Making a more scientific trading strategy

The depressing thing about probability is that one trade is going to be completely independent from another. I may be correct on 65 trades out of 100 but I might get 15 wrong out of 20 in a group from that 100 trades. It can definitely be difficult to ride through. Keep in mind it is long term success that allows us to make a living.
 
Any trading method where you trade outright directional positions IS an attempt to predict future price movements. You do not go long if you expect price to go down. Even if you say "I'm going long because there is less risk to the downside", you have still made a directional prediction.

Now - this is never going to be 100% reliable but it is of course possible because of "cause & effect".

If you base all of your studies on financial time series data, then you are analysing effect only. You can do this for years and years and it will never make any sense, you will never be able to predict because you never consider 'cause'.

Look at John Ehlers work - very, very clever guy but no-one ever made any money from his DSP theories (apart from Johns book sales). He also, was totally focused on trying to make sense out of studying effect and not cause.

im going to look up some of those dsp ideas your talking about because im not fulling grasping your cause and effect anology so much... maybe you can expand a little... but i think im starting to understand where our differing perceptions lay...

1st off let me apologize if ive come off a little crass, or if in my attempt to explain to you what works for me, if i have come across as trying to tell you what to do with your own business, this is not the case... as i have said before i am just doing my best to expand the probable (i started using this word after hearing a hindu analogy told by robert shiller in one of his yale financial markets lectures - free online) trade ideas my business generates by interacting with a larger online community... i have very much enjoyed the dynamic tempo & even the differing ideologies everybody has presented on this forum... at times however, i do become overly passionate about the topic and i recognize that i probably come across as a dick... i ask that you dont hold it against me... im just determined, i guess, to ultimately find that "holy grail", maybe even if it takes the rest of my life... dont tell my wife that.

this is really an issue of looking at the glass half full or half empty...

Yes. each and everyone of my trades does hold a directional bias. i do not attempt to make money trading the "spread". I understand the implications of this, and psychologically, it may sound overtly simple, but I just accept responsibility for it. and because i accept responsibility for every loss i may incur, i am also free to accept being wrong on any one trade idea my "mathematical" systems may produce... because at the end of the day, no indicator, no math, no anything can tell you what the market is going to do next. the absolute chaos that is a mall full of 100,000 shoppers, IS insane!!! cant be measured in a way that will foretell a path to a fortune filled treasure chest... nope, not happening. (Although companies like Home Depot, for example, use Risk & Inventory control measures to use past statistics of how their customer's orders are coming through the door to position themselves as best they can for what the needs of their future customers will be, & eventually, where their profitability will be, and to best determine how they will take their own profits from any given market based on current "technical" metrics they use to measure their own businesses. Chaos theory maybe? out of chaos comes order... quite possibly)

How does this simple fact produce a dominant trading strategy? I have found that i can dominantly trade a strategy if and only if i approach the market on my own terms according to the mathematically defined "rules of engagement" i have predefined according to any number of ideas that can be effectively used to trade the market. (I am actually proposing here that the strategy does not matter... what matters, which i do not discuss in this post, is the expectancy of a strategy, & even then, that is worthless if you cannot abide by the fundamental principles of this article).

what does all this have to do with half full/half empty? you see, although i am doing everything in my power to consistently make profits on a short/medium term directional bias over and over again throughout the year... the ONLY NUMBER I CARE ABOUT in every trade I execute... come on, somebody guess...

I only care about the amount of money each trade will lose. regardless of the "probable" outcomes that may arise. The amount of money I can potentially lose on any given trade, or my Risk (R), is absolutely the only number that can and will put me, and anyone who trades any market, out of business faster than you can say "I lost all my money".... The is the only guarantee the market will give you...

