CYOF said:
A good follow up to this:
http://www.trade2win.com/knowledge/articles/general_articles/an-example-of-tape-reading/
- pertinent experience
- see
- wait
- act
- manage
A good follow up to this:
http://www.trade2win.com/knowledge/articles/general_articles/an-example-of-tape-reading/
Surfing opportunity
http://www.answers.com/surfing
surfing, sport of gliding toward the shore on a breaking wave. Surfers originally used long, cumbersome wooden boards but now ride lightweight synthetic boards that allow a greater degree of maneuverability. The surfer begins at the point where the waves begin to form
Note: click on a word meaning below to see its connections and related words.
The noun opportunity has one meaning:
Meaning #1: a possibility due to a favorable combination of circumstances
Synonym: chance
http://www.answers.com/surfing
surfing, sport of gliding toward the shore on a breaking wave. Surfers originally used long, cumbersome wooden boards but now ride lightweight synthetic boards that allow a greater degree of maneuverability. The surfer begins at the point where the waves begin to form
Note: click on a word meaning below to see its connections and related words.
The noun opportunity has one meaning:
Meaning #1: a possibility due to a favorable combination of circumstances
Synonym: chance
Last edited:
Why We Love to be Scared Charles Q. Choi
Special to LiveScience
LiveScience.comMon Oct 30, 8:30 PM ET
For all of their stomach-turning gore, horror films and haunted houses attract people in droves. This ability of the human brain to turn fear on its head could be a key to treating phobias and anxiety disorders, according to scientists.
When people get scared, their bodies automatically triggers the "fight or flight" response—their heart rates increase, they breathe faster, their muscles tense, and their attention focuses for quick and effective responses to threats.
"It's nature's way of protecting us," said clinical psychologist David Rudd at Texas Tech University.
If the brain knows there is no risk of really being harmed, it experiences this adrenaline rush as enjoyable, Rudd explained. The key to enjoying such thrills lies in knowing how to properly gauge the risk of harm.
"Young children may overestimate the risk of harm and experience true 'fear.' When that happens you see the child cling to a parent and cry, convinced there's a very real chance of harm," Rudd told LiveScience. On the other hand, "adults may well scream but quickly follow it with a laugh since they readily recognize there's no chance for real harm."
On a higher level
This phenomenon also explains why people can enjoy skydiving, bungee jumping and extreme sports.
"In these cases, those engaging in high-risk activities will tell you that the risk is lowered by their training and precautions," enabling them to enjoy the experience, Rudd said. The key structure in the brain responsible for this effect is likely the amygdala, he added, which is key to forming and storing memories linked with emotions.
The ability to enjoy fear makes evolutionary sense, said environmental psychologist Frank McAndrew at Knox College in Galesburg, Ill.
"We're motivated to seek out this kind of stimulation to explore new possibilities, to find new sources of food, better places to live and good allies," McAndrew said. "People enjoy deviations from the norm—a change of pace, within limits."
Key to therapy
If exposed repeatedly to a fearsome stimulus, the brain will get used to it and no longer experience it as frightening. This is a key behind cognitive therapies for anxiety dysfunctions such as phobias and post-traumatic stress disorder, where a person's system overreacts to perceive something as threatening when it is not, Rudd said. When such cognitive therapies are combined with medicines, their success rate at improving symptoms "is 80 percent," he added.
Meanwhile, McAndrew is exploring what makes houses feel haunted in the first place.
"We're focusing on what architectural features make houses appear haunted or not," he said. "We're finding they tend to be laid out in a confusing way, so that you're not sure where you are in the house. They're high in 'mystery'—you can't see very far in the house. And there are all kinds of sounds and smells not usually found in a house that can make it seem creepy."
Full Frightening Coverage
What Halloween is Really About Top 5 Haunted Places in America The Shady Science of Ghost Hunting Halloween's Top 10 Scary Creatures Ghost Photos: A Close Look at the Paranormal Higher Education Fuels Stronger Belief in Ghosts Vampires a Mathematical Impossibility, Scientist Says Candy Fears are Mere Halloween Phantoms Halloween Too Scary for Some Kids In Search of the Real Dracula Pumpkin Shortage?
