Tradewinds

I recently became interested in what it would take to prove that my trading system is actually profitable. It helped me a lot. It made me more serious, and much more critical of my own system. But that really helped. I suggest that you trade you system, and that you scrutinize you system as if you were trying to prove to someone beyond any reasonable doubt that they could trust it. Not that you can trust it, that someone else could trust it. That's a much higher standard.

The subject of fear is a foundational element of life. My opinion is, that we need to break fear down into it's positive and negative influences. If I burned my hand on a hot stove burner because I was not paying attention, and after that experience I start being more attentive around a hot stove in order to avoid burning myself again, that's a good thing. If my fear stops me from using a stove altogether, and my nutrition suffers because I won't go around a stove anymore, that's a bad thing. If, after I get burned, I don't face my fear, then I'll stop cooking. That's a bad thing. My argument is, that it depends upon what the fear is associated with. How did the brain cells get wired to interpret that fear? Learning how to operate a stove is very simple. Learning how to make money trading is not easy. Don't misunderstand me, I'm not saying that trading can't be easy and simple. I'm saying that coming up with a winning trading strategy is not easy and simple. Those are two different things. My point is, that once fear has settled in, and that fear becomes associated with something that you don't need to be fearful of anymore, then you have a problem. If I fear trading, and I don't have a winning strategy, then the fear is actually a good thing. The only time the fear of trading is not good, is AFTER you have a proven winning strategy. It's important to make that distinction. My fear of trading has kept me from loosing a lot of money trading. That's not necessarily bad. Now that I have a winning strategy, I need to disassociate the fear from the trading.

I took a quick look at your website, and it seems interesting and informative. It seems that you are basically explaining Supply and Demand, and the Auction process. After clicking your user name, I was able to click on, "Visit Homepage".

Yes, I would still trade. You only need to trade a few hours a day to make money, so it's not a huge commitment. I could travel and trade at the same time. I will find a way to use the money, even if it's way over what I need.

I'm guessing that Advancers and Decliners are a generic measure that can be applied to any market, or any subset of a market. I don't think it has to be from the NYSE or the NASDAQ.

I don't have any data to prove this, but from observations, price does pull back to a midpoint very often. Thanks for pointing that out because I can get caught up in the details and miss the obvious.

What do you think of targets based on the last high or last low? If price is going up, it will often break over the last high unless there is indecision or the trend is turning. Or you could have a target at the last high or low. If price goes past the last high or low, that won't maximize your profit, but it increases your odds of getting a profit.

I now know that you are deep into cutting edge scientific methods of data analysis, so I'm assuming that you have references and data sources to back that statement up. Sorry, man. I just couldn't resist the temptation. I hope you take it in the light hearted way that I mean it.

I agree. I know nothing about MARS® (Multivariate Adaptive Regression Splines) or Neural Networks. It's interesting, and I have no doubt that it is very valuable. I have programed predictive curves using the Least Squares Method based on price. I haven't tried doing that with a combination of other inputs. But now you have got my brain cells vibrating a little bit here. I doubt that I will ever use MARS® (Multivariate Adaptive Regression Splines) or Neural Networks. I guess I should never say never, but I'd need to look at the cost/benefit of getting that deep into the analytics. I'd be very interested to see performance comparisons of some big system compared to a similar methods and calculations in a good retail platform. The data processing has to be based on something. A theory, conditions, a strategy, or observations. I'm not necessarily looking for a backtested condition that's been proven to a certain standard deviation. I'm all for that, and I hope to prove my system by that means eventually. But I'm just looking for the ideas that work in trading.

Looks interesting. I guess I should have read further.

Are you using something like the weighted least squares approach for best fitting a set of points to a non-linear approximation? Missiles don't have a choppy, erratic trajectory. Price points in the market can either be uncorrelated and uncertain, or have some reasonable distribution. If it is determined that those price points are a candidate for a normal distribution, they can then be fitted to a predictive curve.

When I add up Advancers+Decliners+Unchanged, I get numbers around 2,700 to 3,100 So there must be approximately 2,700 to 3,100 stocks that are being tracked. There are only 500 stocks in the S&P 500, so I guess to get the Advancers, Decliners for the S&P 500, I would need a special data feed, and have to make the calculation myself.

In the past, I would have intuitively perceived risk as entering a long order as price is dropping very fast. And I'm not saying that it isn't risky. Price may continue to drop hard. But it's not always risky, sometimes it's the best opportunity. Think of a gambling casino. Consider if, after a week, all the casino customers had a net gain; the casino would go out of business. There would be more money going out than coming in. The market can't allow most short term traders to make money. It would destroy the investment industry. So the exchanges need to make it hard for you. It's hard to enter at a good price, and it's hard to exit at a good price. How? The speed at which price moves. The time window allowed to enter at the optimal price, or exit at the optimal price is severely shortened. It's shorted by the speed at which price moves. So when you see a price bar or a candle on the chart, and you see that price hit or went through a certain price level, the chart does not tell you or show you have fast price went through that level or how long it stayed at that level. That is something that the chart does not tell you, and it easy to have that fact allude you if you are not watching price action as it is happening. So, people perceive speed as risk, and slowness as safety. Reality is, that your best opportunities happen as price is moving very fast, or right after wards. I'm not talking about volatility. Speed is an element of volatility, but I'm talking about a market that is considered normal volatility. The bottom on that chart is preceded by a long red candle, closing low. Many people, me included, would see price dropping very hard and very fast and have a feeling of danger and see it as a situation that was out of control, and to get the heck out of the way, not to step in front of it. But if you had gone long right under the low of that long red candle, that would have been just about as good a long entry as you can get. So, now the question is, what if you did just step in front of train? My answer to that, is you need confirmation very quickly that it's not a bad entry. The next bar close up, and the second bar gaped up on the open. Risk but verify, risk but verify.

