How to resolve Unknowable Uncertainty?

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adrianjm

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I have been trading for a long time, and to date I am barely breaking even, so I firmly still belong to the 90% of retail traders out there. So even though I am long in tooth in terms of trading, I still can't say I am beyond the new trader stage.

I'm doing a reasonable amount of soul searching, as I agree with the statement that a trader should spend as much time observing themselves and understanding their own motivations, as they do searching for systems. I have just realised that for me, and perhaps for you, that there is an irony in trading that prevents many of us from being successful. Here is a typical process of the unsuccessful trader:

1. Find or develop a system you think will work;
2. Trade the system;
3. Experience a few losers and discard the system;

Now this is not new to me, I have done this often, and have read many times, from many esteemed traders that this is one of serious flaws for new traders - how easily they give up on a system as soon as they experience a few losers.

But why is this so? Why do new traders give up so easily, when successful traders follow through?

Confidence - I can't make that word stand out enough. I fail because I don't have confidence in the trades I take. A winning system is a losing system without confidence - I am sure about that.

The irony is that it's very difficult to develop confidence without the experience of winning. This is why I believe working with successful traders helps - you can develop a belief system (and thus confidence), in the actions of a mentor - that is what a mentor is for. Is it any wonder that so many of the supertraders we read about come from a background of working with experienced traders during their developing careers.

So for those of us who do not have that contact with successful mentors, what can we do to resolve the irony? (I am still at a loss here).

A proper methodology around systems trading can help. If you have the coding skills and the proper plan to understand how to backtest (in sample, out of sample etc), your process can help you to develop confidence in a system before you trade with real $$. You know the system and trade drawdowns you can expect, so experiencing them realtime is not as - dare I say it - painful, as not having that knowledge in the first place.

But what about discretionary traders? Is it at all possible to develop confidence if you don't know before hand that your discretionary behaviour will be successful? I am sure that without that special quality, you will never be able to handle holding your winners long enough, or never really know when you cut your losses.

I once knew a very successful discretionary trader who never worked with a mentor before he was successful. I regret not being able to ask how he did it.

This is where I am up to in my trading career, and would appreciate any discretionary traders out there who can advise how they got over the hump to be confident in unknowable uncertainty.

Adrian
 
Excellent post.

Can you now cast the mechanical stuff away and take a fresh look at what's going on?
 
This will probably get deleted - but it may resonate with what you feel right now.

Download it quick...
 

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The reason you have little faith/confidence in any edge you trade is that you probably and firstly know insufficient about it. For eg - It may be that the edge you are trading has a 50% strike rate (ie winners as a % of total set-ups seen) in which case there is a 50.8% probability of a consecutive losing run of 6 trades or more over a 50 trade sample, 15.5% of a consec losing run of 8 over that same 50 trade sample etc...Indeed the lielly maximum consec losing run over any extended sample is 7 at this strike rate, but typically it will be 4-6. But what if you hit 6 losers in a run - most will abandon the edge - losing confidence in it and themselves even though this falls within the norms of it's working probability associated with it's historical strike rate.

Incidentally Most retail traders will be over-leveraged so a consecutive losing run really hurts in respect of % loss in their a/c not least the money loss, thus compounding the loss of confidence in the edge.

So the first thing you gotta do is understand the edge you are trading, and it's typical-maximum distributions, and optimise your money management to it, ensuring that when (not if) the typical (and likely max) consec losing run occurs it doesn't hurt you. Only if it exceeds the maximumk should you start to lose confience in it.

i. Know how it performs/behaves over a large sample

ii. Know it's overall strike rate (winning trades as a % of total trades, at your minimum r:r ratios.)

iii. Know it's typical strike rate

iv. Know it's typical/max distributions of wins/losses over a typical sample


Secondly you simply have to accept that it is impossible to know with any degree of certainty what future price discovery will be. You have to uderstand that in entering when your edge sets-up you are not predicting what will happen next you are simply playing the edge, ie playing the probabilities.