I dont know about you, but, Im pissing in my pants just thinking about how that last statement came together... it's so true! The markets are indeed a force to be reckoned with, and one must not attempt to let anything interfere with your grasp of that idea. the minute you think you got a handle on this baby, "the market", you get tossed aside like the next $2 whore... (sorry ladies)

So you see, i dont look at trading on a directional bias as an inherently bad thing. i have studied charts dating back to 1854 and the only common theme that can be found is that the markets are simply, volatile, and directionaly biased. why? because the inherent nature of human psychology is volatile... & biased. dont even get me started on group psychology, the stampede is insane! is it not?

with that said, although i am trading on a theoretically riskier "trade platform", if you will, by seeking out directional opportunities as part of my trading business' long term profit objectives. In all reality, my day to day trade management details, that are predefined and outlined in my business plan, state, that, my primary objective is to eliminate my Risk (R) as much as possible. Because trading on a directional bias is inherently more risky than a spread strategy, we will probably never eliminate risk in the "traditional" sense of the term, but I will spend the rest of this post making an attempt at explaining how i do it using what a gentleman by the name of Van K Tharp termed, the R-Multiple...

Generally I think that as traders, when we start researching these stats, we quite simply forget to work on ways of using the very quantitative mathematical methods we are calculating to improve our trading, in ways that are actionable so as to assist in actually turning a profit.

Just a theory, but i suspect that most traders calculate figures on back dated data without taking into account how you would actually trade each system... ie.. back-testing...

you with me so far?

what we all have to remember, is that these statistical and mathematical tools, no matter how you calculate them or what you actually calculate to measure your performance, must ALSO be measured against your actual performance in a way in which you can incorporate Risk Control metrics that work within the parameters of the system you are testing.

With the application of the "R-Mulitple", you are effectively measuring your actual Risk per trade and how you actually performed against the stated risk you said you were going to take on by executing the trade, FROM THE BEGINNING OF THE TRADE.

What the hell is an R-Multiple anyways?

If Risk is defined as how much you'll lose per unit of your investment (i.e. # of forex contracts) and you are wrong about the 'given' position, then the 'initial' Risk associated with the 'given' position is called 'R'. Or, 1R.

Example: If you buy a stock for $10 per share and it drops to $5 per share, your initial Risk for that particular trade is $5 per share. So in this example, 1R is equal to $5. If you buy 100 shares, then your total risk is $500...

R Represents a method in which to compare the initial risk of different trades equally and objectively against all other trades, and it therefore represents your initial risk per unit. the reason you want to objectively quantify this info is because all of your profits & losses should be related to your PREDETERMINED initial risk. you want your losses to be 1R or less. that means if you say (before you get in the trade) that you will get out of the stock when it drops from $10 to $5, then you actually get out when it gets to $5. If you get out when it drops to $0, than your loss is much bigger than 1R. its twice what you planned to lose or a 2R loss. you want to avoid that situation at all cost. as a matter of fact you want to keep all losses as close to 1R as possible or less... (i.e. you want to actively work on taking your (R) down to zero (0) throughout the life of your trade. Effectively, you want to work towards the feasible elimination of the Risk (R) associated with the trade... if you're able to get it down to 0R, ie. break even, you've won the game.)

the opposite holds true as well. the few times when the trade DOES go in your favor you want to hold those trades as much beyond a 1R Gain as possible. that means that when the market decides to reward you, you must close the position in the given example at $25, therefore giving you a 3R Profit or 3 times the initial risk...

This is the mathematical procedure of ensuring that you cut your losses short & hold your winners longer...

but its difficult to get that info out there, i know.... The R-Mulitple is simply the Division of the Total Profit or Loss (including commissions & Fees) by the Initial Risk. You want to keep this as close to +1 or greater than +1 as possible. (No Less Than -1R for Losing trades)

ill tell you though, most of my winners are 1 to 1 with a few 1 to 3 Risk/Reward Ratios, so it is difficult to achieve trades with higher R Multiples but it is possible...

so you see, at the end of the day, with the knowledge that since 1854, markets have consistently moved up, down, & sideways in a volatile & biased fashion; my primary objective is simply to put myself in a position to participate. nothing more. because i want to be a "trader", and because i want to make money, then all i really want to do is to "Participate" in as many of those movements as I can catch. Furthermore, the only way I can catch those directional moves, is to "Test" the market at certain points of market extremes, where it always seems that panic has struck deep into the hearts of the "Stampeding Cattle", that i find myself entering into a directionaly biased position based on the rules i have dictated that allow me to "Engage my Targets" that show characteristics of having the lowest "probable' & quantifiable Risk (R) available to me at that particular point in time...

