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Twelve widely believed forex myths

  • #61
  • Nov 12, 2015 5:15pm Nov 12, 2015 5:15pm
Quoting hanover
{quote} However, even if price subsequently moves X pips from an arbitrary point, that lost 'opportunity' does not automatically equate to missed win of X pips, because at the hypothetical time of 'entry' there was no guarantee that price would subsequently behave that way. Hence the 'myth' fallaciously employs the perspective of hindsight, and I (now) believe that you're correct. If 'opportunity' means 'valid setup according to your strategy', then although there's no guarantee that the lost opportunity would have resulted in a win, presumably...

well, this was exactly what i thought, but i will now say that you stole my thought, because yesterday somebody got upset with such a comment of mine
as always, excellent thread and response
As Above, So Below
  • #62
  • Nov 12, 2015 7:17pm Nov 12, 2015 7:17pm
How many "missed losses" were there before this sacred missed win. Crying over spilled milk does not a trader make.
Congratulations ScalaFX for coming out of the closet!
  • #63
  • Edited 8:50am Nov 13, 2015 8:26am | Edited 8:50am
Myth: Testing a system on 'live data' is superior to backtesting.

The chief function of a backtest is to test for robustness. As such a larger test period is desired to encompass a wide range of market conditions. If you have the assumption that the character of your system will change under live conditions then that itself reveals a lack of robustness.

Myth: 'I tried trading with real money and made a loss. I should practice on a demo account until im ready.'

The folly is not a lack of skill in execution but having no plan to begin with. A speculator must be prudent in his contemplation and account for all possible outcomes before making his play. Your trading style is developed from careful and extensive research not staring at a live intraday chart.

Myth: Markets are fractal therefore I can scale down a strategy to the intraday level to get more trading opportunities.

Doing this simply makes your system more sensitive to noise and increased friction and transaction costs. Ultimately, all directional strategies require a trend on the macro level to thrive.

Myth: Unprofitable mechanical systems / Failure to develop profitable mechanical systems can be remedied by applying a filter of discretionary decision making.

All trade decisions are made through some kind of reasoning process. If you cannot specifically identify what gives you an edge then chances are you have no edge.
  • #64
  • Edited 12:44pm Nov 14, 2015 11:46am | Edited 12:44pm
Quoting Atokys
.....
My 2c for whatever it's worth.......

Myth: Testing a system on 'live data' is superior to backtesting.
I agree with your comments, and would also add that -- everything else being equal -- running a backtest for the past X months should yield the same results as a live data test that was started X months ago. I suspect that a big reason why backtesting is maligned on forums like this, is that many traders use MT4, whose system tester does not factor in costs/slippage properly on historical transactions, and (in the case of many MT4 br0kers) historical data is inaccurate, thus generating erroneous results.

Myth: 'I tried trading with real money and made a loss. I should practice on a demo account until I'm ready.'
Agree that a lot of newcomers are too quick to blame execution issues, which in many cases could mask an impotent strategy.

I believe demo accounts (assuming accurate data) are useful for testing, where the goal is to test the system itself, while minimizing any emotional factors that might affect implementation and thus distort the results. (However, judging by what I read on trading forums, this is possibly a minority view.)

Myth: Markets are fractal therefore I can scale down a strategy to the intraday level to get more trading opportunities.
Totally agree, I touched on this in my original post (myth #13).

Myth: Unprofitable mechanical systems / Failure to develop profitable mechanical systems can be remedied by applying a filter of discretionary decision making.
I know at least 3 long-time profitable traders whose approach revolves around a discretionary take on 'fundamentals' (specifically: macroeconomics; central bank monetary policy; effect of red news; 'fair' and projected future price values; etc). Hence, if a discretionary component is in itself profitable, it should follow that it could be added as a filter to a suitably compatible mechanical system, and potentially improve its performance.

Discretionary approaches are able to assess data (e.g. the content of a Draghi speech) that is unavailable to mechanical systems. They may also be able to integrate and weigh different types of data; evaluate abstract or nuanced chart-based patterns that are otherwise impractical to quantify; be more flexible to adapt, where necessary, to changing market conditions; and able to take extraordinary action needed to cope with 'black swan' events.
  • #65
  • Nov 14, 2015 12:28pm Nov 14, 2015 12:28pm
Quoting hanover
{quote} My 2c for whatever it's worth....... Myth: Testing a system on 'live data' is superior to backtesting. I agree with your comments, and would also add that -- everything else being equal -- running a backtest for the past X months should yield the same results as a live data test that was started X months ago. I suspect that a big reason why backtesting is maligned on forums like this, is that many traders use MT4, whose system tester does not factor in costs/slippage properly on historical transactions, and (in the case of many MT4 br0kers)...
  • #66
  • Nov 14, 2015 5:58pm Nov 14, 2015 5:58pm
Quoting Atokys
Myth: Testing a system on 'live data' is superior to backtesting. The chief function of a backtest is to test for robustness. As such a larger test period is desired to encompass a wide range of market conditions. If you have the assumption that the character of your system will change under live conditions then that itself reveals a lack of robustness. Myth: 'I tried trading with real money and made a loss. I should practice on a demo account until im ready.' The folly is not a lack of skill in execution but having no plan to begin with. A speculator...
Geez A. Whenever you open your mouth, all I see is a stream of wisdom. I luv that gunk inside your cranium mate. Great post :-)

