The right way to trading success (by common sense thinking)

There are three elements in trading which are essential to success:
- trading system (decision making framework)
- risk management
- psychology
(Alexander Elder - Trading for a Living)

One cannot be consistently successful if any one of the three elements is missing. According to Mark Douglas (Trading in The Zone) and many other authors, appropriate psychological attitude is probably the most difficult part to acquire. This is primarily the reason why so many people fail in this business. Psychological features of successful traders include: discipline, following the system, lack of hesitation, confidence, waiting for the signal (not jumping in too soon nor too late), detachment from fear, etc. Therefore you have to be like a machine, without any emotions, doing what is to be done, when it has to be done without hesitation. If this statement is correct, than why not to simply let an EA do the work? It does not have any emotions, it will do what it is coded to do, and it will never freak out when something wrong is happening. There are arguments for and against. In my opinion, most of people prefer manual trading simply because they lack programming skills. Or they can't bear the pressure of letting a machine manage their savings.

I believe it was in The New Market Wizards (Jack Schwager) where a mathematician initially skeptical towards automated trading, eventually became convinced that if a strategy is worth anything, than it should be possible to code it.

There is an opposing argument stating that in trading as well as in flying human factor is indispensable. Although we have already developed technology which can safely manage hundreds of factors and safely keep an aircraft in the air, we still need pilots. Their experience cannot be replaced by a machine in extreme situations, for example: a computer would have a hard time landing an airplane without gear out. This is the analogy that was used (not sure which author that was) to underline the importance of a trader in a trading process, and dismiss possibility of successful automatic trading. The problem I find with this statement is that trading is nowhere close to flying! When a wing brakes of a pilot can save the plane and passengers by using his skills. This is however like using entire margin on a single trade and having no stop loss. A pilot contrary to a trader doesn't have the option of saving 98% of passengers for the cost of 2% no matter how extreme the situation is. Therefore if one controls himself there is no such thing as extreme situation in trading.

Furthermore with little programming skills testing a strategy is easy, accurate and quick. Much better than manually going through charts and writing down how many pips you would have made. The problem however with automatic trading is that a programme doesn't have an 'eye' to spot trend lines or chart patterns which are subjective in interpretation (at least none that I know of). Never the less if the Curiosity made it to Mars, and giants like Knight Capital depend on software it seems to be within a reach to develop a software which could have an 'eye' i.e. be subjective to some degree.

I always wanted to know if I am following the best possible direction. I can't know that until later, cause I can only take one way at a time. I have number of reasons why I believe using EA is the right way as opposed to manual trading. I had some success with different EAs and I see how much better it is than trading manually. Given all the common sense arguments and my own experience learning how to trade is just a mean necessary for development and use of an EA, but it manual trading is not an ultimate solution. On the other hand I am curious what your opinions are. Take a look at some arguments of mine that I posted above and please let me know what you think and if you trade fully automated EA or you prefer discretionary trading.

Cheers
Casper Coldman

A good philosophy as long as it works for you.

I just wanted to point out that there are millions of "right ways" to be a successful trader. I know a first-time Japanese house wife made 5 millions US$ out of 20-30k in a couple of months and got busted for a tax fraud. I doubt if she knew even "common sense thinking."

My point is, some successful traders didn't even have to think about "to be successful."

Hope I'm making sense...

I agree, there is more than one way to do it. Almost everywhere you can find advise that one should choose to trade the way that suits him personally. What I wanted to discuss is why people decide to follow the hard way of learning to trade manually which is often emotionally exhausting and leads to failure, instead of coding an EA that has so much benefits?

By the right way I meant direction of development as a trader.

Point taken. I want to agree on your opinion about EAs, but I don't know much about EAs, so, can't discuss the point the way you want.

All I can say is, manual trades seem to be easier to develop than EAs since you can try any methods without coding.

Have a great weekend

Seems like a valid argument, but do you consider moving to automated trading in some future point of your trading career?