As soon as I have executed a trade, we go back to the beginning: the only thing I care about, at that point in time, is where my stops will be trailed to. As a matter of fact, I go into every trade EXPECTING TO LOSE!!! The sooner price action tells me I can move my Stops to break even the better, usually after a .382 retracement of the previous trend... for example... if this were to occur, I would be involved in an absolutely risk free, directionaly biased trade as soon as stops moved to break even. would I not?

You see fundamentally speaking, what has to occur in the traders "Mental State" is a sincere understanding that Losing is very much a part of this business. an acceptance of those losses is what is needed in order to give in to the fact that we will never know the future... holding a position beyond your defined stop loss, is simply a function of not being able to take a loss. when you cant take a loss, you are in essence saying that you cant accept being wrong. You rationalize a trade to find excuses to stay in it all the while losing more and more equity... you see, this is why psychology is so important, and please forgive my crude understanding of it, but at the end of the day, you have to put your ego & pride aside to be able to say, "This Trade Idea I had, was a horrendously bad idea; I need to get out ASAP"... that is as best as I can explain it... Set your ego aside, if your wrong get out, if your right, THEN get to Break even and let the market just do whatever it is going to do... (you can't control the market, as you already know, it will move with, or without you. your goal has to be one of Objective & Quantifiable "Participation"...)

the problem with this, is that the inherent freedom the market gives us to make money, is also a sword we can use to slice our own throats with, because it also gives us the absolute freedom to make a Decision to not obey our Stop Loss orders, or to trade without strict adherence to our predefined plan....

In order to combat this reality of undisciplined and inconsistent action which results in substantial monetary losses, one must undergo a "Paradigm Shift" where the glass goes from half empty for taking a simple trading loss, to half full for taking a small monetary loss thanks to the foresight & mathematically laid out definition of your trading plan.

When you take a small loss after having executed your trade according to your game plane, and on your own terms, THEN, it's actually a Win. why? because you will have not broken the 1st rule of Fight Club, er... Trading:

Protect your Wealth & Don't Lose your entire Stake!

Do I have to go into what Jesse Livermoore has to say about this?

so really, at the end of the day, i guess that's why i really dont care about cause because the cause doesnt concern me... beCAUSE its been happening over and over and over again since 1854...

All i have to know, is how my decisions to execute the trades that allow me to participate in these markets actually EFFECT my equity curve... the markets will tell me I'm doing wrong if I am losing money... in the mean time i will keep doing what I am doing, & sharing with anyone who wants to "have at it"...

If you've been with me this long... Thank you for listening

On a side note. I cannot take the credit for this knowledge because i did not invent any of it. It is all knowledge that I have obtained from researchers whose works extend as far back to 1854... I simply just read every last word and started putting it to use...

I know how frustrating it could be to read worthless books that provide no real material benefit to your bottom line. In the theme of sharing the knowledge on my website I have also established a list to links where you can buy all of the books that have helped me to harness the butt load of data that has helped to express myself today... if and only if you're interested in obtaining the breadth of knowledge that i have made a sincere attempt at condensing for you today, then please just visit what I call the "ProTrader Library" portion of my blog... The entire list of books needed to absorb this knowledge is located here:

TradeSocial Network ProTrader Library & Bookstore

you guys are the shiz... much love! and always, TakeYourProfits!!!!
 
cum hoc ergo propter hoc

Or

A occured after B, therefore B caused A.

This is a fallacy. C or D could have just as easily caused A. C and D might not be a pattern or even present on the time-series.

Fibs are a good example of ascribing cause. If you draw fibonacci extensions & retracements, allow a few percentage tolerance on either side, then you WILL absolutely see price react at these levels.

On the flip side, if you calculate how much of the price range you have covered by the tolerance around your fibs, then you may just find that it was statistically unlikely for price not to react on one of the areas.

You can draw random horizontal lines on a chart and price will appear to react in those areas. These are not cause either.