Special to LiveScience
LiveScience.comMon Oct 30, 8:30 PM ET
For all of their stomach-turning gore, horror films and haunted houses attract people in droves. This ability of the human brain to turn fear on its head could be a key to treating phobias and anxiety disorders, according to scientists.
When people get scared, their bodies automatically triggers the "fight or flight" response—their heart rates increase, they breathe faster, their muscles tense, and their attention focuses for quick and effective responses to threats.
"It's nature's way of protecting us," said clinical psychologist David Rudd at Texas Tech University.
If the brain knows there is no risk of really being harmed, it experiences this adrenaline rush as enjoyable, Rudd explained. The key to enjoying such thrills lies in knowing how to properly gauge the risk of harm.
"Young children may overestimate the risk of harm and experience true 'fear.' When that happens you see the child cling to a parent and cry, convinced there's a very real chance of harm," Rudd told LiveScience. On the other hand, "adults may well scream but quickly follow it with a laugh since they readily recognize there's no chance for real harm."
On a higher level
This phenomenon also explains why people can enjoy skydiving, bungee jumping and extreme sports.
"In these cases, those engaging in high-risk activities will tell you that the risk is lowered by their training and precautions," enabling them to enjoy the experience, Rudd said. The key structure in the brain responsible for this effect is likely the amygdala, he added, which is key to forming and storing memories linked with emotions.
The ability to enjoy fear makes evolutionary sense, said environmental psychologist Frank McAndrew at Knox College in Galesburg, Ill.
"We're motivated to seek out this kind of stimulation to explore new possibilities, to find new sources of food, better places to live and good allies," McAndrew said. "People enjoy deviations from the norm—a change of pace, within limits."
Key to therapy
If exposed repeatedly to a fearsome stimulus, the brain will get used to it and no longer experience it as frightening. This is a key behind cognitive therapies for anxiety dysfunctions such as phobias and post-traumatic stress disorder, where a person's system overreacts to perceive something as threatening when it is not, Rudd said. When such cognitive therapies are combined with medicines, their success rate at improving symptoms "is 80 percent," he added.
Meanwhile, McAndrew is exploring what makes houses feel haunted in the first place.
"We're focusing on what architectural features make houses appear haunted or not," he said. "We're finding they tend to be laid out in a confusing way, so that you're not sure where you are in the house. They're high in 'mystery'—you can't see very far in the house. And there are all kinds of sounds and smells not usually found in a house that can make it seem creepy."
Full Frightening Coverage
What Halloween is Really About Top 5 Haunted Places in America The Shady Science of Ghost Hunting Halloween's Top 10 Scary Creatures Ghost Photos: A Close Look at the Paranormal Higher Education Fuels Stronger Belief in Ghosts Vampires a Mathematical Impossibility, Scientist Says Candy Fears are Mere Halloween Phantoms Halloween Too Scary for Some Kids In Search of the Real Dracula Pumpkin Shortage?
A New Trader's Journey to Success
by James Okada Lee - Nov 6, 2006
The 3(of a total of 6) stages of a developing trader are looked at below.
Stage Four: The Determined Trader
This is the stage in which you learn to specialize in certain markets and trading methods. Without realizing it, you have finally found your style of trading after hours of hard work and research. You stick to your method and you improve it. You realize that you need an edge whether its tape reading or being a Fibonacci expert. The important thing is you are slowly transforming yourself into a specialized trader. You test your methods and they seem to work. You gain tremendous market knowledge. You reflect back on yourself and you can't help but laugh at your foolishness. Although you have not made enough money to call yourself successful you are proud of your journey and accomplishments. You realize that the Holy Grail is not about technical indicators or price patterns. You calculate risk before profits and place strict money management on all your trades. You cut losses short and learn to scale out on your winners. You start accept losing as a natural part of the game. You take high probability trades that you have tested and feel confident about your setups because you understand that trading is a game of probabilities. Your psychological makeup has changed from an amateur mindset to a professional one.
Step Five: The Consistent Trader
You rely on your trading method and start taking trades systematically. You try to aim for consistency and are meeting your daily goals often. You have reached the conscious competence stage. You are fully aware of your strengths and weaknesses as a trader. At times you feel euphoric and at times you feel pain. But you are able to understand your own psychological makeup to control your emotional swings. You are now able to trade for a living.
