your fundamental or technical analysis can provide a 100% confidence. It cannot and it should not, because we live in a dynamic world. You never know what happens next that changes the whole scenario. The best way therefore to reduce stress from a trade is to limit your risk to a reasonable level. Trill will be there but no fear.

The greatest mistake I repeatedly made was to deviate from my method, "this one time only" thinking. This one time produced nothing but fear and stress and seldom proved profitable.

One may think 1% profit is not worth wasting time and effort especially when a right opportunity is there. I agree, 1% is not big enough profit but kindly do remember your risk is also 1%. But this 1% profit will look a huge amount after you lose 30% of your account. After losing 30% on one single trade, one regrets even for 1% loss.

People who have read "Reminiscences of a Stock Operator" know that Jesse Livermore had a tough time changing his method from a scalper to a longer-term trader. He had to do this only because of the lead time between what goes on at the trading floor and when it appears on the quotation board. Today, we live in a different world. Information passes at the speed of light and therefore this gap is minimum. We can now do what he couldn't do. I don't promote scalping, but trying to make a point that we can now benefit from many smaller moves and frequent opportunities. It is possible for us to increase number of trades and decrease risk per trade.

To be continued ....

beautiful Chicky , Thank You....

3. Logic of what I believe in (Part E)


Logic behind "Think twice before you leap, wait for the right time"

Have you ever noticed how meticulously hawks maintain their wings; how silently, patiently and carefully tigers prepare for pounding on their prey; how much effort goes into collecting intelligence and planning a war before attack takes place? Everyone knows this.

The principle behind this is to maintain the edge and take no chances even if the prey is a sitting duck. This market is high risk and therefore managing risk is the name of the game.

No matter what is our edge, it is not definite and is very small. We cannot afford to lose this meager edge. But the good thing about this market is that we live in a very rich land. Plenty of opportunities show every now and then. If we have a system that is not reliant on big size of the moves, we can afford to watch opportunities develop and vanish without feeling left behind. There is always another opportunity not too far.

Winning and losing in forex has multiplier effect. Once buried in losses, it is very difficult to come out because losses hamper not only one's operating capacity but also shake confidence in the method and trust in one's abilities. But if one is inch by inch collecting profits, the compounding effect generates snowball effect.

The end.

Dear Chicky,

I have been offline for a time and just saw that you added quite a lot to this thread. Very great info, thanks a lot, will take some time to work this through. And will definitly come back to you.

Best regards,

LD

Thanks for your input Larry.

It was tiring but was able to fulfill my promise. The recent posts narrate the details and application of lessons learned.

I use one more method in addition to 1:1 1% risk/reward, but that is a bit high risk and not right for everyone. That other method is nothing but what Jesse Livermore used to do. All details of this second method are available in Reminiscenes of a Stock Operator.

The 1:1 1% risk/reward is also nothing but application of principles mentioned in Trading in the Zone by Mark Douglas.

Will be glad to answer any questions one has on methods/principles mentioned in either of these two books.

ps- I am in no way affiliated with the publishers of these two books or trying to promote them. This is an honest effort to help people here like I learned most from here. I read many books on forex and studied many systems. These books only provide some basic principles and that also are very vauge. One has to do a lot of work to develop a system/method learning principles from whatever sources.

Applause, Chicky, really eye-opening golden stuff. Will definitely copy that to my "Must re-read occasionally" list

What excites me the most is that I am developing a similar method like this and you made everything clearer and it "clicked" logically, which is essential for me to keep that motivation flowing in this not-so easy road.


Thank that good heart of yours

Hats off to you Sir

i did not knew that you got experience of so many years. This thread is really helpful. Even if we do not understand all at once but it surely stables the trader.

Thanks & regards. From now on, i'll keep an eye on your updates here.

Thanks for your nice comments Bangster and Gamer.

Knowledge grows by sharing. I am just trying to repay what I got from others on these forums and from several other places. Don't know if this will help.

Please feel free to ask if I was not able to articulate something in a better way.

Dear Chicky,
after reading your posts through more carfully, I got mixed results if I compare this with my trading so far:

a) 1% rule: more or less observed, which lead to much lesser losses as could have been experienced. And subsequently me staying in the market to make more observations and learn and get better
b) mental capital: an interesting concept I was guided to by FibbinArchie last week. Makes sense absolutely and I have subconscously (?) followed some of the advice I read about, but have to incorporate much more in my state of trading...
c) logic behind a system: fail! My 'system' is trying to identify a trend on the upper TF, judge if this fits into my view of the fundamental situation and enter if after a retrace in a lower TF (m5) the aforementioned trend is taken up again.
I cannot say which targetprice I really have and so I suffer because
d) fear makes me close trades early.

So I have started to apply a set of rules to make me take partial profit when certain conditions are met, and let the rest run on in expectation of further gains.

Hence my interest in the 1%:1%-logic you apply.

Well, I will think about your lessons learned more and try to apply something in my way of trading.

Thanks again,

LD

Larry,

Everyone of us is a different person and we trade differently, maybe with same principles but entries and exits may differ.

When following my second method (not 1:1 1% r/r), if I am long, I am long and if I am short, I am short. Do not consider any retrace or move my sls. Why? because of this quote:

"Everybody knew that the way to do that was to take profits and buy back your stocks on reactions. And that is precisely what I did, or rather what I tried to do; for I often took profits and waited for a reaction that never came. And I saw my stock go kiting up ten points more and I sitting there with my four-point profit safe in my conservative pocket. They say you never grow poor taking profits. No, you don't. But neither do you grow rich taking a four-point profit in a bull market" - Jesse Livermore

Morning Chicky Mark Douglas states in his book that the first stage for new traders to learn is the mechanical stage.I wish i had taken his advise two years ago when i first read the book.I am now at the mechanical stage,trading an edge that i have backtested over years of historic data.The most important thing about mechanical trading is it builds confidense in your method.When you hit a loosing streak of x amount of trades you have the confidense to know from your tests that show you will have x amount of winners to x amount of loosers