The market rewards risk, not safety. Risk = opportunity to make money. Most people intuitively perceive the exact opposite. I don't require confirmation BEFORE the entry, I require confirmation AFTER the entry. Those are two different things. I should not worry about fake-outs and false breaks. (I do worry about them. But that fear will never help my trading.) There is nothing I can do to stop those, and unless I had a time machine, I'll probably never be able to predict them. My point is, there was a signal there. So it's not just a random entry. Once that short order had filled, and you saw the hammer, that is confirmation after the entry. Of course, by that time, your order is already into a nice little profit. So we are back to the risk question. Is that strategy more risk? Or is it actually less risk? The market rewards traders for taking risk. My opinion is, that price action is designed to be against rewarding traders for playing it safe. Yes, yes, you can "play it safe" and make money. But overall, I don't think the market is designed to reward safety. If everyone could play it safe, and make tons of money, that would be the end of the investment industry in about a week. All the profits would get sucked out, and there would be nothing left. So, if the market is designed to reward risk, then is "risk" really risk? If the market rewards risk, then the risk is actually less risky. Here is the problem with chart analysis, or any market analysis. Your signals will almost always be late. By that time, you've missed the best opportunity. There are extremely few leading indicators. Almost all of them lag. One of the few leading indicators is when two trend lines are converging. Momentum is slowing down. Yes, on a very strong trending day, you could be trying to reverse all day, and get killed, when you should have just traded one direction all day long. But that's where interpreting the news comes in, and that has nothing to do with indicators.

Those are all good conditions to have for a confirmation. Here are my confirmations: First bar going in the direction of my order needs to show some strength. Needs to be a higher high for a long, needs to be a lower low for a short, or needs to be a bigger than average price move in my direction. Hard price move against my order is a reason to exit. If no sign of strength in the direction of my order within two or three bars, exit. A strong price move in the direction of my order that turns and closes in the opposite direction on the same bar, is a reason to get out. These are the kind of specific conditions that I'm looking for to make decisions. Being able to define my rules, will hopefully make the decision making easier. If the rule works, and the conditions are met, then act. I should state that I'm using Traders Laboratory as a way to work through ideas, solidify my thinking and bring my trading rules to the front of my consciousness. Typing it out and posting them probably helps to set those thoughts more solidly and acts as a way to train those brain cells. So if someone reading this wants to post their rules for a stop loss, then it may help you to recognize those conditions and make the trading decision easier.

One website states that Maximum Adverse Excursion only happens when the trade has a loss. Another site defines it in a different way. Then there is Maximum Favorable Excursion. I'm really not looking for either one of those. Those are statistic provided from backtesting. I'm looking for some kind of indication of whether the trade is going to go in your favor, after the entry, and some loss.

Yes, you are right about the aspect of trading that you are talking about. You are talking about the ability to play the instrument. I am talking about whether the violinist has the right music. There is a lot about trading that takes discipline and practice. That discipline and practice is really just training your brain cells to react a certain way under certain situations. What you are talking about is the ability to read music, play many different notes, in many different ways, and the physical ability to play the instrument. What I am talking about is analogous to telling people how to read sheet music for "Mary Had a Little Lamb", a very simple tune. Explaining the notes for, "Mary Had a Little Lamb" might take half an hour. You still can't play "Mary Had a Little Lamb" on the violin from that information, but you now understand the concepts and have the sheet music to play. I would compare the ability to trade well, with the ability to play, "Mary Had a Little Lamb" on the violin. The problem is, people don't have the right music. I really don't believe that a person needs the same musical and physical discipline as a good violinist to trade. You might need the same skills at a 12 year old playing their first tune. Of course, emotionally and psychologically, you would need to be more mature than a 12 year old to trade, but that's a different aspect of trading that I'm not talking about. What I'm saying is, if you don't have the tune on paper or in your head, then you can't play the music, no matter how good your skills are to play the instrument. What I'm talking about is the right music. What you are talking about is the ability to play the instrument. Some people might be able to play the instrument (know the platform, understand how to enter and exit orders, be able to read charts), but the music they are playing is atrocious. It would make you scream, "Please Stop!!".

The difficult things to learn might result in the biggest reward. The things that took me years to learn, I could probably teach in 30 minutes. But I don't want to teach them in 30 minutes, because it took me so long to learn them. :rofl: Why should I give away in 30 minutes what it took me years to learn? In a perfect Utopian world full of love and goodwill, I would gladly do that. But unfortunately, I'm stuck here in this world.