Step Six: The Expert Trader
In this final stage, you completely understand the markets you are trading. Being involved in it everyday you are aware of every key price level. You understand market concept and are able to predict the direction of the markets a fairly good amount of time. You pat yourself on your back and take profits as soon as you feel euphoric. You do this because you understand euphoria is the same as emotional trading. You talk to other traders and realize the development stage they are in. People start asking you for trading advice, you publish a book, and you have a specific trading methodology that represents you!
Taking trades come naturally and you are able to get in and out at the precise price levels based on tape. Instead of having the markets take your stop out, you exit when you know you are wrong. You keep your head high but remain humble on the inside. You have now officially graduated the school of the hard knocks.
Entering the trading profession can be a tough journey for many people. Trading is one of the toughest careers that you can choose. If you enjoy the challenge, you will definitely enjoy the feeling of accomplishment. Trading is 30% mechanical and 170% psychological. 200% is required to become a successful trader. Good luck and best of trading.
by James Okada Lee - Nov 6, 2006
The 3(of a total of 6) stages of a developing trader are looked at below.
Stage Four: The Determined Trader
This is the stage in which you learn to specialize in certain markets and trading methods. Without realizing it, you have finally found your style of trading after hours of hard work and research. You stick to your method and you improve it. You realize that you need an edge whether its tape reading or being a Fibonacci expert. The important thing is you are slowly transforming yourself into a specialized trader. You test your methods and they seem to work. You gain tremendous market knowledge. You reflect back on yourself and you can't help but laugh at your foolishness. Although you have not made enough money to call yourself successful you are proud of your journey and accomplishments. You realize that the Holy Grail is not about technical indicators or price patterns. You calculate risk before profits and place strict money management on all your trades. You cut losses short and learn to scale out on your winners. You start accept losing as a natural part of the game. You take high probability trades that you have tested and feel confident about your setups because you understand that trading is a game of probabilities. Your psychological makeup has changed from an amateur mindset to a professional one.
Step Five: The Consistent Trader
You rely on your trading method and start taking trades systematically. You try to aim for consistency and are meeting your daily goals often. You have reached the conscious competence stage. You are fully aware of your strengths and weaknesses as a trader. At times you feel euphoric and at times you feel pain. But you are able to understand your own psychological makeup to control your emotional swings. You are now able to trade for a living.
Step Six: The Expert Trader
In this final stage, you completely understand the markets you are trading. Being involved in it everyday you are aware of every key price level. You understand market concept and are able to predict the direction of the markets a fairly good amount of time. You pat yourself on your back and take profits as soon as you feel euphoric. You do this because you understand euphoria is the same as emotional trading. You talk to other traders and realize the development stage they are in. People start asking you for trading advice, you publish a book, and you have a specific trading methodology that represents you!
Taking trades come naturally and you are able to get in and out at the precise price levels based on tape. Instead of having the markets take your stop out, you exit when you know you are wrong. You keep your head high but remain humble on the inside. You have now officially graduated the school of the hard knocks.
Entering the trading profession can be a tough journey for many people. Trading is one of the toughest careers that you can choose. If you enjoy the challenge, you will definitely enjoy the feeling of accomplishment. Trading is 30% mechanical and 170% psychological. 200% is required to become a successful trader. Good luck and best of trading.
Thank you Jon
Our Jack
by Barjon - Nov 9, 2006
Our Jack is, of course, a fiction but I suspect that there is a bit of him lurking in most of us so far as his emotional weaknesses are concerned. The purpose of this article is to suggest that where people struggle to control their emotions it makes sense to adopt a trading strategy that, at least, minimises the potential for those emotions to wreak havoc. There is one absolutely crucial point. And that is that however much it hurts we must be absolutely honest with ourselves in identifying our weaknesses and it is no good brushing them under the carpet. If we are dishonest in this analysis we may fool ourselves but we won’t fool the market, nor will we fool the non-emotional cool cats that are waiting ready to pounce and strip us of our cash.
Good trading.