Excellent thread as well Hanover. Thanks muchly.
  • #67
  • Nov 14, 2015 6:19pm Nov 14, 2015 6:19pm
The GDR 12 merry poems of christmas condensed into one long boring paragraph...

Find out where the market will hit and most likely bounce away from, fuck all that confirmation bollocks, you want to be first in and first out and let the peasants fight for the scraps, as in, the price drops, you have a buy limit down way under at whatever price, you get filled and the only drawdown you go into is the spread, then market immediately turns the other way and slams through your take profit level like a whore on crack. They are the positions you want. You don't want to be in the market any longer than you have to as it's an unpredictable beast open to any and all manipulation. On that note regarding slamming through profit levels like whores, most amateurs in this game would not even think to have a buy limit at the turning point but would wait for 'confirmation' or whatever that means, then enter long on a small pullback, only to get cleaned out by the dogs dangleys, mr market and his rotten crotch.

The key is, knowing where the price will hit and most likely bounce away from on first touch. Then it's having the balls to put a limit order there when all conventional wisdom and every forex site in existence tells you absolutely not to do it and to do it this way or that way.

The end.
  • #68
  • Nov 14, 2015 6:26pm Nov 14, 2015 6:26pm
Quoting GDR3k
Find out where the market will hit and most likely bounce away from, fuck all that confirmation bollocks, you want to be first in and first out and let the peasants fight for the scraps, as in, the price drops, you have a buy limit down way under at whatever price, you get filled and the only drawdown you go into is the spread, then market immediately turns the other way and slams through your take profit level like a whore on crack. They are the positions you want. You don't want to be in the market any longer than you have to as it's an unpredictable...

GDR's got plenty excellent TEs to back up this method.
  • #69
  • Nov 15, 2015 8:45am Nov 15, 2015 8:45am
Quote
I know at least 3 long-time profitable traders whose approach revolves around a discretionary take on 'fundamentals' (specifically: macroeconomics; central bank monetary policy; effect of red news; 'fair' and projected future price values; etc).
The ways to interpret fundamentals are as numerous as the people that use them. I cannot tell if those people truly improved their edge with fundamental inputs or if they simply had beliefs that predisposed them to prefer using fundamentals or if there is even a difference between these two. People who successfully employ fundamentals use them in their own highly personalized and nuanced way. Some even adopting a contrarian approach to fundamentals. I say this to contrast the common opinion that fundamentals can somehow provide a filter of added certainty in trading. Trading is all guesswork whether you use fundamentals or technicals.
Quote
Hence, if a discretionary component is in itself profitable, it should follow that it could be added as a filter to a suitably compatible mechanical...
Not necessarily. Sometimes, requiring fundamentals to fully align will be too slow to justify a trading opportunity that results from a surprise event. I might even say that such profitable events are profitable because they cannot be predicted with fundamentals. Also, I don't think discretion can be tested as a component of a system.
Quote
They may also be able to integrate and weigh different types of data; evaluate abstract or nuanced chart-based patterns that are otherwise impractical to quantify
If someone believes that he/she can profit through a form of technical trading that cannot be quantified then there is no point in meddling with a mechanical system. Mechanical systems are designed to be mechanical. Sure, there may be rare occasions where its reasonable to override signals based on a strong hunch but these should be the exception. Otherwise one would be better off using a non-mechanical approach. Though the pitfalls in designing an approach this way are numerous.