A Trading Edge is just a repeating circumstance or set of circumstances (ie a set-up or combination of set-ups) that suggest a greater probability of one thing happening over another, based on historical precedent. Additionally and/or alternatively; if the edge does not suggest a greater probability of one thing happening over another, then based on historical precedent, it suggests that more gain is available when it succeeds than when it fails, sufficient to realise a net gain over any given sample.

Once you have accepted that and you know the typical - maximum distributions of the edge you are trading you can begin to trade with more confidence and probabilistically.

The excellent Mark Douglas (Trading in the Zone, The Disciplined Trader etc..)
talks about the 5 fundamental truths of trading, They are;


1. Anything can happen.

2. You don’t need to know what is going to happen next in order to make money.

3. There is a random distribution between wins and losses for any given set of variables that define an edge.

4. An edge is nothing more than an indication of a higher probability of one thing happening over another.

5. Every moment in the market is unique

He goes on to talk about his 7 Principles of consistency, they are

1. I objectively identify my edges.

2. I predefine the risk of every trade.

3. I completely accept the risk or I am willing to let go of the trade.

4. I act on my edge without reservation or hesitation.

5. I pay myself as the market makes money available to me.

6. I continually monitor my susceptibility for making errors.

7. I understand the absolute necessity of these principles of consistent success and, therefore, I never violate them.

This is very good advice.

G/L
 
bbmac,

Great post. It makes good sense, and outlines why someone has has confidence in their 'edge'.

I would appreciate your thoughts on how can you know the stats with respect to pattern trading (I have assumed your a pattern trader and not a systems trader). Let's take double bottoms as an example. Do you use (and by the same token, have confidence) in the statistics from Magee, Bulkowski, or others, or do you do your own homework - manually backtesting every double bottom you see for validity?

And if you do manually test, and come up with your buy points and exit criteria for a new pattern, what's that thing that allows you to test this new strategy without having any results? For example, if you know from your testing it's right 50% of the time, are you saying you position size yourself such that 6 consecutive losers not only doesn't damage your account, but does not impact it terribly much at all, considering it's a new pattern on test, and there are many more of those to come?


Thanks again for the great post, I appreciate your comments!

Adrian
 
In a sense I am a pattern trader...Ie I trade repeating proprietary hi-probability set-ups (patterns) that are comprised of a confluence of repeating tech factors based around price action which indeed is the trigger for entry at such a set-up. These set-ups also develop a secondary and most important pattern - repeating hi-probability combinations of these individual set-ups across different time frames. These set-ups/set-up combos are traded at repeating hi-probability combo's of potential support/resistance/sbr/rbs factors identified on the t/f (s) above that they develop on...all this giving a full repeating hi-probability 'full set-up' for market entry. I also keep a running record of the probability of a break or bounce and in what market conditions at these repeating combo's of potential supp/res factors, and these are graded accordingly for risk.

I have my own running stats (excel files) on the running strike rate and win/loss distributions of each set-up and set-up combo etc and this enables me to work out the running probabilities.

In other words, I know my edge, I know what to typically expect and what it may expose me to (ie it's likley maximum consec losing run over any given sample- albeit that this is very low probability - I leverage accordingly such that should this occur it does not destabliise me. This puts me ahead of most other traders. All of this takes work and effort but this is the price of a consistently profitable trading edge. Knowing this info gives me the confidence to trade the edge in that it is the greater expectation (provided I stick to the rules) that entering the market will result in a gain. [y proprietary set-ups were developed in the live market and I have been keeping these records in this format for over 3 years now with a very large total sample.]

With a postive expectancy ( more important than a high strike rate-per say) every trade is a winner even if it loses.

Ie lets say you have for example a modest-good strike rate of 65% (winning trades as a % of total trades) and a risk reward of 1:2, so 65% of trades win at twice the loss/trade of the remaining 35%. Using 20pips as the target and 10pips for the stop (risk) just to keep the maths simple tThe expectancy is therefore (65x20 = 1300) - (35x10=350) = 900 . Now divide by total number of trades in the sample = 100 and the expectancy per trade (win or lose) is a positive 9 pips/trade.