Jon
Our Jack
by Barjon - Nov 9, 2006
Our Jack is, of course, a fiction but I suspect that there is a bit of him lurking in most of us so far as his emotional weaknesses are concerned. The purpose of this article is to suggest that where people struggle to control their emotions it makes sense to adopt a trading strategy that, at least, minimises the potential for those emotions to wreak havoc. There is one absolutely crucial point. And that is that however much it hurts we must be absolutely honest with ourselves in identifying our weaknesses and it is no good brushing them under the carpet. If we are dishonest in this analysis we may fool ourselves but we won’t fool the market, nor will we fool the non-emotional cool cats that are waiting ready to pounce and strip us of our cash.
Good trading.
Jon
You do not realise all of this is not about money. It is about getting it consistently right. This is also a reason why people lose money in the market.
Additionally all of this is about brain power.
It is brain power that allows the trader to be consistently right and not the motivation of making money, that is an added bonus but not the main focal point of the excercise.
The main focal point of the excercise is to overcome and succeed, and then to fully master, and then to perfect and then to absolutely and unquestionly master in totality, regardless of what instrument it is, or which market, or under which circumstances and in whatever size.
_________________
SOCRATES
Additionally all of this is about brain power.
It is brain power that allows the trader to be consistently right and not the motivation of making money, that is an added bonus but not the main focal point of the excercise.
The main focal point of the excercise is to overcome and succeed, and then to fully master, and then to perfect and then to absolutely and unquestionly master in totality, regardless of what instrument it is, or which market, or under which circumstances and in whatever size.
_________________
SOCRATES
Minute and Range
Quote from TL Trader:
I use both. I watch for the same thing
on both, TL's and simple horizontal S/R levels. As far as I'm concerned range bars are nothing revolutionary.
There are just another way to chart prices. Like any other method they have their pros and cons. Some cons are you won't have NRB's, WRB's, inside bars or outside bars. Pros are you'll have a much less cluttered chart when volatility is low since new bars print only when there is [ vertical] price movement [beyond your calibrated threshold].
I find them attractive for charting instruments like all sessions stock indexes and currencies. Where it's common that not much happens for hours at a time. I'm not much on using indicators myself but if you are it may be worth experimenting with constant range bars. Can't say as to whether it would make any particular indicator strategy profitable or not.
[superfly]
Quote from TL Trader:
I use both. I watch for the same thing
on both, TL's and simple horizontal S/R levels. As far as I'm concerned range bars are nothing revolutionary.
There are just another way to chart prices. Like any other method they have their pros and cons. Some cons are you won't have NRB's, WRB's, inside bars or outside bars. Pros are you'll have a much less cluttered chart when volatility is low since new bars print only when there is [ vertical] price movement [beyond your calibrated threshold].
I find them attractive for charting instruments like all sessions stock indexes and currencies. Where it's common that not much happens for hours at a time. I'm not much on using indicators myself but if you are it may be worth experimenting with constant range bars. Can't say as to whether it would make any particular indicator strategy profitable or not.
[superfly]
Last edited:
Illiquid
Like I've said before, I've seen as much so-called wisdom over the years that I've eventually learned to hold as inviolate truth, as that which should be thrown out with yesterday's garbage. Yet why does the eventual accumulation of pertinent knowledge translate so slowly into one's trading results? If we are capable of weeding out the good stuff from the bad, why doesn't the good stuff just take over and guide us directly towards success?
Aside from the fact that I might just be a dumbass, one thing I've figured out is that the distance between the brain and the finger might not be so close as you'd think -- if you're not careful. I know I'm not the only trader who has a tendency to repeat the usual mistakes, or variations of same, despite having berated myself 10 times in the previous week to make an effort not to do it again. My contention is that old habits die hard. Real hard. And only if you go out of your way to kill them outright.
Like I've said before, I've seen as much so-called wisdom over the years that I've eventually learned to hold as inviolate truth, as that which should be thrown out with yesterday's garbage. Yet why does the eventual accumulation of pertinent knowledge translate so slowly into one's trading results? If we are capable of weeding out the good stuff from the bad, why doesn't the good stuff just take over and guide us directly towards success?
Aside from the fact that I might just be a dumbass, one thing I've figured out is that the distance between the brain and the finger might not be so close as you'd think -- if you're not careful. I know I'm not the only trader who has a tendency to repeat the usual mistakes, or variations of same, despite having berated myself 10 times in the previous week to make an effort not to do it again. My contention is that old habits die hard. Real hard. And only if you go out of your way to kill them outright.