Yesterday, I was short the ES from about 1253, price moved down to 1250 and then at 8:37 some idiot in Germany said something about Europe and before I could react price shot up and clipped me out. After this, the price moved sideways for what felt like an eternity. The reason for that sideways move was obvious - even if you hadn't heard the news - no-one wanted to pick a side. That sudden 27 tick spike up spooked people. Who wants to be on the wrong side of one of those? Everyone was waiting for everyone else to react. I knew the cause of that choppy action, I knew also that once people committed to one side, other people would too and we'd have an actionable move.

Later on, we did see people piling onto one side and the market and some opportunities came up.

The past few weeks we have had the same thing - news about Europe - it's either falling apart or going to be fine - take your pick - a different announcement every 10 minutes on some days.

This is a cause, I am not a fundamental trader and I do not trade the news but I do listen to it because it throws the market offside and helps to warn you off.

Any mathematical analysis of the past few weeks on the ES will be totally useless in absence of the time of the news which effectively changed the decisions of perfectly happy little traders.

In the absence of all this news nonsense, it comes down to a bunch of people trying to trade in the direction they think will make the most profit. That is the real cause. Instead of trying to model this mathematically, it is much better to study game theory as people do tend to react in a similar manner over & over again.

Use math, and all of those spots where C, D, E or F caused the move will be totally hidden from you.

if you notice and look closely at my previous looooong post you may be able to find the subtleties of "Game Theory" verbage i used to describe the use of dominant strategies and what not...

everything i picked up about game theory and how i choose to apply it was through the lecture series i watched at yale broadcast on itunes university for free.
 
"1st off let me apologize if ive come off a little crass"

No apology needed - this could be a good discussion. I am a bit of a lulz merchant so I did start it!

My apologies to you...
 
The depressing thing about probability is that one trade is going to be completely independent from another. I may be correct on 65 trades out of 100 but I might get 15 wrong out of 20 in a group from that 100 trades. It can definitely be difficult to ride through. Keep in mind it is long term success that allows us to make a living.

i actually experienced that this year and made a video about it. i would like to write some more about it, but considering my last post, i hope you can understand why i would be all "forum'ed" out and deciding to go the easy way by showing you my videos...

Trade Psychology – Trading Through Drawdown
 
but you can't go broke managing risk effectively using objectively defined trading rules based in mathematics...

so long as you have the discipline to consistently obey those rules that is... thats the only key you really have to have: DISCIPLINE

the only way youre account will go to zero is if you refuse to obey your stops... ive lost 65 trades this year trading the forex market for example... and i didnt go broke... i turned around a 200% forex gain (my total portfolio gain across all markets is 60% ytd) on less than 50 wins... why? because I took profits on more trades that had 400 pip winners, while i kept my losses under 50 pip losers... trade management, risk management, money management... math can define all three so that you can execute your plan consistently every time...

how can you have a winning strategy if you approach the market a different way every time you take a trade? you would never be able to figure out what you're doing wrong or what you're doing right because it's all different... please tell me that makes sense to you.... and i mean that in the nicest possible way...

and you're right... psychology is key...!!! what i do in the market has everything to do with what I & I ALONE PERSONALLY DECIDE TO DO... so therefore, a deep and fundamental understanding of my own psychological decisions making processes are imperative to the success of my business... because at the end of the day, if i came on this forum and i blamed my losses on how you traded the market against me, you would laugh at my ridiculous notion that has no place in a trading forum where traders want to maintain consistent profitability...

as you can see i do everything i can to internalize every piece of literature i read in order to better educate myself... one of those tools i use is to verbalize the very lessons that i have learned, in detail, in order to share as much of it with the general trading public... obviously this is a selfish habit, as I only share my knowledge for my own selfish reason to make efficient psychological use of my own internal dialogue... but lets just say that in the end, i hope that this will eventually help just 1 person willing to see beyond the "fog"...

but as you can see, if your not charging $3,000 for information, people dont take it seriously... something about psychology...

i challenge you to try to verbalize some of your own knowledge rather than pointing out the fact that I've read a few books, as it is obviously apparent that I have...(again, i mean that in the nicest possible way because i really do believe in the exercise)... its like they say: people learn by listening, by writing, & by doing.... so why not use all three methods to help yourself achieve more effectively, against seasoned professionals, in an industry with absolutely no existing barriers for entry other than the fact that you have to deposit money with a broker???