You need of course to ensure that the edge/set-up/pattern you are trading has a positive expectancy over a large sample preferably forward tested as well as back tested. Knowing the edge is at least theorteically profitable over a typical sample is the starting point in giving you the confidence to trade it.

G/L
 
Last edited:
adrianjm said:
I have been trading for a long time, and to date I am barely breaking even, so I firmly still belong to the 90% of retail traders out there. So even though I am long in tooth in terms of trading, I still can't say I am beyond the new trader stage.

I'm doing a reasonable amount of soul searching, as I agree with the statement that a trader should spend as much time observing themselves and understanding their own motivations, as they do searching for systems. I have just realised that for me, and perhaps for you, that there is an irony in trading that prevents many of us from being successful. Here is a typical process of the unsuccessful trader:

1. Find or develop a system you think will work;
2. Trade the system;
3. Experience a few losers and discard the system;

Now this is not new to me, I have done this often, and have read many times, from many esteemed traders that this is one of serious flaws for new traders - how easily they give up on a system as soon as they experience a few losers.

But why is this so? Why do new traders give up so easily, when successful traders follow through?

Confidence - I can't make that word stand out enough. I fail because I don't have confidence in the trades I take. A winning system is a losing system without confidence - I am sure about that.

The irony is that it's very difficult to develop confidence without the experience of winning. This is why I believe working with successful traders helps - you can develop a belief system (and thus confidence), in the actions of a mentor - that is what a mentor is for. Is it any wonder that so many of the supertraders we read about come from a background of working with experienced traders during their developing careers.

So for those of us who do not have that contact with successful mentors, what can we do to resolve the irony? (I am still at a loss here).

A proper methodology around systems trading can help. If you have the coding skills and the proper plan to understand how to backtest (in sample, out of sample etc), your process can help you to develop confidence in a system before you trade with real $$. You know the system and trade drawdowns you can expect, so experiencing them realtime is not as - dare I say it - painful, as not having that knowledge in the first place.

But what about discretionary traders? Is it at all possible to develop confidence if you don't know before hand that your discretionary behaviour will be successful? I am sure that without that special quality, you will never be able to handle holding your winners long enough, or never really know when you cut your losses.

I once knew a very successful discretionary trader who never worked with a mentor before he was successful. I regret not being able to ask how he did it.

This is where I am up to in my trading career, and would appreciate any discretionary traders out there who can advise how they got over the hump to be confident in unknowable uncertainty.

Adrian
Click to expand...

I can relate to this!

I am a discretionary trader, but I have mechanical setups, which I use when I feel the time is right. It's difficult, ambigious, conflicting signals left right and centre. It makes it hard but over time I have developed semi-mechanical rules.

I can never say ' last year I made 40%' because i'll say ' well actually if I was to take that trade now i'd do X etc'. It's obsessive but necessary I think.
 
adrianjm said:
I have been trading for a long time, and to date I am barely breaking even, so I firmly still belong to the 90% of retail traders out there. So even though I am long in tooth in terms of trading, I still can't say I am beyond the new trader stage.

I'm doing a reasonable amount of soul searching, as I agree with the statement that a trader should spend as much time observing themselves and understanding their own motivations, as they do searching for systems. I have just realised that for me, and perhaps for you, that there is an irony in trading that prevents many of us from being successful. Here is a typical process of the unsuccessful trader:

1. Find or develop a system you think will work;
2. Trade the system;
3. Experience a few losers and discard the system;

Now this is not new to me, I have done this often, and have read many times, from many esteemed traders that this is one of serious flaws for new traders - how easily they give up on a system as soon as they experience a few losers.

But why is this so? Why do new traders give up so easily, when successful traders follow through?

Confidence - I can't make that word stand out enough. I fail because I don't have confidence in the trades I take. A winning system is a losing system without confidence - I am sure about that.