Quoting Copernicus
{quote} Geez A. Whenever you open your mouth, all I see is a stream of wisdom. I luv that gunk inside your cranium mate. Great post :-) Excellent thread as well Hanover. Thanks muchly.
Haha, you're too kind.
  • #70
  • Edited 2:41pm Nov 15, 2015 12:43pm | Edited 2:41pm
Quoting Atokys
People who successfully employ fundamentals use them in their own highly personalized and nuanced way.
For sure.
Quote
Mechanical systems are designed to be mechanical....... Otherwise one would be better off using a non-mechanical approach. Though the pitfalls in designing an approach this way are numerous.
I guess this is stating the obvious, but if a discretionary process is used to override an otherwise mechanical system, then the overall approach is no longer mechanical. Some discretionary approaches are not necessarily "designed", they are more about applying situation-dependent knowledge. Agree that discretionary approaches can't be objectively backtested, and that discretionary trading is ostensibly guesswork, but with experience the guesswork can potentially become more educated, and as always, the ultimate test is long-term performance.

Quoting GDR3k
The GDR 12 merry poems of christmas condensed into one long boring paragraph......
It's ultimately about profit factor (= win rate x average RR), and comes down to how frequently you can accurately pick reversal points.

Everything else being equal, 'falling knife' trading results in high average RR and lower win rate, while 'waiting for confirmation' tends to dramatically reduce RR, but delivers a higher win rate. If you're skilful enough at picking reversal points, then you'll get the high RR with a decent enough win rate to obtain a profit factor > 1.

Anyway, that's the math.

In more practical terms, my understanding is that the 'institutional money' seeks to accrue its buy or sell positions while the market itself is accumulating -- or, if heavweight enough, helps to create an accumulation pattern -- and then closes out its profitable positions as the 'amateur money' looks to enter into the subsequent move (i.e. the 'confirmation' that you mention). At least that's how I believe it works, and the way in which markets go through accumulation-move-accumulation-move-....... cycles tends to support this idea.
  • #71
  • Nov 16, 2015 9:54am Nov 16, 2015 9:54am
Quoting hanover
I guess this is stating the obvious, but if a discretionary process is used to override an otherwise mechanical system, then the overall approach is no longer mechanical. Some discretionary approaches are not necessarily "designed", they are more about applying situation-dependent knowledge. Agree that discretionary approaches can't be objectively backtested, and that discretionary trading is ostensibly guesswork, but with experience the guesswork can potentially become more educated, and as always, the ultimate test is long-term performance....
In the context of FF, I almost never see Expert Advisors being created with the intention of being purely mechanical. This diminishes the merit of a technical system. Furthermore, if you dont design a system to be robust when fully automated you end up allowing too many flaws to pass through.
  • #72
  • Nov 20, 2015 3:08pm Nov 20, 2015 3:08pm
Quoting GDR3k
The GDR 12 merry poems of christmas condensed into one long boring paragraph... Find out where the market will hit and most likely bounce away from, fuck all that confirmation bollocks, you want to be first in and first out and let the peasants fight for the scraps, as in, the price drops, you have a buy limit down way under at whatever price, you get filled and the only drawdown you go into is the spread, then market immediately turns the other way and slams through your take profit level like a whore on crack. They are the positions you want....
Great Post GD , It just isn't taught about levels which can stop an express train in it's tracks. Pick it out, have conviction and hit the button. "Faint Heart Never Won Fair Maiden" as us old Bastards would say. C Ya Around Mate. If you decide to publish the final edit might need a clean up to protect the innocent
Once You See, You Can't Unsee But You Will Get The Odd Poke In The Eye
  • #73
  • Edited 7:10pm Nov 20, 2015 6:53pm | Edited 7:10pm
Quoting hanover
It's ultimately about profit factor (= win rate x average RR), and comes down to how frequently you can accurately pick reversal points. Everything else being equal, 'falling knife' trading results in high average RR and lower win rate, while 'waiting for confirmation' tends to dramatically reduce RR, but delivers a higher win rate. If you're skilful enough at picking reversal points, then you'll get the high RR with a decent enough win rate to obtain a profit factor > 1. Anyway, that's the math.
We know our goal and the math tells us the rest. Therefore, the objective to acquire skills that enable us to meet our goal beckons.