I believe that if you make a serious effort at verbalizing the knowledge that you hold in your head, to teach others without question and without fee, then you will find the experience rewarding and beneficial to your own business...

the sad fact is that nobody does that... and the people that charge you for their mentoring services will use this forum to attack my concepts because they themselves are the one using underhanded psychological tactics, like going into a newbie forum pretending to help newbies, with the sole intention to help them part ways with their money... this is an online marketing fact... so beware...

dont believe me...? the shysters in question have already used my blog as a way to inform me that my "knowledge sharing" idea is actually bothering a lot of these "social security check" thieves... dont take my word for it, do a google search for the following terms & see it for yourself:

takeyourprofits.com people normally pay me for this and you are giving it away

you'll find it under the comments in a video blog i posted for my Trade No.86 - Post Trade Review

just, fyi...

good luck with your trading, i really do wish you the best...

My message for this forum is to develop an Objective trading approach defined by mathematics, to ensure that you will engage the market in a consistent fashion, every time you execute a trade. This is the only way to stop the losses, so that you too can TakeYourProfits...

tldr
 
"1st off let me apologize if ive come off a little crass"

No apology needed - this could be a good discussion. I am a bit of a lulz merchant so I did start it!

My apologies to you...

lulz! i love it... lets do this man i love the dynamic... you should join the TradeSocial Network team on the site, lets see what kind of new strategy we can develop... maybe you can show me how to trade spreads successfully... i still have yet to wrap my head around much of it...

im serious, i feel like we've had some real break through today... this is really rewarding for me and i must say i do appreciate your participation in all of it...
 
I agree that we all have to trade in our comfort zones.

In terms of cause & effect. We could observe that B occurs after A. Now, we could surmise that A causes B. This would be an erroneous assumption as C could have caused both A and B. A may also occur without B following. If C is not observed and is a cause, then it will be impossible to build any model that will define the markets without considering C.

In my opinion, there is a C and it is liquidity. D is news and E is 'gameplay'.

C - liquidity, the cause is pockets of liquidity being exploited...

liquiditybuildup.png


In this case, as we see each bounce off that 'resistance' point, more and more liquidity is created above that area . That liquidity is actually a bunch of traders that are telegraphing the fact they they will buy at higher prices than the current market price. How could this not cause price to move up so that people can sell to them, all other things being equal?

People that trade thousands of contracts know this and so they game the market. By the time we see 4 bounces off that resistance point, they know there is a healthy number of buy market orders that will be triggered as it pushes through. The more bounces, the more liquidity created above. Other participants may or may not join that - sometimes the snowball stops halfway down the hill, sometimes it becomes an avalanche.

With observation, you can see where pockets of liquidity are created. You can even set targets based on where you think the pockets of liquidity will run dry.

D is news. You can't ignore it when you trade but there aren't many platforms that allow you to model the news. As such, you know there is a factor D, you know that it will impact the price but in your data, there is no information on when D occurred. This is quite troubling if you want to do any modelling. The best way to use news is to not trade the reaction to the news. There's a lot of that going on now. You see what sort of reaction the news caused and then you trade accordingly. Sometimes it's a flash in the pan, sometimes it's a sustained move you can simply jump on board.

In terms of cause & effect. The 'effect' is the price action you see on a chart. For every piece of price action, there is a cause. The cause is often just plain old supply & demand. The cause is often people just going where the money is, jumping onto a move. The cause can be pockets of liquidity or news. The effect is the price. The risk, if you study effects to look for cause is that you won't find it because is isn't there.
 
im going to look up some of those dsp ideas your talking about because im not fulling grasping your cause and effect anology so much... maybe you can expand a little... but i think im starting to understand where our differing perceptions lay...

1st off let me apologize if ive come off a little crass, or if in my attempt to explain to you what works for me, if i have come across as trying to tell you what to do with your own business, this is not the case... as i have said before i am just doing my best to expand the probable (i started using this word after hearing a hindu analogy told by robert shiller in one of his yale financial markets lectures - free online) trade ideas my business generates by interacting with a larger online community... i have very much enjoyed the dynamic tempo & even the differing ideologies everybody has presented on this forum... at times however, i do become overly passionate about the topic and i recognize that i probably come across as a dick... i ask that you dont hold it against me... im just determined, i guess, to ultimately find that "holy grail", maybe even if it takes the rest of my life... dont tell my wife that.

this is really an issue of looking at the glass half full or half empty...