Shift
Recently, a fundamental shift occurred in my concept of what comprised an edge.
My approach to finding opportunities began to rely more on the situational logic of any given moment, and less upon blanket, "incidental" setups.
In other words, instead of just scanning the market passively and waiting for some pre-defined "pattern match" for a point of execution, any opportunity would now have its basis upon my understanding of the present (read: unique) impetus for market movement, and an accurate anticipation of where/when the next source of demand or supply would come from.
Changes in market psychology would now comprise the elements of the setup-pattern, rather than just their visual manifestations on the charts, which are often a step or two behind in providing an entry point.
The most glaring difference in the before/after would be the primacy of context over any rigid, abstract interpretation of market action; pattern XYZ might denote a "buy" today, but could just as easily convey a "sell" tomorrow.
Putting discretion at the forefront of my trading was no easy task, but was a necessary move considering the markets I trade. Any "rinse and repeat" setup can only last so long before it disappears beneath a glut of competitive forces. But this shift was not only a way to sharpen my edge or deepen my understanding of the markets; in my opinion, it was an indispensable step for achieving longevity as a trader. I promised myself I would never repeat the mistake of letting the markets outdate me, and this is the first step to ensuring my edge always remains sharp.
http://tradingthoughts.blogspot.com/
Recently, a fundamental shift occurred in my concept of what comprised an edge.
My approach to finding opportunities began to rely more on the situational logic of any given moment, and less upon blanket, "incidental" setups.
In other words, instead of just scanning the market passively and waiting for some pre-defined "pattern match" for a point of execution, any opportunity would now have its basis upon my understanding of the present (read: unique) impetus for market movement, and an accurate anticipation of where/when the next source of demand or supply would come from.
Changes in market psychology would now comprise the elements of the setup-pattern, rather than just their visual manifestations on the charts, which are often a step or two behind in providing an entry point.
The most glaring difference in the before/after would be the primacy of context over any rigid, abstract interpretation of market action; pattern XYZ might denote a "buy" today, but could just as easily convey a "sell" tomorrow.
Putting discretion at the forefront of my trading was no easy task, but was a necessary move considering the markets I trade. Any "rinse and repeat" setup can only last so long before it disappears beneath a glut of competitive forces. But this shift was not only a way to sharpen my edge or deepen my understanding of the markets; in my opinion, it was an indispensable step for achieving longevity as a trader. I promised myself I would never repeat the mistake of letting the markets outdate me, and this is the first step to ensuring my edge always remains sharp.
http://tradingthoughts.blogspot.com/
Last edited:
www.brettsteenbarger.com:
November 26, 2006
More on Transtheoretical Trading
In psychotherapy, there are practitioners from different theoretical perspectives. Some adopt a cognitive framework; others are psychoanalytic. We have solution-focused therapists, behaviorists, interpersonal psychologists, and many, many more. Each theory offers an explanation for why a person might be having problems. Each theory also offers a set of procedures that are designed to change these problems.
Not surprisingly, a great deal of research has been devoted to the question of which approaches are most effective. It turns out that all of them are more effective than no therapy at all, but none of them are consistently better than any of the others across various people and problems. One researcher anointed this the "Dodo Bird" finding, naming it after the character in Alice in Wonderland who declares, "All have won, and all shall have prizes!"
The reality behind the Dodo finding is that all the approaches work because of their common ingredients, not because of the specifics of their theories. In other words, it's what behaviorists, analysts, cognitive therapists, etc. are doing similarly--not what makes them unique--that accounts for psychological change.
Trading, interestingly, is in a similar situation. There are many different trading methods, ranging from chart and indicator reading to assessment of stock and market fundamentals. Each practitioner is convinced that his or her methods are responsible for success. Yet, when we look across traders, we find that successful traders employ many different methods. As with therapies, no one method seems to have a lock on truth.
The notion of transtheoretical trading is that perhaps all successful traders share common ingredients that account for their success. These common factors are independent of the explicit rationales that they employ in taking and managing trades. In other words, it's not really about the Fib numbers, the chart patterns, fundamental data, statistical analyses, or oscillator readings. Rather, it's what all good traders do that makes them successful.