Quoting hanover
In more practical terms, my understanding is that the 'institutional money' seeks to accrue its buy or sell positions while the market itself is accumulating -- or, if heavweight enough, helps to create an accumulation pattern -- and then closes out its profitable positions as the 'amateur money' looks to enter into the subsequent move (i.e. the 'confirmation' that you mention). At least that's how I believe it works, and the way in which markets go through accumulation-move-accumulation-move-....... cycles tends to support this idea.
If 'institutional money' means banks, I cannot see why banks will want to undertake risk to make profits from a risky business setting by taking directional positions in the forex market, they do. The proposition that 'institutional money' is 'smart money' cut no ice with me - they are no smarter than you and me and no amateurish/stupider than us - merely much, much larger than our paltry retail size whose decisions mean something sometimes. It is over-rated.
  • #74
  • Nov 20, 2015 7:42pm Nov 20, 2015 7:42pm
Quoting hanover
{quote}Discretionary approaches are able to assess data (e.g. the content of a Draghi speech) that is unavailable to mechanical systems. They may also be able to integrate and weigh different types of data; evaluate abstract or nuanced chart-based patterns that are otherwise impractical to quantify; be more flexible to adapt, where necessary, to changing market conditions; and able to take extraordinary action needed to cope with 'black swan' events.
Is it possible to measure historical price reaction resulting from fundamental inputs and integrate this data inside the mechanical system?Is it possible to mechanically detect abnormally large size price movements like a potential volcanic eruption?
  • #75
  • Nov 20, 2015 7:54pm Nov 20, 2015 7:54pm
Started reading post #1 without seeing who's thread it was, as soon as I was into myth #2, I said to myself "this sounds like hanover wrote this" I looked up and sure enought it was...good stuff, will read through the rest.
  • #76
  • Nov 21, 2015 1:00am Nov 21, 2015 1:00am
Quoting hanover
Myth # 7. That unrealized (floating) P/L is less important than realized (already banked) P/L.
Im happy to concur on this excellent point.

If people understood it they would realize that much of the usual talk about technical systems (RR, take profits, win rate, trade frequency, non-systematic entry/exit decisions, pyramiding as an edge in itself etc.) becomes irrelevant.

However, this is not to say that a system that undertakes more exposure with floating profits is misguided. That decision is simply up to the risk appetite of the trader.
  • #77
  • Nov 22, 2015 12:24pm Nov 22, 2015 12:24pm
Quoting skyway
The proposition that 'institutional money' is 'smart money' cut no ice with me - they are no smarter than you and me and no amateurish/stupider than us - merely much, much larger than our paltry retail size whose decisions mean something sometimes. It is over-rated.
Fair enough, I'm merely using a term that's been made popular through its use in forums, books and seminars.

Quote
(1) Is it possible to measure historical price reaction resulting from fundamental inputs and integrate this data inside the mechanical system?
(2) Is it possible to mechanically detect abnormally large size price movements like a potential volcanic eruption?
Good questions IMO.

(1) I think much depends on whether the input has an aspect that's quantifiable, and also how situation-specific it is. The greater the number of individual situations that must be included, the more complex the mechanical system becomes. And if that includes systems that are mechanical enough to be fully automated, then automation would represent a significant project way beyond the scope of any 'retail' or vended EAs.

(2) Again, it probably depends on each situation, and that's assuming that a given scenario can be predicted (which is not necessarily the case with a 'black swan').
  • #78
  • Nov 22, 2015 2:01pm Nov 22, 2015 2:01pm
Hi Hanover, lot's of visdom there, and great post, I think I can agree on most of them, however, I like to make a comment on
Myth # 11. That a simple ('KISS') strategy is more likely to be profitable than a more complex one.
I think you are wrong on this one, but also right, I'm ok with it if you only talk from an EA programmers perpective,
and I think you do, but if you are a manual trader only, I believe you are dead wrong here, let me tell you why.

it is because of the psychology of the human mind, the more indicators, filters, etc he have on his strating system,
the more confuse he will get, his decision making will be suffering.
I really believe that the KISS principle apply here, but in a expert advisor, not so much
Bulls are stupid Animals!especially when Im short!
  • #79
  • Nov 23, 2015 2:07pm Nov 23, 2015 2:07pm
Quoting roughtrader
if you are a manual trader only, I believe you are dead wrong here, let me tell you why. it is because of the psychology of the human mind, the more indicators, filters, etc he have on his strating system, the more confuse he will get, his decision making will be suffering.
Fair enough. As I said, it depends on how a person defines 'simple'.

Some of the profitable traders that I know use a highly nuanced approach -- their 'rules' are subject to some interpretation, or are occasionally modified or overridden by contextual, or situation-specific, data -- a process that has taken them several years to refine. Whereas for me, 'simple' means something like a seasoned pro being able to explain his entire strategy to a newbie in (say) less than a few hours, allowing the newbie to walk away with enough information to potentially be equally as profitable.

But other people may see it differently. I don't want to get into a lengthy debate so I'll leave it at that.
  • #80
  • Dec 17, 2015 5:52pm Dec 17, 2015 5:52pm
Myth#1: Exploiting a market inefficiency

I agree with your point. How much % of profitable traders, do you think, does not truly know what market inefficiency they are exploiting? I'm a bit confused as to whether I should be doing research or whether I should be looking at charts and look at price action / patterns...

Best,
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