Probably not. I don't think I can create a good EA and maintain it for a long term use. Big corporations (not only finance, but also oil companies like BP) have a trading department where a bunch of cream of crop traders and computer scientists develop and maintain EA-like programs with no limit budget. I doubt I can play forex the same way they do.

Well, but hey, I trade manually maybe just because of my personality as you rightfully pointed out. (I don't even use a speed dial on my phone!)

Trading using an automated system is definitely possible, but you need to have an edge, you need to understand WHY the system works otherwise you will never have the confidence to stick with the system through the hard times. Good luck with your search...

10k hrs of training can definitely make you proficient in almost any discipline. It was proved! The elements of successful trading that are the most difficult to gain are psychological. Mastering trading is so hard because it requires certain set of attitudes and although people know what those attitudes are they are rarely capable of making them work in practice. Why? My guess is: it's damn hard to change one's own personality, especially by doing it without external influence (like brainwashing, or electroshocks). Unless you've been thought and guided by a professional since you were a kid, it means that in order to become consistently profitable you have to learn new habits of thought. It is certainly possible, and we have all heard of people who managed to accomplish that. However from an objective observer's point of view, all the characteristics of a successful trader can be gained by delegating entire or most of the trading process to a machine, hence, creating a shortcut in 10k hrs. Does it make sense?

True. Once a friend (not familiar with trading at all) asked me if he could 'borrow' my EA and run it on it's own computer for a while. I said: sure, but don't trade it with real money. But he did! He got back to me after couple of weeks devastated and angry that the programme lost his money! Meanwhile the same software made me some relatively nice profit for me. How did this happen? The EA to him was like a magic box. He probably thought: I'll put some notes in the box for a week and after this time they should multiply. After a week they did! Yey! Now that I know it works I will put in there some more and I'll be rich in no time! But on the second occasion the EA had some draw down, nothing special, just proven and thoroughly tested fluctuations of the account balance, which should come by unnoticed for a trader using it. To my friend though it was like the 'magic box' ate his money! I'm not saying that you should rely blindly on EAs. Learning how to trade and how the 'magic box' works is indispensable. What an EA gives you is positive expectancy of trading results, confidence built on statistical data from testing, and freedom from errors such as: getting reckless, angry, overtrading, directional bias, etc.

Here is a story that I like. Doctors and layers are very unlikely to succeed in trading (forex, stock, futures). The reason is, they are so smart (they think) that they can't help "improving" a trading method that is given by a professional. On the other hand, it is not surprising if a high school graduate auto mechanic makes a ton of money out of trading by the same method in a long run -- it's because he just blindly follows the method without any modification.

The moral of the story -- you really should know what you are doing in trading. Doctors and lawyers didn't know that they were destroying a good method with their poor knowledge/experience. The auto mechanic knew he was making money by following the method exactly as instructed.


The famous "Turtle" story is all about this.

So, this is the reason I stick to my principle, "monkey see monkey do (just follow the good stuff without changing)"

"most of people": Yes.
"if a strategy":No. There are far too many subtleties. The notion of strategy implies there's no way to capture most all strategies in one approach. Choosing which strategy per trade seems more accurate, so at least some manual is preferred.
"if one controls": Maybe. It's dependent on ability to match appetite for risk with how often and much trades are profitable. And this thing about no emotions, is unlikely, tho I've heard of it ; )

Sorry, I have to disagree with your idea of trading with EAs is far better than manual trading
To me, the most two important concepts I apply into currency trading is 1. Game Theory 2. Logical Reasoning
Game Theory: Knowing yourself, knowing your competitors. As an individual trader,I can only try to figure out what the big players are doing and hopefully I can follow their directions in time. How? we need to know what's going on in the world, What is the hottest topic atm in the market?

Logical Reasoning: After we catch the main focus in the market, we need to come up with all all possible scenarios of how market might have moved based on market perception ( what are the big players thinking?)

After all of those, you pick the best scenario and place your trades and hopefully it goes your way.

Again, Market condition changes all the time, you have to be flexible enough to change decisions; fixed strategies won't do it, and I don't think the big players use EAs to figure out the future.

Thanks