What might these successful ingredients be?
1) Generating favorable risk/reward with price targets and stops;
2) Proper allocation of assets to trades (position sizing) to avoid large drawdowns and risk of ruin;
3) Diversification of capital to spread risk and reduce fluctuations in P/L;
4) Superior reading of supply/demand patterns (regimes; see previous entry) to enter trades at prices that incur little heat during the trade;
5) Superior reading of supply/demand patterns to exit trades at prices that take meaningful pieces out of market moves;
6) Trading with the market's directional (or non-directional) bias;
7) Holding winning trades longer than losers to create the favorable risk/reward balance;
8) Reducing the frequency of trading during periods of low opportunity (low volatility);
9) Quickly recognizing shifts in market regimes (trend changes; volatility changes) and changing trading patterns based on this recognition;
10) Consistency: trading similar markets similarly.
Much of trader education focuses on setups specific to a trading method and not to these basic, core skills. Doing things right in trading means doing the right things--and these are the things all good traders do.
November 19, 2006
Transtheoretical Trading
One thing I'm working on is a transtheoretical perspective on trading. What I mean by that is a description of what good traders do regardless of their specific methods. The transtheoretical notion suggests that traders are basically doing the same thing, whether they're looking at statistical patterns, chart patterns, oscillator patterns, wave patterns, or Fib patterns.
My account begins with the idea of the regime. A regime is a set of rules that fit the market's performance over a recent period of time. An active daytrader may define a regime in terms of minutes; a longer-term trader will focus on a series of days. The regime might be thought of as the rules that the market is playing by over that period. One simple description of a regime is that the market is trading in a 90-day cycle.
By its very nature, a regime is a curve-fit description of the past. Regimes come and go across various timeframes: this provides the market with its complexity. A good example is a trendline. It is a description of the market's past action, but eventually it will be violated--until a new regime can be defined.
This brings us to two basic modes of trading: 1) regime-following and 2) regime-changing. A regime-following trade assumes that, as long as the participants in the marketplace remain relatively constant and fundamental, macro influences do not significantly change, the regime that is in place will persist. Thus, we can figure out the rules that the market has been playing with over the past X bars and use that information to anticipate the next bars. Trend following is a common example of this kind of regime trading.
Regime changing trades attempt to anticipate shifts in regimes. A market has been trading one set of rules, but because of shifts among market participants and/or macro-economic factors, is about to shift its regime. During such shifts, there will be many traders who are late to recognize the change and who will behave emotionally when the rules change. The trader who is trading regime change hopes to profit from this behavior. A good example of regime-changing trading is breakout trades.
From this perspective, chart trading, statistical trading, indicator trading--all are different ways of framing regimes and their changes. We can think of these trading approaches as different languages that traders speak. Truth lies, not in the language, but in the thoughts that are spoken. But the visual language of charts may speak to some traders better than the analytical language of statistics. What makes the trader successful is the performance skill of being able to recognize regimes and their shifts--not the charts or oscillators themselves.
This has important implications for training and trader education, which I will be exploring in future posts.
November 26, 2006
More on Transtheoretical Trading
In psychotherapy, there are practitioners from different theoretical perspectives. Some adopt a cognitive framework; others are psychoanalytic. We have solution-focused therapists, behaviorists, interpersonal psychologists, and many, many more. Each theory offers an explanation for why a person might be having problems. Each theory also offers a set of procedures that are designed to change these problems.
Not surprisingly, a great deal of research has been devoted to the question of which approaches are most effective. It turns out that all of them are more effective than no therapy at all, but none of them are consistently better than any of the others across various people and problems. One researcher anointed this the "Dodo Bird" finding, naming it after the character in Alice in Wonderland who declares, "All have won, and all shall have prizes!"
The reality behind the Dodo finding is that all the approaches work because of their common ingredients, not because of the specifics of their theories. In other words, it's what behaviorists, analysts, cognitive therapists, etc. are doing similarly--not what makes them unique--that accounts for psychological change.