Yes. each and everyone of my trades does hold a directional bias. i do not attempt to make money trading the "spread". I understand the implications of this, and psychologically, it may sound overtly simple, but I just accept responsibility for it. and because i accept responsibility for every loss i may incur, i am also free to accept being wrong on any one trade idea my "mathematical" systems may produce... because at the end of the day, no indicator, no math, no anything can tell you what the market is going to do next. the absolute chaos that is a mall full of 100,000 shoppers, IS insane!!! cant be measured in a way that will foretell a path to a fortune filled treasure chest... nope, not happening. (Although companies like Home Depot, for example, use Risk & Inventory control measures to use past statistics of how their customer's orders are coming through the door to position themselves as best they can for what the needs of their future customers will be, & eventually, where their profitability will be, and to best determine how they will take their own profits from any given market based on current "technical" metrics they use to measure their own businesses. Chaos theory maybe? out of chaos comes order... quite possibly)

How does this simple fact produce a dominant trading strategy? I have found that i can dominantly trade a strategy if and only if i approach the market on my own terms according to the mathematically defined "rules of engagement" i have predefined according to any number of ideas that can be effectively used to trade the market. (I am actually proposing here that the strategy does not matter... what matters, which i do not discuss in this post, is the expectancy of a strategy, & even then, that is worthless if you cannot abide by the fundamental principles of this article).

what does all this have to do with half full/half empty? you see, although i am doing everything in my power to consistently make profits on a short/medium term directional bias over and over again throughout the year... the ONLY NUMBER I CARE ABOUT in every trade I execute... come on, somebody guess...

I only care about the amount of money each trade will lose. regardless of the "probable" outcomes that may arise. The amount of money I can potentially lose on any given trade, or my Risk (R), is absolutely the only number that can and will put me, and anyone who trades any market, out of business faster than you can say "I lost all my money".... The is the only guarantee the market will give you...

I dont know about you, but, Im pissing in my pants just thinking about how that last statement came together... it's so true! The markets are indeed a force to be reckoned with, and one must not attempt to let anything interfere with your grasp of that idea. the minute you think you got a handle on this baby, "the market", you get tossed aside like the next $2 whore... (sorry ladies)

So you see, i dont look at trading on a directional bias as an inherently bad thing. i have studied charts dating back to 1854 and the only common theme that can be found is that the markets are simply, volatile, and directionaly biased. why? because the inherent nature of human psychology is volatile... & biased. dont even get me started on group psychology, the stampede is insane! is it not?

with that said, although i am trading on a theoretically riskier "trade platform", if you will, by seeking out directional opportunities as part of my trading business' long term profit objectives. In all reality, my day to day trade management details, that are predefined and outlined in my business plan, state, that, my primary objective is to eliminate my Risk (R) as much as possible. Because trading on a directional bias is inherently more risky than a spread strategy, we will probably never eliminate risk in the "traditional" sense of the term, but I will spend the rest of this post making an attempt at explaining how i do it using what a gentleman by the name of Van K Tharp termed, the R-Multiple...

Generally I think that as traders, when we start researching these stats, we quite simply forget to work on ways of using the very quantitative mathematical methods we are calculating to improve our trading, in ways that are actionable so as to assist in actually turning a profit.

Just a theory, but i suspect that most traders calculate figures on back dated data without taking into account how you would actually trade each system... ie.. back-testing...

you with me so far?

what we all have to remember, is that these statistical and mathematical tools, no matter how you calculate them or what you actually calculate to measure your performance, must ALSO be measured against your actual performance in a way in which you can incorporate Risk Control metrics that work within the parameters of the system you are testing.

With the application of the "R-Mulitple", you are effectively measuring your actual Risk per trade and how you actually performed against the stated risk you said you were going to take on by executing the trade, FROM THE BEGINNING OF THE TRADE.

What the hell is an R-Multiple anyways?

