Lessons in directional probability and risk management

Just as I predicted, I copped a tirade from slamdunk, and also banishment from both of his threads (here and here). Episodes like this make me feel thoroughly vindicated in leaving forums like this one behind.

I posted a ‘Pair Strength Analyzer’ indicator that I originally wrote specifically for a client (hence, sorry, it’s not available in the public domain), which I use as part of one of my trading edges.

I posted the screenshot of values yesterday (here). Just for fun, let’s look at how many pips one would currently be ahead, simply by taking a position at today’s open, by trading in the direction of the top 6 pairs suggested by the indicator:

USDJPY +45 pips
EURJPY +81 pips
AUDUSD +48 pips
EURAUD +88 pips
GBPUSD +66 pips
GBPJPY + 1 pip

These results are based purely on trading in the DIRECTION of the strongest trending pairs. They could potentially be further improved by applying some TA to more accurately TIME the entries.

I’ve no idea why slamdunk is so intensely focused in trying to make his three calculated values sum to zero in triangular based pairs. I can’t see how there’s an edge, let alone possible arbitrage, in values that the market takes no cognizance of. It’s my view that the best edges come from abstracts like macroeconomics, money flows, levels of supply and demand, orderflow, breakouts during times of high liquidity, tracking central bank/heavyweight activity, self-fulfilling prophecy, news trading, fading extreme overboughtness/oversoldness, trapped trader behavior, key OHLC levels (hint: see Seneca_pilot's "Ramblings of a FX junkie" thread), session/time-of-day idiosyncrasies........ and no doubt many others that I'm unaware of.

We can learn from slamdunk. By fading EURAUD (selling against the uptrend), he is swimming against the tide of probabilities that are ultimately rooted in two different nations' macroeconomics. On this occasion his trades are down, collectively, several hundred pips (here).

And finally, as I further pointed out in my post, (1) trading without a loss exit strategy leaves one open to potentially unlimited loss, and (2) adding indiscriminately to losing trades — regardless of whatever methodology is being used — exacerbates this even further. It’s the antithesis of prudent risk management.

Just my 2c — take it or leave it.

It seems you have been banging your head against a brick wall for some time here. You are one of the very few traders I have come across who sees market dynamics the same way I do, and is capable of understanding the concepts I trade. I can certainly understand your frustration, most of the threads i read simply cause me to shake my head and move on. I don't bother trying to argue with idiots - I tried a couple of times and they quickly drowned me, I don't know where you find the patience. You don't have to leave altogether though, there are a few of us who value your knowledge and share your approach to trading - we are just a lot quieter than the others.

Many thanks, I appreciate your comments. It's always reassuring to find like-minded folk, especially in an activity that's as demanding as forex.

Hanover, please don't allow yourself to be overly concerned by arrogant fools such as Slamdunk.
It is obvious from looking at his trades that he considers it impossible for him to be wrong.
Nobody in their right mind could look at EURAUD and consider that a short entry is high probability. Not only refusing to accept that he is wrong, he then adds to the losing position.
It is obvious to any but the most gullible that he opened a number of demo accounts and when one made an impressive profit, he decided to make it public.
Of course as soon as he starts tooting his horn. his ego allows his account to go 30% into loss with what is effectively a single trade.
It's moved a bit in his direction now. but he trades on arrogance and hope



Many of us appreciate and value your contributions, I hope that you will not give up on FF totally

Woh never seen such kind of same pair positions even on a demo account until today

@Hanover

I saw your recent strength indicator a while back and honestly found it difficult to use.I get the principle behind it but I have seen other recent strength indicators and each give different readings.
This differences lead to analysis paralysis.

how reliable is this method in catching trends lets say compared to a simple MA cross? does it help filter most of the weak trends?

Pemully,

IMO which indicator you decide to use, or its settings, is unimportant. To state the obvious, the market takes absolutely no notice of the indicators used by one insignificant retail trader. Topherhk88 explains it brilliantly here.

Instead of thinking about indicators, review the list of possible edges in my previous post. The next step is to discover how these manifest themselves in terms of price movement and behavior, but without getting too preoccupied with TA-based detail. (For example, if you see a pinbar, the pinbar in itself is essentially meaningless, as any candle merely represents a collection of ticks between two arbitrary cutoff times. But what is important is that the pinbar shows sharp rejection of a particular price level. Hence you should study the level, and decide if/why it might be significant).

Hence (IMO) one of the most important questions a trader can ask himself is: what limitations are imposed by 'pure' TA, and how can I best work around them? My solution is to take a step back to first principles, and try to ascertain what drives price, and why. The candles are produced by underlying market drivers, not the other way round.

Hence (for example) you could use an indy like the PSA which I posted in slamdunk's thread, or ANY strength indicator. Or you could simply trawl through D1 charts of all 28 pairs and visualize which are trending most strongly and cleanly. The real question is not about which indicator to use, nor what settings. It is this: do macroeconomic (and no doubt other) factors hold trends in place for long enough, on balance, to provide the opportunity of an edge?


If the answer to that question is 'yes', then I'm trading because a fundamentally-backed trend exists, not because of the value provided by some indicator.

My understanding (somebody correct me if I'm wrong) is that the reason that the JPY-based pairs trended strongly between last November and January was the BOJ's announcement to devalue the yen, causing the markets to re-appraise its value. Hence that impacted directly on the price movement that ensued.

Triangular ratios must always be maintained, e.g. GBPUSD x USDJPY will always equal GBPJPY. Hence if GBP > USD and USD > JPY, then GBP >> JPY, i.e. GBPJPY will be trending even more strongly than both GBPUSD and USDJPY, making it the better pair to trade.