Trading, interestingly, is in a similar situation. There are many different trading methods, ranging from chart and indicator reading to assessment of stock and market fundamentals. Each practitioner is convinced that his or her methods are responsible for success. Yet, when we look across traders, we find that successful traders employ many different methods. As with therapies, no one method seems to have a lock on truth.
The notion of transtheoretical trading is that perhaps all successful traders share common ingredients that account for their success. These common factors are independent of the explicit rationales that they employ in taking and managing trades. In other words, it's not really about the Fib numbers, the chart patterns, fundamental data, statistical analyses, or oscillator readings. Rather, it's what all good traders do that makes them successful.
What might these successful ingredients be?
1) Generating favorable risk/reward with price targets and stops;
2) Proper allocation of assets to trades (position sizing) to avoid large drawdowns and risk of ruin;
3) Diversification of capital to spread risk and reduce fluctuations in P/L;
4) Superior reading of supply/demand patterns (regimes; see previous entry) to enter trades at prices that incur little heat during the trade;
5) Superior reading of supply/demand patterns to exit trades at prices that take meaningful pieces out of market moves;
6) Trading with the market's directional (or non-directional) bias;
7) Holding winning trades longer than losers to create the favorable risk/reward balance;
8) Reducing the frequency of trading during periods of low opportunity (low volatility);
9) Quickly recognizing shifts in market regimes (trend changes; volatility changes) and changing trading patterns based on this recognition;
10) Consistency: trading similar markets similarly.
Much of trader education focuses on setups specific to a trading method and not to these basic, core skills. Doing things right in trading means doing the right things--and these are the things all good traders do.
November 19, 2006
Transtheoretical Trading
One thing I'm working on is a transtheoretical perspective on trading. What I mean by that is a description of what good traders do regardless of their specific methods. The transtheoretical notion suggests that traders are basically doing the same thing, whether they're looking at statistical patterns, chart patterns, oscillator patterns, wave patterns, or Fib patterns.
My account begins with the idea of the regime. A regime is a set of rules that fit the market's performance over a recent period of time. An active daytrader may define a regime in terms of minutes; a longer-term trader will focus on a series of days. The regime might be thought of as the rules that the market is playing by over that period. One simple description of a regime is that the market is trading in a 90-day cycle.
By its very nature, a regime is a curve-fit description of the past. Regimes come and go across various timeframes: this provides the market with its complexity. A good example is a trendline. It is a description of the market's past action, but eventually it will be violated--until a new regime can be defined.
This brings us to two basic modes of trading: 1) regime-following and 2) regime-changing. A regime-following trade assumes that, as long as the participants in the marketplace remain relatively constant and fundamental, macro influences do not significantly change, the regime that is in place will persist. Thus, we can figure out the rules that the market has been playing with over the past X bars and use that information to anticipate the next bars. Trend following is a common example of this kind of regime trading.
Regime changing trades attempt to anticipate shifts in regimes. A market has been trading one set of rules, but because of shifts among market participants and/or macro-economic factors, is about to shift its regime. During such shifts, there will be many traders who are late to recognize the change and who will behave emotionally when the rules change. The trader who is trading regime change hopes to profit from this behavior. A good example of regime-changing trading is breakout trades.
From this perspective, chart trading, statistical trading, indicator trading--all are different ways of framing regimes and their changes. We can think of these trading approaches as different languages that traders speak. Truth lies, not in the language, but in the thoughts that are spoken. But the visual language of charts may speak to some traders better than the analytical language of statistics. What makes the trader successful is the performance skill of being able to recognize regimes and their shifts--not the charts or oscillators themselves.
This has important implications for training and trader education, which I will be exploring in future posts.
Prep dec-4-06
For my personal record
====================================
Cockpit dec-4-06:
Marketpulse:
IB Booktrader: FASTINDEX
IB Marketdepth: SMH
4 candle charts:
Chart 1: S/QFastindex 9/1 cent key-, trend- and ambush-lines
Chart 2/3/4:marketweight TI+ S 10m,V atr(200) key- and trend-lines
Platform:
TELE2/IB/Sierra
For my personal record
====================================
Cockpit dec-4-06:
Marketpulse:
IB Booktrader: FASTINDEX
IB Marketdepth: SMH
4 candle charts:
Chart 1: S/QFastindex 9/1 cent key-, trend- and ambush-lines
Chart 2/3/4:marketweight TI+ S 10m,V atr(200) key- and trend-lines
Platform:
TELE2/IB/Sierra
Attachments
Last edited:
Quote from Scientist:
....to put it in one sentence, "Price leads, volume confirms."