The irony is that it's very difficult to develop confidence without the experience of winning. This is why I believe working with successful traders helps - you can develop a belief system (and thus confidence), in the actions of a mentor - that is what a mentor is for. Is it any wonder that so many of the supertraders we read about come from a background of working with experienced traders during their developing careers.

So for those of us who do not have that contact with successful mentors, what can we do to resolve the irony? (I am still at a loss here).

A proper methodology around systems trading can help. If you have the coding skills and the proper plan to understand how to backtest (in sample, out of sample etc), your process can help you to develop confidence in a system before you trade with real $$. You know the system and trade drawdowns you can expect, so experiencing them realtime is not as - dare I say it - painful, as not having that knowledge in the first place.

But what about discretionary traders? Is it at all possible to develop confidence if you don't know before hand that your discretionary behaviour will be successful? I am sure that without that special quality, you will never be able to handle holding your winners long enough, or never really know when you cut your losses.

I once knew a very successful discretionary trader who never worked with a mentor before he was successful. I regret not being able to ask how he did it.

This is where I am up to in my trading career, and would appreciate any discretionary traders out there who can advise how they got over the hump to be confident in unknowable uncertainty.

Adrian
Click to expand...


If you are consistently wrong 90% of the time over a long period then have you tried doing your analysis and then placing the trade in the opposite direction :idea: ?


I know it may be like tickling one self, you should try it. You will learn to let go of your opinion and ego that one is right. You should have no opinion or care re: direction. It's all about psychology. Start from the premise your analysis is usually wrong anyway.



I hold the markets in contempt as trading is simply a daft stupid game which produces nothing of any real benefit anyway.

Don't bother understanding the sytem just screw it. When you have sex you don't study the physical biological mechanics of what you do and how much you enjoy it - do you?

You just get on with it until you reach satisfaction. Think of the markets as something you go in and come away from with a smile on your face.

Leave your brain behind. To much analysis is not good imho.

KISS it! :cheesy:
 
bbmac said:
You need of course to ensure that the edge/set-up/pattern you are trading has a positive expectancy over a large sample preferably forward tested as well as back tested. Knowing the edge is at least theorteically profitable over a typical sample is the starting point in giving you the confidence to trade it.

G/L
Click to expand...

Thanks bbmac, you have given me some stuff to think about.

Positive thinking is great - I think there are many with enthusiasm before they begin trading, and think this will hold them together, but you really need to put in the effort to know the behaviour of your setups before you trade - I guess it once again comes down to the confidence in your setups.

You have clearly indicated the importance of knowing before acting.

Adrian
 
Atilla said:
If you are consistently wrong 90% of the time over a long period then have you tried doing your analysis and then placing the trade in the opposite direction
Click to expand...


Hi Atilla,

I never said I wrong wrong 90% of the time. I presently below to the 90% of traders who are unsuccessful.

Thanks for the coments.
 
adrianjm said:
Hi Atilla,

I never said I wrong wrong 90% of the time. I presently below to the 90% of traders who are unsuccessful.

Thanks for the coments.
Click to expand...


Ok good luck Adrian. All I can say is it is a long journey and after 7 years I hate and loath the markets. I have several systems and they pretty much all work. The spanner in the works is thy self.

One of the simple ones with no bearing on anything is counting squares. Not interested even in levels. Move two boxes up buy. Move two boxes down sell. It is effectively scalping but system does work. Works with just about any instrument too.

Having dissasociated my self from my ego and thinking I understand or comprehend or predict what's going to happen has been my biggest hurdle. I was told this by past legends here but I recall arguing with them. Now don't care for much what the markets do at all.

I am interested in current affairs and economics but that's about it for FA. It's all about TA. Good luck and don't give up. (y)


Old beliefs [may] not lead you to new cheese.
by Spencer Johnson, M.D.
 
Atilla said:
Ok good luck Adrian. All I can say is it is a long journey and after 7 years I hate and loath the markets. I have several systems and they pretty much all work. The spanner in the works is thy self.