I would have been looking to take the trade way before the circles that are drawn on the chart. I don't like entering orders after the price has already turned. As soon as the MACD showed a shorter value on the way up, I would put in a short order just slightly over the highest high. The short would have filled, and showed a loss on the long tail of the candle that is the peak. But what people must understand, is that the speed at which the price moves on those long tails is so fast, that you are only loosing money for a very short period of time before price quickly starts moving in your favor. Then I would have taken profit immediately on the next candle, and re-entered a short at a better price as the price was moving back up. On the way up, as soon as I saw that higher high, I would have entered on that candle. I would not have waited until the candle that you have circled. Price often surges up, defines the upper range, and immediately drops hard on the same price bar. What you see on a chart, can be deceiving compared to how price behaves even within the time frame of that one candle. The typical analysis that people make, is that they look for pull backs to enter a long on a bar or candle that shows a pull back. But a nice price drop to enter a long can happen on a candle that shows a higher high. But I'm guessing that people do not readily or intuitively understand what I just described when doing chart analysis. Price can do all kinds of things inside that bar between the high, low and close.

I've been thinking some more about this question, and it's quite interesting really. In a chess game, or many other games, you have time to contemplate your next move, and other people don't make a game move until you have made your move. If you are making very short term trade, then you have almost no time to contemplate your next move. So even if all the information really was there for you to see, it's not like a chess game where you have time to think. And in a chess game, there is only one other player. In the market, no one waits for a small time retail trader to make their move before everyone else follows. It would be like playing a chess game where multiple people are moving pieces on the side against you, and they don't wait for you to make your move before they make a second move, or a third move. It would be like playing a chess game where you could be put into checkmate without ever having made a move. You could loose pieces, but if you never made a move, then you would never take the opponents pieces. That's kind of an amusing mental picture. Someone asks you if you want to play chess, and then you find out that you are playing chess against 5 other people, and they are all moving pieces against you, all at the same time, and they couldn't care less what you are doing. Picture that in your mind.

It is practically impossible to enter a trade without it initially going to a loss. The only way to enter a trade without it going to a loss, would be if the order filled from the bid/ask shifting without the price actually moving. That situation can occur, but don't count on it. So, my point is this: An initial loss on your order is almost impossible to avoid. So it is something that needs to be accepted, and dealt with. It's all about the never ending situation in trading about where to cut your losses.

I just looked this up for drawdown: Drawdown Definition Ok, I guess I didn't know the official definition of drawdown. I viewed drawdown as the amount of money that the trade would have lost if the trade had been exited at a loss, when it could have rebounded for a profit. So for example, if the trade was entered at 100, then dropped to 95, then rebounded to 110, I thought the "drawdown" was 5. You see what I'm saying? So what would you call what I just described above? Because I've obviously been misusing the term "drawdown".

One per customer. Sorry! :rofl: But seriously, there is no point in selling a trading system, indicator, subscription or anything else if it actually does make money. If it really does make money, then I will never tell anyone about it. I will hire employees to trade my system. I will run a trading room where people can trade my system. But it would all be "black box". No one will ever see what is on the inside of that little "black box". But I could still sell my system for a 110% guarantee and not loose money. In fact, I would guarantee that you would make money in LIVE trading. Because I would have a verification system that the customer didn't intentionally loose money in order to get the 110% back. Let's say I charged $10,000 dollars for the system. You would get $11,000 dollars back if you lost money in LIVE trading. Yes, I know that I said sim trading before. And I would put in the contract that you would have to loose more than $1,000 dollars in live trading. So ultimately, you would have a net negative. So would I, but I probably would not get a lot of people who just intentionally wanted to loose money in order to mess with me. Then, if they couldn't make money in live trading, I would have it in the contract that they would have to stop using the system. So they wouldn't be able to trade the system either. So the customer would still have a net negative, and they wouldn't be able to keep the system. Remember, it would be "black box" indicators. So it would all be locked up, and have an expiration date. All kinds of software has that. If I was selling a system that was not black box indicators, I would set up a system where I would be part owner of your broker account. Yes, I know, I know. No one would ever agree to that. But that would be their loss. If they don't want to make tons of money trading, fine, then don't buy my system. It will be a crushing blow to my ego that will take a few days to get over, but hopefully I'll pull out of it.

Drawdown vs. Loss What's the difference? Is it possible to know the difference before your stop is hit? If you can tell the difference, how do you do it? When do you decide that it's really a loss, and not drawdown? Is it better not to worry about whether it's drawdown or a loss? Should you just set your stop loss, and that is all you need to do?

I think that many people like to pass along knowledge that has been acquired. It makes us feel like we have value, and it can give us an ego boost. So emotionally and psychologically there is a benefit to telling other people what we know. If we can get paid for telling people what we know, then there is also a financial benefit. But it seems like there are conflicting motives for someone to write a trading book, sell a system or a subscription, or sell any other information. If the information is so valuable, then why don't people just keep it to themselves?