As I've posted many times before, some of the reasons I like strength/weakness (S/W) analysis of individual currencies are these:

1. To completely reverse a trend in a pair, both currencies must effectively reverse in S/W. In many situations (it depends on how the currencies are correlated) , this improves the probabilities of 'getting the direction right'.

2. S/W operates independent of any technical strategy. It tells you which pairs to trade, and in which DIRECTION, rather than how. Hence you can apply your preferred TA-based strategies to TIME your entries and exits. (Entries basically come down to two factors: direction and timing).

3. S/W analysis provides valuable insight into currency correlations.

4. Analysis of S/W provides insight as to which of the two currencies may be 'driving' the movement in a given pair.


I understand what you mean by analysis paralysis. It was (and still is) one of my biggest problems. Often when I look at a chart, I can see five different reasons to buy, and five reasons to sell, depending on technical criteria, timeframe, viewpoint, intuition, outside influences, etc. The only way around this that I know of, is to have a statistically proven edge (ultimately based on the types of principles that I alluded to previously). For example, price is in an uptrend that screams: BUY. But it is about to meet a strong resistance/supply area that screams: SELL. So you either (1) follow your statistically proven edge (N.B. we're talking probabilities, not certainties), which overrides this dilemma, and/or (2) take a 50/50 punt on the direction, and cut your loss quickly if you're wrong. There are situations that deliver directional bias, and situations that deliver what I would term 'behavioral bias': for example, if price has been in congestion for a very long period, it must eventually break out a decent distance, but the direction is uncertain. So it could be straddled with two trades that potentially offer a high enough RR; even though one of the trades will be an almost certain loser, the other trade will likely more than compensate.

In summary, then (sorry, I've been waffling, but I'm tired):

1. Find robust edges grounded in underlying market drivers.
2. Ascertain how these manifest themselves in terms of price movement and behavior.
3. Satisfy yourself that this price movement is non-random, on balance, to the point of statistical validity.
4. Devise suitable entry and exit rules, to exploit this inefficiency.
5. Follow these rules.

I realize that I'm probably making trading sound easier than it really is. (Contributors like Mingary and MapleLeaf provide fair warning that maintaining any kind of consistent profitability is extremely challenging). But that is the nature of the game: either you have faith that past edges will continue to operate profitably, and you have the willingness and the confidence to take your chances accordingly; or you find another way of making an income. There is no return without some kind of risk.

David

@Gumrai: many thanks for your words of encouragement.

Now I really MUST give forums a rest, and make some progress with my own systems. (Note to self: I MUST NOT allow threads like slamdunk's to derail me).

Undervalued indeed, at $0.02. I'll take it, and I'll thank you for it, and hope to welcome you back at some point.

@hanover,

thanks for your lengthy and thorough reply.Ill have to study more on this concept.

warm regards

I guess that Slamdunk's account has suffered from margin calls and the broker has closed positions for him, otherwise he would have totally blown his account.
When the massive drawdown started, he posted in his other thread that he had somehow decided to do this on purpose. That is so laughable. Of course if it had gone his way, he would be blowing his own trumpet and telling everyone what a great trader he is.
He showed his account that had made 30,000 $. This is a normal ploy from scammers setting up to scam. Open a number of demo accounts, and when one makes a good profit, post it to show what a great trader he is.
In this case, slamdunk gave details of a demo account that had gone from $100,000 to $130,000. It would have been believable if he had given details of the account when it was 100,000 instead of waiting until it had made 30% profit. But that is enough to fool some newbies.
The account now stands at less than $13,000, a loss of more than 90%.
I hope that newbies are no longer fooled

Reminds me of years ago, watching an Asian looking fellow playing roulette, empty his pockets and everything else, as he continued to bet on BLACK while RED came up 23 times in a row

If he switched to betting on red the next spin would have come up on black. It is the law of the universe.

No offence slamdunk, but instead of a healthy debate, you just degraded yourself to a troll. You are probably going to spend the next few pages "fighting" with the people here instead of debating your discoveries, and then Twee will extract your posts to the Recycled Bin or give you a 3-days suspension or kick you out for multiple usernames. That's the usual sad ending for this kind of revenge posts with silly videos and silly cartoons.

Is this true? Then Hanover might get more votes here.

For those that are a bit confused. Slamdunk has made quite a few posts here and has then deleted them.
That is why the most recent posts don't quite make sense

i am suggesting that you all carry on with your lesson on probability and risk management.

that is what i am suggesting. i am suggesting that you discuss probability and risk management.

exactly how is it that my forum handle has been mentioned so many times in this thread?

i am all ears.

zero/.

Yes it is true. Slamdrunk released details of his account and so I set up a trade explorer, but kept it private.
I have now made it public, so if you click on my name, you should see the 2nd TE which is Slamdunk's
I won't leave it public for long because I would lose any credibility if people thought that it was my account.
Let me know when you have had a look and I will make it private again.

Thanks Gumrai. I have captured what I needed to know about this guy and his system. You can set it private again.

In my case, it is because you have banned me from your threads so I am unable to respond to your childish posts.
Here, you cannot ban me. Don't bite off more than you can chew.
Your pathetic demo account already proves what a useless trader you are. Probably a lot of people here think that you are an idiot. Why not keep posting and remove all doubt!

I have set it to private again.
I just have to stress that although it appears to be my account, it was set up with Slamdunk's investor password and has nothing to do with me.

If anybody is interested, Slamduck posted his details at
http://www.forexfactory.com/showthread.php?t=428300

Broker: http://www.citifxpro.com/metatrader-4
Login : 2089587303
Password : elu7brc (read only password)

With that info, anyone can set up a TE on his account.