If Risk is defined as how much you'll lose per unit of your investment (i.e. # of forex contracts) and you are wrong about the 'given' position, then the 'initial' Risk associated with the 'given' position is called 'R'. Or, 1R.

Example: If you buy a stock for $10 per share and it drops to $5 per share, your initial Risk for that particular trade is $5 per share. So in this example, 1R is equal to $5. If you buy 100 shares, then your total risk is $500...

R Represents a method in which to compare the initial risk of different trades equally and objectively against all other trades, and it therefore represents your initial risk per unit. the reason you want to objectively quantify this info is because all of your profits & losses should be related to your PREDETERMINED initial risk. you want your losses to be 1R or less. that means if you say (before you get in the trade) that you will get out of the stock when it drops from $10 to $5, then you actually get out when it gets to $5. If you get out when it drops to $0, than your loss is much bigger than 1R. its twice what you planned to lose or a 2R loss. you want to avoid that situation at all cost. as a matter of fact you want to keep all losses as close to 1R as possible or less... (i.e. you want to actively work on taking your (R) down to zero (0) throughout the life of your trade. Effectively, you want to work towards the feasible elimination of the Risk (R) associated with the trade... if you're able to get it down to 0R, ie. break even, you've won the game.)

the opposite holds true as well. the few times when the trade DOES go in your favor you want to hold those trades as much beyond a 1R Gain as possible. that means that when the market decides to reward you, you must close the position in the given example at $25, therefore giving you a 3R Profit or 3 times the initial risk...

This is the mathematical procedure of ensuring that you cut your losses short & hold your winners longer...

but its difficult to get that info out there, i know.... The R-Mulitple is simply the Division of the Total Profit or Loss (including commissions & Fees) by the Initial Risk. You want to keep this as close to +1 or greater than +1 as possible. (No Less Than -1R for Losing trades)

ill tell you though, most of my winners are 1 to 1 with a few 1 to 3 Risk/Reward Ratios, so it is difficult to achieve trades with higher R Multiples but it is possible...

so you see, at the end of the day, with the knowledge that since 1854, markets have consistently moved up, down, & sideways in a volatile & biased fashion; my primary objective is simply to put myself in a position to participate. nothing more. because i want to be a "trader", and because i want to make money, then all i really want to do is to "Participate" in as many of those movements as I can catch. Furthermore, the only way I can catch those directional moves, is to "Test" the market at certain points of market extremes, where it always seems that panic has struck deep into the hearts of the "Stampeding Cattle", that i find myself entering into a directionaly biased position based on the rules i have dictated that allow me to "Engage my Targets" that show characteristics of having the lowest "probable' & quantifiable Risk (R) available to me at that particular point in time...

As soon as I have executed a trade, we go back to the beginning: the only thing I care about, at that point in time, is where my stops will be trailed to. As a matter of fact, I go into every trade EXPECTING TO LOSE!!! The sooner price action tells me I can move my Stops to break even the better, usually after a .382 retracement of the previous trend... for example... if this were to occur, I would be involved in an absolutely risk free, directionaly biased trade as soon as stops moved to break even. would I not?

You see fundamentally speaking, what has to occur in the traders "Mental State" is a sincere understanding that Losing is very much a part of this business. an acceptance of those losses is what is needed in order to give in to the fact that we will never know the future... holding a position beyond your defined stop loss, is simply a function of not being able to take a loss. when you cant take a loss, you are in essence saying that you cant accept being wrong. You rationalize a trade to find excuses to stay in it all the while losing more and more equity... you see, this is why psychology is so important, and please forgive my crude understanding of it, but at the end of the day, you have to put your ego & pride aside to be able to say, "This Trade Idea I had, was a horrendously bad idea; I need to get out ASAP"... that is as best as I can explain it... Set your ego aside, if your wrong get out, if your right, THEN get to Break even and let the market just do whatever it is going to do... (you can't control the market, as you already know, it will move with, or without you. your goal has to be one of Objective & Quantifiable "Participation"...)

the problem with this, is that the inherent freedom the market gives us to make money, is also a sword we can use to slice our own throats with, because it also gives us the absolute freedom to make a Decision to not obey our Stop Loss orders, or to trade without strict adherence to our predefined plan....