Time is the market's regulator.
Price is the market's advertiser.
Volume is the market's judge.
If you don't understand volume, then you understand less than half of what markets are about. Markets are all about facilitating trade. If a price level doesn't faciliate trade, then it isn't a fair price level, and thus price will have to go elsewhere (probing) to find better facilitation. In order to do that, price will either/or probe beyond current levels to see if it generates new volume, and if it doesn't (rejecton), well then it will return to old levels of fair value (acceptance).
There's a lovely passage on P/V relationship that applies here for visualization:
"Suppose a movie theater raises ticket prices. In the following weeks, ticket sales drop substantially. At higher ticket prices, the theater isn't facilitating trade for the movie-fans. If the theater is going to stay in business, it will have to lower price. Decreased volume indicates a rejection of higher prices."
Volume is the ultimate measure of directional performance. Only in combination can price and volume answer "The 2 Great Questions" about the market:
1. Which way is the market trying to go?
2. Is it doing a good job of going that way?
The first question is answered (mostly) by price.
The second question (mostly) by volume.
However, to the starter of this thread, this is not to argue with your notion that volume won't help you much with mechanical trading systems. But then again, I don't believe you'll make much profit using them, anyway. At least not indefinitely. It's such a great dream, the "automated money pump", that millions of happy lemmings pursue it. But all mechanical systems, since in one way or another all empirically curve-fitted, will eventually fail, or to put into elegant financial terms, "return to the norm".
-S
....to put it in one sentence, "Price leads, volume confirms."
Time is the market's regulator.
Price is the market's advertiser.
Volume is the market's judge.
If you don't understand volume, then you understand less than half of what markets are about. Markets are all about facilitating trade. If a price level doesn't faciliate trade, then it isn't a fair price level, and thus price will have to go elsewhere (probing) to find better facilitation. In order to do that, price will either/or probe beyond current levels to see if it generates new volume, and if it doesn't (rejecton), well then it will return to old levels of fair value (acceptance).
There's a lovely passage on P/V relationship that applies here for visualization:
"Suppose a movie theater raises ticket prices. In the following weeks, ticket sales drop substantially. At higher ticket prices, the theater isn't facilitating trade for the movie-fans. If the theater is going to stay in business, it will have to lower price. Decreased volume indicates a rejection of higher prices."
Volume is the ultimate measure of directional performance. Only in combination can price and volume answer "The 2 Great Questions" about the market:
1. Which way is the market trying to go?
2. Is it doing a good job of going that way?
The first question is answered (mostly) by price.
The second question (mostly) by volume.
However, to the starter of this thread, this is not to argue with your notion that volume won't help you much with mechanical trading systems. But then again, I don't believe you'll make much profit using them, anyway. At least not indefinitely. It's such a great dream, the "automated money pump", that millions of happy lemmings pursue it. But all mechanical systems, since in one way or another all empirically curve-fitted, will eventually fail, or to put into elegant financial terms, "return to the norm".
-S
Quote from Scientist:
.......... I often enter or exit trades at market (wide limit), sometimes up to several ticks or points. I used to believe passive entries were the grail, but have changed my mind. If you do an honest backtest on your signal performances, then you too might find out that bidding or asking, in the long run, can serve you with a majority of losing trades. Not because the majority of fills are against you, but because the majority of winning trades you will simply miss because of your fear to enter a great trade at market when the signal is there. Unfortunately, the really good trades rarely allow for a passive entry. They see you coming, sucker. And they all want the same thing.
.......... I often enter or exit trades at market (wide limit), sometimes up to several ticks or points. I used to believe passive entries were the grail, but have changed my mind. If you do an honest backtest on your signal performances, then you too might find out that bidding or asking, in the long run, can serve you with a majority of losing trades. Not because the majority of fills are against you, but because the majority of winning trades you will simply miss because of your fear to enter a great trade at market when the signal is there. Unfortunately, the really good trades rarely allow for a passive entry. They see you coming, sucker. And they all want the same thing.