One of the simple ones with no bearing on anything is counting squares. Not interested even in levels. Move two boxes up buy. Move two boxes down sell. It is effectively scalping but system does work. Works with just about any instrument too.

Having dissasociated my self from my ego and thinking I understand or comprehend or predict what's going to happen has been my biggest hurdle. I was told this by past legends here but I recall arguing with them. Now don't care for much what the markets do at all.

I am interested in current affairs and economics but that's about it for FA. It's all about TA. Good luck and don't give up. (y)


Old beliefs [may] not lead you to new cheese.
by Spencer Johnson, M.D.
Click to expand...

It's a tough journey, and I empathise with you man. Wish you luck in your future endeavours.

Adrian
 
In my search for why I have not been doing particulary well as a Chart daytrader, I have noticed a couple of things about my entries, and how they relate to the way markets work. I thought I would share in the hope someone finds it of benefit.

First of all, I need to be able to do something different to the many thousands of other people trying to make (take) money out of the markets. All these other guys want my moula as much (maybe more!) as I want theirs. So I have to be able to do something uncommon.

The other day I was in a trade, and like so many times, price just sits there at my entry, jiggling about, doing essentially nothing. It then either jiggles a bit more and stops me out, or enough for me to lose confidence. Then, happily, it may jiggle a bit in my direction and I get out at BE, or BE plus a tiny bit.

Why does this happen so often? How is it that given all the big moves lately, I always happen to get in right when price goes nowhere?

Then I realised one of the things I read many moons ago. Time is a huge factor in trading. I am not sure of the actual number, but if you spent time looking, I believe you would see that most of the time, price goes nowhere (relatively speaking). The big moves happen over the shortest periods. That's why when I put on a trade, there is a high probability that I have picked the molasses period, because I have been trading when I want to trade, not when the market tells me there is a valid entry point

And for me, now, that valid entry point has to be the frothy fast moving bit, either the tail (fade) or the breakout that has just shown itself as being an unreasonable price, a place where buyers and sellers disagree, and thus price moves rapidly to the point where there is agreement. It may all happen very quickly, and its quite often the place that presents itself as the toughest entry point. If it wasn't, it wouldn't be a good entry point (since everyone would feel good about entering here).

So in future, my entries are going judged not only on whether price moves to my target, but whether it did so within the time alloted to the trade. If I expect to see a bounce in the next x minutes and enter, but I don't get the bounce, but price drags itself to my target over a long period of time, then essentially my hypothesis was incorrect, and the fact that price hit my target could be nothing more than luck. I think this is now an important part of reviewing and refining my entries.

This is especially true, I think when reading the order flow. If you expect a few ticks or points in the next minute, and your trade is still open 5 minutes later, did you really read the action correctly?

Good trading to you!

Adrian
 
I, through being overconfident, took out too much from my account for Christmas, full expecting to be able to build up the remainder. In fact, the idea is to be able to take the next amount out in March, when the first crop of birthdays arrive. Being retired, I don't want to, particularly, hit it rich( although it would be nice) being more interested in trading as a profitable pastime and with no worries.

This philosophy has been the difference between me and lots of others who post on this forum.

I had a losing streak that has taken me very close to the margin requirement, to the extent that I have switched from Footsie to SP, just to be able to trade while waiting for money to arrive back in my account. I have a suspicion of credit cards and do not use anything except good, oldfashioned, cheques so I have to struggle until the New Year.

To get to the nuts and bolts of this post, it is amazing how getting close to getting stopped out by margin sharpens the mind. Anyone who enters the market with thousands is likely to lose the lot, whereas he, who has little, but with not much chance of being able to start again, pays more attention to what he is doing. At least, I do. In two careful trades, yesterday, I ended the day in a better position but what would have happened if I had lost? . In actual fact,in real life, nothing much.

So my advice to you is trade that way. Don't put more than a minimum into the trading basket and sweat like hell to make it grow. It is excellent training and it has made me pay more attention to what I do to stay in the game. Putting a lot into an account and, when you lose, opening another big trade is a dangerous game to play.
 
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