In order to combat this reality of undisciplined and inconsistent action which results in substantial monetary losses, one must undergo a "Paradigm Shift" where the glass goes from half empty for taking a simple trading loss, to half full for taking a small monetary loss thanks to the foresight & mathematically laid out definition of your trading plan.

When you take a small loss after having executed your trade according to your game plane, and on your own terms, THEN, it's actually a Win. why? because you will have not broken the 1st rule of Fight Club, er... Trading:

Protect your Wealth & Don't Lose your entire Stake!

Do I have to go into what Jesse Livermoore has to say about this?

so really, at the end of the day, i guess that's why i really dont care about cause because the cause doesnt concern me... beCAUSE its been happening over and over and over again since 1854...

All i have to know, is how my decisions to execute the trades that allow me to participate in these markets actually EFFECT my equity curve... the markets will tell me I'm doing wrong if I am losing money... in the mean time i will keep doing what I am doing, & sharing with anyone who wants to "have at it"...

If you've been with me this long... Thank you for listening

On a side note. I cannot take the credit for this knowledge because i did not invent any of it. It is all knowledge that I have obtained from researchers whose works extend as far back to 1854... I simply just read every last word and started putting it to use...

I know how frustrating it could be to read worthless books that provide no real material benefit to your bottom line. In the theme of sharing the knowledge on my website I have also established a list to links where you can buy all of the books that have helped me to harness the butt load of data that has helped to express myself today... if and only if you're interested in obtaining the breadth of knowledge that i have made a sincere attempt at condensing for you today, then please just visit what I call the "ProTrader Library" portion of my blog... The entire list of books needed to absorb this knowledge is located here:

TradeSocial Network ProTrader Library & Bookstore

you guys are the shiz... much love! and always, TakeYourProfits!!!!

After reading this last post I made above, one can safely conclude that I am indeed in the dissenting opinion when it comes to the "Efficient Markets Theory"
which states:


An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments. - Investopedia

Investopedia explains Efficient Market Hypothesis - EMH

Although it is a cornerstone of modern financial theory, the EMH is highly controversial and often disputed. Believers argue it is pointless to search for undervalued stocks or to try to predict trends in the market through either fundamental or technical analysis.

Meanwhile, while academics point to a large body of evidence in support of EMH, an equal amount of dissension also exists. For example, investors, such as Warren Buffett have consistently beaten the market over long periods of time, which by definition is impossible according to the EMH. Detractors of the EMH also point to events, such as the 1987 stock market crash when the Dow Jones Industrial Average (DJIA) fell by over 20% in a single day, as evidence that stock prices can seriously deviate from their fair values.
 
on your FACE!

Well yes, in your face too.

This is actually all you need to trade isn't it my flexible friend?

Still, I think there is much merit in using charts on the ES, although I don't think they are needed for Bund, Bobl (who trades Schatz anyway) or the US treasuries.

I think for instruments that put in a lot of intra-day gyrations, it helps to have a chart to see the various intra-day pivots. Of course, having a good memory for numbers and levels is just as good. I smoked too much weed as a youth for that though.
 
There is a loophole in EMH.

Fundamental traders are generally taught that EMH is da ****.

So you would think it means there is no way to make $$$$. Not correct. All current information may be priced into the market - but look at the issues in Europe now.

Fundamental players will be looking at the unkowns - for example, the unknowns are the outcome of the current debt problems in Europe . They will look at the different potential scenarios, figure out the potential impacts and look at which is more likely. This is how EMH fundies speculate bcoz current value is always correct. They can only speculate based on unknown outcomes, like a new product line for a company. Either that or admit EMH is bo11ocks.
 
Quote: "In terms of cause & effect. The 'effect' is the price action you see on a chart. For every piece of price action, there is a cause. The cause is often just plain old supply & demand. The cause is often people just going where the money is, jumping onto a move. The cause can be pockets of liquidity or news. The effect is the price. The risk, if you study effects to look for cause is that you won't find it because is isn't there."

Is that really true? So if someone has a rubiks cube presented to him scrambled up and he cannot solve the cube, does that mean it cannot be solved?

Surely every effect has a cause?
 
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